<PAGE> 1
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 0-16461
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OF INFORMATION
STATEMENTS INCORPORATED BY REFERENCE TO PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ ]
AS OF MARCH 15, 1999 THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY
NON-AFFILIATES WAS $ 62,090,050.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT MARCH 15, 1999
- ---------------------------- -----------------------------
COMMON STOCK, $.10 PAR VALUE 4,656,847
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
- --------------------------------------- ----------------------------------
PROXY STATEMENT FOR 1999 ANNUAL MEETING PART III
THE TOTAL NUMBER OF PAGES IN THIS REPORT INCLUDING EXHIBITS IS 162.
<PAGE> 2
PART 1
ITEM 1 - BUSINESS
GENERAL
Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank
holding company registered with the Board of Governors of the Federal Reserve
Board (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank,
an Alabama banking corporation which conducts a general commercial banking
business in northern Alabama and southern Tennessee. At December 31, 1998, the
Company and its subsidiaries had total assets of about $603,244,000, deposits of
about $538,586,000 and shareholders' equity of about $47,233,000.
SUBSIDIARY BANK
Community Bank currently operates through 30 locations in 12 counties in Alabama
and southern Tennessee. It offers a wide range of commercial and retail banking
services, including demand and time deposit accounts, personal and commercial
loans and personal and commercial checking accounts. The majority of loans by
Community Bank are to individuals and small to mid-sized businesses in Alabama
and Tennessee. Community Bank seeks to provide superior service to its customers
and to become a vital component of each of the communities it serves.
Community Bank operates in small non-urban communities, including locations in
Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County,
Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in
Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley,
Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo
County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and
Gunterville in Marshall County, Alabama; Falkville and Hartselle in Morgan
County, Alabama; Uniontown in Perry County, Alabama; Double Springs and
Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee.
Four of these offices are located within Wal-Mart stores, including one office
opened in the first quarter of 1998. In June 1998, Community Bank purchased
certain assets and assumed certain liabilities of the Uniontown, Alabama office
of the First National Bank of West Point, Georgia.
OTHER SUBSIDIARIES
1st Community Credit Corporation, another subsidiary of the Company currently
operates 12 finance company offices in nine Alabama communities, including
Albertville, Arab, Athens, Boaz, Cullman, Decatur, Gadsden, Hartselle,
Huntsville, Fort Payne, Jasper and Moulton, Alabama. In March 1998, 1st
Community Credit Corporation acquired certain assets of Valley Finance, Inc.
relating to its offices in Boaz and Gadsden, Alabama. Other subsidiaries of the
Company are of Community Appraisals, Inc., which operates a real estate
appraisal business, and Community Insurance Corp., which serves as an agent in
the sale of title, life, automobile, homeowner's and farmowner's insurance
policies. In April 1998, Community Insurance Corp. acquired 100% ownership of
the outstanding shares of capital stock of Chafin Insurance Agency, Inc. and Jim
Murphree Insurance Agency, Inc., insurance agencies located in Graysville and
Oneonta, Alabama, respectively. Both agencies merged into Community Insurance
Corp. in January 1999. In April 1998, Community Insurance Corp. acquired 100%
ownership of the outstanding shares of capital stock of Southern
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Select Insurance, Inc., a property and casualty insurance general agency located
in Birmingham, Alabama that serves as the general agent to over 140 insurance
agencies in Alabama. The Company had acquired a controlling interest in Southern
Select Insurance, Inc. in August 1997.
The Company maintains its principal executive offices at 68149 Main Street, P.
O. Box 1000, Blountsville, Alabama 35031, and its telephone number is (205)
429-1000.
COMPETITION
The banking business in Alabama and southern Tennessee is highly competitive
with respect to loans, deposits and other services and is dominated by a number
of major banks and bank holding companies which have numerous offices and
affiliates operating over wide geographic areas. Community Bank competes for
deposits, loans and other business with these banks as well as with savings and
loan associations, credit unions, mortgage companies, insurance companies and
other local financial institutions. Many of the major commercial banks operating
in Community Bank's service areas offer services such as international banking,
and investment and trust services, which are not offered by Community Bank.
EMPLOYEES
At December 31, 1998, the Company and its subsidiaries had approximately 408
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans (ESOP) and other benefit programs for their employees. The
Company maintains continuing educational and training programs for its employees
designed to prepare them for positions of increasing responsibility in
management or operations. Membership and participation in professional and
industry organizations is encouraged and supported by the Company.
SUPERVISION AND REGULATION
THE COMPANY
The banking industry is highly regulated. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provision.
FEDERAL RESERVE
The Company is a bank holding company within the meaning of the Bank Holding
Company Act, and is registered with, and subject to supervision by, the Federal
Reserve and the Federal Reserve Bank of Atlanta. The Company is required to file
periodic reports and such additional information as the Federal Reserve may
require pursuant to the Bank Holding Company Act. The Federal Reserve may also
examine the Company and its subsidiaries.
Subject to certain exceptions, the BHC Act requires Federal Reserve approval
before the Company can acquire substantially all the assets of any bank if as a
result of the acquisition the Company would own or
2
<PAGE> 4
control more than 5% of the voting shares of the bank, or for a merger or
consolidation with another bank holding company. The Company may also engage in
or acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be properly incidental thereto.
The Federal Reserve has adopted a risk-based capital adequacy assessment system
for bank holding companies. Assets are weighted by a risk factor and a ratio is
calculated by dividing qualifying capital by the risk-weighted assets. Tier I
capital generally includes common stock and retained earnings. Total capital is
comprised of Tier I capital and Tier II capital, which includes certain
allowances for loan losses and certain subordinated debt. The Company's Tier I
and Total Capital ratios exceeded the required minimum levels as of December 31,
1998.
The Company is a legal entity which is separate and distinct from its
subsidiaries. Federal law restricts extensions of credit by Community Bank to
the Company or its affiliates. Dividends to shareholders of the Company may be
paid only from dividends paid to the Company by its subsidiaries.
FEDERAL DEPOSIT INSURANCE CORPORATION
Deposits in Community Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") and therefore they are subject to examination by the FDIC.
Pursuant to provisions of the Federal Deposit Insurance Act, any FDIC-insured
subsidiary of the Company can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with the default
of a commonly controlled FDIC-insured subsidiary or any assistance by the FDIC
to any commonly controlled FDIC-insured subsidiary in danger of default. The
FDIC charges an annual assessment for the insurance of deposits based upon the
risk a particular institution poses to the FDIC's deposit insurance fund.
FEDERAL LEGISLATION
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented a number of provisions applicable to insured banks and bank holding
companies. Federal bank regulatory agencies are required to establish standards
for safety and soundness of banks and bank holding companies relating to
internal controls and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth and compensation. The FDICIA also
requires bank holding companies to guarantee compliance with any capital
restoration plans entered into by a subsidiary bank and the FDIC. The activities
of insured state banks, including non-subsidiary equity investment, is generally
limited under the FDICIA to those permitted for national banks.
The FDICIA also requires regulations to by federal banking agencies establishing
minimum loan to value ratios for all real estate mortgage and construction
loans. The FDICIA also requires regulations to limit risks posed by an insured
bank's "exposure" to another bank. Exposure includes extension of credit,
purchases of securities issued by the other bank, or acceptance of securities
issued by the other bank as collateral for an extension of credit. Regulations
pursuant to FDICIA limit such exposure.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company
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may not, following an interstate acquisition, control more than 10% of the
nation's total amount of bank deposits or 30% of bank deposits in the relevant
state (unless the state enacts legislation to raise the 30% limit). States
retain the ability to adopt legislation to effectively lower the 30% limit.
Federal banking regulators may approve merger transactions involving banks
located in different states, without regard to laws of any state prohibiting
such transactions, except that merger may not be approved with respect to banks
located in states that, prior to June 1, 1997, enacted legislation prohibiting
mergers by banks located in such states with out-of-state institutions. Federal
banking regulators may permit an out-of-sate bank to open new branches in
another state if such state has enacted legislation permitting interstate
branching. Affiliated institutions are authorized to accept deposits for
existing accounts, renew time deposits, and close and service loans for
affiliated institutions without being deemed an impermissible branch of the
affiliate.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") permits, among other things, the acquisition by bank holding
companies of savings associations, irrespective of their financial condition.
FIRREA also provides that commonly controlled federally insured financial
institutions must reimburse the FDIC for losses incurred by the FDIC in
connection with the default of another commonly controlled financial institution
or in connection with the provision of FDIC assistance to such a commonly
controlled financial institution in danger of default. Reimbursement liability
under FIRREA is superior to any obligations to shareholders of such federally
insured institutions, including a bank holding company such as the Company,
arising as a result of their status as a shareholder of a reimbursing financial
institution.
The Community Reinvestment Act of 1977 ("CRA") and its implementing regulations
are intended to encourage regulated financial institutions to meet the credit
needs of their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The regulations provide that the appropriate regulatory authority
will assess CRA reports in connection with applications for establishment of
domestic branches, acquisitions of banks or mergers involving bank holding
companies. Regulators are placing increased emphasis on CRA assessments. An
unsatisfactory CRA rating may serve as a basis to deny an application to acquire
or establish a new bank, to establish a new branch or to expand banking
services.
The Equal Credit Opportunity Act ("ECOA") requires non-discrimination in banking
services. The federal enforcement agencies have recently cited institutions for
red-lining (refusing to extend credit to residents of a specific geographic area
known to be comprised predominantly of minorities) or reverse red-lining
(extending credit to minority applicants on terms less favorable than those
offered to non-minority applicants). Violations can result in the assessment of
substantial civil penalties.
ALABAMA BANKING DEPARTMENT
Community Bank is subject to regulation and examination by the Alabama
Superintendent of Banks (the "Superintendent"). State regulations in Alabama
relate to such matters as loans, mortgages, consolidations, required reserves,
allowable investments, issuance of securities, payment of dividends,
establishment of branches, filing of periodic reports and other matters
affecting the business of Community Bank.
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4
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GOVERNMENTAL MONETARY POLICIES
The Federal Reserve regulates the national supply of bank credit. The
instruments on monetary policy used by the Federal Reserve to implement these
objectives are: open market operations in U. S. Government securities, changes
in discount rate, reserve requirements on member bank's deposits and funds
availability regulations. The Company and its subsidiaries are affected by the
credit policies of monetary authorities. These instruments are used in varying
combinations to influence the overall growth of bank loans. The earnings and
growth of the Company and subsidiaries will be subject to the influence of
economic conditions generally and also to the monetary and fiscal policies of
the United States and its agencies, particularly the Federal Reserve. The nature
and timing of any changes in such policies and their impact on the Company
cannot be predicted.
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5
<PAGE> 7
ITEM 1 - STATISTICAL DISCLOSURE
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Loan Portfolio........................................................................................... 14
Selected Loan Maturity and Interest Rate Sensitivity..................................................... 15
Investment Portfolio and Investment Portfolio Maturity Schedule.......................................... 16
Maturities of Large Time Deposits........................................................................ 17
Maturities of Long-term Debt ............................................................................ 18
Interest Rate Sensitivity and Market Risk................................................................ 20
Capital Adequacy Ratios.................................................................................. 22
Return on Equity and Assets.............................................................................. 22
Consolidated Average Balances,
Interest Income/Expense and Yields/Rates............................................................... 25-26
Rate/Volume Variance Analysis............................................................................ 27-28
Summary of Loan Loss Experience.......................................................................... 29-30
Allocation of Loan Loss Reserve.......................................................................... 30
Nonperforming Assets..................................................................................... 31
Noninterest Income....................................................................................... 32
Noninterest Expense...................................................................................... 33
</TABLE>
6
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ITEM 2 - PROPERTIES
The main offices of the Company are housed in a colonial style two-story
building owned by Community Bank and located on U. S. Highway 231 in
Blountsville, Alabama.
The main office of Community Bank is located at 68149 Main Street, Blountsville,
Alabama, in a one story brick building constructed in 1975 and extensively
remodeled during 1994. The premises are owned by Community Bank . Community
Bank's administrative, operational, legal and accounting functions are housed in
facilities built at the same location as the Company's main office during 1997.
Community Bank owns or leases buildings that are used in the normal course of
business in eleven counties in Alabama, namely Blount, DeKalb, Lauderdale,
Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston, and in
Giles County, Tennessee. 1st Community Credit Corporation owns or leases
buildings that are used in the normal course of business in nine counties in
Alabama, namely Cullman, Marshall, Morgan, Limestone, Lawrence, Etowah, Madison,
DeKalb and Walker. Community Insurance Corporation and its subsidiary, Southern
Select Insurance, Inc., own or lease buildings that are used in the normal
course of business in Blount, Jefferson and Shelby counties in Alabama.
For information with respect to the amounts at which bank premises, equipment
and other real estate are carried and relating to commitments under leases, see
Consolidated Financial Statements.
ITEM 3 - LEGAL PROCEEDINGS
Litigation: On November 19, 1998, Mr. William Towns, a shareholder of the
Company, filed a shareholder derivative action against the directors of the
Company in the Circuit Court of Blount County, Alabama. Mr. Towns amended his
complaint on January 14, 1999 to add the Company and Community Bank as
defendants in the action. On February 11, 1999, the complaint was again amended
to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the
Company, as additional plaintiffs. The complaint alleged that the directors of
the Company breached their fiduciary duty to the Company and its shareholders,
engaged in fraud, fraudulent concealment, suppression of material fact and
suppression of the plaintiff shareholders, failed to supervise management, paid
themselves excessive director fees and conspired to conceal wrongful acts from
the Company's shareholders. The complaint also alleged that the Board of
Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson,
Sr., the Chairman of the Board, Chief Executive Officer and President of the
Company, including alleged self dealing, payment of excessive compensation ,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint seeks an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors, and
attorneys fees and costs. Management of the Company believes that the
plaintiffs' allegations are false and that the action lacks merit. The Company
and its directors have filed a motion with the court seeking to have the action
dismissed. Management of the Company believes that the action will not have a
material adverse effect on the Company's financial condition and results of
operations.
The Company and its subsidiaries are from time to time parties to other legal
proceedings arising from the ordinary course of business. Management believes,
after consultation with legal counsel, that no such proceedings will,
individually or in the aggregate, have a material adverse effect on the business
or consolidated financial condition of the Company.
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ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, the positions held by them
with the Company and certain of its subsidiaries and their principal occupations
for the last five years are as follows:
<TABLE>
<CAPTION>
Name, Age and Position Held in the Company
and its Subsidiaries Principal Experience During Past Five Years
- ------------------------------------------ -------------------------------------------
<S> <C>
Kennon R. Patterson, Sr. (56) Chairman, President and Chief Executive Officer
Chairman, President and Chief Executive Officer of the Company (1985-present); Chairman and
of the Company; Chairman and Chief Executive Chief Executive Officer of Community Bank
Officer of Community Bank; Director of (1993-present)
Community Appraisals, Inc., Community
Insurance Corp, 1st Community Credit
Corporation and Southern Select Insurance, Inc.
Bishop K. Walker, Jr. (67) Vice Chairman, Senior Executive Vice President
Director, Vice Chairman, Secretary, Senior and General Counsel of the Company (1987-
Executive Vice President and General Counsel of present); President and Director of Community
the Company; Director, Senior Executive Vice Insurance Corporation (1987-1997)
President and Secretary of Community Bank;
Director of Community Insurance Corp and
Southern Select Insurance, Inc.
Denny G. Kelly (59) President of Community Bank (1993-present)
Director and Executive Vice President of the
Company; Director and President of Community
Bank; Director of 1st Community Credit
Corporation, Community Appraisals, Inc.,
Community Insurance Corp and Southern Select
Insurance, Inc.
Michael A. Bean (51) Executive Vice President and Chief Financial
Acting Chief Accounting Officer of the Company; Officer of Community Bank (1998-present);
Director, Executive Vice President and Chief Chief Accounting Officer of Compass Bancshares,
Financial Officer of Community Bank; Director Inc. (1991-1998)
of Community Insurance Corp and Southern
Select Insurance, Inc.
</TABLE>
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PART II
ITEM 5 - MARKET OF REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Shares of the common stock ( the "Common Stock") of the Company were held by
approximately 2,200 shareholders of record as of March 1, 1999. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.
<TABLE>
<CAPTION>
Estimated Price Range
Per Share
--------------------------
High Low
---------- ---------
<S> <C> <C>
1998:
FIRST QUARTER.................................................................. $ 15.00 $ 15.00
SECOND QUARTER................................................................. 19.00 15.00
THIRD QUARTER.................................................................. 19.00 19.00
FOURTH QUARTER................................................................. 20.00 19.00
1997:
First Quarter.................................................................. $ 12.50 $ 11.50
Second Quarter................................................................. 13.00 12.50
Third Quarter.................................................................. 15.00 13.00
Fourth Quarter................................................................. 15.00 14.10
</TABLE>
Annual dividends of $.50 per share and $.38 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 12, 1998 and
January 10, 1997, respectively. Management continues to anticipate retaining
substantially all earnings to finance the Company's growth. The payment of
dividends on the Common Stock is subject to the prior payment of principal and
interest on the Company's long-term debt, the retention of sufficient earnings
and capital in the Company's operating subsidiaries and regulatory restrictions.
See Consolidated Financial Statements and related notes.
During 1998, the following equity securities were sold by the Company without
registration under the Securities Act of 1993 (the "Securities Act"):
In February 1998, the Company issued an aggregate of 12,642 shares of Common
Stock to certain of Community Bank's city directors in payment of director fees,
in reliance upon an exemption from registration under Section 4(2) of the
Securities Act.
In March 1998, the Company granted options to purchase an aggregate of 203,221
shares of Common Stock to the directors and certain senior officers of the
Company and Community Bank. The exercise price for each of such options is equal
to the market price of the Common Stock on the date of grant. The Company did
not receive any payment in exchange for granting any of such options, which were
granted in reliance upon an exemption from registration under Section 4(2) of
the Securities Act.
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In April 1998, the Company issued 22,306 shares of Common Stock to the holders,
other than the Company, of capital stock of Southern Select Insurance, Inc., as
a portion of the consideration for the purchase of all of the outstanding shares
of capital stock of Southern Select Insurance, Inc. that were not already held
by the Company. In August 1997, the Company issued 11,770 shares of Common Stock
to the holders of capital stock of Southern Select Insurance, Inc. as a portion
of the consideration for the purchase of 51% of the outstanding shares of such
capital stock. The Company issued shares of the Common Stock in each of these
transactions in reliance upon an exemption from registration under Section 4(2)
of the Securities Act.
In April 1998, the Company issued 10,833 shares of Common Stock to the holders
of capital stock of Chafin Insurance Agency, Inc. as a portion of the
consideration for the purchase of all of the outstanding shares of such capital
stock. The Company issued shares of Common Stock in this transaction in reliance
upon an exemption from registration under Section 4(2) of the Securities Act.
In April 1998, the Company issued 6,667 shares of Common Stock to the holder of
capital stock of Jim Murphree Insurance Agency, Inc. as a portion of the
consideration for the purchase of all of the outstanding shares of such capital
stock. The Company issued shares of Common Stock in this transaction in reliance
upon an exemption from registration under Section 4(2) of the Securities Act.
In March 1999, the Company issued an aggregate of 8.923 shares of Common Stock
to certain of Community Bank's city directors in payment of director fees, in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act.
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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>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income.................................. $ 44,365 $ 37,791 $ 33,600 $ 26,304 $ 20,751
Interest expense................................. 22,693 19,541 17,426 13,751 9,507
Net interest income.............................. 21,672 18,250 16,174 12,553 11,244
Provision for loan losses........................ 885 773 834 1,088 638
Non-interest income.............................. 8,102 4,891 4,447 3,717 3,189
Non-interest expense............................. 23,784 17,423 14,902 12,046 10,193
Net income....................................... 3,579 3,512 3,459 2,705 2,688
Per Share data:
Net income - basic........................... .90 .92 .93 .81 .80
Net income - diluted......................... .88 .92 .93 .81 .80
Cash dividends............................... .50 .38 .25 .25 -0-
Shareholders' equity (book value)
at period end............................ 10.16 8.85 8.63 8.13 6.96
Balance Sheet:
Loans........................................ $433,853 $326,134 $322,762 $237,841 $206,428
Deposits..................................... 538,586 440,889 400,338 320,149 263,413
Long-term debt............................... 7,569 7,398 8,281 7,920 8,713
Average equity............................... 37,318 33,428 30,079 24,839 22,672
Average assets............................... 538,470 473,381 421,839 328,244 276,063
Total assets................................. 603,244 491,839 454,710 362,824 299,352
Ratios:
Return on average assets..................... 0.67% 0.74% 0.82% 0.82% 0.97%
Return on average equity..................... 9.59% 10.51% 11.50% 10.88% 11.86%
Dividend payout ratio........................ 55.60% 40.50% 26.90% 30.90% 0.00%
Average equity to average assets............. 6.93% 7.06% 7.13% 7.57% 8.21%
Total risk-based capital..................... 11.03% 11.86% 11.45% 14.10% 13.58%
Leverage ratio............................... 7.79% 6.94% 9.20% 8.61% 7.52%
</TABLE>
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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.
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.
Certain statements in this Report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Act of 1934, as amended. These forward-looking statements
are not based on historical facts and may be identified by their reference to a
future period(s) or by the use of forward-looking terminology, such as
"anticipate," "estimate," "expect," "may" and should." These forward-looking
statements include, without limitation, those relating to the Company's future
growth, dividend payments, deposit base, economies, long-term obligations, loan
losses, interest sensitivity, market risk, impact of inflation and impact of
Year 2000 issues. Actual results could differ materially from those indicated in
such forward-looking statements due to a variety of factors. These factors
include, but are not limited to, economic conditions, government fiscal and
monetary policies, prevailing interest rates and effectiveness of the Company's
interest rate strategies, laws and regulations affecting financial institutions,
changes in and effectiveness of the Company's operating or expansion strategies,
geographic concentration of assets and operations, competition from other
financial services companies, Year 2000 compliance issues, and other risks
detailed from time to time in the Company's press releases and filings with the
Securities and Exchange Commission.
SUMMARY
The Company's principal market areas are located in North Central Alabama
(Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marion,
Marshall, Morgan, and Winston Counties), Western Alabama (Marengo and Perry
Counties) and in South Central Tennessee (Giles County). All of the Company's
banking and finance company facilities are located in relatively rural areas,
placing an emphasis on personal service. None of the banks are located in urban
areas.
Management believes that the economies of the areas in which we serve are
healthy and expanding, but not at a pace that threatens stability. With the
exception of Blount County, Alabama and Marengo and Perry Counties, Alabama, the
markets in which the Company operates share one common characteristic: they are
separate and distinct economies, but each is close enough to Huntsville, Alabama
to share in the economic and employment benefits of that city. Similarly, Blount
County is close enough to Birmingham, Alabama to share in the economic and
employment benefits of that city.
Despite the apparent dependency upon the military and aerospace industries, the
Huntsville Metropolitan Statistical Area (the "MSA") possesses a diverse
economic base. Significant employers include manufacturers of durable goods,
machinery, and transportation equipment, as well as in retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also
12
<PAGE> 14
makes up a significant portion of the economy. In 1997, the Huntsville MSA and
Madison County had an average unemployment rate of 2.7%, and the counties served
by the Company and its subsidiaries had unemployment averaging 5.6%, both lower
than the average of 6.5% experienced in the entire State of Alabama. In 1995,
the average per capita income in the Company's markets surpassed the rate for
the average per capita income in the State of Alabama by approximately 5.5%.
Based on 1998 projections, the average population for the counties served by the
Company and its subsidiaries exceeds 70,000 persons per county. The current
economic prospects in our markets are good, and the Company attempts to assist
those prospects by returning the deposits of our customers to the communities
from which they come in the form of loans.
The Company's net income of $3,579,493 for 1998 was 1.9 percent more than 1997's
amount of $3,512,278, which was 1.5 percent more than the $3,458,986 earned
during 1996. When stated as changes in the basic earnings per share, 1998
represented a 2.2 percent decrease from 1997 compared to a 1.1 percent decrease
in 1997 over 1996. The decrease in earnings per share resulted primarily from
increases in non-interest expenses associated with expansion of the bank office
network, new finance company facilities and additional insurance offices.
Management continues to emphasize quality loans and investments with good yields
while keeping expenses in line. The losses sustained by Community Bank in its
new branches were fully anticipated and projected prior to the openings of these
facilities. The growth of these new locations is expected by management to
become a significant factor to the Company's future earnings.
The Company raised approximately $15,000,000 in two public offerings of Common
Stock that closed in 1994 and 1996 after being fully subscribed. In the fourth
quarter of 1998, the Company offered to the public 500,000 newly issued shares
of Common Stock, at a price of $19.00 per share, in accordance with the
Company's Prospectus dated August 14, 1998. The offering was closed on December
1, 1998 upon full subscription of all shares offered, raising approximately
$9,469,000 of capital net of offering costs. This additional capital and
internally generated retained earnings have allowed the Company to remain in a
strong capital position to support current, as well as anticipated future,
growth and expansion.
EARNING ASSETS
Average earning assets in 1998 increased 13.3 percent over 1997 primarily as a
result of increases in the loan portfolio and accounted for approximately 89.0
percent of the Company's average total assets. This is compared to an increase,
during 1997, of 11.3 percent in average earning assets, which represented 89.3
percent of average total assets.
During 1998, the Company's mix of average earning assets continued to shift to
the loan portfolio as loans averaged 78.9 percent of the total average earning
assets for 1998, up from 76.8 percent during 1997 and 72.9 percent during 1996.
Investment securities averaged 18.5 percent, 19.4 percent and 23.4 percent
during 1998, 1997 and 1996, respectively. The other earning assets category
accounted for less than 4.0 percent of the total mix for all three periods. The
increased volume in earning assets contributed to the higher net interest income
reported by the Company.
Average loans increased 16.5 percent in 1998, with no concentration of the
increase in any one specific loan
13
<PAGE> 15
type. Total loans, net of unearned income, outstanding at year-end 1998 were up
33.0 percent over the previous year-end level. Commercial, financial and
agricultural loans increased 46.7 percent in 1998 over year-end 1997, while
consumer loans increased 48.8 percent from year-end 1997 to year-end 1998. Real
estate-mortgage loans, which made up 47.2 percent of the total loans, increased
19.1 percent at year-end 1998 when compared to the previous year. Real
estate-construction loans increased 75.8 percent at year-end 1998 when compared
to the previous year, but had little effect due to representing only 1.4 percent
of total loans outstanding in 1998.
Total loans, net of unearned income, at year-end 1998 grew 33.0 percent over
year-end 1997 and average loans, net of unearned income, grew 16.5 percent over
the same period.
The Company's current strategy is to avoid the growing national market in loans
to finance leveraged buy-outs, participating in no nationally syndicated
leveraged buy-out loans. The Company's strategy also includes avoiding exposure
to lesser developed country ("LDC") debt, having no LDC loans in its portfolio.
The following table shows the classification of loans by major category at
December 31, 1998 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,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ------------------- ------------------- -------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural.... $ 94,057 21.7% $ 64,136 19.6% $ 65,634 20.2% $ 44,686 18.6% $ 46,892 22.1%
Real estate -
construction.... 6,153 1.4 3,499 1.1 5,262 1.6 5,624 2.4 3,972 1.9
Real estate -
mortgage........ 205,457 47.2 172,504 52.7 162,994 50.2 116,289 48.4 103,194 48.6
Consumer.......... 129,334 29.7 86,945 26.6 90,682 28.0 73,479 30.6 58,051 27.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
435,001 100.0% 327,084 100.0% 324,572 100.0% 240,078 100.0% 212,109 100.0%
===== ===== ===== ===== =====
Less: Unearned
income.......... 1,148 950 1,810 2,237 5,681
Allowance for
loan losses..... 2,971 2,131 2,425 2,209 1,548
-------- -------- -------- -------- --------
Net loans......... $430,882 $324,003 $320,337 $235,632 $204,880
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 16
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Rate Structure For Loans
Maturity Maturing Over One Year
------------------------------------------------ ------------------------------
Over One
Year
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 . $42,445 $18,368 $ 33,244 $ 94,057 $37,491 $14,121
Real estate -
construction ..... 5,240 110 803 6,153 582 331
------- ------- -------- -------- ------- -------
$47,685 $18,478 $ 34,047 $100,210 $38,073 $14,452
======= ======= ======== ======== ======= =======
</TABLE>
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. The Company's entire
portfolio is classified as available for sale 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 1998, gross
investment securities sales were $24,045,000 and maturities were $21,786,000,
representing 27.2 percent and 24.6 percent, respectively, of the average
portfolio for the year. Net gains associated with the sales totaled $465,982,
accounting for 5.8 percent of noninterest income during 1998. Gross unrealized
gains in the portfolio amounted to $1,085,098 at year-end 1998 and unrealized
losses amounted to $346,866. Average investment securities for 1998 increased
8.0 percent from 1997.
Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Company's mortgage-backed securities
portfolio as of December 31, 1998 and 1997 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
1998 was only $343,164. The recoverability of the Company's investment in
mortgage-backed securities is reviewed periodically by management, and if
necessary, appropriate adjustments would be made to income for impaired values.
15
<PAGE> 17
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,
---------------------------------
1998 1997 1996
---- ---- ----
(in Thousands)
<S> <C> <C> <C>
U. S. Treasury and U.S. Government agencies $49,145 $51,153 $45,135
Mortgage-backed securities ................ 31,324 21,241 26,298
State and municipal securities ............ 15,187 12,698 15,478
Equity securities ......................... 1,736 -0- -0-
------- ------- -------
Total investment securities ............ $97,392 $85,092 $86,911
======= ======= =======
</TABLE>
Average investment securities increased 8.0 percent during 1998 compared to a
decline of 8.0 percent during 1997. Average taxable securities accounted for
84.7 percent of the investment portfolio in 1998 and 84.8 percent in 1997 while
tax-exempt securities were 15.3 percent in 1998 and 15.2 percent in 1997. During
1998, the Company experienced growth in both taxable and non-taxable investment
securities. Period-end securities for 1998 increased 14.5 percent from the
previous year.
The maturities and weighted average yields of the investments in the 1998
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 at
December 31, 1998 was 10.92 years with an average yield of 6.03 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>
December 31, 1998
---------------------------------------------------------------------------------------
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
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Securities- All Available for Sale:
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury......... $ 6,224 6.25% $ 9,624 5.84% $26,408 6.11% $20,321 6.66%
U. S. Government
agencies............. 3,519 5.38 14,374 5.58 -0- 0.00 -0- 0.00
State and municipal
securities........... 1,343 3.69 1,148 5.33 4,010 6.05 8,685 5.58
Equity securities...... -0- 0.00 -0- 0.00 -0- 0.00 1,736 7.50
------- ------- ------- -------
Total.................. $11,086 5.66 $25,146 5.67 $30,418 6.10 $30,742 6.40
======= ======= ======= =======
</TABLE>
There were no securities held by the Company, whose aggregate value on December
31, 1998 exceeded 10.0 percent of the Company's consolidated shareholders'
equity at that date.
16
<PAGE> 18
Average Federal Funds sold decreased 15.7 percent during 1998 , reflecting the
increased cash available from deposit growth in excess of loan growth. During
1997, average Federal Funds sold increased 21.1 percent from 1996 levels. As a
percentage of average earning assets, these funds represented 2.4 percent for
1998 compared to 3.2 percent for 1997.
Interest-bearing deposits with other banks has accounted for less than 1.0
percent of the Company's average earning assets during 1998 . The average
balance of interest-bearing deposits with other banks have reflected declines of
59.5 percent and 1.6 percent during 1998 and 1997, respectively.
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 1998 and 1997 by 14.6 percent and 13.6 percent,
respectively. Average interest-bearing demand deposits and average time deposits
increased 28.3 percent and 15.5 percent, respectively, during 1998, while
average saving deposits decreased 8.0 percent during this same period. Average
noninterest-bearing demand deposits increased 8.4 percent and 8.8 percent during
1998 and 1997, respectively. Customer confidence and satisfaction is evidenced
by the increase in total average deposits of 13.8 percent in 1998 and 12.9
percent in 1997. The two categories of lowest cost deposits comprised the
following percentages of total deposits during 1998 and 1997, respectively:
average noninterest-bearing demand deposits - 12.4 percent and 13.0 percent; and
average interest-bearing demand deposits - 17.6 percent and 15.6 percent. During
1998, interest-bearing demand accounts increased $18,365,000, or 25.7 percent,
while certificates of deposit of less than $100,000 increased $39,501,000, or
22.1 percent. Certificates of deposit of $100,000 or more increased $22,023,000,
or 32.2 percent, during this same period. Of total time deposits at December 31,
1998, approximately 33.3 percent were large denomination certificates of
deposit, up slightly from 32.7 percent at December 31, 1997. The maturities of
the time certificates of deposit and other time deposits of $100,000 or more
issued by the Company at December 31, 1998 are summarized in the table below.
MATURITIES OF LARGE TIME DEPOSITS
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
------------ -------- -----
(in Thousands)
<S> <C> <C> <C>
Three months or less ............. $17,537 $18,535 $ 36,072
Over three through six months..... 10,578 -0- 10,578
Over six through twelve months.... 23,990 -0- 23,990
Over twelve months ............... 38,345 -0- 38,345
------- ------- --------
Total ......................... $90,450 $18,535 $108,985
======= ======= ========
</TABLE>
17
<PAGE> 19
Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1998 and 1997 consisted of the U. S. Treasury
Tax and Loan Note Option account, Federal Funds purchased, overnight funds
purchased from the Federal Home Loan Bank (1998 only), and securities sold under
agreements to repurchase. Community Bank had $10,000,000 in available lines to
purchase Federal Funds, on an unsecured basis, from commercial banks. At
December 31, 1998, Community Bank had no funds advanced against these lines. In
addition, in the fourth quarter of 1998, Community Bank became a member of the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and was approved to
borrow up to $70,000,000 under various short-term and long-term programs offered
by the FHLB-Atlanta. These borrowings are secured under a blanket lien agreement
on certain qualifying mortgage instruments in Community Bank's loan and
investment portfolios. While Community Bank drew up to a maximum of $11,000,000
under the FHLB-Atlanta's "Overnight Borrowings" program during the fourth
quarter 1998, no funds were advanced against its line as of December 31, 1998.
Long-term debt consisted of various commitments with scheduled maturities from
one to twenty years.
The following table sets forth expected debt service for the next five years
based on interest rates and repayment provisions as of December 31, 1998.
<TABLE>
<CAPTION>
MATURITIES OF LONG-TERM DEBT
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(in Thousands)
<S> <C> <C> <C> <C> <C>
Interest on indebtedness... $ 540 $ 467 $ 394 $ 319 $256
Repayment of principal .... 933 949 968 988 298
------ ------ ------ ------ ----
$1,473 $1,416 $1,362 $1,307 $554
====== ====== ====== ====== ====
</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 Community Bank's 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 are the primary source of funds available to
the Company for debt repayment, payment of dividends to its shareholders and
other needs. Certain restrictions exist regarding the ability of Community Bank
to transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the Alabama Superintendent of Banks is required to pay
dividends in excess of Community Bank's earnings retained in the current year
plus retained net profits for the preceding two years less any required
transfers to surplus. At December 31, 1998, Community Bank could have declared
dividends of approximately $7,640,960 without approval of regulatory
authorities.
18
<PAGE> 20
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 $ 47,685,000, or 11.0 percent of the
total loan portfolio, at December 31, 1998 and investment securities maturing in
one year or less equaled $11,086,000, or 11.2 percent of the investment
portfolio, at December 31, 1998. 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 other commercial banks
and borrowings against available line through the FHLB-Atlanta. Liquidity
management involves the daily monitoring of the sources and uses of funds to
maintain an acceptable Company cash position.
INTEREST RATE SENSITIVITY AND MARKET RISK
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1998, indicating
that it had more liabilities than assets repricing during 1999. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180
days; and iv) .43% at 365 days.
The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a +200 basis points shift and a -200
basis points shift in interest rates.
[The remainder of this page intentionally left blank]
19
<PAGE> 21
The following tables estimate the impact of shifts in interest rates on
Community Bank's net interest income for the twelve months ending December 31,
1999:
RATE SHOCK ANALYSIS
<TABLE>
<CAPTION>
-200 +200
Basis Basis
Points Level Points
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Prime Rate.................................................... 5.75% 7.75% 9.75%
Interest Income............................................... $ 50,182 $ 51,750 $ 55,988
Interest Expense.............................................. 20,996 23,693 28,562
-------------- -------------- --------------
Net Interest Income........................................ $ 29,186 $ 28,057 $ 27,426
============== ============== ==============
Dollar change from Level...................................... $ 1,129 $ (631)
Percentage change from Level.................................. 4.03% (2.25%)
</TABLE>
INTEREST SENSITIVITY
<TABLE>
<CAPTION> Percentage Increase (Decrease)
in Interest Income/Expense
Principal Amount of Given Immediate and Sustained
Earning Assets, Interest Rate Shifts
Interest-bearing -------------------------------
Liabilities at Down 200 Up 200
December 31, 1998 Basis Points Basis Points
------------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets which reprice in:
One year or less.............. $ 154,840 (4.31)% 9.61%
Over one year................. 375,631 (2.62) 7.73
-----------------------
$ 530,471 (3.03) 8.19
=======================
Liabilities which reprice in:
One year or less.............. $ 360,085 (11.78) 21.31
Over one year................. 125,699 (10.78) 19.39
-----------------------
$ 485,784 (11.38) 20.55
=======================
Total net interest income sensitivity........................................ 4.03 (2.25)
</TABLE>
While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to be relatively stable to slightly lower
during 1999 and believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending December 31. 1999. 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.
20
<PAGE> 22
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.
In 1993 and again in 1995, the Company raised capital through the sale of shares
of its $.10 par value Common Stock. Both offerings were closed upon being fully
subscribed. The Company offered to the public, beginning in the third quarter of
1998, a maximum of 500,000 newly issued shares of its $.10 par value Common
Stock at a price of $19.00 per share. The offering was closed on December 1,
1998 upon full subscription of all shares offered for sale, raising
approximately $9,467,000 of capital after reduction for offering costs.
The proceeds from all offerings has been available for debt reduction, capital
enhancement, growth and expansion of the Company and general corporate purposes.
Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets to
determine the risk-based capital ratios. The Company's Tier I capital, which
consists of common equity, amounted to $41,521,000 at December 31, 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 are referred to as Total Risk-based Capital and
was $46,083,000 at year-end 1998. The percentage ratios, as calculated under the
guidelines, were 9.94 percent and 11.03 percent for Tier I and Total Risk-based
Capital, respectively, at year-end 1998. Both levels currently exceed the
minimum ratios of four percent and eight percent, respectively and the well
capitalized ratios of six percent and ten percent, respectively.
Applying the current guidelines to 1997 and 1996 also resulted in capital ratios
exceeding both the regulatory minimum requirements and requirements to be
considered a well capitalized bank.
Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The leverage ratio is defined as the ratio the Company's
shareholders' equity, minus goodwill, bears to total average assets minus
goodwill. The Company's leverage ratios as of December 31, 1998, 1997 and 1996
exceeded the regulatory minimum requirement of 4 percent.
[The remainder of this page intentionally left blank]
21
<PAGE> 23
The following table illustrates the company's regulatory capital ratios at
December 31, 1998, 1997 and 1996:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Tier I Capital.............................................. $ 41,521 $ 32,638 $ 29,941
Tier II Capital............................................. 4,562 3,773 4,135
-------------- ------------- --------------
TOTAL QUALIFYING CAPITAL............................. $ 46,083 $ 36,411 $ 34,076
============== ============= ==============
Risk Adjusted Total Assets (including
off-balance-sheet exposures).............................. $ 417,945 $ 306,947 $ 297,650
============== ============= ==============
Tier I Risk-Based Capital Ratio............................. 9.94% 10.63% 10.06%
============== ============= ==============
Total Risk-Based Capital Ratio.............................. 11.03% 11.86% 11.45%
============== ============= ==============
Leverage Ratio.............................................. 7.79% 6.94% 9.20%
============== ============= ==============
</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,
---------------------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Return on average assets.......................................... 0.67% 0.74% 0.82%
Return on average equity.......................................... 9.59 10.51 11.50
Dividend payout ratio............................................. 55.60 40.50 26.90
Average equity to average assets ratio............................ 7.79 7.06 7.13
</TABLE>
[The remainder of this page intentionally left blank]
22
<PAGE> 24
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 impact net interest
income. All discussions in this section assume a taxable equivalent basis unless
otherwise noted.
Net interest income for 1998 increased 18.0 percent from 1997 and 11.9 percent
in 1997 over 1996. An increase in average earning asset and average
interest-bearing liabilities in 1998 and 1997 accounted for the majority of the
increase. The "Rate/Volume Variance Analysis" table provides the detail changes
in interest income, interest expense and net interest income due to changes in
average balances and rates.
Interest income increased 17.1 percent in 1998 and 12.0 percent in 1997. The
1998 increase is due both to the 13.3 percent increase in average earning assets
and the 30 basis point rise in the average yield on earning assets. The increase
in interest income in 1997 was attributable to the 11.3% increase in average
earning assets. Interest income on loans increased 20.7 percent primarily due to
a 16.5 percent increase in the average balances outstanding coupled with a 36
basis point increase in the average yield. Interest income on investment
securities increased 2.5 percent from 1997 to 1998 primarily as a result of the
8.0 percent increase in the average balances outstanding.
Total interest expense increased 16.1 percent primarily due to the effect of a
14.2 percent increase in average interest-bearing liabilities, coupled with the
effect of a 9 basis point increase in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in average balances
which exceeded declines in deposit rates.
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 1998 was 4.64 percent as compared to 4.46 percent for 1997.
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 1998 increased 21 basis points to 4.15 percent from
the 1997 spread of 3.94 percent, as the yields on earning assets increased as
the cost of interest-bearing liabilities decreased. See the accompanying tables
entitled "Consolidated Average Balances, Interest Income/Expenses and
Yields/Rates" and "Rate/Volume Variance Analysis" for more information.
[The remainder of this page intentionally left blank]
23
<PAGE> 25
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rate earned on earning assets..................... 9.15% 8.94% 8.85% 8.82% 8.20%
Rate paid on borrowed funds....................... 5.23 5.14 5.18 5.17 4.33
Interest rate spread.............................. 3.92 3.80 3.67 3.65 3.87
Net yield on earning assets....................... 4.41 4.32 4.26 4.21 4.44
</TABLE>
During 1998, the banking industry experienced a declining interest rate
environment as evidenced by two drops, of 25 basis points each, in the prime
rate during October 1998 and an additional drop of 25 basis points in the prime
rate again in November 1998. Despite the declining interest rate environment,
the Company's net interest income increased by 18.8 percent due to the 13.3
percent increase in average earning assets. This is in contrast to a relatively
flat interest rate environment during 1997.
Absolute changes in net interest income from 1997 to 1998 and from 1996 to 1997
were $3,422,000 and $2,076,000, respectively, as reported in the Consolidated
Statements of Income. The net interest margin increased to 4.52 percent in 1998
from 4.32 percent in 1997 and the interest rate spread increased to 4.04 percent
for 1998 from 3.80 percent for 1997.
[The remainder of this page intentionally left blank]
24
<PAGE> 26
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998
--------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
------- ------- ----
<S> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned income (1) ......... $ 378,189 $38,616 10.21%
Investment securities:
Taxable .................................. 74,952 4,488 5.99
Tax-exempt ............................... 13,488 1,139 8.44
--------- -------
Total investment securities ............. 88,440 5,627 6.36
Time deposits in other banks ............. 1,006 91 9.05
Federal funds sold ....................... 11,558 611 5.29
-------- ------
Total interest-earning assets (2) .......... 479,193 44,945 9.38
Noninterest-earning assets:
Cash and due from banks ................... 21,609
Premises and equipment .................... 26,986
Accrued interest and other assets ......... 13,642
Allowance for loan losses ................. (2,960)
---------
Total assets ............................. $ 538,470
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ........................... $ 85,044 3,286 3.86
Savings deposits .......................... 46,374 1,651 3.56
Time deposits ............................. 292,357 17,026 5.82
--------- -------
423,775 21,963 5.18
Other short-term borrowings ............... 3,258 164 5.03
Long-term debt ............................ 6,878 566 8.23
--------- -------
Total interest-bearing liabilities ....... 433,911 22,693 5.23
------- ----
Noninterest-bearing liabilities:
Demand deposits ........................... 60,147
Accrued interest and other liabilities .... 7,094
Shareholders' equity ...................... 37,318
---------
Total liabilities and shareholders' equity $ 538,470
=========
Net interest income/net interest spread ...... 22,252 4.15%
====
Net yield on earning assets .................. 4.64%
====
Taxable equivalent adjustment:
Loans ...................................... 374
Investment securities ...................... 752
-------
Total taxable equivalent adjustment ....... 1,126
-------
Net interest income .......................... $21,126
=======
</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.
25
<PAGE> 27
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------- ------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C>
$324,745 $31,999 9.85% $276,878 $27,468 9.92%
69,432 4,410 6.35 73,011 4,702 6.44
12,475 1,080 8.66 16,049 1,380 8.60
-------- ------- -------- -------
81,907 5,490 6.70 89,060 6,082 6.83
2,483 113 4.55 2,522 122 4.84
13,704 796 5.81 11,319 604 5.34
-------- ------- -------- -------
422,839 38,398 9.08 379,779 34,276 9.03
19,732 20,276
20,126 15,187
13,156 8,931
(2,472) (2,334)
-------- --------
$473,381 $421,839
======== ========
$ 66,265 2,722 4.11 $ 55,990 2,106 3.76
50,393 1,784 3.54 50,844 1,924 3.78
253,095 14,258 5.63 218,720 12,565 5.74
-------- ------- -------- -------
369,753 18,764 5.07 325,554 16,595 5.10
2,524 146 5.78 2,824 155 5.49
7,833 631 8.06 8,053 676 8.39
-------- ------- -------- -------
380,110 19,541 5.14 336,431 17,426 5.18
------- ------- ------- -----
55,466 51,003
4,377 4,326
33,428 30,079
-------- --------
$473,381 $421,839
======== ========
18,857 3.94% 16,850 3.85%
======= =====
4.46% 4.44%
======= =====
240 206
367 470
------- -------
607 676
$18,250 $16,174
======= =======
</TABLE>
26
<PAGE> 28
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
Average Volume Change in Volume
--------------------------------- -------------------------
1998 1997 1996 1998-1997 1997-1996
---- ---- ---- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income ............ $378,189 $324,745 $276,878 $ 53,444 $ 47,867
Investment securities:
Taxable ............................... 74,952 69,432 73,011 5,520 (3,579)
Tax exempt ............................ 13,488 12,475 16,049 1,013 (3,574)
-------- -------- -------- -------- --------
Total investment securities ......... 88,440 81,907 89,060 6,533 (7,153)
Interest-bearing deposits with other banks 1,006 2,483 2,522 (1,477) (39)
Federal funds sold ....................... 11,558 13,704 11,319 (2,146) 2,385
-------- -------- -------- -------- --------
Total earning assets ............... $479,193 $422,839 $379,779 $ 56,354 $ 43,060
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand ................................ $ 85,044 $ 66,265 $ 55,990 $ 18,779 $ 10,275
Savings ............................... 46,374 50,393 50,844 (4,019) (451)
Time .................................. 292,357 253,095 218,720 39,262 34,375
-------- -------- -------- -------- --------
Total interest-bearing deposits .... 423,775 369,753 325,554 54,022 44,199
Other short-term borrowings .............. 3,258 2,524 2,824 734 (300)
Long-term borrowings ..................... 6,878 7,833 8,053 (955) (220)
-------- -------- -------- -------- --------
Total interest-bearing liabilities . $433,911 $380,110 $336,431 $ 53,801 $ 43,679
======== ======== ======== ======== ========
Net interest income/net interest spread............................................................................
Net yield on earning assets........................................................................................
Net cost of funds..................................................................................................
</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.
27
<PAGE> 29
<TABLE>
<CAPTION>
Variance Attributed to (1)
----------------------------------
Average Rate Interest Income/Expense Variance 1998 1997
----------------------- ------------------------- ---------------------- --------------- ---------------
1998 1997 1996 1998 1997 1996 1998-1997 1997-1996 VOLUME RATE Volume Rate
---- ---- ---- ---- ---- ---- --------- --------- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10.21% 9.85% 9.92% $38,616 $31,999 $27,468 $6,617 $4,531 $5,415 $1,202 $4,726 $(195)
5.99 6.35 6.44 4,488 4,410 4,702 78 (292) 337 (259) (227) (65)
8.44 8.66 8.60 1,139 1,080 1,380 59 (300) 87 (28) (310) 10
------- ------- ------- ------ ------ ------ ---- ------ -----
6.36 6.70 6.83 5,627 5,490 6,082 137 (592) 424 (287) (537) (55)
9.05 4.55 4.84 91 113 122 (22) (9) (92) 70 ( 2) (7)
5.29 5.81 5.34 611 796 604 (185) 192 (118) (67) 135 57
------- ------- ------- ------ ------ ------ ---- ------ -----
9.38 9.08 9.03 44,945 38,398 34,276 6,547 4,122 5,629 918 4,322 (200)
3.86 4.11 3.76 3,286 2,722 2,106 564 616 737 (173) 409 207
3.56 3.54 3.78 1,651 1,784 1,924 (133) (140) (143) 10 (17) (123)
5.82 5.63 5.74 17,026 14,258 12,565 2,768 1,693 2,273 495 1,938 (245)
------- ------- ------- ------ ------ ------ ---- ------ -----
5.18 5.07 5.10 21,963 18,764 16,595 3,199 2,169 2,867 332 2,330 (161)
5.03 5.78 5.49 164 146 155 18 (9) 39 (21) (17) 8
8.23 8.06 8.39 566 631 676 (65) (45) (78) 13 (18) (27)
------- ------- ------- ------ ------ ------ ---- ------ -----
5.23 5.14 5.18 22,693 19,541 17,426 3,152 2,115 2,828 324 2,295 (180)
---- ---- ---- ------- ------- ------- ------ ------ ------ ---- ------ -----
4.15% 3.94% 3.85% $22,252 $18,857 $16,850 $3,395 $2,007 $2,801 $594 $2,027 $ (20)
==== ==== ==== ======= ======= ======= ====== ====== ====== ==== ====== =====
4.64% 4.46% 4.44%
==== ==== ====
4.74% 4.62% 4.59%
==== ==== ====
</TABLE>
28
<PAGE> 30
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 was $885,000, $773,000
and $834,000 in 1998, 1997 and 1996, respectively. This represents an increase
of $112,000, or 14.4 percent, in 1998, compared to declines of $61,000, or 7.4
percent, in 1997, and $254,000, or 23.3 percent, in 1996. There was a 39.4
percent increase in the allowance for loan losses at December 31, 1998 as
compared to December 31, 1997, in contrast to a decrease of 12.1 percent at
December 31, 1997 as compared to December 31, 1996. The increase in the
allowance for loan losses during 1998 was due primarily to reserves purchased
through acquisitions. Net loan charge-offs increased 23.1 percent in 1998 after
decreasing 6.1 percent in 1997. Net charge-offs on consumer loans amounted to
82.7 percent of total net charge-offs for 1998 compared to 63.7 percent in 1997
and 53.0 percent in 1996. Management believes that the $2,971,000 in the
allowance for loan losses at December 31, 1998 (.68% 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, 1998.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- -------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year............ $ 2,131 $ 2,425 $ 2,209 $ 1,548 $ 1,255
Loans charged off:
Commercial, financial and agricultural.................. 190 80 392 110 91
Real Estate - mortgage.................................. 50 325 158 -0- -0-
Consumer................................................ 1,223 783 680 399 319
--------- -------- --------- --------- ----------
Total loans charged off............................... 1,463 1,188 1,230 509 410
--------- -------- --------- --------- ----------
Recoveries on loans previously charged off:
Commercial, financial and agricultural.................. 11 5 10 22 52
Real Estate - mortgage.................................. -0- 9 1 1 2
Consumer................................................ 126 97 72 59 11
--------- -------- --------- --------- ----------
Total recoveries...................................... 137 111 83 82 65
--------- -------- --------- --------- ----------
Net loans charged off..................................... 1,326 1,077 1,147 427 345
Reserves acquired through purchase........................ 1,281 10 529 -0- -0-
Provision for loan losses................................. 885 773 834 1,088 638
--------- -------- --------- --------- ----------
Allowance for loan losses at end of period................ $ 2,971 $ 2,131 $ 2,425 $ 2,209 $ 1,548
========= ======== ========= ========= ==========
Loans, net of unearned income, at end of period........... $ 433,853 $326,134 $ 322,762 $ 237,841 $ 206,428
========= ======== ========= ========= ==========
Average loans, net of unearned income,
outstanding for the period.............................. $ 378,189 $324,745 $ 276,878 $ 223,222 $ 178,123
========= ======== ========= ========= ==========
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratios:
Allowance at end of period to loans, net of
unearned income....................................... .68% .65% .75% .93% .75%
Allowance at end of period to average loans,
net of unearned income................................ .79 .66 .88 .99 .87
Net charge-offs to average loans, net of
unearned income....................................... .35 .33 .41 .19 .19
Net charge-offs to allowance at end of period........... 44.63 50.54 47.30 19.33 22.29
Recoveries to prior year charge-offs.................... 11.53 9.02 16.31 20.00 21.96
</TABLE>
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 historical loan loss
experience of Community Bank, the amount of past due and nonperforming loans,
current and anticipated economic conditions, lender requirements and other
appropriate information. Community Bank allocates its allowance for loan losses
to specific loan categories based on an average of the previous five years net
losses for each loan type.
Management allocated the allowance for loan losses to specific loan classes as
follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ------------------- ------------------ ----------------- -----------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic loans
Commercial,
financial and
and agricultural $ 526 17.7% $ 149 7% $ 800 33% $ 442 20% $ 170 11%
Real estate -
mortgage ....... 357 12 618 29 340 14 -- -- -- --
Consumer ........ 2,088 70.3 1,364 64 1,285 53 1,767 80 1,378 89
------ ------ ------ ----- ------ --- -------- ---- ------ --
$2,971 100% $2,131 100% $2,425 100% $ 2,209 100% $1,548 100%
====== ====== ====== ===== ====== === ======== ==== ====== ===
</TABLE>
30
<PAGE> 32
NONPERFORMING ASSETS
Nonperforming assets as of December 31, 1998 increased 71.9 percent from
year-end 1997. 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, 1998. The following table
summarizes the Company's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans................................. $ 1,600 $ 1,093 $ 565 $ 491 $ 422
Loans past due 90 days or more.................... 2,384 975 470 317 343
Restructured loans................................ -0- -0- -0- -0- -0-
--------- --------- -------- -------- ---------
Total nonperforming loans......................... 3,984 2,068 1,035 808 765
Other real estate................................. 699 656 791 417 290
--------- --------- -------- -------- ---------
Total nonperforming assets...................... $ 4,683 $ 2,724 $ 1,826 $ 1,225 $ 1,055
========= ========= ======== ======== =========
Ratios:
Loan loss allowance to
total nonperforming assets...................... 0.63 0.78 1.33 1.80 1.47
========= ========= ======== ======== =========
Total nonperforming loans to total
loans (net of unearned interest)................ 0.009 0.006 0.003 0.003 0.004
========= ========= ======== ======== =========
Total nonperforming assets
to total assets................................. 0.008 0.006 0.004 0.003 0.004
========= ========= ======== ======== =========
</TABLE>
The ratio of loan loss allowance to total nonperforming assets decreased by 19.2
percent to 0.63 during 1998, compared to a decrease of 41.4 percent, to 0.78
percent, during 1997. The ratio of total nonperforming loans to total loans
increased 50.0 percent, to 0.009, during 1998, and total nonperforming assets to
total assets increased by 0.2% from 1997 to 1998, placing it at a slightly
higher level than in the previous three years. Each of these ratios compare
favorably with industry averages, and management is aware of no factors which
should suggest that they are prone to increases in future periods.
For the years ended December 31, 1998, 1997 and 1996, 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 immaterial.
There were no concentrations of loans exceeding 10 percent of total loans which
are not otherwise disclosed as a category of loans.
31
<PAGE> 33
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 1998 totaled $8,102,398, as compared to $4,890,980 in
1997 and $4,447,235 in 1996. These amounts are primarily from service charges on
deposit accounts, insurance commissions, Bank club dues ( a deposit account
packaged with other financial services) and debt cancellation fees. Service
charge increases are primarily a reflection of the deposit growth of the Company
as it has expanded into new markets. The insurance commissions increased in 1998
as a result of the activities of the Company's Community Insurance unit in the
areas of title insurance and life insurance. Service charges and Bank club dues
were up a combined 19.8%, primarily due to the continued geographic expansion of
the Company's bank subsidiary, leading to increases in the types of transaction
accounts which create these kinds of fees. The Company also recognized a gain on
the sale of investment securities in connection with a restructuring of its
investment portfolio in October 1998.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31, Percent Change
-------------------------------------- ------------------------
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ----------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposits............... $ 3,055 $ 2,512 $ 2,229 26.6% 12.7%
Insurance commissions..................... 2,269 796 656 185.1 21.3
Investment securities gains (losses)...... 466 (3) 8 15633.3 (137.5)
Bank club dues............................ 631 562 498 12.3 12.9
Debt cancellation fees.................... 688 275 388 150.2 (29.1)
Other..................................... 993 749 668 32.6 12.1
---------- ---------- -----------
$ 8,102 $ 4,891 $ 4,447 65.7 10.0
========== ========== ===========
</TABLE>
NONINTEREST EXPENSES
Noninterest expenses totaled $23,783,885 in 1998, which represents a 36.5
percent increase over 1997 noninterest expenses, which were 16.9 percent higher
than in 1996. Salaries and benefits increased $3,786,442, or 36.4 percent to
$14,189,168 in 1998, reflecting the increased personnel costs of completing the
staffing of the new Alabama bank locations and finance offices. Director and
committee fees, which were $638,120 in 1997 and $465,775 in 1996, increased
11.4% in 1998 to $711,358. Occupancy expense increased 44.3% to $2,113,400 in
32
<PAGE> 34
1998 primarily as a result of the building and renovation of several bank
locations. Furniture and equipment expense increased 27.2% in 1998 from the 1997
amount, to $1,543,634, compared to a 20.8% increase in 1997. Other operating
expenses increased 41.6% to $5,226,325 during 1998. From 1996 to 1997, other
operating expenses increased 13.0%.
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31, Percent Change
-------------------------------------- ------------------------
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ----------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............ $ 14,189 $ 10,403 $ 9,135 36.4% 13.9%
Occupancy expense......................... 2,113 1,478 1,031 43.0 43.4
Furniture and equipment expense........... 1,544 1,214 1,005 27.2 20.8
Director and committee fees............... 711 638 466 11.4 36.9
Amortization of intangibles............... 440 328 275 34.2 19.3
Advertising............................... 93 238 229 (60.9) 3.9
Insurance................................. 130 283 224 (54.1) 26.3
Professional fees......................... 360 273 250 31.9 1.0
Supplies.................................. 471 537 547 (12.3) (1.8)
Postage................................... 364 280 257 30.0 9.0
Telephone................................. 554 357 298 55.2 19.8
Training and Education.................... 256 98 45 161.2 117.8
Other..................................... 2,559 1,296 1,140 97.5 13.6
---------- ---------- -----------
$ 23,784 $ 17,423 $ 14,902 36.5 16.9
========== ========== ===========
</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 $1,526,204 (29.9%) for
1998, on pre-tax income of $5,105,697. The tax for 1997 was $1,451,419 (29.3%)
on income of $4,945,355 and for 1996 was $1,426,344 (29.2%) on income of
$4,885,330. 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. 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 1998 the effective
tax rate was 87.9 percent of the statutory Federal tax rate, compared to 86.2
percent in 1997. A more detailed explanation of income tax expense is included
in the accompanying notes to the Consolidated Financial Statements.
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.
33
<PAGE> 35
YEAR 2000 ISSUES
The Year 2000 issue is the result of potential problems with computer systems or
other equipment with computer chips using 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 and phase two
examination of the Company and its Year 2000 readiness in the past nine months.
As of December 31, 1998, no regulatory restriction had been imposed on the
Company by federal regulatory authorities in connection with the Company's
current Year 2000 plan and implementation.
Prior to year-end 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 a
micro-controller in elevators. As of December 31, 1998, all mission critical
systems have been validated and it is anticipated that 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 risk 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 risk associated with these relationships and management
does not believe that any special additions to the allowance for loan losses are
necessary. The Company's assessment of these parties will be ongoing throughout
1999 in order to identify any changes in the readiness of its credit customers
that could negatively impact the Company.
During 1998, the Company 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 spent an additional $5,000 for testing of the core system and estimates
it will spend approximately $15,000 during 1999 for third party reviews of test
results. Since this is an ongoing process involving continual evaluation, the
Company could incur additional unanticipated cost associated with its Year 2000
readiness. However, management believes that these cost would be material to the
Company's financial condition or results of operations.
Throughout 1998, the Company worked to assess Year 2000 readiness of vendors,
business partners, and other counter parties, 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
34
<PAGE> 36
1998. The Company will continue to monitor and evaluate the Year 2000 readiness
of third parties and take appropriate measures, including development of
contingency plans, to mitigate the risk to the Company where Year 2000
noncompliance by third parties could have a material adverse impact on the
Company's financial condition or results of operations. 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 financial condition and results of operations. Management is currently
developing a contingency plan to address any potential failures.
[The remainder of this page intentionally left blank]
35
<PAGE> 37
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Interest
rate sensitivity is a function of the repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities. Management monitors
its interest rate risk exposure through the use of a Static Gap analysis and an
Interest Rate Shock analysis. The static gap analysis measures the amount of
repricing risk embedded in the balance sheet at a specific point in time, by
comparing the difference in the volume of interest-earning assets and
interest-bearing liabilities that are subject to repricing within specific time
periods. Community Bank was liability sensitive at year-end 1998, indicating
that it had more liabilities than assets repricing during 1999. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180
days; and iv) .43% at 365 days.
The interest rate shock analysis measures the impact on Community Bank's net
interest income as a result of immediate and sustained shift in interest rates.
The movement in market rates are based on statistical regression analyses while
management makes assumptions concerning balance sheet growth and the magnitude
of interest rate movements for certain interest earning asset and
interest-bearing liabilities. Using actual maturity and repricing opportunities
of Community Bank's portfolio, in conjunction with management's assumptions, a
rate shock analysis is performed using a +200 basis points shift and a -200
basis points shift in interest rates.
The following tables estimate the impact of shifts in interest rates on
Community Bank's net interest income for the twelve months ending December 31,
1999:
RATE SHOCK ANALYSIS
<TABLE>
<CAPTION>
-200 +200
Basis Basis
Points Level Points
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Prime Rate.................................................... 5.75% 7.75% 9.75%
Interest Income............................................... $ 50,182 $ 51,750 $ 55,988
Interest Expense.............................................. 20,996 23,693 28,562
-------------- -------------- --------------
Net Interest Income........................................ $ 29,186 $ 28,057 $ 27,426
============== ============== ==============
Dollar change from Level...................................... $ 1,129 $ (631)
Percentage change from Level.................................. 4.03% (2.25%)
</TABLE>
36
<PAGE> 38
INTEREST SENSITIVITY
<TABLE>
<CAPTION>
Percentage Increase (Decrease)
in Interest Income/Expense
Principal Amount of Given Immediate and Sustained
Earning Assets, Interest Rate Shifts
Interest-bearing --------------------------------
Liabilities at Down 200 Up 200
December 31, 1998 Basis Points Basis Points
--------------------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets which reprice in:
One year or less.............. $ 154,840 (4.31)% 9.61%
Over one year................. 375,631 (2.62) 7.73
-----------------------
$ 530,471 (3.03) 8.19
=======================
Liabilities which reprice in:
One year or less.............. $ 360,085 (11.78) 21.31
Over one year................. 125,699 (10.78) 19.39
-----------------------
$ 485,784 (11.38) 20.55
=======================
Total net interest income sensitivity........................................ 4.03 (2.25)
</TABLE>
While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to be relatively stable to slightly lower
during 1999 and believes that Community Bank's current interest rate sensitivity
analysis fairly reflects its interest rate risk exposure during the twelve
months ending December 31. 1999. 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.
[The remainder of this page intentionally left blank]
37
<PAGE> 39
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
COMMUNITY BANCSHARES, INC.
The management of Community Bancshares, Inc. is responsible for the preparation,
integrity, and objectivity of the consolidated financial statements, related
financial data, and other information in this annual report. The consolidated
financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's best estimates
and judgement where appropriate. Financial information appearing throughout this
annual report is consistent with the consolidated financial statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company maintains a professional staff of
internal auditors who monitor compliance and assess the effectiveness of
internal control systems and coordinate audit coverage with independent
certified public accountants.
The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the consolidated
financial statements presented. Their opinion is based on an audit conducted in
accordance with generally accepted auditing standards as described in their
report.
The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the consolidated financial statements. The Audit
Committee meets periodically with both management and the independent certified
public accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and Board of Directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.
38
<PAGE> 40
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below.
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Financial Statements
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditor's Report................................................................................ 40
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................. 41
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 43
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 44-45
Notes to Consolidated Financial Statements -
December 31, 1998, 1997 and 1996.......................................................................... 46-83
Quarterly Results (Unaudited)............................................................................... 84
</TABLE>
39
<PAGE> 41
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Community Bancshares, Inc.
We have audited the consolidated statements of financial condition of Community
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Birmingham, Alabama
March 2, 1999
/S/ DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
40
<PAGE> 42
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash .................................................................. $ 6,204,531 $ 6,359,331
Due from banks ........................................................ 19,348,639 13,292,647
Interest-bearing deposits with banks .................................. 950,000 2,514,558
Federal funds sold .................................................... -0- 26,600,000
Securities available for sale ......................................... 97,391,609 85,092,069
Loans ................................................................. 435,000,601 327,084,688
Less: Unearned income ................................................. 1,147,965 950,205
Allowance for loan losses ....................................... 2,970,597 2,131,354
------------- -------------
NET LOANS ............................................. 430,882,039 324,003,129
Premises and equipment, net ........................................... 29,545,798 22,362,432
Accrued interest ...................................................... 5,991,588 5,089,765
Intangibles, net ...................................................... 6,355,833 4,117,825
Other real estate ..................................................... 699,014 656,271
Other assets .......................................................... 5,874,546 1,750,819
------------- -------------
TOTAL ASSETS .......................................... $ 603,243,597 $ 491,838,846
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................ $ 62,562,296 $ 52,356,858
Interest-bearing ................................................... 476,023,225 388,531,773
------------- -------------
TOTAL DEPOSITS ........................................ 538,585,521 440,888,631
Other short-term borrowings ........................................... 2,191,841 2,630,387
Accrued interest ...................................................... 3,580,934 2,912,286
Long-term debt ........................................................ 7,568,716 7,397,612
Other liabilities ..................................................... 4,083,184 2,012,500
------------- -------------
TOTAL LIABILITIES ..................................... 556,010,196 455,841,416
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY ............................ -0- 18,382
Shareholders' equity
Preferred stock, par value $.01 per share, 200,000 shares
authorized, no shares issued ................................... -0- -0-
Common stock, par value $.10 per share, 20,000,000 and 5,000,000
shares authorized, 4,647,924 and 2,031,606 shares
issued, as of December 31, 1998 and 1997, respectively ......... 464,792 203,161
Capital surplus .................................................... 29,100,383 18,524,301
Retained earnings .................................................. 20,169,519 18,824,795
Unearned ESOP shares - 241,350 and 102,376 shares
as of December 31, 1998 and 1997, respectively ................. (2,944,232) (2,002,902)
Accumulated other comprehensive income ............................. 442,939 429,693
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ............................ 47,233,401 35,979,048
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 603,243,597 $ 491,838,846
============= =============
</TABLE>
See notes to consolidated financial statements
41
<PAGE> 43
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans..................................... $ 38,422,899 $ 31,759,123 $ 27,261,734
Interest on investment securities:
Taxable securities........................................... 4,488,336 4,410,193 4,701,656
Securities exempt from federal income taxes.................. 752,013 712,565 910,822
Interest on federal funds sold................................. 611,030 795,620 604,111
Interest on deposits in other banks............................ 90,641 113,523 121,568
-------------- ------------- --------------
TOTAL INTEREST INCOME.......................... 44,364,919 37,791,024 33,599,891
-------------- ------------- --------------
INTEREST EXPENSE
Interest on deposits........................................... 21,963,493 18,764,865 16,595,417
Interest on other short-term borrowings........................ 163,673 145,991 154,982
Interest on long-term debt..................................... 565,887 630,553 675,706
-------------- ------------- --------------
TOTAL INTEREST EXPENSE......................... 22,693,053 19,541,409 17,426,105
-------------- ------------- --------------
NET INTEREST INCOME.............................................. 21,671,866 18,249,615 16,173,786
Provision for loan losses........................................ 884,682 772,579 834,140
-------------- ------------- --------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES.............. 20,787,184 17,477,036 15,339,646
NONINTEREST INCOME
Service charges on deposits 3,055,298 2,511,501 2,228,762
Insurance commissions.......................................... 2,268,680 795,805 656,134
Bank club dues................................................. 630,427 562,552 498,282
Debt cancellation fees......................................... 688,859 274,989 387,876
Other operating income......................................... 993,152 748,723 668,672
Investment securities gains (losses)........................... 465,982 (2,590) 7,509
--------------- ------------- --------------
TOTAL NONINTEREST INCOME....................... 8,102,398 4,890,980 4,447,235
-------------- ------------- --------------
NONINTEREST EXPENSES
Salaries and employee benefits................................. 14,189,168 10,402,726 9,135,335
Occupancy expense.............................................. 2,113,400 1,477,721 1,030,522
Furniture and equipment expense................................ 1,543,634 1,213,978 1,004,804
Director and committee fees.................................... 711,358 638,120 465,775
Other operating expenses....................................... 5,226,325 3,690,116 3,265,115
-------------- ------------- --------------
TOTAL NONINTEREST EXPENSES..................... 23,783,885 17,422,661 14,901,551
-------------- ------------- --------------
Income before income taxes....................................... 5,105,697 4,945,355 4,885,330
Provision for income taxes....................................... 1,526,204 1,451,419 1,426,344
-------------- ------------- --------------
NET INCOME BEFORE MINORITY INTEREST............ 3,579,493 3,493,936 3,458,986
Minority interest in consolidated subsidiary..................... -0- 18,342 -0-
-------------- ------------- --------------
NET INCOME..................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
============== ============= ==============
EARNINGS PER COMMON SHARE - basic................................ $ .90 $ .92 $ .93
EARNINGS PER COMMON SHARE - diluted.............................. $ .88 $ .92 $ .93
</TABLE>
See notes to consolidated financial statements
42
<PAGE> 44
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Capital Retained ESOP Comprehensive Comprehensive
Stock Surplus Earnings Shares Income Total Income
---------- ------------ ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,1996.... $ 184,927 $ 14,821,302 $ 14,262,319 $ (995,198) $ 745,887 $29,019,237
Net Income - 1996............ 3,458,986 3,458,986 $3,458,986
Other Comprehensive Income, net:
Net Change in Unrealized Gains
(Losses) on Securities .... (899,449) (899,449) (899,449)
----------
Comprehensive Income......... $2,559,537
==========
Cash dividends: Common....... (908,788) (908,788)
Issuance of Common Stock..... 15,073 2,998,420 3,013,493
Release of ESOP shares ...... 135,314 135,314
Pledging of additional ESOP
shares ................... (1,260,007) (1,260,007)
---------- ------------ ------------- ----------- ----------- -----------
Balance at December 31, 1996. 200,000 17,819,722 16,812,517 (2,119,891) (153,562) 32,558,786
Net Income - 1997............ 3,512,278 3,512,278 $3,512,278
Other comprehensive income, net:
Net Change in Unrealized Gains
(Losses) on Securities .... 583,255 583,255 583,255
----------
Comprehensive Income......... $4,095,533
==========
Cash dividends: Common....... (1,500,000) (1,500,000)
Issuance of Common Stock..... 3,161 704,579 707,740
Release of ESOP shares....... 116,989 116,989
---------- ------------ ------------- ----------- ----------- -----------
Balance at December 31, 1997 203,161 18,524,301 18,824,795 (2,002,902) 429,693 35,979,048
NET INCOME - 1998............ 3,579,493 3,579,493 $3,579,493
OTHER COMPREHENSIVE INCOME, NET:
NET CHANGE IN UNREALIZED GAINS
(LOSSES) ON SECURITIES .... 13,246 13,246 13,246
----------
COMPREHENSIVE INCOME......... $3,592,739
==========
CASH DIVIDENDS: COMMON....... (2,031,608) (2,031,608)
2:1 STOCK SPLIT.............. 203,161 (203,161) -0-
ISSUANCE OF COMMON STOCK..... 58,470 10,576,082 10,634,552
RELEASE OF ESOP SHARES....... 135,628 135,628
PLEDGING OF ADDITIONAL ESOP
SHARES.................... (1,076,958) (1,076,958)
---------- ------------ ------------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998. $ 464,792 $ 29,100,383 $ 20,169,519 $(2,944,232) $ 442,939 $47,233,401
========== ============ ============= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
43
<PAGE> 45
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses .................................... 884,682 772,579 834,140
Provision for depreciation and amortization .................. 1,990,250 1,577,243 1,251,145
Amortization of investment security
premiums and accretion of discounts ........................ 166,455 82,839 (44,943)
Deferred tax expense ......................................... 308,759 386,061 61,324
Realized investment security (gains) losses .................. (465,982) 2,590 (7,509)
Loss (gain) on sale of premises and equipment ................ 26,599 (64,787) 39,866
Increase in accrued interest receivable ...................... (901,823) (242,457) (1,009,584)
Increase in accrued interest payable ......................... 668,648 369,461 233,690
Other ........................................................ (3,520,039) (439,836) 1,217,000
------------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 2,737,042 5,955,971 6,034,115
------------- ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............ 24,045,040 5,007,863 20,014,380
Proceeds from maturity of securities available for sale ......... 21,785,801 6,636,625 15,569,562
Purchase of securities available for sale ....................... (57,808,777) (8,938,589) (53,952,015)
Net decrease (increase) in interest-bearing
deposits with other banks ..................................... 1,564,558 (740,780) 138,510
Cash used in acquisition of bank branches and finance offices ... (5,321,041) -0- (929,639)
Net increase in loans to customers .............................. (99,903,246) (5,349,333) (43,823,086)
Proceeds from sale of premises and equipment .................... 87,630 250,596 115,319
Capital expenditures ............................................ (8,452,082) (6,420,709) (5,352,381)
Net proceeds from sale of other real estate ..................... 1,119,355 240,000 380,508
------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................... (122,882,762) (9,314,327) (67,838,842)
------------- ------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts .......................................... 30,636,345 8,114,624 19,052,113
Net increase in certificates of deposit ......................... 61,416,395 31,022,542 15,686,984
Net (decrease) increase in short-term borrowings ................ (438,546) (5,275,058) 6,897,972
Repayment of long-term debt ..................................... (770,226) (766,848) (763,117)
Issuance of common stock ........................................ 10,634,552 402,897 3,013,493
Cash dividends .................................................. (2,031,608) (1,500,000) (908,788)
------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 99,446,912 31,998,157 42,978,657
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents .............. (20,698,808) 28,639,801 (18,826,070)
Cash and cash equivalents at beginning of year .................... 46,251,978 17,612,177 36,438,247
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $ 25,553,170 $ 46,251,978 $ 17,612,177
============= ============ ============
</TABLE>
See notes to consolidated financial statements
44
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................... $ 22,024,405 $ 19,171,945 $ 16,956,814
Income taxes................................................. 843,623 1,933,488 601,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Other real estate of $792,518, $808,150 and $1,328,284 was acquired in 1998,
1997 and 1996, respectively, through foreclosure. Other assets acquired by
foreclosure amounted to $277,675 in 1998 and $471,027 in 1997.
Upon the pledging of additional shares to obtain additional ESOP debt of
$1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996, long-term debt
was increased and equity was decreased. The debt was reduced and shares were
released by $135,628, $116,989, and $135,314, respectively, during each of the
years ended December 31, 1998, 1997, and 1996 as a result of payments made by
the Company's ESOP on the outstanding ESOP debt.
In August 1997, the Company issued 11,770 shares of its common stock to the
owners of Southern Select Insurance, Inc. as a portion of the consideration
given in exchange for 51% of its issued and outstanding common stock. The
Company issued an additional 22,306 shares of its common stock, in April 1998,
to the owners of Southern Select Insurance, Inc. as a portion of the
consideration in exchange for the remaining 49% of its issued and outstanding
common stock. In April 1998 the Company issued 10,833 shares of its common stock
to the owners of Chafin Insurance Agency, Inc. as a portion of the consideration
given in exchange for 100% of the issued and outstanding shares of common stock.
The Company also issued 6,667 shares of its common stock to the owner of the Jim
Murphree Insurance Agency, Inc. as a portion of the consideration given in
exchange for 100% of the issued and outstanding shares of common stock.
[The remainder of this page intentionally left blank]
See notes to consolidated financial statements
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the
accounts of Community Bancshares, Inc. and its wholly owned subsidiaries (the
"Company"), Community Bank, Community Appraisals, Inc., Community Insurance
Corp. and 1st Community Credit Corporation (collectively, the "Bank.") All
significant intercompany balances and transactions have been eliminated.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowances based on their
judgements about information available to them at the time of their examination.
Investments in Securities The Company's investments in securities must be
classified as either "Investment Securities Held to Maturity" or "Investment
Securities Available for Sale" and accounted for as follows:
- Securities Held to Maturity. Bonds, notes and debentures for which the
Bank has the positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using methods which approximate
level yields over the period to maturity.
- Securities Available for Sale. Securities available for sale consist of
bonds, notes, debentures, and certain equity securities not classified as
securities held to maturity.
The Company and its subsidiaries have no trading securities. Effective December
1, 1995, the Company reclassified all of its investments in securities as
securities available for sale.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders's
equity (Accumulated Other Comprehensive Income) until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Revenue Recognition Interest on loans is accrued and credited to operations
based upon the principal amount outstanding, except for interest on certain
consumer loans which is recognized over the term of the loan using a method
which approximates level yields.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
Allowance for Loan Losses The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential loan losses in the
loan portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loan loss experience, current
domestic and international economic conditions, volume, growth and composition
of the loan portfolio, and other relevant factors. Loans deemed uncollectible
are charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance.
Loan Fees The Company accounts for loan fees and origination costs in
accordance with FASB Statement No. 91, entitled: Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Direct Costs
of Leases. The basic requirement of this statement calls for the Company to
treat loan fees, net of direct costs, as an adjustment to the yield of the
related loan over the term of the loan.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation. Expenditures for additions and major improvements that
significantly extend the useful lives of the assets are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred. The
carrying value of assets traded in are used to adjust the carrying values of the
new assets acquired by trade. Assets which are disposed of are removed from the
accounts and the resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.
Other Real Estate Other real estate comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties are carried at the lower of cost or fair market value based on
appraised value at the date acquired. Loan losses arising from the acquisition
of such properties are charged against the allowance for loan losses.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Earnings Per Common Share Basic earnings per common share are computed by
dividing earnings available to stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect
per share amounts that would have resulted if dilutive potential common stock
had been converted to common stock, as prescribed by SFAS No. 128, Earnings per
Share. The following reconciles the weighted average number of shares
outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average of common shares outstanding ... 3,994,798 3,807,232 3,727,506
Effect of dilutive options ...................... 57,461 22,999 -0-
--------- --------- ---------
Weighted average of common shares
Outstanding effected for dilution ............ 4,052,259 3,830,231 3,727,506
========= ========= =========
</TABLE>
Income Taxes Provisions for income taxes are based on amounts reported in the
statement of income (after exclusion of non-taxable income such as interest on
state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred tax assets and liabilities are included in the
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in SFAS No. 109, Accounting for Income Taxes.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
The Company and its subsidiaries file a consolidated federal income tax return.
Each subsidiary provides for income taxes on a separate-return basis, and remits
to the Company amounts determined to be currently payable.
Pension and Employee Stock Ownership Plans The Company and its subsidiaries
have various employee benefit plans which cover substantially all employees.
Pension expense is determined based on an actuarial valuation. The Company
contributes amounts to the pension fund sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act. Contributions to
the Employee Stock Ownership Plan are determined by the Board of Directors but
may not be less than the amount required to cover the debt service on the ESOP
loan. In February 1998, the Financial Accounting Standards Board issued
Financial Accounting Statement SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits. This Statement standardizes the
disclosure requirement for pensions and other postretirement benefits to the
extent practicable, and requires additional information on changes in the
benefits obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain other disclosures previously
required. The adoption of this statement had no material impact on the financial
condition or results of operations of the Company.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Intangibles Intangibles consist primarily of legal organizational costs and
goodwill. Organizational costs are generally amortized over 5 years using the
straight-line method. The goodwill intangible represents premiums paid on the
purchase of assets and deposit liabilities. The asset is stated at cost, net of
accumulated amortization, which is provided using the straight-line method over
the estimated useful life of approximately 15 and 20 years.
Off Balance Sheet Financial Instruments In the ordinary course of business the
Company has entered into off balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines of up to
$10,000,000. In addition, the Company has an available overnight funds line of
up to $70,000,000 from the Federal Home Loan Bank of Atlanta (FHLB-Atlanta).
Debt Cancellation Contracts The Company began issuing debt cancellation
contracts on certain loans to customers as of October 1, 1995. The contract
represents an agreement by the Company to cancel the debt of the borrower upon
said borrower's death. Contracts may not be written on loans in excess of
$15,000 per borrower. The Company charges fees equivalent to that authorized by
the state banking authorities and establishes a reserve account, from fees
collected, to cover potential claims. The reserve for debt cancellation
contracts totaled $137,803 and $135,139 at December 31, 1998 and 1997.
Cash Flow Information For purposes of the statements of cash flows, the
Company considers cash, due from banks and federal funds sold as cash and cash
equivalents.
Stock Based Compensation The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123, became 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 fair value method of expense
recognition as described in SFAS No. 123. The Company has elected to follow APB
No. 25 in accounting for its employee stock options.
Repurchase Agreements In June 1996, the Financial Accounting Standards board
issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, relating to repurchase agreements,
securities lending and other similar transactions, and pledged collateral. This
statement established new criteria for determining whether a transfer of
financial assets in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral. Subsequently, SFAS No. 127, Deferral
of the Effective Date of Certain Provisions of SFAS No. 125 was issued and
deferred
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
implementation of certain aspects of the original statement until January 1,
1998. The adoption of these provisions did not have a material impact on the
Company's financial position or results of operations.
Net Income Per Share The Company also adopted SFAS No. 128, Earnings Per
Share, during 1997. See Note 1 - Earnings per Share, and Note 11 - Prior Period
Restatement.
Reclassification Certain amounts in 1997 and 1996 have been reclassified to
conform with the 1998 presentation.
Recently Issued Accounting Standards In June 1997, the Financial Accounting
Standards Board issued Financial Accounting Statement No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes reporting and presentation
standards for comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during the period from transactions
and other events and circumstances arising from nonowner sources. The adoption
of this statement, on January 1, 1998, had no material impact on the Company's
financial condition or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
provisions of this statement establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments. This statement is effective for financial statements for periods
beginning after December 15, 1997. All of the Company's subsidiaries offer
similar products and services, are located in the same geographic region, and
serve the same customer segments of the market. As a result, management
considers all units as one operating segment and therefore feels that the basic
financial statements and related footnotes provide details related to segment
reporting.
In February 1998, the FASB issued SFAS No 132, Employer's Disclosures about
Pension and Other Postretirement Benefits. This statement standardizes the
disclosure requirement for pensions and other Postretirement benefits to the
extent practicable, and requires additional information on changes in the
benefits obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain other disclosures previously
required. The adoption of this statement had no material impact on the financial
condition or results of operations of the Company.
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve. The amount of those reserves required at
December 31, 1998 was approximately $1,481,000.
During 1998 the Bank implemented a system, which under Regulation D and recent
Federal Reserve Rulings, allows the Bank to segregate its transaction accounts
into a transaction sub-account component and a non-transaction sub-account
component. The transaction sub-account component remains subject to the higher
10% reserve requirement while the non-transaction sub-account component is
subject to a 3% reserve requirement. This process allows the Bank to maintain
lower reserves required by the Federal Reserve System.
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1998 and 1997, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (Accumulated Other Comprehensive Income) until realized.
At December 31, 1998, the Company's available-for-sale securities reflected net
unrealized gains of $738,232, which resulted in an increase in shareholders'
equity of $ 442,939, net of deferred tax expense, compared to net unrealized
gains of $716,155 and a resultant increase in stockholders' equity of $429,693,
net of deferred tax liability, at December 31, 1997. At December 31, 1996, the
investment securities reflected $255,937 of net unrealized losses in available
for sale securities, with a decrease in shareholders' equity, net of deferred
tax benefit, of $153,562.
[The remainder of this page intentionally left blank]
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
The carrying amounts of investment securities as shown in the consolidated
statements of financial condition of the Company and their approximate fair
values at December 31, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
- ------------------------
SECURITIES AVAILABLE FOR SALE:
U. S. GOVERNMENT AND AGENCY SECURITIES .... $48,877,741 $ 484,437 $ 217,017 $49,145,161
STATE AND MUNICIPAL SECURITIES ............ 14,640,733 545,949 -0- 15,186,682
MORTGAGE-BACKED SECURITIES ................ 31,399,003 54,712 129,849 31,323,866
EQUITY SECURITIES ......................... 1,735,900 -0- -0- 1,735,900
----------- ---------- ----------- -----------
$96,653,377 $1,085,098 $ 346,866 $97,391,609
=========== ========== =========== ===========
As of December 31, 1997:
- ------------------------
Securities available for sale:
U. S. government and agency securities .... $51,267,361 $ 117,694 $ 231,651 $51,153,404
State and municipal securities ............ 12,118,830 578,983 -0- 12,697,813
Mortgage-backed securities ................ 20,989,723 267,361 16,232 21,240,852
----------- ---------- ----------- -----------
$84,375,914 $ 964,038 $ 247,883 $85,092,069
=========== ========== =========== ===========
</TABLE>
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
The contractual maturities of securities available for sale at December 31, 1998
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
AS OF DECEMBER 31, 1998:
- ------------------------
SECURITIES AVAILABLE FOR SALE:
DUE IN ONE YEAR OR LESS ..................... $11,104,481 $11,086,181
DUE AFTER ONE YEAR THROUGH FIVE YEARS ....... 24,744,893 25,145,548
DUE AFTER FIVE YEARS THROUGH TEN YEARS ...... 30,285,147 30,417,673
DUE AFTER TEN YEARS ......................... 28,782,956 29,006,307
EQUITY SECURITIES ........................... 1,735,900 1,735,900
----------- -----------
$96,653,377 $97,391,609
=========== ===========
</TABLE>
Mortgage-backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
Gross realized gains and losses on investments in debt securities available for
sale for each of the three years in the period ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Gross realized gains ......... $472,904 $48,454 $136,304
Gross realized losses ........ 6,922 51,044 128,795
</TABLE>
The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $80,163,283 and $73,920,000 at
December 31, 1998 and 1997, respectively.
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - LOANS
The Bank grants loans to customers primarily in North Central Alabama and South
Central Tennessee.
The major classifications of loans as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural ......... $ 94,056,615 $ 64,136,607
Real estate - construction ..................... 6,152,759 3,498,853
Real estate - mortgage ......................... 205,457,289 172,504,056
Consumer ....................................... 129,333,938 86,945,172
------------ ------------
435,000,601 327,084,688
Unearned income ................................ 1,147,965 950,205
Allowance for loan losses ...................... 2,970,597 2,131,354
------------ ------------
Net loans ...................................... $430,882,039 $324,003,129
============ ============
</TABLE>
As of December 31, 1998, there were no loans which the Bank had specifically
classified as impaired. Other nonaccrual loans at December 31, 1998 and 1997
amounted to approximately $1,599,439 and $1,093,000, respectively. For the years
ended December 31, 1998 and 1997, the difference between 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
immaterial.
The Bank has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
[The remainder of this page intentionally left blank]
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year ................ $ 2,131,354 $ 2,424,847 $ 2,208,798
Charge-offs ................................. (1,463,450) (1,187,263) (1,229,976)
Recoveries .................................. 137,264 112,417 82,081
----------- ----------- -----------
Net charge-offs ........................... (1,326,186) (1,074,846) (1,147,895)
Provision for loan losses ................... 884,682 772,579 834,140
Reserves acquired through acquisitions ...... 1,280,747 8,774 529,804
----------- ----------- -----------
Balance at end of year ...................... $ 2,970,597 $ 2,131,354 $ 2,424,847
=========== =========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land ....................................................... $ 3,911,361 $ 2,426,678
Buildings, land improvements and construction in process ... 19,904,561 15,761,915
Furniture and equipment .................................... 10,123,164 7,851,306
Automobiles ................................................ 1,925,544 1,498,323
Leasehold improvements ..................................... 927,894 684,178
----------- -----------
36,792,524 28,222,400
Less allowance for depreciation ............................ 7,246,726 5,859,968
----------- -----------
$29,545,798 $22,362,432
=========== ===========
</TABLE>
The provisions for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1998, 1997 and 1996 were $1,549,920,
$1,249,420 and $976,519, respectively. The Bank capitalized $123,099 in interest
cost related to building construction in 1998.
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 - DEPOSITS
The major classifications of deposits as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Noninterest-bearing demand...................................................... $ 62,562,296 $ 52,356,858
Interest-bearing demand......................................................... 89,808,368 71,442,832
Savings......................................................................... 58,722,767 51,050,582
Time............................................................................ 218,507,099 179,055,956
Certificates of deposit of $100,000 or more..................................... 90,449,991 68,427,403
Other time deposits............................................................. 18,535,000 18,555,000
------------- --------------
$ 538,585,521 $ 440,888,631
============= ==============
</TABLE>
The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------- ------------- --------------
<S> <C> <C> <C>
Three months or less............................................. $ 17,537,343 $ 18,535,000 $ 36,072,343
Over three through six months.................................... 10,577,684 -0- 10,577,684
Over six through twelve months................................... 23,990,216 -0- 23,990,216
Over twelve months............................................... 38,344,748 -0- 38,344,748
------------- ------------- --------------
$ 90,449,991 $ 18,535,000 $ 108,984,991
============= ============= ==============
</TABLE>
NOTE 8 - LONG TERM DEBT
At December 31, 1998 and 1997, the Company had notes payable totaling $7,568,716
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 December 31, 1998 and 1997, the amounts
outstanding were $2,846,631 and $3,557,509, respectively, due December 17, 2002,
bearing interest at a floating prime rate, collateralized by 100% of the common
stock of the subsidiary bank. The note agreement contains provisions which limit
the Company's right to transfer or issue shares of the subsidiary bank's 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.
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 - LONG TERM DEBT - CONTINUED
On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock from the Company's public
offering of new common stock. The note was originally secured by 80,000 shares
of purchased stock. The promissory note had been refinanced in years subsequent
to 1993 as additional shares were purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments of
$31,677 due monthly through November 16, 2010, with all remaining principal, if
any, due upon that date. The Company has guaranteed this debt and in accordance
with the applicable accounting and reporting guidelines the debt has been
recognized on the Company's statement of condition, with an offsetting charge
against equity. As principal payments are made by the ESOP, the debt and
offsetting charge against equity are reduced. The shares securing the note are
released on a prorata basis by the lender as monthly payments of principal and
interest are made. The outstanding balance of this note was $2,944,232 at
December 31, 1998, secured by 241,350 of unreleased shares of Company stock. See
Note 16.
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 $ 1,777,853
and $1,837,201 at December 31, 1998 and 1997, respectively.
Maturities of long-term debt following December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................ $ 932,661
2000............................ 949,238
2001............................ 967,784
2002............................ 987,779
2003............................ 297,837
Thereafter...................... 3,433,417
-----------
$ 7,568,716
===========
</TABLE>
[The remainder of this page intentionally left blank]
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Amortization of intangibles ....... $ 440,330 $ 327,823 $ 274,826
Advertising ....................... 92,663 237,887 229,087
Insurance ......................... 129,572 282,791 223,696
Professional fees ................. 359,981 272,999 250,105
Supplies .......................... 471,676 537,374 546,697
Postage ........................... 363,948 280,346 257,071
Telephone ......................... 553,693 357,048 298,437
Training and Education ............ 255,497 98,337 44,515
Other ............................. 2,558,965 1,295,511 1,140,681
---------- ---------- ----------
$5,226,325 $3,690,116 $3,265,115
========== ========== ==========
</TABLE>
NOTE 10 - INCOME TAXES
Federal and state income taxes receivable and (payable) as of December 31, 1998
and 1997 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Current
Federal ........................................ $ (30,282) $225,520
========= ========
State .......................................... $(162,232) $ 33,316
========= ========
</TABLE>
The components of the net deferred income tax asset and (liability) included in
other assets and other liabilities, respectively, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
DEFERRED TAX ASSET:
Federal..................................................................... $ 652,659 $ 667,885
State....................................................................... 114,763 116,176
------------ --------------
Total gross deferred income tax asset...................................... 767,422 784,061
------------ --------------
Deferred tax liability:
Federal..................................................................... (1,194,959) (898,021)
State....................................................................... (159,583 (158,978)
------------ --------------
Total gross deferred income tax liability.................................. (1,354,542) (1,056,999)
------------ --------------
Net deferred income tax asset (liability)..................................... $ (587,120) $ (272,938)
============ ==============
</TABLE>
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10 - INCOME TAXES - CONTINUED
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
Net unrealized losses (gains) on securities
available for sale.......................................................... $ (295,293) $ (286,462)
Depreciation.................................................................. (945,316) (739,956)
Pension expense............................................................... 260,079 150,521
Provision for loan losses..................................................... 335,450 469,998
Deferred compensation......................................................... 15,152 49,419
Provision for debt cancellation............................................... 55,121 52,922
Other......................................................................... (12,313) 30,620
------------ --------------
$ (587,120) $ (272,938)
============ ==============
</TABLE>
The components of income tax expense for each of the years ended December 31,
1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------------------------------ ------------------------------
CURRENT DEFERRED Current Deferred Current Deferred
------------ ------------ ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Federal........ $ 1,070,862 $ 264,234 $ 1,041,065 $ 322,262 $ 1,164,205 $ 59,451
State.......... 146,583 44,525 24,293 63,799 200,815 1,873
------------ ------------ ------------- ------------- ------------ --------------
$ 1,217,445 $ 308,759 $ 1,065,358 $ 386,061 $ 1,365,020 $ 61,324
============ ============ ============= ============= ============ ==============
</TABLE>
The principal sources of temporary differences resulting in deferred income
taxes included in the accompanying consolidated statements of income and the tax
effect of each are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Depreciation............................ $ 205,360 $ 140,117 $ 88,004
Provision for loan losses............... 135,538 159,886 36,173
Pension expense......................... (109,558) (61,630) 50,372
Alternative minimum
tax credit............................ -0- -0- 29,293
Other................................... 77,419 147,688 (142,518)
------------- ------------- ------------
$ 308,759 $ 386,061 $ 61,324
============= ============= ============
</TABLE>
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10 - INCOME TAXES - CONTINUED
Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 1998, 1997 and 1996 of $167,940, ($1,036) and $3,004,
respectively.
The following is a reconciliation of the difference in the effective tax rate
and the federal statutory rate:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rates.................. 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities............................. (5.0) (4.9) (6.3)
Tax-exempt loan income............................ (2.5) (3.2) (2.8)
State income tax, net of federal tax benefit...... -- --- 2.2
Interest expense disallowance..................... 0.6 0.7 0.9
Other items....................................... 2.8 2.7 1.2
----- ----- -----
Effective income tax rate......................... 29.9% 29.3% 29.2%
===== ===== =====
</TABLE>
NOTE 11 - PRIOR PERIOD RESTATEMENT
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, was adopted by the Company during 1997. Earnings per share amounts for
1997 and 1996 have been restated to give effect for the 2:1 stock split
effective March 26, 1998.
NOTE 12 - SHAREHOLDERS' EQUITY
In 1998, the Board of Directors passed a resolution authorizing the preparation
of a Registration Statement for the proposed sale of up to 500,000 newly issued
shares of the Company's $.10 par value common stock. Shares were offered to the
public, at a purchase price of $19.00 per share, in accordance with the
Company's Prospectus dated August 14, 1998. The offering was closed on December
1, 1998 upon full subscription of all shares offered for sale, raising
$9,468,655 of capital after reduction for offering costs.
On March 28, 1996, the Company issued a total of 135,000 options to its
directors to purchase its common shares. The options were distributed among the
directors 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 $10.00 per share, the market value of the shares at the time of issuance. The
options are exercisable between April 1, 1996 and March 31, 2001 (1996 options).
In March 1997, an additional 103,000 options were issued to the Company's
directors with an option price of $12.50 per share. These options were
exercisable between April 1, 1997 and March 31, 2002 (1997 options). In March
1998, 203,331 options were issued to directors and certain senior officers with
an option price of $15.00 per share. These options are exercisable between
April 1, 1998 and March 31, 2003 (1998 options). Options under the plan 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.
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED
The following sets forth certain information regarding stock options for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Number Wgt. Average
of Shares Exercise Price
----------- ---------------
<S> <C> <C>
Balance, December 31, 1995.................................... -0- $ -0-
Granted, Year Ended December 31, 1996......................... 270,000 10.00
Exercised, Year Ended December 31, 1996....................... -0- -0-
----------- ---------------
Balance, December 31, 1996.................................... 270,000 10.00
Granted, Year Ended December 31, 1997......................... 103,000 12.50
Exercised, Year Ended December 31, 1997....................... (30,000) (10.16)
----------- ---------------
Balance, December 31, 1997.................................... 343,000 10.74
GRANTED, YEAR ENDED DECEMBER 31, 1998......................... 203,331 15.00
EXERCISED, YEAR ENDED DECEMBER 31, 1998....................... (32,000) (11.72)
----------- --------------
BALANCE, DECEMBER 31, 1998.................................... 514,331 $ 12.36
=========== ==============
</TABLE>
<TABLE>
<CAPTION>
Expiration Options
Number Date Exercisable
------------- ------------ --------------
<S> <C> <C> <C>
Options with Exercise Price of $10.00............................ 222,000 3-31-2001 222,000
Options with Exercise Price of $12.50............................ 99,000 3-31-2002 99,000
Options with Exercise Price of $15.00............................ 193,331 3-31-2003 193,331
------------- --------------
Total outstanding, December 31, 1998............................. 514,331 514,331
============= ==============
</TABLE>
The number of shares and weighted average exercise price have been restated to
give effect for the 2:1 stock split effective March 26, 1998.
In October 1995, the 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 Stocks 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 cost has been recognized
by the Company.
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 1996, 1997 and 1998 was estimated at
the date of grant using a Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.
The Company's options outstanding have a weighted average contractual life of
3.19 years. The weighted average fair value of options granted was $ 3.68 in
1998, $3.32 in 1997 and $2.66 in 1996. The fair value of each option granted is
estimated using the following weighted-average assumptions in the option pricing
model: expected dividend yield of 3.33% for 1998, 3.00% for 1997 and 2.50% for
1996; an expected option life of 5 years; expected volatility of 0.289 for 1998,
1997 and 1996; and a risk free interest rate of 5.49%, 6.12% and 5.19% for 1998,
1997 and 1996, respectively.
If compensation cost for the Company's stock-based compensation plan had been
determined consistent with SFAS No. 123, net income and earnings per share would
have been as presented below for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Pro forma earnings ($000's) $ 3,101 $ 3,361 $ 3,120
Pro forma Earnings per Common Share - basic .78 .88 .84
Pro forma Earnings per Common Share - diluted .77 .88 .84
</TABLE>
These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent average number of shares
outstanding on a diluted basis to be 57,461 greater than that used to calculate
basic earnings per share for 1998. Average shares outstanding when assuming
dilution were greater than average shares outstanding for basic earnings per
share by 22,999 for 1997. Diluted shares and basic shares were the same for
1996. The dilutative effect on earnings per share for the year ended December
31, 1998 was $.02. There was no dilutative effect on the book value of the
Company's common shares at December 31, 1997 or 1996.
The effects of applying SFAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board of Directors.
Annual dividends of $.50 per share, $.38 per share and $.25 per share were
declared by the Company's Board of Directors on its common stock and paid in
January of 1998, 1997 and 1996, respectively. The payment of dividends on common
stock is subject to the prior payment of principal and interest on the Company's
long-term debt, maintenance of sufficient earnings and capital of the
subsidiaries, and to regulatory restrictions. (See Notes 8 and 17).
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension of credit that are recorded on the consolidated
statements of financial condition. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to the Company. The Company has
not been required to perform on any financial guarantees nor has it incurred any
losses on its commitments in either 1998 or 1997. Following is a discussion of
these commitments:
Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 1998 and 1997, the Company has issued standby letters of credit of
approximately $621,000 and $577,000, respectively.
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. Management does not anticipate any material
losses as a result of these letters of credit.
Loan Commitments: As of December 31, 1998 and 1997, the Company had commitments
outstanding to extend credit totaling approximately $15,698,000 and $18,049,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.
Litigation: On November 19, 1998, Mr. William Towns, a shareholder of the
Company, filed a shareholder derivative action against the directors of the
Company in the state Circuit Court of Blount County, Alabama. Mr. Towns amended
his complaint on January 14, 1999 to add the Company and Community Bank as
defendants in the action. On February 11, 1999, the complaint was again amended
to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the
Company, as additional plaintiffs. The complaint alleged that the directors of
the Company breached their fiduciary duty to the Company and its shareholders,
engaged in fraud, fraudulent concealment, suppression of material fact and
suppression of the plaintiff shareholders, failed to supervise management, and
conspired to conceal wrongful acts from the Company's shareholders and paid
themselves excessive director fees. The complaint also alleged that the Board of
Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson,
Sr., the Chairman of the Board, Chief Executive Officer and President of the
Company, including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint seeks an unspecified amount of compensatory and punitive damages,
removal of the current
63
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED
directors, appointment of a new Board of Directors, and attorneys fees and
costs. Management of the company believes that the plaintiffs' allegations are
false and that the action lacks merit. The Company and its directors intend to
defend the action vigorously, and have filed a motion with the court seeking to
have the action dismissed. Management of the Company believes that the action
will not have a material adverse effect on the Company's financial condition and
results of operations.
The Company and its subsidiaries are parties to other litigation and claims
arising in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims are not material to the consolidated financial statements.
In September 1998, Community Bank discovered that a number of automobile and
truck loans had been made through its Ft. Payne, Alabama Wal-Mart location which
were not in compliance with the Bank's lending policy. The total amount of those
loans was approximately $9,300,000. The appropriate authorities and the Bank's
financial institution bond carrier were notified, and investigations are still
proceeding. As of December 31, 1998, borrowers had defaulted on loans totaling
approximately $3,400,000 and the Bank had taken possession of over 200 vehicles,
which were the collateral for such defaulted loans. Although investigation of
the matter has not yet been completed, management currently believes that the
Bank will be reimbursed either by its bond carrier or by other parties involved
in these transactions and the Bank will not incur any material losses from such
loans.
NOTE 14 - CONCENTRATIONS OF CREDIT
All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. Investments in state and municipal
securities also involve governmental entities within the Company's market area.
The concentrations of credit by type of loan are set forth in Note 4. The
commitments to extend credit relate primarily to consumer cash lines which
represented approximately $2,399,000 and $2,967,000 of the unused commitment
balances at December 31, 1998 and 1997. All remaining commitments consist
primarily of unused real estate commitment lines.
The Company maintains its cash accounts at various commercial banks in Alabama.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $18,440,464 and $6,791,718,
at December 31, 1998 and 1997, respectively.
[The remainder of this page intentionally left blank]
64
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - PENSION PLAN
The Company has a defined benefit plan that provides retirement and disability
benefits for substantially all employees of the Company and its subsidiaries,
and death benefits for their beneficiaries. An employee will become a
participant in the Pension Plan on January 1 or July 1 after completing 12
months of employment during which the employee works at least 1,000 hours. All
employees are eligible to become participants in the Pension Plan regardless of
age on the date they begin employment and the normal retirement age is age 65.
In addition, participants in the Pension Plan accrue benefits after they have
attained the normal retirement age.
Benefits under the Pension Plan depend upon a participant's years of credited
service with the Company or any of its subsidiaries and his average monthly
earnings for the highest five consecutive years out of the participants final 10
years of employment. Employees who become participants on or after January 1,
1996 will not be vested in any benefit until he completes five years of service
at which time the employee will be 100% vested. Employees who became
participants before January 1, 1996, are 20% vested in his accrued benefits
after completion of two years of service, 40% vested after three years of
service, 60% vested after four years of service and becomes fully vested upon
completion of five years of service. An employee who completes ten years of
service and attains age 55 is eligible for early retirement benefits. Plan
assets consist primarily of corporate stocks and bonds.
The Company contributes amounts to the pension funds sufficient to satisfy
funding requirements of the Employee Retirement Income Security Act.
Effective January 1, 1995, the Company established a nonqualified benefit plan
for certain key executives called the Community Bancshares Benefit Restoration
Plan, the purpose of which is to provide the amount of the benefit which would
otherwise be paid under the Company's pension plan but which cannot be paid
under that plan due to the limitations imposed by the Internal Revenue Code of
1986, as amended.
The following tables set forth the funding status and the amount recognized for
both the Pension Plan and the Benefit Restoration Plan in the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income.
[The remainder of this page intentionally left blank]
65
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - PENSION PLAN - CONTINUED
Pension Plan as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ............. $ 4,051,109 $ 3,512,362
Service cost ........................................ 410,795 310,756
Interest cost ....................................... 334,729 280,601
Amendments .......................................... -0- -0-
Actuarial (gain) or loss ............................ 630,395 46,932
Benefits paid ....................................... (106,510) (99,542)
----------- -----------
Benefit obligation at end of year ................... $ 5,320,518 $ 4,051,109
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year ...... $ 4,001,126 $ 3,131,790
Actual return on plan assets ........................ 534,351 522,773
Employer contribution ............................... 367,438 446,105
Benefits paid from plan assets ...................... (106,510) (99,542)
----------- -----------
Fair value of plan assets at end of year ............ $ 4,796,405 $ 4,001,126
=========== ===========
Funded status of plan:
Funded status of plan ............................... $ (524,113) $ (49,983)
Unrecognized actuarial (gain) or loss ............... 314,786 (176,394)
Unrecognized prior service cost ..................... 112,434 124,133
Unrecognized transition (asset) or obligation ....... (54,431) (71,310)
----------- -----------
Accrued benefit cost ................................ $ (151,324) $ (173,554)
=========== ===========
Weighted average rate assumptions used in
determining pension cost and the
projected benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year .... 7.25% 8.00%
Expected long-term rate of return on plan
assets for the year ............................... 10.00% 8.00%
Expected rate of increase in future
compensation levels ............................... 6.00% 6.00%
</TABLE>
66
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - PENSION PLAN - CONTINUED
Pension plan net periodic benefit cost:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Service cost.............................................. $ 410,795 $ 310,756 $ 269,391
Interest cost............................................. 334,729 280,601 241,630
Expected return on plan assets............................ (395,136) (245,114) (223,356)
Amortization of prior service cost........................ 11,699 11,699 11,699
Amortization of transitional (asset) or obligation........ (16,879) (16,879) (16,879)
Recognized actuarial loss................................. -0- -0- -0-
------------- ------------ --------------
Net periodic benefit cost................................. $ 345,208 $ 341,063 $ 282,485
============= =========== ==============
</TABLE>
[The remainder of this page intentionally left blank]
67
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - PENSION PLAN - CONTINUED
Benefit Restoration Plan as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................................ $ 802,984 $ 619,321
Service cost........................................................... 68,927 52,515
Interest cost.......................................................... 74,466 55,410
Amendments............................................................. -0- -0-
Actuarial (gain) or loss............................................... 242,018 75,738
Benefits paid.......................................................... -0- -0-
--------------- ----------------
Benefit obligation at end of year...................................... $ 1,188,395 $ 802,984
=============== ================
Change in plan assets:
Fair value of plan assets at beginning of year......................... $ -0- $ -0-
Actual return on plan assets........................................... -0- -0-
Employer contribution.................................................. -0- -0-
Benefits paid from plan assets......................................... 0- -0-
--------------- ----------------
Fair value of plan assets at end of year............................... $ -0- $ -0-
=============== ================
Funded status of plan:
Funded status of plan.................................................. $ (1,188,395) $ (802,984)
Unrecognized actuarial (gain) or loss.................................. 404,666 188,615
Unrecognized prior service cost........................................ 203,160 238,067
Unrecognized transition (asset) or obligation.......................... -0- -0-
--------------- ----------------
Accrued benefit cost................................................... $ (580,569) $ (376,302)
=============== ================
Weighted average rate assumptions used in
determining pension cost and the projected
benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year....................... 7.25% 8.00%
Expected long-term rate of return on plan
assets for the year.................................................. 10.00% 8.00%
Expected rate of increase in future
compensation levels.................................................. 6.00% 6.00%
</TABLE>
68
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - PENSION PLAN - CONTINUED
Benefit Restoration plan net periodic benefit cost:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Service cost................................................ $ 68,927 $ 52,515 $ 44,552
Interest cost............................................... 74,466 55,410 42,521
Expected return on plan assets.............................. -0- -0- -0-
Amortization of prior service cost.......................... 34,907 34,907 34,907
Amortization of transitional (asset) or obligation.......... -0- -0- -0-
Recognized actuarial loss................................... 25,967 11,243 6,325
------------- ------------ ---------
Net periodic benefit cost................................... $ 204,267 $ 154,075 $ 128,305
============= ============ ==========
</TABLE>
[The remainder of this page intentionally left blank]
69
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($160,000 in 1998) on the amount of compensation which may be
considered under the plan.
On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments of
$31,677 due monthly through November 16, 2010, with the remaining principal, if
any, due upon that date. The Company has guaranteed this debt and in accordance
with the applicable accounting and reporting guidelines the debt has been
recognized on the Company's statement of condition, with an offsetting charge
against equity. As principal payments are made by the ESOP, the debt and
offsetting charge against equity are reduced. The shares securing the note are
released on a prorata basis by the lender as monthly payments of principal and
interest are made. As of December 31, 1998, there were 241,350 unreleased shares
with a fair value of approximately $4,827,000. 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 stockholders' 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
on behalf of its participating employees which are used to pay interest on the
ESOP debt ($165,808, $165,550 and $152,822 in 1998, 1997 and 1996, respectively)
is classified as interest expense on the Company's income statement.
Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated. Dividends on unreleased shares
are treated as other income of the ESOP.
At December 31, 1998 and 1997, the Company's financial statements reflect long
term debt and a corresponding contra-equity account, as a result of the ESOP
debt, of $2,944,232 and $2,002,902, respectively.
70
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
Company contributions to the ESOP amounted to $316,008, $289,147 and $288,878,
for 1998, 1997 and 1996, respectively.
NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
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 less any required transfers to surplus. At
December 31, 1998, Community Bank could have declared dividends of approximately
$7,640,960 without approval of regulatory authorities.
NOTE 18 - REGULATORY CAPITAL
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if taken, could have a
direct material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary bank must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998 and 1997, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1998 and 1997, the Company and its banking subsidiary are
classified as well capitalized under the financial institution regulatory
framework. To be categorized as well capitalized the Company and the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since year-end 1998
that management believes have changed the institution's category.
71
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18 - REGULATORY CAPITAL - CONTINUED
<TABLE>
<CAPTION>
For Capital To Be
Actual Adequacy Purposes Well Capitalized
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 46,083 11.03% $ 33,436 8.00% $ 41,795 10.00%
COMMUNITY BANK 47,333 11.40 33,218 8.00 41,523 10.00
TIER 1 CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 41,521 9.94% $ 16,718 4.00% $ 25,777 6.00%
COMMUNITY BANK 44,362 10.68 16,609 4.00 24,914 6.00
TIER 1 CAPITAL
(TO AVERAGE ASSETS):
CONSOLIDATED $ 41,521 7.79% $ 21,328 4.00% $ 26,660 5.00%
COMMUNITY BANK 44,362 8.34 21,268 4.00 26,585 5.00
</TABLE>
<TABLE>
<CAPTION>
For Capital To Be
Actual Adequacy Purposes Well Capitalized
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 36,411 11.86% $ 24,556 8.00% $ 30,695 10.00%
Community Bank 39,351 12.80 24,586 8.00 30,733 10.00
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated $ 32,638 10.63% $ 12,278 4.00% $ 18,417 6.00%
Community Bank 37,219 12.11 12,294 4.00 18,441 6.00
Tier 1 Capital
(to Average Assets):
Consolidated $ 32,638 6.94% $ 18,813 4.00% $ 23,524 5.00%
Community Bank 37,219 7.95 18,718 4.00 23,398 5.00
</TABLE>
72
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19 - COMPREHENSIVE INCOME
In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes reporting and presentation standards for comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances arising
from nonowner sources. The adoption of SFAS No. 130 in 1998 did not have a
material impact on the Company's financial condition or its results of
operations.
The following is a summary of the components of other comprehensive income:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- -------- -----------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period .... $ 488,059 $969,502 $(1,491,574)
Reclassification adjustments for net (gains) losses
included in net income ................................... (465,982) 2,590 (7,509)
--------- -------- -----------
Other comprehensive income, before income taxes ............ 22,077 972,092 (1,499,083)
Income tax expense (benefit) related to other
Comprehensive Income ..................................... 8,831 388,837 (599,634)
--------- -------- -----------
Other Comprehensive Income ................................. $ 13,246 $583,255 $ (899,449)
========= ======== ===========
</TABLE>
NOTE 20 - RELATED PARTY TRANSACTIONS
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1998 and 1997. Except as noted below, all such loans are made in the
ordinary course of business on substantially the same credit terms, including
interest rates and collateral and do not represent more than a normal risk of
collection or present other unfavorable features. Total loans to these persons
at December 31, 1998 and 1997, amounted to $10,780,000 and $6,971,000,
respectively. An analysis of activity during 1998 in loans to related parties
resulted in additions of $8,108,000, representing new loans, reductions of
$4,484,000, representing payments, and an increase of $185,000, representing a
change in the composition of related parties.
73
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED
The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are one percent below the prevailing market rate. As of December 31,
1998, executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had loans outstanding pursuant to this policy
with total indebtedness of approximately $1,719,000. The Company, through its
wholly owned bank subsidiary, also offers first mortgage real estate loans on
the primary residence, at a rate of 5%, to employees who are required to
relocate in the course of their employment. As of December 31, 1998, executive
officers and directors of the Company and executive officers of Community Bank
and its subsidiaries, including members of their immediate families and related
interest, had relocation loans outstanding with total indebtedness of
approximately $2,985,000.
Maintenance Contract: The Bank has a service contract with Heritage Farms, an
unincorporated business owned by Kennon R. Patterson, Sr., a director and
officer of the Company, for the upkeep and maintenance of the external grounds
of six of the Bank's locations and one location for 1st Community Credit
Corporation for most of 1998. External grounds upkeep and maintenance was also
performed for twelve other Bank locations only during the first quarter of 1998.
Maintenance expense under this contract amounted to $51,465, $96,300 and $64,875
for the years ended December 31, 1998, 1997 and 1996, respectively, a monthly
average of $468, $422 and $318 per location.
Interior Design : The Company and the Bank, including the Bank's subsidiaries,
paid Heritage Interiors, a decorating and design firm owned and operated by the
wife of Kennon R. Patterson, Sr., a director and officer of the Company, for the
interior design, furniture, appliances, fixtures, hardware, carpets, wall
coverings, paint, drapes and accessories for new facilities and similar work
associated with the renovation of existing locations. During 1998, Heritage
Interiors was paid $265,066 in connection with the completion of three new
buildings with a total of approximately 60,000 square feet and $31,876 for the
renovation of an existing building at the Company's headquarters in
Blountsville, $150,723 in connection with the opening of a permanent location in
Double Springs, $38,647 in connection with the opening of bank offices in
Albertville, Boaz and Guntersville, $44,610 in connection with the opening of
six offices of 1st Community Credit Corporation, and additional amounts relating
to 23 other offices of the Company, Community Bank or its subsidiaries. Total
payments to Heritage Interiors in 1998 were $666,492. During 1997, Heritage
Interiors was paid $803,510 in connection with the building of the three new
buildings at the Company's headquarters in Blountsville, $136,133 for goods and
services for the Oneonta office, $139,484 for goods and services for the
Cleveland office and additional amounts for goods and services for 20 other
offices of the Company, Community Bank and its subsidiaries. Total payments to
Heritage Interiors in 1997 were $1,186,287. During 1996, Heritage Interiors was
paid $122,346 in connection with the opening of an office in Rainsville,
$129,033 in connection with the opening of an office in Rogersville and
additional amounts for goods and services for 17 other offices of the Company,
Community Bank and its subsidiaries. Total payments to Heritage Interiors in
1996 were $377,897.
These purchases were at a cost more favorable to the Company and its
subsidiaries than could be obtained from unrelated parties.
74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 21 - LEASES
The Company has a number of operating lease agreements, involving land and
buildings. These leases are noncancellable and expire on various dates through
the year 2013. The leases provide for renewal options and generally require the
Company to pay maintenance, insurance and property taxes. Options to purchase
are also included in some leases. For the years ended December 31, 1998, 1997
and 1996, rental expense for operating leases was approximately $539,655,
$232,759, and $176,942, respectively.
Future minimum lease payments for all leases at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
OPERATING
-------------
<S> <C>
Years Ending December 31,
1999.............................. $ 382,624
2000.............................. 365,461
2001.............................. 336,757
2002.............................. 272,726
2003.............................. 237,492
Thereafter........................ 1,255,710
-------------
Total minimum lease payments...... $ 2,850,770
=============
</TABLE>
NOTE 22 - BUSINESS COMBINATIONS
On March 6, 1998, 1st Community Credit Corporation, a subsidiary of Community
Bank, opened offices in Boaz and Gadsden, Alabama as a result of the acquisition
of certain assets and the assumption of certain liabilities from Valley Finance,
a subsidiary of Home Bank, Guntersville, Alabama. In exchange for $6,544,000 in
cash, 1st Community Credit Corporation acquired assets of $5,652,000, net of
$1,373,000 in unearned income on loans and $900,000 in reserve for loan losses,
recorded $1,000,000 in goodwill and assumed $108,000 in liabilities. The effect
of this business combination was not material to the Company's financial
statements for periods prior to the acquisition date.
Effective August 1, 1997, Community Insurance, Inc., a subsidiary of Community
Bank, acquired a controlling interest in Southern Select Insurance, Inc., a
property and casualty insurance general agency located in Birmingham, Alabama.
Community Insurance paid $382,564 for 51% of the common stock of Southern
Select, paying a premium of $344,341. On April 1, 1998, Southern Select became a
wholly owned subsidiary of Community Insurance as a result of Community
Insurance acquiring the remaining 49% of the common stock of Southern Select in
exchange for a combination of cash and shares of the Company's common stock,
totaling $383,014. The entire amount was recorded as an intangible. The effect
of this business combination was not material to the consolidated financial
statements of the Company for periods prior to the date of acquisition.
75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 22 - BUSINESS COMBINATIONS - CONTINUED
On April 1, 1998, Community Insurance established an office in Oneonta, Alabama
through the acquisition of 100% of the common stock of the Murphree Insurance
Agency. Community Insurance exchanged a combination of cash and shares of the
Company's common stock, totaling $375,000, acquiring $7,884 in fixed assets and
paying a premium of $367,116. Also effective April 1, 1998, Community Insurance
established an office in Graysville, Alabama as a result of the acquisition of
the Chafin Insurance Agency. Community Insurance exchanged a combination of cash
and shares of the Company's common stock, totaling $700,000, acquiring $62,488
in assets and paying a premium of $637,512. Neither of these transactions were
material to the financial statements of the Company for periods prior to the
acquisition date.
Effective June 15, 1998, Community Bank consummated the transaction to purchase
certain assets and assumed certain liabilities from the Uniontown, Alabama
branch of the First National Bank of West Point, Georgia. In exchange for cash
totaling $2,615,000, the Bank received approximately $2,500,000 in additional
loans, net of unearned interest and loan loss reserve, $295,000 in other assets,
$5,672,000 in additional deposit liabilities, and $262,000 of intangible assets.
This transaction had no material effect of the financial statements of the
Company for periods prior to the date of acquisition.
All business combinations were accounted for using the purchase method of
accounting for business combinations.
NOTE 23 - OTHER SHORT-TERM BORROWINGS
Other short-term borrowings at December 31, 1998 and 1997 consisted of the U.S.
Treasury Tax and Loan Note Option account, federal funds purchased, overnight
funds purchased from FHLB-Atlanta and securities sold under agreements to
repurchase.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Average balance during the year................................................. $ 880,551 $ 1,271,798
Average interest rate during the year........................................... 6.02% 6.29%
Maximum month-end balance during the year....................................... $ 1,930,582 $ 1,033,137
U.S. government and agency securities underlying the agreements at year-end:
Carrying Value.................................................................. $ 1,901,763 $ 2,842,188
Estimated Fair Value............................................................ 1,852,228 2,842,188
Accrued Interest Receivable..................................................... 25,801 51,938
</TABLE>
76
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 23 - OTHER SHORT-TERM BORROWINGS - CONTINUED
Securities sold under agreements to repurchase are generally treated as
collateralized financing transactions. It is the Company's policy to deliver
underlying securities to custodian accounts for customers.
NOTE 24 - SUBSEQUENT EVENTS
On January 7, 1999, the Board of Directors of the Company adopted a Share
Purchase Rights Plan and declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock of the Company to
shareholders of record on January 7, 1999. Each Right entitles the stockholder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a price of $84 per one
one-hundredth of a preferred share. In the event that any person or group of
affiliated or associated persons acquires beneficial ownership of 15 % or more
of the outstanding common stock of the Company (an "Acquiring Person"), each
holder of a purchase right, other than the Acquiring Person, will thereafter
have the right to receive upon exercise of the Right that number of shares of
common stock of the Company having a market value of two times the exercise
price of the Right. If the Company is acquired in a merger or other business
combination transaction of 50% or more of its assets or earning power are sold
after a person or group has become an Acquiring Person, each holder of a Right,
other than an Acquiring Person, will thereafter have the right to receive that
number of shares of common stock of the acquiring company which at that time of
such transaction have a market value of two times the exercise price of the
Right. At any time after a person or group becomes an Acquiring Person and prior
to the acquisition of 50% or more of the outstanding common stock of the Company
by such person or group the Board of Directors of the Company may exchange the
Rights, other than Rights owned by an Acquiring Person, in whole or in part, at
an exchange ratio of one common share or one one-hundredth of preferred share.
The purchase price and the number of shares issuable upon exercise of the Rights
are subject to adjustment in the event of a stock split, stock dividend,
reclassification or certain distributions with respect to the preferred stock.
The Rights will expire January 13, 2009 unless such date is extended or unless
the Rights are redeemed or exchanged prior to such date.
[The remainder of this page intentionally left blank]
77
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities: For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market prices or dealer
quotes. For other securities held as investments, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loan Receivables: For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposit of similar remaining maturities.
Long-term Debt: Rates currently available to the Bank for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments and letters of credit is
estimated to be approximately the same as the notional amount of the related
commitment.
[The remainder of this page intentionally left blank]
78
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Company's financial instruments as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments......... $ 26,503 $ 26,503 $ 48,766 $ 48,766
Investment securities................... 97,392 97,392 85,092 85,092
Loans................................... 433,853 326,134
Less: allowance for losses.............. 2,971 2,131
------------- -------------
Net Loans............................... 430,882 436,914 324,003 320,133
------------- ------------- ------------- --------------
TOTAL FINANCIAL ASSETS.................. $ 554,777 $ 560,809 $ 457,861 $ 453,991
============= ============= ============= ==============
FINANCIAL LIABILITIES:
Deposits................................ $ 538,586 $ 543,221 $ 440,889 $ 440,964
Short-term borrowings................... 2,192 2,192 2,630 2,630
Long-term debt.......................... 7,569 7,606 7,398 7,246
------------- ------------- ------------- --------------
TOTAL FINANCIAL LIABILITIES............. $ 548,347 $ 553,019 $ 450,917 $ 450,840
============= ============= ============= ==============
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit............ $ -0- $ 15,698 $ -0- $ 18,049
Standby letters of credit............... -0- 621 -0- 577
------------- ------------- ------------- --------------
TOTAL UNRECOGNIZED
FINANCIAL INSTRUMENTS................. $ -0- $ 16,319 $ -0- $ 18,626
============= ============= ============= ==============
</TABLE>
79
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 26 - CONDENSED PARENT COMPANY INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks................................. $ 3,203,234 $ 491,956
Interest-bearing deposits with other banks.............. -0- 822,713
Investment in subsidiaries (equity method) -
eliminated upon consolidation.......................... 50,073,892 40,559,940
Premises and equipment, net............................. 80,684 54,084
Intangibles, net........................................ 1,086,800 1,197,428
Other assets............................................ 1,299,265 920,810
-------------- --------------
TOTAL ASSETS...................................... $ 55,743,875 $ 44,046,931
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.......................................... $ 7,568,716 $ 7,397,612
Other liabilities....................................... 941,758 670,271
-------------- --------------
TOTAL LIABILITIES................................. 8,510,474 8,067,883
TOTAL SHAREHOLDERS' EQUITY........................ 47,233,401 35,979,048
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 55,743,875 $ 44,046,931
============== ==============
</TABLE>
80
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
INCOME
From subsidiaries - eliminated upon consolidation
Dividends................................................ $ 3,017,970 $ 2,548,201 $ 1,103,482
Management fees.......................................... 600,000 600,000 575,000
Interest................................................. 22,222 30,513 143,649
Other Income............................................. 3,740 2,400 3,904
-------------- ------------- --------------
3,643,932 3,181,114 1,826,035
-------------- ------------- --------------
EXPENSES
Salaries and employee benefits............................ 1,751,593 1,385,633 1,472,670
Interest.................................................. 400,079 465,003 522,884
Other expenses............................................ 666,862 683,802 445,751
-------------- ------------- --------------
2,818,534 2,534,438 2,441,305
-------------- ------------- --------------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries.................... 825,398 646,676 (615,270)
Income tax benefit............................................ (753,387) (719,485) (597,778)
-------------- ------------- --------------
Income (loss) before equity in undistributed earnings
of subsidiaries........................................... 1,578,785 1,366,161 (17,492)
Equity in undistributed earnings of subsidiaries.............. 2,000,708 2,146,117 3,476,478
-------------- ------------- --------------
NET INCOME....................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
============== ============= ==============
</TABLE>
81
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries ............. (2,000,708) (2,146,117) (3,476,478)
Provision for depreciation, amortization and accretion ..... 118,571 111,642 23,426
(Increase) decrease in other assets ........................ (378,456) (1,277) 43,489
Increase (decrease) in other liabilities .................. 271,490 19,194 (8,623)
------------ ----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................ 1,590,390 1,495,720 40,800
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ..................... -0- -0- (9,010,957)
Proceeds from maturity of securities available for sale ....... 822,713 1,050,000 10,073,749
(Increase) decrease in interest-bearing deposits with banks ... -0- (742,932) 113,250
Proceeds from sale of assets .................................. -0- 39,584 23,315
Capitalization of bank subsidiary ............................. (7,500,000) -0- (5,600,000)
Capital expenditures .......................................... (34,543) (17,041) (58,085)
------------ ----------- ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ............................ (6,711,830) 329,611 (4,458,728)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................................... (770,226) (766,848) (763,117)
Issuance of common stock ...................................... 10,634,552 707,740 3,013,493
Cash dividends ................................................ (2,031,608) (1,500,000) (908,788)
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ 7,832,718 (1,559,108) 1,341,588
------------ ----------- ------------
Net increase(decrease) in cash and cash equivalents ............. 2,711,278 266,223 (3,076,340)
Cash and due from banks at beginning of year .................... 491,956 225,733 3,302,073
------------ ----------- ------------
CASH AND DUE FROM BANKS AT END OF YEAR .......................... $ 3,203,234 $ 491,956 $ 225,733
============ =========== ============
</TABLE>
82
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Years Ended December 31,
--------------- ------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest ......................................... $ 402,209 $ 467,424 $ 526,437
Income taxes ..................................... (780,000) (735,803) (393,793)
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Long-term debt was increased and equity was decreased $1,200,000 on January 1,
1994 to reflect the existence of leveraged, unreleased ESOP shares. Upon the
pledging of purchased shares to obtain additional ESOP debt of $1,076,958 on
December 1, 1998 and $1,260,007 on May 17, 1996 long-term debt was increased
and equity was decreased. The debt was reduced and shares were released by
$135,628, $116,989 and $135,314, respectively, during each of the years ended
December 31, 1998, 1997 and 1996 as a result of payments made by the Company's
ESOP on the outstanding ESOP debt.
[The remainder of this page intentionally left blank]
83
<PAGE> 85
QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1998 and
1997 follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
1998:
TOTAL INTEREST INCOME........................................... $ 9,794 $ 10,715 $ 11,677 $ 12,179
TOTAL INTEREST EXPENSE.......................................... 5,307 5,452 5,751 6,183
PROVISION FOR LOAN LOSSES....................................... 188 208 226 263
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES..................................... 4,299 5,055 5,700 5,733
INVESTMENT SECURITIES GAINS (LOSSES) ........................... 9 3 7 447
TOTAL NONINTEREST INCOME........................................ 1,573 2,058 2,037 1,968
TOTAL NONINTEREST EXPENSE....................................... 5,115 5,667 6,419 6,583
INCOME TAX EXPENSE.............................................. 211 411 401 503
NET INCOME...................................................... 555 1,038 924 1,062
PER COMMON SHARE:
BASIC EARNINGS................................................. .14 .27 .24 .25
DILUTED EARNINGS............................................... .14 .26 .23 .25
1997:
Total interest income........................................... $ 9,120 $ 9,313 $ 9,626 $ 9,732
Total interest expense.......................................... 4,643 4,883 5,053 4,963
Provision for loan losses....................................... 198 296 302 (24)
Net interest income after
provision for loan losses..................................... 4,279 4,134 4,271 4,793
Investment securities gains (losses) ........................... (3) -0- -0- -0-
Total noninterest income........................................ 1,178 1,145 1,204 1,385
Total noninterest expense....................................... 4,301 3,896 4,513 4,713
Income tax expense.............................................. 332 381 256 483
Net income...................................................... 821 1,002 706 982
Per Common Share:
Basic earnings................................................. .22 .27 .19 .24
Diluted earnings............................................... .22 .27 .19 .24
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
84
<PAGE> 86
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item on the directors and director nominees of the
Company is incorporated by reference from the sections entitled "Election of
Directors" and "Executive Compensation and Other Information" in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held during 1999.
Information on the executive officers of the Company is included in Part I of
this Report.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the section
entitled "Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held during 1999.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is incorporated by reference from the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
during 1999.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section
entitled "Certain Relationships, and Related Transactions" in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held during 1999.
[The remainder of this page intentionally left blank]
85
<PAGE> 87
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
Community Bancshares, Inc and Subsidiaries
<TABLE>
<CAPTION>
Financial Statements Page(s)
------
<S> <C>
Auditor's Report........................................................... 40
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997............................................... 41
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996......................................... 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996......................................... 43
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996......................................... 44-45
Notes to Consolidated Financial Statements -
December 31, 1998, 1997 and 1996......................................... 46-83
Quarterly Results (Unaudited).............................................. 84
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December 31,
1998.
<TABLE>
<CAPTION>
(C) Exhibits
- -------------
<S> <C>
3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment to the Certificate of Incorporation,
changing the name of the registrant to Community Bancshares, Inc.
(2)
3.3 By-Laws of Registrant, as amended and restated January 1999
3.4 Certificate of Amendment to the Certificate of Incorporation,
providing for directors' indemnification (3)
3.5 Certificate of Amendment to the Certificate of Incorporation,
increasing the number of authorized shares (4)
3.6 Amended Certificate of Amendment of the Certificate of
Incorporation, increasing the number of authorized shares (5)
4.1 Certificate of Registrant establishing the Series 1984-1 Preferred
Stock, dated August 17, 1984 ("Certificate of Stock Designation")
(6)
4.2 Certificate of Amendment to the Certificate of Stock Designation
(7)
10.1 Subordinated Promissory Note between the Registrant as borrower
and Jack Cornelius as holder (8)
</TABLE>
86
<PAGE> 88
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
10.2 Promissory Note, Guaranty and Pledge Agreement by and between
Community Bancshares, Inc. and Colonial Bank, N.A.
10.3 Plan document for the Community Bancshares, Inc. Benefit
Restoration Plan adopted April 12, 1994, effective January 1, 1995
(9)
10.4 Subordinated Promissory Note between the Registrant as borrower
and Jeffrey K. Cornelius as holder (10)
10.5 Employment Agreement dated March 28, 1996 by and between Kennon R.
Patterson, Sr. and Community Bancshares, Inc. (11)
10.6 Employment Agreement dated March 28, 1996 by and between Bishop K.
Walker, Jr. and Community Bancshares, Inc. (12)
10.7 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr. dated March 28, 1996 (13)
10.8 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker dated March 28, 1996 (14)
10.9 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly dated March 28, 1996 (15)
10.10 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III dated March 28, 1996 (16)
10.11 Stock Option Agreement between Community Bancshares, Inc. and Loy
McGruder dated March 28, 1996 (17)
10.12 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins dated March 28, 1996 (18)
10.13 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam dated March 28, 1996 (19)
10:14 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter dated March 28, 1996 (20)
10.15 Stock Option Agreement between Community Bancshares, Inc. and
Robert Summerford dated March 28, 1996 (21)
10.16 Change in Control Agreement dated March 28, 1996 by and between
Kennon R. Patterson, Sr. and Community Bancshares, Inc. (22)
10.17 Change in Control Agreement dated March 28, 1996 by and between
Bishop K. Walker, Jr. and Community Bancshares, Inc. (23)
10.18 Change in Control Agreement dated March 28, 1996 by and between
Hodge Patterson and Community Bancshares, Inc. (24)
10.19 Change in Control Agreement dated March 28, 1996 by and between
Denny Kelly and Community Bancshares, Inc. (25)
10.20 Change in Control Agreement dated March 28, 1996 by and between
Loy McGruder and Community Bancshares, Inc. (26)
10.21 Change in Control Agreement dated December 28, 1998 by and between
Michael A. Bean and Community Bancshares, Inc.
10.22 Stock Option Agreement between Community Bancshares, Inc. and Jon
Owings dated March 28, 1996 (27)
10.23 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr. dated March 27, 1997 (28)
10.24 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr. dated March 27, 1997 (29)
10.25 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly dated March 27, 1997 (30)
</TABLE>
87
<PAGE> 89
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
10.26 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III. dated March 27, 1997 (31)
10.27 Stock Option Agreement between Community Bancshares, Inc. and Loy
McGruder dated March 27, 1997 (32)
10.28 Stock Option Agreement between Community Bancshares, Inc. and
Merritt Robbins dated March 27, 1997 (33)
10.29 Stock Option Agreement between Community Bancshares, Inc. and
Wayne Washam dated March 27, 1997 (34)
10.30 Stock Option Agreement between Community Bancshares, Inc. and
Glynn Debter dated March 27, 1997 (35)
10.31 Stock Option Agreement between Community Bancshares, Inc. and
Robert Summerford dated March 27, 1997 (36)
10.32 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Jr. dated March 27, 1997 (37)
10.33 Stock Option Agreement between Community Bancshares, Inc. and John
J. Lewis, Jr. dated March 27, 1997 (38)
10.34 Stock Option Agreement between Community Bancshares, Inc. and
Stacey W. Mann dated March 27, 1997 (39)
10.35 Stock Option Agreement between Community Bancshares, Inc. and
Edward Ferguson dated March 27, 1997 (40)
10.36 Stock Option Agreement between Community Bancshares, Inc. and
Kennon R. Patterson, Sr. dated March 26, 1998
10.37 Stock Option Agreement between Community Bancshares, Inc. and
Bishop K. Walker, Jr. dated March 26, 1998
10.38 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly dated March 26, 1998
10.39 Stock Option Agreement between Community Bancshares, Inc. and
Hodge Patterson, III dated March 26, 1998
10.40 Stock Option Agreement between Community Bancshares, Inc. and Loy
McGruder dated March 26, 1998
10.41 Form of Stock Option Agreement between Community Bancshares, Inc.
and Grantees dated March 26, 1998
11 Statement of computation of earnings per common share......... 92
12 Statement of Computation of Ratios............................ 93
21 Subsidiaries of the Registrant................................ 93
27 Financial Data Table (for SEC use only).......................
</TABLE>
Notes to Exhibits:
(1) Filed as appendix II to the Proxy Statement included in part I of
the Registration Statement on Form S-14, Registration No 2-92974,
and incorporated herein by reference.
(2) Filed as Exhibit 4 to Form 10-K for the year ended December 31,
1985, and incorporated herein by reference.
(3) Filed as Exhibit 3.4 to Form 10-K for the year ended December 31,
1987, and incorporated herein by reference.
(4) Filed as Exhibit 3.5 to Form 10-K for the year ended December 31,
1993, and incorporated herein by reference.
(5) Filed as Exhibit 3 to Form 10-Q/A-1 for the period ended September
30, 1998, and incorporated herein by reference.
88
<PAGE> 90
(6) Filed as Appendix I to the Proxy Statement included in Part I of
the Registration Statement on Form S-14, Registration No. 2-92974,
and incorporated herein by reference.
(7) Filed as Exhibit 4.1 to the Registration Statement on Form S-1,
Registration No. 33-7032, and incorporated herein by reference.
(8) Filed as Exhibit 10.17 to Form 10-K for the year ended December 31,
1988, and incorporated herein by reference.
(9) Filed as Exhibit 10.13 to Form 10-K for the year ended December 31,
1995, and incorporated herein by reference
(10) Filed as Exhibit 10.15 to Form 10-K for the year ended December 31,
1995, and incorporated herein by reference
(11) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the period ended
September 30, 1998, and incorporated herein by reference
(12) Filed as Exhibit 10.2 to Form 10-Q/A-2 for the period ended
September 30, 1998, and incorporated herein by reference
(13) Filed as Exhibit 10.20 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(14) Filed as Exhibit 10.21 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(15) Filed as Exhibit 10.22 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(16) Filed as Exhibit 10.23 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(17) Filed as Exhibit 10.24 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(18) Filed as Exhibit 10.27 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(19) Filed as Exhibit 10.28 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(20) Filed as Exhibit 10.29 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(21) Filed as Exhibit 10.30 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(22) Filed as Exhibit 10.31 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(23) Filed as Exhibit 10.32 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(24) Filed as Exhibit 10.33 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(25) Filed as Exhibit 10.34 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(26) Filed as Exhibit 10.35 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(27) Filed as Exhibit 10.36 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference
(28) Filed as Exhibit 10.37 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(29) Filed as Exhibit 10.38 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(30) Filed as Exhibit 10.39 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(31) Filed as Exhibit 10.40 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(32) Filed as Exhibit 10.41 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(33) Filed as Exhibit 10.44 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
89
<PAGE> 91
(34) Filed as Exhibit 10.45 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(35) Filed as Exhibit 10.46 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(36) Filed as Exhibit 10.47 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(37) Filed as Exhibit 10.49 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(38) Filed as Exhibit 10.50 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(39) Filed as Exhibit 10.51 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
(40) Filed as Exhibit 10.52 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
Certain financial statements schedules and exhibits have been omitted because
they are not applicable.
[The remainder of this page intentionally left blank]
90
<PAGE> 92
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
COMMUNITY BANCSHARES, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
The following tabulation presents the calculation of primary and fully diluted
earnings per common share for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Reported net income.................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
============= ============ =============
Earnings on common shares.............................................. $ 3,579,493 $ 3,512,278 $ 3,458,986
============= ============ =============
Weighted average common shares outstanding - basic..................... 3,994,798 3,807,232 3,727,506
============= ============ =============
Earnings per common share- basic
Income from continuing operations.................................... $ .90 $ .92 $ .93
============= ============ =============
Net income............................................................ $ .90 $ .92 $ .93
============= ============ =============
Weighted average common shares outstanding - diluted.................... 4,052,259 3,830,231 3,727,506
============= ============ =============
Earnings per common share- diluted
Income from continuing operations..................................... $ .88 $ .92 $ .93
============= ============ =============
Net income............................................................ $ .88 $ .92 $ .93
============= ============ =============
</TABLE>
{The remainder of this page intentionally left blank]
91
<PAGE> 93
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS
COMMUNITY BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885
Add fixed charges:
Interest on deposits............................................... 21,963 18,765 16,595
Interest on borrowings............................................. 730 777 831
Portion of rental expense representing interest expense............ 180 78 59
------------ ------------ -------------
Total fixed charges............................................ 22,873 19,620 17,485
------------ ------------ -------------
Income before fixed charges............................................ $ 27,979 $ 24,565 $ 22,370
============ ============ =============
Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885
Add fixed charges:
Interest on borrowings............................................. 730 777 831
Portion of rental expense representing interest expense............ 180 78 59
------------ ------------ -------------
Total fixed charges............................................ 910 855 890
------------ ------------ -------------
Income before fixed charges (excluding interest on deposits)........... $ 6,016 $ 5,800 $ 5,775
============ ============ =============
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits..................................... 1.22X 1.25x 1.28x
Excluding interest on deposits..................................... 6.61X 6.78x 6.49x
</TABLE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ----------------------
<S> <C>
Community Bank Alabama
Subsidiaries - Indirect/wholly-owned by Community Bank
- ------------------------------------------------------
Community Appraisals, Inc. Alabama
1st Community Credit Corporation Alabama
Community Insurance Corp Alabama
Subsidiaries - Indirect/wholly-owned by Community Insurance Corp
- -----------------------------------------------------------------
Southern Select Insurance, Inc. Alabama
</TABLE>
92
<PAGE> 94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
COMMUNITY BANCSHARES, INC.
Date: March 25, 1999 By /s/ Kennon R. Patterson, Sr.
------------------- --------------------------------------
KENNON R. PATTERSON, SR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: March 25, 1999 By /s/ Michael A. Bean
------------------- ----------------------------------------
MICHAEL A. BEAN
EXECUTIVE VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kennon R. Patterson, Sr. and Bishop K. Walker, Jr., and
each of them, his true and lawful attorney-in-fact, as agent with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacity, to sign any or all amendments to this Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents in full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might or could be in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Directors Date
--------- ----
/s/ Glynn Debter March 25, 1999
- ---------------------- --------------
GLYNN DEBTER
/s/ Roy B. Jackson March 25, 1999
- ---------------------- --------------
ROY B. JACKSON
/s/ Denny Kelly March 25, 1999
- ---------------------- --------------
DENNY KELLY
93
<PAGE> 95
SIGNATURES, Continued
Directors Date
--------- ----
/s/ John J. Lewis, Jr. March 25, 1999
- --------------------------------- ----------------------
JOHN J. LEWIS, JR.
/s/ Loy McGruder March 25, 1999
- --------------------------------- ----------------------
LOY MCGRUDER
/s/ Hodge Patterson, III March 25, 1999
- --------------------------------- ----------------------
HODGE PATTERSON, III
/s/ Kennon R. Patterson, Sr. March 25, 1999
- --------------------------------- ----------------------
KENNON R. PATTERSON, SR.
/s/ Merritt Robbins March 25, 1999
- --------------------------------- ----------------------
MERRITT ROBBINS
/s/ Robert O. Summerford March 25, 1999
- --------------------------------- ----------------------
ROBERT O. SUMMERFORD
/s/ Bishop K. Walker, Jr. March 25, 1999
- --------------------------------- ----------------------
BISHOP K. WALKER, JR.
/s/ Wayne Washam March 25, 1999
- --------------------------------- ----------------------
WAYNE WASHAM
94
<PAGE> 96
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
EXHIBITS TO
ANNUAL REPORT AND FORM 10-K
YEAR ENDED DECEMBER 31, 1998
-----------------
COMMUNITY BANCSHARES, INC.
P.O. BOX 1000
MAIN STREET
BLOUNTSVILLE, ALABAMA 35031
================================================================================
95
<PAGE> 1
---------------------------
EXHIBIT 3.3
BY-LAWS OF COMMUNITY BANCSHARES, INC.
----------------------------
96
<PAGE> 2
BYLAWS
OF
COMMUNITY BANCSHARES, INC.
ARTICLE I
OFFICES
SECTION 1.1. PRINCIPAL OFFICE. The principal office of the
Corporation shall be in the city of Blountsville, County of Blount, State of
Alabama.
SECTION 1.2. OTHER OFFICES. The Corporation may also have
offices at such other places within or without the States of Alabama or Delaware
as the Board of Directors may from time to time determine or as the business of
the Corporation may require.
ARTICLE II
MEETINGS OF THE STOCKHOLDERS
SECTION 2.1. PLACE OF MEETINGS. Meetings of the stockholders
shall be held at the Corporation's principal office in Blountsville, Alabama or
at such other place either within or without the States of Alabama or Delaware
as shall be specified in the notice of the meeting or in a waiver thereof.
SECTION 2.2. ANNUAL MEETING. Annual meetings of the
stockholders shall be held on a date and time designated by the Board of
Directors and, as set forth in the notice of the meeting, for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.
SECTION 2.3. SPECIAL MEETINGS. Special meetings of the
stockholders may be called only by the Chairman of the Board, President, a
majority of the Board of Directors, or by such person or persons as may be
authorized by the Certificate of Incorporation or by these Bylaws. A request for
a special meeting shall state the purpose of the meeting and the matters
proposed to be acted on at it.
SECTION 2.4. NOTICE. Not less than twenty (20) nor more than
sixty (60) days before each meeting of the stockholders, the Secretary of the
Corporation shall give written notice of the meeting to each stockholder of
record entitled to vote at the meeting. The notice shall state the date, hour
and place of the meeting and the purpose of the meeting, if the meeting is a
special meeting or notice of the purpose is required by the General Corporation
Law of the State of Delaware.
SECTION 2.5. QUORUM. The holders of shares entitled to vote as
a separate voting group may take action on a matter at a meeting only if a
quorum exists with respect to that matter. The presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast on
a matter by a voting group, shall constitute a
97
<PAGE> 3
quorum at meetings of stockholders except as otherwise provided by statute or by
the Certificate of Incorporation. Once a share is represented for any purpose at
a meeting, the holder is deemed present for quorum purposes for the remainder of
the meeting and for any adjournment of that meeting, unless a new record date is
or must be set for that adjourned meeting.
SECTION 2.6. ADJOURNMENT. If a quorum shall not be present or
represented at any meeting of the stockholders, the stockholders present in
person, or represented by proxy, shall have the power to adjourn the meeting
from time to time, without further notice, to a date not more than thirty (30)
days after the original record date if the time and place thereof are announced
at the meeting at which adjournment is taken, unless after the adjournment a new
record date is fixed for the adjourned meeting. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the original meeting.
SECTION 2.7. MAJORITY RULE. A majority of all the votes cast
at a meeting of stockholders at which a quorum is present is sufficient to
approve any matter which properly comes before the meeting, unless the vote of a
greater number is required by the General Corporation Law of the State of
Delaware, the Certificate of Incorporation or these Bylaws.
SECTION 2.8. ELECTION OF DIRECTORS. Directors shall be elected
by a plurality of all the votes cast at a meeting of stockholders at which a
quorum is present.
SECTION 2.9. VOTING. Each outstanding share of stock,
regardless of class, is entitled to one (1) vote on each matter submitted to a
vote at a meeting of stockholders, unless otherwise provided by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
these Bylaws.
SECTION 2.10. PROXIES. Each stockholder entitled to vote at a
meeting of the stockholders or to express consent or dissent to corporate action
in writing without a meeting may authorize another person or persons to act for
him by proxy by signing an appointment form, either personally or by his
attorney-in-fact, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it conspicuously states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be irrevocable
regardless of whether the interest with which it is coupled is an interest in
the stock itself or an interest in the Corporation generally.
SECTION 2.11. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETING OF STOCKHOLDERS.
(1) Nominations of persons for election to
the Board of Directors of the Corporation and the proposal of other business to
be considered by the
98
<PAGE> 4
stockholders may be made at an annual meeting of stockholders (A) pursuant to
the Corporation's notice of meeting, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this Bylaw, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Bylaw in addition to any other applicable law, rule or regulation
applicable to such meeting.
(2) For nominations or other business to be
properly brought before an annual meeting by a stockholder pursuant to clause
(C) of Section 2.11(a)(1), the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 90th day nor earlier
than the close of business on the 120th day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than thirty (30) days before or more than
sixty (60) days after such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the close of business on the 120th
day prior to such annual meeting and not later than the close of business on the
later of the 90th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. In
no event shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (A) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is relevant to such person's
eligibility or qualifications (as established by the Nominating Committee from
time to time) or is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (B) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (C) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second
sentence of Section 2.11(a)(2) to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least one hundred (100) days prior to the first anniversary of
the preceding year's annual meeting, a stockholder's notice required by this
99
<PAGE> 5
Bylaw shall also be considered timely, but only with respect to nominees for any
new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (1) by or at the direction of the Board of
Directors or (2) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this Bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice described in Section 2.11(a)(2)
shall be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the close of business on the 120th day prior to
such special meeting and not later than the close of business on the later of
the 90th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting. In
no event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
(C) GENERAL.
(1) Only such persons who are nominated in
accordance with the procedures set forth in this Bylaw shall be eligible to
serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw. Except as otherwise provided by law, the
Certificate of Incorporation or the Bylaws of the Corporation, the Chairman of
the meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made, or proposed, as
the case may be, in accordance with the procedures set forth in this Bylaw and,
if any proposed nomination or business is not in compliance with this Bylaw, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Bylaw, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions
of this Bylaw, a stockholder shall also comply with all applicable requirements
of the Exchange Act and the
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rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of (A)
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (B) the holders of
any series of Preferred Stock to elect directors under specified circumstances.
SECTION 2.12. LIST OF STOCKHOLDERS. The officer who has charge
of the stock ledger books of the Corporation shall prepare and make, at least
ten (10) days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. Such list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger, to
be included in the list required by this Section 2.12 or to vote in person or by
proxy at any meeting of stockholders.
SECTION 2.13. INSPECTORS. The Board of Directors shall, in
advance of any meeting of the stockholders, appoint one or more inspectors to
act at such meeting or any adjournment thereof. If the inspectors shall not be
so appointed or if any of them shall fail to appear or act, the chairman of the
meeting shall appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to execute faithfully the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors shall determine the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the chairman of the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any challenge, request
or matter determined by them and shall execute a certificate of any fact found
by them. No director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be stockholders.
SECTION 2.14. ORGANIZATION. At every meeting of the
stockholders, the Chairman of the Board, or in the case of a vacancy in the
office or absence of the Chairman of the Board, one of the following persons
present in the order stated: the President, the Vice Presidents in their order
of rank, a chairman designated by the Board of Directors, or a chairman chosen
by the stockholders entitled to cast a majority of the votes which all
stockholders present in person or by proxy are entitled to cast, shall act as
chairman of the meeting, and the Secretary, or, in his absence, an Assistant
Secretary, if any, or any person appointed by the chairman of the meeting, shall
act as secretary of the meeting.
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ARTICLE III
DIRECTORS
SECTION 3.1. GENERAL POWERS: NUMBER AND TENURE. The
Corporation's business, properties and affairs shall be managed by its Board of
Directors, composed of not less than nine nor more than eighteen persons (the
number of directors to be determined by resolution of the Board of Directors
from time to time). The Board of Directors shall be divided into three classes,
designated Class I, Class II, and Class III, as nearly equal in number as
possible, and the term of office of directors of one class shall expire at each
annual meeting of stockholders, and in all cases as to each director until his
successor shall be elected and shall qualify or until his earlier resignation,
removal from office, death or incapacity. Additional directorships resulting
from an increase in number of directors shall be apportioned among the classes
as equally as possible. The initial term of office of directors of Class I shall
expire at the annual meeting of stockholders in 1997; that of Class II shall
expire at the annual meeting in 1998; and that of Class III shall expire at the
annual meeting in 1999; and in all cases as to each director until his successor
shall be elected and shall qualify or until his earlier resignation, removal
from office, death or incapacity. At each annual meeting of stockholders, the
number of directors equal to the number of directors of the class whose term
expires at the time of such meeting (or, if less, the number of directors
properly nominated and qualified for election) shall elected to hold office
until the third succeeding annual meeting of stockholders after their election.
SECTION 3.2. ELECTION. Unless the Certificate of Incorporation
or these Bylaws provide otherwise, directors are elected by a plurality of all
votes cast at a meeting of stockholders at which a quorum is present. Each share
of stock may be voted for as many individuals as there are directors to be
elected and for whose election the share is entitled to be voted. Stockholders
shall not have any cumulative voting rights.
SECTION 3.3. QUALIFICATIONS. Each director of the Corporation
shall have the qualifications required by the Certificate of Incorporation or
these Bylaws. Directors need not be residents of the States of Alabama or
Delaware or stockholders in the Corporation.
SECTION 3.4. REMOVAL. Any director may be removed only for
cause by vote of the holders of at least eighty percent (80%) of the voting
power of all the shares of the Corporation that are present and eligible to vote
at a shareholder meeting for which a quorum exists, voting together as a single
class. Cause shall mean the director's willful dishonesty towards, fraud upon,
or deliberate injury or attempted injury to the Corporation.
SECTION 3.5. VACANCIES. Any vacancy and newly created
directorship occurring in the Board of Directors which results from an increase
in the authorized number of directors elected by all of the stockholders having
the right to vote may be filled
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by the affirmative vote of a majority of the remaining directors or director,
whether or not sufficient to constitute a quorum. When one or more directors
shall resign from the Board of Directors, effective at a future date, a majority
of the directors then in office, including those who have resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective.
SECTION 3.6. LACK OF DIRECTORS. If at any time, by reason of
death or resignation or other cause, the Corporation should have no directors in
office, then any officer may call a special meeting of stockholders in
accordance with the provisions of the Certificate of Incorporation or these
Bylaws, and an election of directors may be held in the manner provided by the
Certificate of Incorporation, these Bylaws or applicable law.
SECTION 3.7. RESIGNATION. A director may resign at any time by
delivering written notice to the Corporation, the Board of Directors, the
Chairman of the Board or the President. A resignation is effective when notice
is delivered, unless the notice specifies a later effective date.
SECTION 3.8. POWERS. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors which
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not by applicable law, the Certificate of Incorporation or by
these Bylaws conferred on or reserved to the stockholders.
SECTION 3.9. QUORUM. A majority of the directors then in
office shall constitute a quorum for the transaction of business. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
SECTION 3.10. ANNUAL MEETING. The annual meeting of the Board
of Directors for the purpose of electing officers and transacting such other
business as may be brought before the meeting shall be held each year
immediately following the annual meeting of stockholders.
SECTION 3.11. REGULAR MEETINGS. Regular meetings of the Board
of Directors may be held without notice at such places, within or without the
States of Delaware or Alabama, on such dates and at such times as may from time
to time be determined by the Board.
SECTION 3.12. SPECIAL MEETINGS. Special meetings of the Board
of Directors may be called by the Chairman of the Board or the President and
shall be called by the Secretary on the written request of a majority of the
directors then in office. Notice of special meetings of the Board of Directors
shall be given to each director at least twenty-four (24) hours before the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting. Such meetings shall be held at such
places,
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within or without the State of Delaware, on such dates and at such times as may
be stated in the notice.
SECTION 3.13. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of the Board of Directors or of a committee
of the Board of Directors may be taken without a meeting if a written consent
which sets forth the action is: (a) signed by each member of the Board of
Directors or committee; and (b) filed with the minutes of proceedings of the
Board of Directors or committee. The affirmative written consent of the number
of directors that would be necessary to authorize or take action at a meeting
pursuant to Section 3.15 hereof is the act of the Board of Directors without a
meeting. Action taken by written consent is effective when the last director
signs the consent unless the consent specifies a different effective date.
SECTION 3.14. MEETINGS BY TELEPHONE. Members of the Board of
Directors or any committee may participate in a meeting by means of a telephone
conference or similar communications equipment provided all persons
participating in the meeting can hear each other at the same time. A director
participating in such a meeting is deemed to be present in person at the
meeting.
SECTION 3.15. MAJORITY RULE. The action of a majority of the
directors present at a meeting at which a quorum is present is the action of the
Board of Directors unless the Certificate of Incorporation or these Bylaws shall
require a greater proportion.
SECTION 3.16. COMPENSATION. The Board of Directors or a
committee thereof shall have the authority to fix the compensation of directors.
Directors shall be entitled to reimbursement for any reasonable expenses
incurred in attending meetings and otherwise carrying out their duties.
SECTION 3.17. ORGANIZATION. At every meeting of the Board of
Directors, the Chairman of the Board, or in the case of a vacancy in the office
or absence of the Chairman of the Board, one of the following officers present
in the order stated: the Vice Chairman of the Board, the President, the Vice
Presidents in their order of rank, or a chairman chosen by a majority of the
directors present, shall act as chairman of the meeting, and the Secretary, or,
in the absence of the Secretary, an Assistant Secretary, if any, or any other
person appointed by the chairman of the meeting, shall act as secretary of the
meeting.
ARTICLE IV
COMMITTEES
SECTION 4.1. APPOINTMENTS AND POWERS. The Board of Directors
shall establish an Executive Committee, an Executive Compensation Committee, a
Nominating Committee and an Audit Committee. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board of Directors,
designate one (1) or more other committees, each consisting of two (2) or more
directors. The Board of Directors may
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designate one (1) or more directors as alternative members of a committee who
may replace any absent or disqualified member at any meeting of the committee.
Such alternate members shall not be counted for purposes of determining a quorum
unless acting for an absent or disqualified member, in which case they shall be
counted in the place of the absent or disqualified member. The committee, to the
extent provided in said resolution or resolutions or in these Bylaws, shall have
and may exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation and may have power to authorize the seal
of the Corporation to be affixed to all papers which may require it, except that
a committee may not: (a) amend the Certificate of Incorporation; (b) adopt an
agreement of merger, share exchange or consolidation; (c) recommend to the
stockholders of the Corporation the sale, lease or exchange of all or
substantially all of the Corporation's property or assets; (d) recommend to the
stockholders of Corporation a dissolution of the Corporation or revocation of a
dissolution; (e) amend these Bylaws; (f) declare a dividend; (g) issue stock; or
(h) adopt a certificate of ownership and merger. Such committee or committees
shall have such name or names as may be stated in these Bylaws or as may be
determined from time to time by resolution adopted by the Board of Directors.
Sections 3.11 through 3.15 applicable to the Board of Directors shall also apply
to all committees.
SECTION 4.2. EXECUTIVE COMMITTEE. There shall be an Executive
Committee, which, during intervals between regular meetings of the Board of
Directors and to the extent permitted by law, the Certificate of Incorporation
and these Bylaws, shall have and may exercise all the powers of the Board of
Directors in the management of the business and affairs of the Corporation.
SECTION 4.3. EXECUTIVE COMPENSATION COMMITTEE. The Executive
Compensation Committee shall report and recommend to the Board of Directors the
compensation of all executive officers.
SECTION 4.4. NOMINATING COMMITTEE. The Nominating Committee
shall recommend to the Board of Directors candidates to be nominated on behalf
of the Corporation at any annual or special meeting of stockholders at which
directors of the Corporation are to be elected. The Nominating Committee may
from time to time establish the information required from prospective nominees.
The Nominating Committee may from time to time, at the direction of the Board of
Directors, investigate the eligibility and qualifications of prospective
nominees to hold office if elected.
SECTION 4.5. AUDIT COMMITTEE. The Audit Committee shall review
the financial and internal operations of the Corporation and make such reports
and recommendations to the Board of Directors as it may determine or as the
Board of Directors may direct.
SECTION 4.6. MINUTES. Committees shall keep regular minutes of
their proceedings and report the same to the Board of Directors when required.
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ARTICLE V
NOTICES
SECTION 5.1. NOTICE. Notices to directors and stockholders
shall be in writing, shall specify the date, time and place of the meeting and
shall be delivered personally, left at his or her residence or usual place of
business, or mailed to the directors or stockholders at their addresses
appearing on the records of the Corporation. Notice by mail shall be deemed to
be given at the time when deposited in the United States mail, postage prepaid,
and directed to the directors or stockholders at their addresses appearing on
the records of the Corporation. Notice to directors may also be given by
telegram, facsimile or overnight courier, and shall be deemed to be given upon
receipt at their addresses appearing on the records of the Corporation.
SECTION 5.2. WAIVER OF NOTICE. Whenever any notice of the
time, place or purpose of a meeting is required to be given to any stockholder
or director under the General Corporation Law of the State of Delaware or the
Certificate of Incorporation or these Bylaws, a written waiver, signed by the
person entitled to notice and delivered to the Corporation and filed with the
Corporation's minutes or records, whether before or after the time stated
therein, shall be deemed equivalent to notice. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, Board of Directors or members of a committee of the Board of
Directors need be specified in any written waiver of notice unless required by
the Certificate of Incorporation or these Bylaws.
SECTION 5.3. ATTENDANCE CONSTITUTES WAIVER. Attendance of a
person at a meeting in person or by proxy shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
ARTICLE VI
OFFICERS
SECTION 6.1. OFFICERS. The officers of the Corporation shall
consist of a Chairman of the Board, a Vice Chairman of the Board, a President,
one or more Vice Presidents (which may have seniority designations), a
Treasurer, a Secretary, and such other officers as the Board of Directors may
from time to time deem proper, each of whom shall be elected by the Board of
Directors. Any number of offices, except President and Secretary, may be held by
the same person.
SECTION 6.2. REMOVAL. If the Board of Directors in its
judgment finds that the best interests of the Corporation will be served, it may
remove any officer or agent of the Corporation at any time with or without
cause. The removal of an officer or agent does not prejudice any of his or her
contract rights, if any.
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SECTION 6.3. TERM OF OFFICE; RESIGNATION. An officer of the
Corporation shall serve for the term provided within any applicable contract for
employment, or absent such contract shall serve for such term as determined by
the Board of Directors and until his or her successor is elected and qualified
or until his or her earlier resignation or removal. Any officer may resign at
any time upon written notice to the Corporation. A resignation is effective when
the notice is delivered, unless the notice specifies a later effective date. If
a resignation is made effective at a later date and the Corporation accepts such
later date, the Board of Directors may fill the pending vacancy before the
effective date if it provides that the successor does not take office until the
effective date. An officer's resignation does not affect the Corporation's
contract rights, if any, with the officer. Any vacancy occurring in any office
of the Corporation by death, resignation, removal or otherwise shall be filled
by the Board of Directors or by such officer or agent of the Corporation to whom
the Board of Directors may expressly delegate such authority.
SECTION 6.4. CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the stockholders and Board of Directors, and
shall be the Corporation's chief executive officer. He shall have authority to
execute bonds, mortgages, and other contracts requiring a seal, under the seal
of the Corporation; he shall have power to endorse, when sold, assigned,
transferred or otherwise disposed of by the Corporation, all certificates or
shares of stock, bonds, or other securities issued by other corporations,
associations, trusts, whether public or private, or by any government or agency
thereof, and owned or held by the Corporation, and to make, execute and deliver
all instruments or assignment or transfer of any such stocks, bonds or other
securities and such other authority as granted by the Board of Directors, by
contract or otherwise. He may, with the approval of the Board, or shall, at the
Board's discretion, delegate any or all of such duties to the president.
SECTION 6.5. PRESIDENT. The President shall have general
powers and duties of supervision and management usually vested in the office of
president of a corporation, including the authority to make contracts on behalf
of the Corporation in the ordinary course of the Corporation's business. The
President shall, under the direction of the Board and the Chairman, have general
supervision, direction and control of the business of the Corporation, and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. In the absence of the Chairman of the Board, the President shall perform
all of the duties and have all of the authority of the Chairman of the Board and
shall preside at all meetings of the stockholders and the Board of Directors.
The President shall execute bonds, mortgages and other contracts, except where
required or permitted by law to be otherwise signed and executed, and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation. The
President shall have the power to appoint, remove and suspend subordinate
officers and agents upon such terms and conditions as he deems reasonable and
appropriate. The President shall have such powers and duties as usually pertain
to such office, except as the same may be modified by the Board of Directors.
SECTION 6.6. VICE PRESIDENTS. The Vice Presidents, in the
order of their seniority, unless otherwise determined by the Board of Directors,
shall, in the absence or
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disability of the President, perform the duties and exercise the powers of the
President. They shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe or as the President may
from time to time delegate.
SECTION 6.7. SECRETARY. The Secretary shall attend meetings of
the Board of Directors and stockholders, and record all the proceedings of such
meetings in a book to be kept for that purpose. The Secretary shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision
the Secretary shall be.
SECTION 6.8. TREASURER. The Treasurer shall have custody of
the corporate funds and securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. The Treasurer shall perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe
or as the President may from time to time delegate.
SECTION 6.9. OTHER OFFICERS. The duties of other officers
elected by the Board of Directors shall be such as are customary to the
respective offices as shall be given to them by the Board of Directors, or by
the Chairman or the President.
SECTION 6.10. COMPENSATION. The salaries of the principal
officers shall be fixed by the Board of Directors on an annual basis or for such
other terms as the Board of Directors may determine from time to time, after
taking account of any recommendations by any committee to which the power to
advise with respect to salaries is delegated by the Board of Directors. The
Board of Directors may from time to time delegate to any principal officer or
any committee power to fix the salaries of other officers, agents and employees.
No officer shall be prevented from receiving such salary by reason of the fact
that he is also a director of the Corporation or a member of any committee
contemplated by these Bylaws.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
SECTION 7.1. CERTIFICATES FOR SHARES. The shares of the
Corporation shall be represented by certificates which shall be in a form
approved by the Board of Directors and contain such information as may be
required by the General Corporation Law of the State of Delaware or any
securities exchanges on which any shares of the Corporation may be listed.
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SECTION 7.2. FACSIMILE SIGNATURES. Any or all the signatures
on the certificate may be a facsimile. In case any officer who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
SECTION 7.3. LOST CERTIFICATES. The Board of Directors may
determine the conditions for issuing a new stock certificate in place of any
certificate issued by it, alleged to have been lost, stolen or destroyed. The
Board of Directors may require the owner of the lost, stolen or destroyed
certificate to give to the Corporation a bond with sufficient surety to
indemnify the Corporation against any loss or claim arising as a result of the
issuance of a new certificate. The issuance of a new certificate under this
Section 7.3 does not constitute an overissue of the shares it represents.
SECTION 7.4. TRANSFER OF SHARES. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 7.5. RECORD DATE FOR NOTICE AND VOTING. For the
purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, the Board of Directors may
set a record date or direct that the stock transfer books be closed for a stated
period for the purpose of making any proper determination with respect to
stockholders. The record date shall be not more than sixty (60) days nor less
than ten (10) days before the date on which the action requiring the
determination will be taken. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the day
next preceding the day on which notice of the meeting is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholder shall apply to any adjournment of the
meeting; providing, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 7.6. RECORD DATE FOR DIVIDENDS. For the purpose of
determining stockholders entitled to receive payment of any dividend or an
allotment of any rights, the Board of Directors may in advance fix a record
date, which record date shall be not more than sixty (60) days prior to such
action. If no record date is fixed, the record date for determining stockholders
for such purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution declaring the dividend or allotment of
rights.
SECTION 7.7. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to recognize the exclusive rights of a person registered on its books
as the owner of shares
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to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. RIGHT TO INDEMNIFICATION. The Corporation shall
indemnify, and upon request shall advance expenses (including attorneys' fees)
to, in the manner and to the fullest extent permitted by law, any officer or
director (or the estate of any such person) who was or is a party to, or is
threatened to be made a party to, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan (an "indemnitee"). The Corporation may, to the fullest
extent permitted by law, purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan against any liability
which may be asserted against such person. To the fullest extent permitted by
law, the indemnification and advances provided for herein shall include expenses
(including attorneys' fees), judgments, penalties, fines and amounts paid in
settlement. The indemnification provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person for any such expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement to
the fullest extent permitted by law, both as to action in his official capacity
and as to action in another capacity while holding such office.
SECTION 8.2. LIABILITY OF INDEMNITEE. Notwithstanding the
foregoing, the Corporation shall not indemnify any such indemnitee who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to secure a
judgment in its favor against such indemnitee with respect to any claim, issue
or matter as to which the indemnitee shall have been adjudged to be liable to
the Corporation, unless and only to the extent that, the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 8.3. SCOPE OF RIGHTS. The rights to indemnification
and advancement of expenses set forth in this Article VIII are intended to be
greater than those which are otherwise provided for in the General Corporation
Law of the State of Delaware, are contractual between the Corporation and the
person being indemnified, his heirs, executors and administrators, and, with
respect to this Article VIII are mandatory,
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notwithstanding a person's failure to meet the standard of conduct required for
permissive indemnification under the General Corporation Law of the State of
Delaware, as amended from time to time. The rights to indemnification and
advancement of expenses set forth in this Article VIII are nonexclusive of other
similar rights which may be granted by law, the Certificate, these Bylaws, a
resolution of the Board of Directors or stockholders or an agreement with the
Corporation, which means of indemnification and advancement of expenses are
hereby specifically authorized.
SECTION 8.4. AMENDMENT OF RIGHTS. Any repeal or modification
of the provisions of this Article VIII, either directly or by the adoption of an
inconsistent provision of these Bylaws, shall be prospective only and shall not
adversely affect any right or protection set forth herein existing in favor of a
particular individual at the time of such repeal or modification. In addition,
if an amendment to the General Corporation Law of the State of Delaware limits
or restricts in any way the indemnification rights permitted by law as of the
date hereof, such amendment shall apply only to the extent mandated by law and
only to activities of persons subject to indemnification under this Article VIII
which occur subsequent to the effective date of such amendment.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1. DIVIDENDS. Subject to the provisions of the
Certificate of Incorporation and the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation may, at any regular or
special meeting, declare dividends upon the capital stock of the Corporation as
and when the Board of Directors may deem expedient.
SECTION 9.2. CHECKS; DRAFTS. All checks or demands for money
and notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
SECTION 9.3. FISCAL YEAR. The fiscal year of the Corporation
shall be the calendar year, unless otherwise fixed by the Board of Directors.
SECTION 9.4. ANNUAL STATEMENT OF AFFAIRS. The President, or
any other officer of the Corporation designated by the Board of Directors, shall
prepare annually a full and correct statement of the affairs of the Corporation,
to include a balance sheet and a financial statement of operations for the
preceding fiscal year.
SECTION 9.5. SEAL. The seal of the Corporation shall be in the
form of a circle and shall bear the name of the Corporation and the state of its
incorporation.
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ARTICLE X
AMENDMENTS
These Bylaws may be altered, amended, or repealed at any
meeting of the Board of Directors or of the stockholders, provided notice of the
proposed change was given in the notice of the meeting and, in the case of a
meeting of the Board of Directors, in a notice given not less than two (2) days
prior to the meeting; provided, however, that, in the case of amendments by
stockholders, notwithstanding any other provisions of these Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote (but in
addition to any affirmative vote of the holders of any particular class or
series of the capital stock of the Corporation required by law, the Certificate
of Incorporation or these Bylaws) the affirmative vote of the holders of eighty
percent (80%) of the voting power of all the shares of the Corporation that are
present and eligible to vote at a shareholder meeting for which a quorum exists,
voting together as a single class, shall be required to alter, amend or repeal
any provision of these Bylaws.
ARTICLE XI
EMERGENCY BYLAW
In the event that a quorum of directors cannot be readily
assembled because of a catastrophic event, the Board of Directors may take
action by the affirmative vote of a majority of those directors present at a
meeting and may exercise any emergency power granted to a board of directors
under the General Corporation Law of the State of Delaware not inconsistent with
these Bylaws. Special meetings of the Board of Directors may be called in an
emergency by the director or, if no director is present at the Corporation's
principal offices, by the officer present having the greatest seniority as an
officer. The director or directors in attendance at the meeting shall constitute
a quorum. If less than three (3) regularly elected directors are present, the
director present having the greatest seniority as a director may appoint one (1)
or more persons (not to exceed the number most recently fixed by the Board
pursuant to Section 3.1) from among the officers or other executive employees of
the Corporation to serve as substitute directors. If no regularly elected
director is present, the officer present having the greatest seniority as an
officer shall serve as a substitute director and shall appoint up to four (4)
additional persons from among the officers or other executive employees of the
Corporation to serve as substitute directors. The Board of Directors, either
before or during any such emergency, may provide, and from time to time modify,
lines of succession in the event that during such emergency any or all officers
or agents of the Corporation shall for any reason be rendered incapable of
discharging their duties. The Board of Directors, either before or during such
emergency, may, effective during the emergency, change the principal office of
the Corporation or designate several alternative principal or regional offices
or authorize the officers to do so. No officer or employee acting in accordance
with the Emergency Bylaw shall be liable except for willful misconduct. To the
extent not inconsistent with the Emergency Bylaw, the Bylaws of the Corporation
shall remain in effect during any emergency, and upon termination of the
emergency, the Emergency Bylaw shall cease to be operative. Notice of any
meeting of the Board of Directors during such emergency may be given only to
such of the directors as it may be feasible to reach at the time and by such
means as may be feasible at the time, including publication or radio.
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----------------------------------------------
EXHIBIT 10.2
PROMISSORY NOTE, GUARANTY AND PLEDGE AGREEMENT
BY AND BETWEEN
COMMUNITY BANCSHARES, INC. AND
COLONIAL BANK, N.A.
DATED DECEMBER 1, 1998
----------------------------------------------
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$2,963,841.91 December 1, 1998
Birmingham, Alabama
PROMISSORY NOTE
(Non Recourse)
- -------------------------------------------------------------------------------
A PORTION OF THIS PROMISSORY NOTE IS A RENEWAL AND REFINANCING OF THE
OBLIGATIONS OF BORROWER UNDER A $2,183,805.18 PROMISSORY NOTE DATED MAY 17,
1996.
- -------------------------------------------------------------------------------
FOR VALUE RECEIVED, the undersigned (herein, along with any other maker,
endorser, surety or guarantor hereof, shall be called "Borrower"), promises to
pay, without recourse, to the order of COLONIAL BANK (hereinafter along with
its successors and assigns called "Lender"), at Lender's office or at such
other place as Lender may from time to time designate, without grace and in
lawful money of the United States of America, the principal sum of Two Million
Nine Hundred Sixty-Three Thousand Eight Hundred Forty-One and 91/100 Dollars
($2,963,841.91), together with interest and charges thereon (hereinafter
"Obligation"), all as evidenced by the records of Lender.
I. INTEREST:
Borrower agrees to pay interest on the unpaid principal Obligation, in
accordance with the terms hereof.
Interest on the unpaid principal Obligation shall be computed from the date
hereof at a rate of 0.00% above the Colonial Base Rate (as herein defined), but
in no event shall the interest rate exceed the maximum amount permitted by law.
As of this date, the Colonial Bank Base Rate is 7.75%, making the interest rate
accruing on the unpaid principal Obligation as of this date, 7.75%
The Colonial Bank Base Rate is a reference rate established by Lender for use
in computing and adjusting interest. It is subject to increase, decrease or
change, and is only one of the reference rates or indices that the Lender uses.
The Lender may lend to others at rates of interest at, or greater or less than
the Colonial Bank Base Rate or the rate provided herein.
The Colonial Bank Base Rate may change as often as daily. Any change in the
interest rate resulting from a change in the Colonial Bank Base Rate shall take
effect upon the change in the Colonial Bank Base Rate.
Interest from date on the outstanding unpaid principal balance shall be
computed on the basis of a 365 day year by multiplying the product of the
principal amount outstanding and the applicable rate by the actual amount of
days elapsed and dividing by 365.
Both principal and accrued interest shall bear interest after maturity or
default at the rate of 2.00% above the Colonial Bank Base Rate.
ADDITIONAL CHARGES: In addition to interest, Borrower has paid the following
additional charges: $100.00 document fee and those other fees shown on the loan
closing statement.
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II. PRINCIPAL AND INTEREST PAYMENTS:
The Borrower promises and agrees to pay principal and interest as follows:
A. One Hundred Forty Three (143) consecutive monthly principal and
interest installments of $31,677.31 followed by
B. One (1) final installment equal to all of the principal of
and interest on the Obligation then remaining unpaid.
If principal and interest are payable in installments, then the first
installment will be due and payable on December 16, 1998 and the remaining
installments will be due and payable on the same day of every month thereafter
until both the principal and interest on this Obligation has been paid in full,
or this note matures.
MATURITY DATE: Any provisions of this Note to the contrary notwithstanding, all
outstanding and unpaid principal indebtedness evidenced hereby, plus accrued
interest, shall be due and payable on November 16, 2010, which shall be the
maturity date of this Note.
EFFECT OF VARIABLE RATE ON MONTHLY PAYMENTS: The monthly payment on this
Obligation will increase or decrease, at the Lender's discretion, pursuant to a
change in the Colonial Bank Base Rate. The fixed monthly installment has been
calculated based upon a twelve (12) year amortization at a 7.75 % annual rate.
In the event of a change in the Colonial Bank Base Rate, the Lender will review
the amount of the monthly payment, and may, at Lender's discretion recalculate
the amount of the monthly payment and so notify Borrower, who shall thenceforth
make monthly payments in the amount so indicated. The ability of Lender to make
changes in the amount of the monthly payment can occur upon each change of the
Colonial Bank Base Rate. In the event Lender does not change the amount of the
monthly payment when Colonial Bank Base Rate changes or any time thereafter,
then the final payment due on this Obligation will increase.
APPLICATION OF PAYMENTS: Unless otherwise elected by Lender, all payments shall
be applied as billed by Lender, and if not billed, then first to late and other
charges, if any, payable hereunder or under any Loan Document, then to interest
and then to principal.
LATE CHARGES FOR OVERDUE PAVMENTS: Any scheduled payment of principal or
principal plus interest in default ten (10) days or more will be subject to a
late charge of five percent (5.0%) of such scheduled payment. The late charge
shall not be less than $0.50, nor exceed $100 for any late payment, except that
such limitation shall be inapplicable if this Note is secured by real property.
The late charge shall be charged only once for any late payment.
PREPAYMENT: The Borrower reserves the right, privilege, and option to prepay
the principal indebtedness evidenced by this Note, or any part thereof, at any
time without penalty, and interest shall cease to accrue on the amount or
amounts of principal so prepaid. Any such prepayment shall be applied to unpaid
principal installments hereunder in the inverse order of the maturities
thereof. No partial principal prepayment shall defer the due date of any
installment of principal and interest due hereunder.
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III. SECURITY:
This Note and the Obligation is secured (in accordance with the terms of a
Pledge Agreement from Borrower to Lender dated this date) solely by the grant
of a first lien security interest in 261,434 shares of the common stock of
COMMUNITY BANCSHARES, INC. owned by BANK ONE TRUST, NA as Trustee (the
"Trustee") of the COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (the
"Plan") and held by the COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP
TRUST (the "Trust"). Lender agrees to release and deliver to the Trustee for
the Borrower that number of common stock shares pledged hereunder as required
by ERISA Regs. (26 C.F.R.) ss. 54.4975-7(b)(8)(i) taking into account both
principal and interest.
This Note and the Obligation is further guaranteed by COMMUNITY BANCSHARES, INC.
IV. EVENTS OF DEFAULT, AND DEFAULT:
The occurrence of any of the following events shall constitute an Event of
Default hereunder, time being of the essence, entitling Lender, at Lender's
option, and without further notice to the Borrower, to declare the entire
Obligation (principal plus accrued interest and charges) immediately due and
payable at once and in full with interest to date:
Borrower's failure to pay when due or to perform or comply with any of
the (i) obligations or provisions under this Note and any renewals,
modifications, refinancing and extensions thereof, or the (ii)
obligations or provisions under the Pledge Agreement.
Failure of the Lender to declare such indebtedness to be due and payable in the
Event of a Default shall not constitute a waiver of the right later to declare
the entire indebtedness to be at once due and payable.
V. PURPOSE OF LOAN:
This Note evidences a loan to be used by Borrower for acquisition of COMMUNITY
BANCSHARES, INC.'s stock in order to continue to be able to fund the COMMUNITY
BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, and to repay existing
indebtedness incurred for such purpose, and Borrower agrees to use the proceeds
of this loan for only those purposes. Notwithstanding the foregoing, the
Borrower hereby represents and warrants to Lender that the money which is the
subject of the credit transaction is not for personal, family, household, or
agricultural purposes within the meaning of the Federal Truth-in Lending Act or
Regulation Z of the Federal Reserve Board issued pursuant thereto, and that
said extension of credit is for business or commercial purposes (other than
agricultural purposes).
VI. NON RECOURSE OBLIGATION:
Notwithstanding any provision to the contrary contained herein or in the Pledge
Agreement, it is hereby expressly understood and agreed that, in the event
Lender shall at any time take action to enforce the collection of the
Obligation, Lender shall not seek a money judgement against the Trust or the
Plan or the Trustee for any sum promised to be paid herein or in the Pledge
Agreement, and Lender shall never institute suit, action, claim, at law or in
equity against the Plan, the Trust or the Trustee, or collect from them
personally any such sums; and if, as a result of sale of collateral described
in the Pledge Agreement, a lesser sum is realized therefrom than the amount
then due and owing under this Note, the Lender shall
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<PAGE> 5
never institute any action, suit, claim or demand at law or in equity against
the Trust, the Plan, or the Trustee. This Note shall be without recourse to the
Plan, the Trust and the Trustee for any deficiency and the Lender's rights are
limited solely to the stock pledged herein and any earning attributable to such
collateral. Furthermore, notwithstanding anything herein to the contrary, all
pledges, liability and collateral of the Plan for the indebtedness represented
by this Note, are subject to and limited by, ERISA Regs. (26 C.F.R.) ss.
54.4975-7(b) and in the event of a default upon indebtedness represented
thereby, the value of the trust assets transferred in satisfaction of the loan
shall not exceed the amount of Obligation. Provided however, nothing contained
herein shall be construed in any way to relieve COMMUNITY BANCSHARES, INC. of
its obligations under its guaranty of Borrower's Obligation, nor to prevent
Lender's enforcement of its rights under the Pledge Agreement.
VII. COMPLIANCE WITH ESOP PROVISIONS:
It is expressly acknowledged and agreed that this Note and the Pledge
Agreement and each provision hereof is intended strictly to comply in all
respects and to be construed in accordance with and be subject to the
provisions of the United States Code and the regulations and regulatory
interpretations thereunder relating to employee stock ownership plans and loans
thereto (the "ESOP Provisions"), including without limitation 26 U.S.C. ss. 401
& 4975, and 26 C. F. R. ss. 54.4975-7 and 29 C. F. R. ss. 2550-408b-3 and that
the Obligation evidenced hereby qualifies as an "exempt loan" and a "stock
acquisition loan" under the ESOP Provisions, and this Note shall be construed
and be deemed to have been amended to the extent necessary to comply with the
ESOP Provisions. Without limiting the generality of the foregoing, it is
expressly acknowledged and agreed that the Lender shall release collateral
pledged hereunder at least as rapidly as required by 26 C.F.R. ss.
54.4975-7(b)(8)(i) as the Obligation is paid.
VIII. WAIVERS, COST OF COLLECTION, MISCELLANEOUS:
The Borrower hereby agrees to pay all costs of collecting or attempting to
collect this Note and the Obligation, including court cost, expenses of
collection, and including a reasonable attorney's fee, if the same be collected
by an attorney consulted with reference to suit or otherwise.
The Borrower and all sureties, endorser and guarantors of this Note, to the
extent not prohibited by applicable law or regulation, hereby jointly and
severally, (a) waive as to this debt or any renewal, modification, extension or
refinancing thereof all rights of exemption under the Constitution or laws of
Alabama or any other state as to real or personal property; (b) waive demand,
presentment, notice of non-payment, protest, notice of protest, notice of
dishonor, all other notice, suit against any party, diligence in collection of
this note, the release of any party primarily or secondarily liable thereon or
any collateral pledged as security, and all other requirements necessary to
hold Borrower liable hereunder; and (c) agree and consent to any one of more
extensions or postponements of time of payment of this Note or any other
indulgences with respect hereto, without notice thereof to any of them, and
without release of liability as to any Borrower or any of them.
Borrower agrees to provide Lender, upon request, any financial statements or
information Lender may deem necessary; and Borrower warrants that all financial
statements and information so provided shall be accurate, correct, and
complete.
Lender's books and records showing the account between us shall be admissible
in evidence in any action or proceeding, shall be binding upon us for the
purposes of establishing the items therein set forth and shall constitute prima
facie proof thereof.
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The Lender shall not by any act, delay, omission or otherwise be deemed to have
waived any of its rights or remedies, and no waiver of any kind shall be valid
against the Lender; unless in writing and signed by the Lender. All rights and
remedies hereunder and under any statute or rule of law shall be cumulative and
may be exercised successively or concurrently. This note shall be governed by
and construed in accordance with the laws of the State of Alabama. BORROWER
CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN
BIRMINGHAM, ALABAMA AND WAIVES ANY OBJECTION WE MAY HAVE BASED UPON IMPROPER
VENUE OR FORUM NON CONVENIENS OR TO THE CONDUCT OF ANY PROCEEDINGS IN ANY SUCH
COURT. IN ANY JUDICIAL PROCEEDING BROUGHT WITH RESPECT TO, RELATING TO, OR
PERTAINING TO THIS NOTE, THE LOAN DOCUMENTS, THE OBLIGATION, THE
ADMINISTRATION, HANDLING OR COLLECTION OF THE OBLIGATION, OR THE ACTIONS OF
LENDER, THE BORROWER ANY RIGHT TO TRLAL BY JURY. Borrower covenant and agree
that Borrower will furnish Lender a prompt written notice of any action or
inaction by Lender or any of Lender's agents or attorneys in connection with
this Note, the Loan Documents, or the advances or obligations thereunder, that
may be actionable against Lender, Lender's agents, Lender's attorneys, or a
defense to payment of the Borrower's obligations to Lender for any reason,
including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower further agrees that, unless
this notice is duly given as promptly as possible (and in any event within ten
(10) days) after Borrower has knowledge or with the exercise of reasonable
diligence should have had knowledge of any such action or inaction, Borrower
will not assert and shall be deemed to have waived, any claim or defense
arising therefrom.
The Borrower understands that the Lender may from time to time enter into a
participation agreement or agreements with one or more participants pursuant to
which such participant or participants shall be given participation in advances
made under this note and that such participants may from time to time similarly
grant to other participants subparticipations in such advances.
Singular or plural words used herein shall be taken to refer to the
undersigned, whether one or more than one, and this Note shall bind each of the
undersigned, jointly and severally.
If any provision of this Note is or becomes invalid or unenforceable, the
remaining provisions shall not be affected thereby.
Any change or modification to this Note must be in writing and signed by both
Lender and Borrower.
IX. EXECUTION:
This note has been executed by the Borrower without condition that anyone else
should sign or become bound hereunder and without any other conditions whatever
being made. The provisions hereof are binding on the successors and assigns of
the Borrower and shall inure to the benefit of the Lender and its successors
and assigns, and every subsequent holder of this Note. Borrower acknowledges
receipt of a completed copy hereof, and of any other instrument executed by
Borrower before this transaction is consummated.
[SIGNATURES CONTINUED ON NEXT PAGE]
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IN WITNESS WHEREOF, we have caused this note to be executed, sealed and
delivered in Birmingham, Alabama on the day and year first above written.
CAUTION -- IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT
BEFORE YOU SIGN IT.
COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK
OWNERSHIP TRUST
By: BANK ONE TRUST, NA As Trustee
By: /s/ Stella LeBlanc
--------------------------------------------------
Stella LeBlanc (Its Relationship Manager)
By: Its Administrative Committee
By: /s/ Bishop K. Walker, Jr.
--------------------------------------------------
Bishop K. Walker, Jr. (Member)
By: /s/ Denny Kelly
--------------------------------------------------
Denny Kelly (Member)
By: /s/ Kennon R. Patterson, Sr.
--------------------------------------------------
Kennon R. Patterson, Sr. (Member)
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GUARANTY
COLONIAL BANK
P.O. Box 1887
Birmingham, Alabama, 35201
Ladies and Gentlemen:
In consideration of and in order to induce you to enter into a Promissory
Note, financing arrangement and/or any modifications, amendments,
supplements, and renewals thereto or thereof (all hereinafter referred to
collectively as "the Loan Agreement") with COMMUNITY BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP TRUST and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK
OWNERSHIP PLAN (hereinafter jointly, severally and collectively referred to
as the "Borrower") and/or to make loans and advances to the Borrower, and for
other good and valuable consideration, the undersigned agrees to be, without
deduction by reason of setoff, defense, or counterclaim of the Borrower,
primarily liable for the due performance and prompt payment of all of the
obligations of the Borrower to you, to all present and future subsidiaries,
assigns, and affiliates of COLONIAL BANK (hereinafter collectively referred
to as "Bank") no matter when or how arising, whether under a note, the Loan
Agreement, or any other present or future agreement with Bank, and
specifically including any and all interest, attorney fees, and cost
pertaining thereto, or which accrue after an order for relief is entered
against Borrower in any Bankruptcy proceedings (all of which are hereafter
collectively referred to as "Obligations").
The undersigned consents to and hereby waives any and all notice of the
making of any modification, amendment, renewal or extension of any note or
Loan Agreement or any supplement thereto; the making of any other agreement;
the incurring of any other debts or obligations by the Borrower to Bank; the
granting to the Borrower or to any obligor, of any extensions of time to make
any payments to perform or discharge any Obligations (or waive such
performances and/or discharge); the compounding, compromising, and/or
adjusting of any claim against the Borrower or any such obligor or debtor;
the accepting or releasing of any security either of Borrower or of any third
party; and all other notices which the undersigned is entitled. No act on
Bank's part and nothing other than the full payment, performances, and
discharge of all Obligations shall operate to discharge or satisfy the
liability of the undersigned hereunder. The liability of the undersigned
hereunder is primary, direct and unconditional and may be enforced without
first resorting to any rights or remedies Bank may have against the Borrower,
any other person, any other entity, or against any security.
The undersigned agrees that this Guaranty, and all Obligations secured
hereby, shall remain in full force and effect and in its original tenor at
all times hereinafter during the term hereof, notwithstanding i) the
unenforceability, non-existence, invalidity, or non-perfection of any of the
Obligations, or any instrument or agreement guaranteeing or securing the
Obligations, or of any lien, pledge, assignment, security interest or
conveyance given as security for the Obligations; ii) the failure of Bank to
pursue any collateral securing the Obligations or the failure to file a claim
against the Borrower or any other guarantor of the Obligation in any
proceeding pertaining to the death, insolvency, or bankruptcy of such person
or entity; or iii) any action or undertakings by, or against, Bank or
Borrower or concerning any collateral which is secured, pledged or assigned
to the Bank in connection with the obligation in any proceeding in the United
States Bankruptcy Court; including without limitation, matters relating to
valuation of collateral, election or imposition of secured or unsecured claim
status upon claims by the Bank pursuant to any Chapter of the Bankruptcy
Code, as may be applicable from time to time.
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This instrument is a continuing guaranty and agreement, extending to and
covering all Obligations of the Borrower arising both before and after the
termination of the undersigned's relationship with Borrower. This guaranty is
terminable by the undersigned only after the expiration of the Loan Agreement,
by notice sent to Bank by registered mail, return receipt requested, and such
termination shall become effective on the thirtieth day after actual receipt by
Bank of such notice and shall apply only to transactions having their inception
thereafter. Any termination by or release of any guarantor in whole or in part
(including without limitation any release by you of the undersigned or of any
other guarantor) shall not affect the continuing liability of any other
guarantors whether under this or any other instrument.
All claims of any kind whatsoever which the undersigned may now or may
hereafter acquire against the Borrower, including rights of indemnity, are
hereby assigned to Bank, and such claims, as well as all money, security, and
property of the undersigned which may at any time be in Bank's possession,
shall be deemed held as security and subject to the Bank's right of set-off,
for all of the Obligations of Borrower and of the undersigned to Bank whether
now or hereafter acquired and no matter how arising and whether under this
instrument or otherwise.
Prior to the execution of this Guaranty, and immediately after the execution of
this Guaranty, the undersigned was and is solvent, and paying its debts as they
come due. So long as there shall be an Obligation due Bank, the undersigned
covenants and agrees that the undersigned will furnish Bank: (a) as soon as
available and in any event within ninety (90) days after the end of each year
the undersigned's financial statement, and if requested by Bank, balance sheet
and copies of the related statements of income, changes in capital accounts and
changes in financial position for such year; (b) a prompt written report of any
material adverse change in the undersigned's financial condition; and (c) a
prompt written notice of any action or inaction by Bank or any of Bank's agents
or attorneys in connection with this Guaranty, the Loan Agreement or the
Obligations, that may be actionable against Bank, Bank's agents, Bank's
attorneys, or a defense to payment of the Obligations for any reason,
including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. The undersigned agrees that unless the
notice provided for in subclause "(c)" hereof is duly given as promptly as
possible (and in any event within ten (10) days) after the undersigned has
knowledge or with the exercise of reasonable diligence should have had
knowledge of any such action or inaction, we will not assert and shall be
deemed to have waived, any claim or defense arising therefrom.
In the event any payment of principal or interest received upon this Obligation
and paid by the undersigned or any other guarantor, surety, co-maker or
endorser, shall be deemed by final order of a court of competent jurisdiction
to have been a voidable preference under the bankruptcy or insolvency laws of
the United States or otherwise due to any party other than the Bank; then in
any such event, the obligation of said undersigned and any security pledged by
the undersigned to secure such obligation, shall remain as an Obligation due
hereunder and as security for such Obligation, and shall not be considered as
having been extinguished by said payment or payments, notwithstanding return by
the Bank to the undersigned of the original hereof, and shall survive the same
in their original terms, without exception. Upon full or partial payment of the
Obligations, Bank, at its discretion, may retain its security interest in any
property pledged by the undersigned as security for the Obligations or this
guaranty, until the expiration of any preference periods set out in the
bankruptcy laws of the United States.
Your books and records show in the accounts and transactions between you and
the Borrower shall be admissible in any action or proceeding, and shall be
binding upon us for the purpose of establishing the items therein set forth,
and shall constitute prima facie proof thereof. THE UNDERSIGNED
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CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN
BIRMINGHAM, ALABAMA AND WAIVES ANY OBJECTION WE MAY HAVE BASED UPON IMPROPER
VENUE OR FORUM NON CONVENIENS OR TO THE CONDUCT OF ANY PROCEEDINGS IN ANY SUCH
COURT. IN ANY JUDICIAL PROCEEDING BROUGHT WITH RESPECT TO THE LOAN AGREEMENT OR
THIS GUARANTY, THE UNDERSIGNED WAIVES ANY RIGHT TO TRIAL BY JURY. In the event
any claim under this instrument is referred to an attorney for collection, the
undersigned, in addition to the liability as hereinabove set forth, shall be
liable for attorneys' fees and cost of collection incurred by the Bank in
collecting the unpaid indebtedness and Obligations of Borrower to Bank, or an
amount equal to 15% of the unpaid indebtedness and Obligations of the Borrower
to Bank, whichever is greater. The undersigned waives any right to exemption
under the Constitution of the State of Alabama or any other state as to any
indebtedness or obligation created hereunder.
This instrument and the agreements executed contemporaneously herewith,
represent the entire and complete agreement between the undersigned and Bank.
This instrument cannot be changed or terminated orally, shall be interpreted in
accordance with the laws of the State of Alabama, shall be binding upon the
undersigned and the respective heirs, executors, administrators, successors,
and assigns of the undersigned, and shall inure to the benefit of Bank and its
successors and assigns. The term "undersigned" as used in the agreement shall
mean COMMUNITY BANCSHARES, INC., and its successors.
Executed under my hands and seals this lst day of December, 1998
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
----------------------------------------
Kennon R. Patterson, Sr.
(Chairman of the Board and President)
ATTEST: /s/ Bishop K. Walker, Jr.
--------------------------------------------
Bishop K. Walker, Jr. (Secretary)
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<PAGE> 11
PLEDGE AGREEMENT
To induce COLONIAL BANK (hereinafter referred to as Lender) to make a loan to
COMMUNITY BANCSHARES, INC.' EMPLOYEE STOCK OWNERSHIP TRUST and COMMUNITY
BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (hereinafter jointly, severally
and collectively referred to as Borrower) the undersigned does herewith
deposit, transfer, assign, convey and pledge to Lender as collateral security
to the Obligation cited herein the following Stock certificates and Securities
belonging to the undersigned, free of any claim, encumbrances, lien, or prior
assignments, to secure the obligations evidenced by that certain Promissory
Note dated this day, in the amount of $2,963,841.91, executed by Borrower
(hereinafter "Loan" or "Obligation"), and all renewals and modifications
thereof, to wit:
261,434 shares of the common stock of COMMUNITY BANCSHARES, INC.,
along with all stock dividends, stock splits, and proceeds (whether in
cash or in kind) of any of the foregoing or pertaining to the
foregoing.
(all of the above, along with all stock dividends, stock splits and
proceeds, hereinafter referred to as "Securities")
It is understood that these Securities hereby pledged to Lender as
Collateral for the Loan shall not be sold or liquidated, without the consent of
Lender, until said Loan, principal and interest, and all other obligations of
the Borrower to Lender have been paid in full, provided however, it is
expressly acknowledged and agreed that this agreement and each provision hereof
is intended strictly to comply in all respects and to be construed in
accordance with and be subject to the provisions of the United States Code and
the regulations and regulatory interpretations thereunder relating to employee
stock ownership plans and loans thereto (the "ESOP Provisions"), including
without limitation 26 U.S.C. ss.ss. 401 & 4975, and 26 C.F.R. ss. 54.4975-7 and
29 C.F.R. ss. 2550-408b-3 and that the Loan secured hereby qualifies as an
"exempt loan" and a "stock acquisition loan" under the ESOP Provisions. This
agreement shall be construed and be deemed to have been amended to the extent
necessary to comply with the ESOP Provisions. Without limiting the generality
of the foregoing, it is expressly acknowledged and agreed that the Lender shall
release collateral pledged hereunder as required by 26 C.F.R. ss.
54.4975-7(b)(8)(i) as the Loan is paid.
Upon the failure of the Borrower to pay the Loan according to the terms
of the Note, Loan, or other document evidencing the Loan, or upon a default in
said obligation as defined in the Note, Loan documents, or other documents
evidencing the Loan, then the aforementioned liability of the Borrower to
Lender shall become immediately due and payable, notwithstanding any credit or
time allowed to the Borrower by any instrument evidencing such liability. In
any of the aforementioned events, the Lender may immediately without
advertisement, and without notice to the undersigned, sell any of the
Securities, as against said indebtedness or liability of the Borrower, at
private sale or broker's board, or otherwise, or may, without notice, discount,
collect compound, compromise, settle, manage, and turn the same into cash
according to opportunity, at the discretion of Lender and apply the proceeds
thereof as far as needed toward the payment of said indebtedness or liability,
together with interest and all expenses (legal or otherwise) for sale or
collection. If any such sale be at broker's board or at public auction, Lender
may itself be a purchaser at such sale free from any right of equity of
redemption of the undersigned, such right and equity being hereby waived and
released.
The undersigned consents to and hereby waives any and all notice of
the making of any modification, amendment, -renewal or extension of any note or
agreement evidencing the Obligation, or any supplement thereto; the making of
any other agreement; the incurring of any other debts or obligations by the
Borrower to Lender or others and/or of the pledge, sale, transfer, and/or
assignment thereof; the granting of security interests therein to Lender; the
granting to the Borrower or to any obligor or debtor of any obligation or debts
assigned
123
<PAGE> 12
to Lender, of any extensions of time to make any payments to perform or
discharge any Obligation (or waive such performances and/or discharge); the
compounding, compromising, and/or adjusting of any claim against the Borrower or
any such obligor or debtor; the accepting or releasing of any security either of
Borrower or of any third party; and all other notices which the undersigned is
entitled. No act on Lender's part and nothing other than the full payment,
performances, and discharge of all Obligation shall operate to discharge or
satisfy the liability of the undersigned hereunder. The liability of the
undersigned hereunder is primary, direct and unconditional and may be enforced
without first resorting to any rights or remedies Bank may have against the
Borrower, any other person, any other entity, or against any security.
The undersigned agrees that this Pledge Agreement, and all Obligation
secured hereby, shall remain in full force and effect and in its original tenor
at all times hereinafter during the term hereof, notwithstanding i) the
unenforceability, non-existence invalidity, or non-perfection of the
Obligation, or any instrument or agreement guaranteeing or securing the
Obligation, or of any lien, pledge, assignment, security interest or conveyance
given as security for the Obligation; ii) the failure of Lender to pursue any
collateral securing the Obligation or the failure to file a claim against the
Borrower or any other guarantor of the Obligation in any proceeding pertaining
to the death, insolvency, or bankruptcy of such person or entity; or iii) any
action or undertakings by, or against, Lender or Borrower or concerning any
collateral which is secured, pledged or assigned to the Lender in connection
with the obligation in any proceeding in the United States Bankruptcy Court;
including without limitation, matters relating to valuation of collateral,
election or imposition of secured or unsecured claim status upon claims by the
Lender pursuant to any Chapter of the Bankruptcy Code, as may be applicable
from time to time.
This pledge shall be binding upon the undersigned and the heirs,
executors, and administrators of the undersigned and shall enure to the benefit
of Lender, its successors, and assigns
This instrument shall be construed and given effect according to the
laws of the State of Alabama, the applicable provisions of ERISA, the Internal
Revenue Code, and other applicable federal laws.
[SIGNATURES CONTINUED ON NEXT PAGE]
124
<PAGE> 13
EXECUTED at Birmingham, Alabama, this lst day of December, 1998.
COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK
OWNERSHIP TRUST and COMMUNITY BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By: BANK ONE TRUST, NA As Trustee
By: /s/ Stella LeBlanc
--------------------------------------------------
Stella LeBlanc (Its Relationship Manager)
By: Its Administrative Committee
By: /s/ Bishop K. Walker, Jr.
--------------------------------------------------
Bishop K. Walker, Jr. (Member)
By: /s/ Denny Kelly
--------------------------------------------------
Denny Kelly (Member)
By: /s/ Kennon R. Patterson, Sr.
--------------------------------------------------
Kennon R. Patterson, Sr. (Member)
STATE OF LOUISIANA
COUNTY OF BLOUNT
I, the undersigned, a Notary Public in and for said County, in said
State, hereby certify that Stella LeBlanc, whose name as Relationship Manager
of BANK ONE TRUST, NA as trustee of COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK
OWNERSHIP TRUST, a trust, and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK
OWNERSHIP PLAN, a plan, 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, she, as such officer, and with full authority, executed the
same voluntarily, as an act of said corporation, acting in its capacity as
trustee as aforesaid.
Given under my hand and official seal, this the 1st day of December,
1998.
/s/ Elaine E. Corvin
-------------------------------------------------------
NOTARY PUBLIC
My Commission Expires: 7/22/2001
--------------------------------
125
<PAGE> 14
STATE OF ALABAMA )
JEFFERSON COUNTY )
I, the undersigned, a Notary Public in and for said County, in said State,
hereby certify that Bishop K. Walker, Jr., Denny Kelly, and Kennon R.
Patterson, Sr, whose name as members of the administrative committee of
COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST, a trust, and
COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, a plan, are signed to
the foregoing instrument and who are known to me, acknowledged before me on
this day that, being informed of the contents of said instrument, they, as such
members, and with fall authority, executed the same voluntarily, as an act of
said committee, acting in its capacity as administrative committee as
aforesaid.
Given under my hand and official seal, this the 1st day of December,
1998.
/s/ Elaine E. Corvin
-------------------------------------------------------
NOTARY PUBLIC
My Commission Expires: 7/22/2001
--------------------------------
126
<PAGE> 1
----------------------------
EXHIBIT 10.21
CHANGE IN CONTROL AGREEMENT
BY AND BETWEEN
MICHAEL A. BEAN AND
COMMUNITY BANCSHARES, INC.
DATED DECEMBER 28, 1998
----------------------------
127
<PAGE> 2
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (this "Agreement"), dated
this 28th day of December, 1998, by and between Community Bancshares,
Inc. a Delaware corporation (the "Company"), and Michael A. Bean (the
"Executive").
WITNESSETH:
WHEREAS, the Company wishes to assure itself and its key
employees of continuity of management and objective judgment in the
event of any actual or contemplated Change in Control of the Company,
and the Executive is a key employee of the Company and is an integral
part of management of the Company (for purposes hereof employment with
any present or future parent or subsidiary corporation of the Company
shall be considered employment by the Company); and
WHEREAS, this Agreement is not intended to materially alter
the compensation and benefits that the Executive could reasonably
expect to receive in the absence of a Change in Control of the
Company, and this Agreement accordingly will be operative only upon
circumstances relating to an actual or anticipated change in control
of the Company.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants herein contained, the parties hereby agree as
follows:
I. OPERATION OF AGREEMENT
This Agreement shall be effective immediately upon its
execution by the parties hereto, but anything in this Agreement to the
contrary notwithstanding, neither the Agreement nor any provision
hereof shall be operative unless, during the term of this Agreement,
there has been a Change in Control of the Company during the term of
this Agreement, all of the provisions hereof shall become operative
immediately.
II. TERM OF AGREEMENT
The term of this Agreement shall be for an initial
three (3) year period commencing on the date hereof, and shall be
renewable at the end of the first year of such initial three (3) year
period and annually thereafter, for an additional one (1) year period
following the initial three (3) year period and prior extensions
thereof in the sole discretion of the Compensation Committee and upon
such terms and conditions as the Compensation Committee may authorize
at such time.
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<PAGE> 3
III. DEFINITIONS
1. "BOARD" or "BOARD OF DIRECTORS" - the Board of
Directors of the Company.
2. "CAUSE" - either
(i) any act that constitutes, on the part of the
Executive, (A) fraud, dishonesty, a felony or gross malfeasance of
duty, and (B) that directly results in material injury to the Company;
or
(ii) conduct by the Executive in his office with the
Company that is grossly inappropriate and demonstrably likely to lead
to material injury to the Company, as determined by the Board acting
reasonably and in good faith;
provided, however, that in the case of (ii) above, such conduct shall
not constitute Cause unless the Board shall have delivered to the
Executive notice setting forth with specificity (A) the conduct deemed
to qualify as Cause, (B) reasonable action that would remedy such
objection, and (c) a reasonable time (not less than thirty (30) days)
within which the Executive may take such remedial action, and the
Executive shall not have taken such specified remedial action within
such specified reasonable time.
3. "CHANGE IN CONTROL" - Either
(i) the acquisition, directly or indirectly, by any
"person" (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1937, as amended) within any
twelve (12) month period of securities of the Company
representing an aggregate of twenty percent (20%) or more of
the combined voting power of the Company's then outstanding
securities; or
(ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute
the Board, cease for any reason to constitute at least a
majority thereof, unless the election of each new director
was approved in advance by a vote of at least a majority of
the directors then still in office who were directors at the
beginning of the period; or
(iii) consummation of (a) a merger, consolidation or
other business combination of the Company with any other
"person" (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) or affiliate
thereof, other than a merger, consolidation or business
combination which would result in the outstanding common
stock of the Company immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into common stock of the surviving entity or a
parent or affiliate thereof) at least sixty (60)% of the
outstanding common stock of the Company or such surviving
entity or parent or affiliate thereof outstanding immediately
after such merger, consolidation or business combination, or
(b) a plan of complete liquidation of the Company or an
agreement for the sale of disposition by the Company of all
or substantially all of the Company's assets; or
(iv) the occurrence of any other event or
circumstance which is not covered by (i) through (iii) above
which the Board determines affects control of the Company
and, in order to implement the purposes of this Agreement as
set forth above, adopts a resolution that such event or
circumstance constitutes a Change in Control of the purposes
of this Agreement.
129
<PAGE> 4
4. "CODE" - the Internal Revenue Code of 1986, as amended.
5. "COMPENSATION COMMITTEE" - the Executive Compensation Committee of
the Board of Directors of the Company, or any successor committee.
6. "DISABILITY" - the Executive's probable and expected inability as a
result of physical or mental incapacity to substantially perform his duties for
the Company on a full time basis for a period of six (6) months. The
determination of whether the Executive suffers a Disability shall be made by a
physician acceptable to both the Executive (or his personal representative) and
the Company.
7. "EXCESS SEVERANCE PAYMENT" - the term "Excess Severance Payment"
shall have the same meaning as the term "excess parachute payment" defined in
Section 280G(b)(1) of the Code.
8. "INVOLUNTARY TERMINATION" - termination of the Executive's
employment by the Executive following a Change in Control which, in the
reasonable judgment of the Executive, is due to (i) a change of the Executive's
responsibilities, position (including status, office, title, reporting
relationships or working conditions), authority or duties (including changes
resulting from the assignment to the Executive of any duties inconsistent with
his positions, duties or responsibilities as in effect immediately prior to the
Change in Control); or (ii) a reduction in the Executive's compensation or
benefits as in effect immediately prior to the Change in Control, or (iii) a
forced relocation of the Executive's primary place of employment to a place
more than fifty (50) miles from the Executive's primary place of employment
immediately prior to the Change in Control. Involuntary Termination does not
include retirement (including early retirement) within the meaning of the
Company's retirement plan, or death or Disability of the executive.
9. "PRESENT VALUE" - The term "Present Value" shall have the same
meaning as provided in Section 280G(d)(4) of the Code.
10. "SEVERANCE PAYMENT" - The term "Severance Payment" shall have the
same meaning as the term "parachute payment" defined in Section 280G(b)(2) of
the Code.
11. "REASONABLE COMPENSATION" - The term "Reasonable Compensation"
shall have the same meaning as provided in Section 280G(b)(4) of the Code.
130
<PAGE> 5
IV. BENEFITS UPON TERMINATION FOLLOWING A CHANGE IN CONTROL
1. TERMINATION - The Executive shall be entitled to, and the Company
shall pay or provide to the Executive, the benefits described in Section 2
below if (a) a Change in Control occurs during the term of this Agreement, and
(b) the Executive's employment is terminated within thirty (30) months
following the Change in Control either (i) by the Company (other than for Cause
or by reason of the Executive's death or Disability) or (ii) by the Executive
pursuant to Involuntary Termination; provided, however, that if:
(a) during the term of this Agreement there is a public announcement
of a proposal for a transaction that, if consummated, would constitute a Change
in Control or the Board receives and decides to explore an expression of
interest with respect to a transaction which, if consummated, would lead to a
Change in Control (either transaction being referred to herein as the "Proposed
Transaction"); and
(b) the Executive's employment is thereafter terminated by the Company
other than for Cause or by reason of the Executive's death or Disability; and
(c) the Proposed Transaction is consummated within one (1) year after
the date of termination of the Executive's employment.
then, for the purposes of this Agreement, a Change in Control shall be
deemed to have occurred during the term of this Agreement and the termination
of the Executive's employment shall be deemed to have occurred within two (2)
years following a Change in Control.
2. BENEFITS TO BE PROVIDED - If the Executive becomes eligible for
benefits under Section 1 above, the Company shall pay or provide to the
Executive the benefits set forth in this Section 2.
(a) SALARY - The Executive will continue to receive his current salary
(subject to withholding of all applicable taxes and any amounts referred to in
Section 2(c) below) for a period of thirty (30) months from his date of
termination in the same manner as it was being paid as of the date of
termination; provided, however, that the salary payments provided for hereunder
shall be paid in a single lump sum payment, to be paid not later than thirty
(30) days after his termination of employment; provided further, that the
amount of such lump sum payment shall be determined by taking the salary
payments to be made and discounting them to their Present Value. For purposes
hereof, the Executive's "current salary" shall be the highest rate in effect
during the six-month period prior to the Executive's termination.
(b) BONUSES - The Executive shall receive payments from the Company
for the thirty (30) months following the month in which this employment is
terminated in an amount for each such month equal to one-twelfth of the average
of the bonuses earned by him for the two calendar years immediately preceding
the year in which such termination occurs. Any bonus amounts that the Executive
had previously earned from the Company but which may not yet have been paid as
of the date of termination shall not be affected by this provision, other than
to serve as a measurement for this portion of the severance benefit. The bonus
amounts determined herein shall be paid in a single lump sum payment, to be
paid not later than 30 days after termination of employment; provided, further,
that the amount of such lump sum payment shall be determined by taking the
bonus payments (as of the payment date) to be made and discounting them to
their Present Value.
131
<PAGE> 6
(c) HEALTH AND LIFE INSURANCE COVERAGE - The health and life insurance
benefits coverage provided to the Executive at his date of termination shall be
continued at the same level and in the same manner as if his employment had not
terminated (subject to the customary changes in such coverages if the Executive
retires or reaches age 65 or similar events), beginning on the date of such
termination and ending on the date thirty (30) months from the date of such
termination. Any additional coverages the Executive had at termination,
including dependent coverage, will also be continued for such period at the
same level and on the same terms as provided to the Executive immediately prior
to his termination, to the extent permitted by the applicable policies or
contract. Any costs Executive was paying for such coverages at the time of
termination shall be paid by the Executive by separate check payable to the
Company each month in advance. If the terms of any benefit plan referred to in
this Section do not permit continued participation by the Executive, then the
Company will arrange for other coverage at its expense providing substantially
similar benefits as it can find for other officers in similar positions.
(d) EMPLOYEE RETIREMENT PLANS - To the extent permitted by the
applicable plan, the Executive will be fully vested in and will be entitled to
continue to participate, consistent with past practices, in all employee
retirement plans maintained by the Company in effect as of his date of
termination. The Executive's participation in such retirement plans shall
continue for a period of thirty (30) months from the date of termination of his
employment (at which point he will be considered to have terminated employment
within the meaning of the plans) and the compensation payable to the executive
under (a) and (b) above shall be treated (unless otherwise excluded) as
compensation under the plan. If full vesting and continued participation in any
plan is not permitted, the Company shall pay to the executive and, if
applicable, his beneficiary, a supplemental benefit equal to the Present Value
on the date of termination of employment of the excess of (i) the benefit the
Executive would have been paid under such plan if he had been fully vested and
had continued to be covered for the 30-month period as if the Executive had
earned compensation described under (a) and (b) above and had made
contributions sufficient to earn the maximum matching contribution, if any,
under such plan (less any amounts he would have been required to contribute),
over (ii) the benefit actually payable to or on behalf of the Executive under
such plan. For purposes of determining the benefit under (i) in the preceding
sentence, contributions deemed to be made under a defined contribution plan
will be deemed to be invested in the same manner as the Executive's account
under such plan at the time of termination of employment. The Company shall pay
such supplemental benefits (if any) in a lump sum.
132
<PAGE> 7
(e) CAREER COUNSELING - The Company will provide career counseling and
out placement services on an individual basis to the Executive as the Company
deems appropriate and for a reasonable period following the Executive's
termination of employment; provided, however, that the Company's obligation to
provide such services shall terminate at such time, if any, as the cost of such
services exceeds $5,000.
(f) EFFECT OF LUMP SUM PAYMENT - The lump sum payment under (a) or (b)
above shall not alter the amounts the Executive is entitled to receive under
the benefit plans described in (c) and (d) above. Benefits under such plans
shall be determined as if the Executive had remained employed and received such
payments over a period of thirty (30) months.
(g) EFFECT OF DEATH OR RETIREMENT - The benefits payable or to be
provided under this Agreement shall continue in the event of the Executive's
death and shall be payable to his estate or named beneficiary. The benefits
payable or to be provided under this Agreement shall cease in the event of the
Executive's election to commence retirement benefits under the Company's
retirement plan.
(h) LIMITATION ON AMOUNT - Notwithstanding anything in this Agreement
to the contrary, any benefits payable or to be provided to the Executive by the
Company or its affiliates, whether pursuant to this Agreement or otherwise,
which are treated as Severance Payments shall be modified or reduced in the
manner provided in (h) below to the extent necessary so that the benefits
payable or to be provided to the Executive under this Agreement that are
treated as Severance Payments, as well as any payments or benefits provided
outside of this Agreement that are so treated, shall not cause the Company to
have paid an Excess Severance Payment. In computing such amount, the parties
shall take into account all provisions of Internal Revenue Code Section 280G,
including making appropriate adjustments to such calculation for amounts
established to be Reasonable Compensation.
(i) MODIFICATION OF AMOUNT - In the event that the amount of any
Severance Payments that would be payable to or for the benefit of the Executive
under this Agreement must be modified or reduced to comply with this Section 2,
the Executive shall direct which Severance Payments are to be modified or
reduced; provided, however, that no increase in the amount of any payment or
change in the timing of the payment shall be made without the consent of the
Company.
(j) AVOIDANCE OF PENALTY TAXES - This Section 2 shall be interpreted
so as to avoid the imposition of excise taxes on the Executive under Section
4999 of the Code or the disallowance of a deduction to the Company pursuant to
Section 280G(a) of the Code with respect to amounts payable under this
Agreement or otherwise.
(k) ADDITIONAL LIMITATION - In addition to the limits otherwise
provided in this Section 2, to the extent permitted by law, the Executive may
in his sole discretion elect to reduce any payments he may be eligible to
receive under this Agreement to prevent the imposition of excise taxes on the
Executive under Section 4999 of the Code.
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<PAGE> 8
(l) NO OBLIGATION TO FUND - The agreement of the Company (or its
successor) to make payments to the Executive hereunder shall represent solely
the unsecured obligation of the Company (and its successor), except to the
extent the Company (or its successors) in its sole discretion elects in whole
or in part to fund its obligations under this Agreement pursuant to a trust
arrangement or otherwise.
VI. MISCELLANEOUS
1. CONTRACT NON-ASSIGNABLE - The parties acknowledge that this
Agreement has been entered into due to, among other things, the special skills
of the Executive, and agree that this Agreement may not be assigned or
transferred by the Executive, in whole or in part, without the prior written
consent of the Company. Any business entity succeeding to all or substantially
all of the business of the Company by purchase, merger, consolidation, sale of
assets or otherwise, shall be bound by this Agreement.
2. OTHER AGENTS - Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and
conditions as may be satisfactory to the Company.
3. NOTICES - All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or seven days after mailing if mailed, first
class, certified mail, postage prepaid:
To the Company: Community Bancshares, Inc.
P.O. Box 1000
Blountsville, Alabama 35031
To the Executive: Michael A. Bean
P.O. Box 1000
Blountsville, Alabama 35031
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
4. PROVISIONS SEVERABLE - If any provision or covenant, or any part
thereof, of this Agreement should be held by any court to be invalid, illegal
or unenforceable, either in whole or in part, such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
the remaining provisions or covenants, or any part thereof, of this Agreement,
all of which shall remain in full force and effect.
5. WAIVER - Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
term or condition or of any other term or condition of this Agreement, unless
such waiver is contained in a writing signed by the party making the waiver.
6. AMENDMENTS AND MODIFICATIONS - This Agreement may be amended or
modified only by a writing signed by both parties hereto, which makes specific
reference to this Agreement.
7. GOVERNING LAW - The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Alabama.
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<PAGE> 9
8. ARBITRATION OF DISPUTES; EXPENSES - The parties agree that all
disputes that may arise between them relating to the interpretation or
performance of this Agreement, including matters relating to any funding
arrangements for the benefits provided under this Agreement, shall be
determined by binding arbitration through an arbitrator approved by the
American Arbitration Association or other arbitrator mutually acceptable to the
parties. The award of the arbitrator shall be final and binding upon the
parties and judgment upon the award rendered may be entered in any court having
jurisdiction. In the event the Executive incurs legal fees and other expenses
in seeking to obtain or to enforce any such rights or benefits through
settlement, arbitration or otherwise, the Company shall promptly pay the
Executive's reasonable legal fees and expenses incurred in enforcing this
Agreement. Except to the extent provided in the preceding sentence, each party
shall pay its own legal fees and other expenses associated with the
arbitration, provided that the fee for the arbitrator shall be shared equally.
9. INDEMNITY - The Executive shall be entitled to the benefits of the
indemnity currently applicable to the Executive, if any, as provided by the
Company's articles of incorporation or bylaws. Any changes to the articles of
incorporation or bylaws reducing the indemnity granted to officers shall not
affect the rights granted hereunder. The Company may not reduce these indemnity
benefits confirmed to the Executive hereunder without the written consent of
the Executive.
10. TERMINATION OF PRIOR AGREEMENTS - The Executive hereby agrees to a
mutual termination, effective as of the effective date of this Agreement, of
any prior existing change in control agreements (by whatever name), providing
benefits to the Executive upon a termination of employment following a Change
in Control of the Company, to which he and the Company are parties, and as to
such prior agreements, if any, the Executive releases all claims, rights and
entitlements.
11. REGULATORY APPROVALS - The Agreement, and the rights and
obligations of the parties hereto, shall be subject to approval of the same by
any and all regulatory authorities having jurisdiction over the Company, to the
extent such approval is required by law, regulation, or order.
135
<PAGE> 10
12. REGULATOR INTERVENTION - Notwithstanding any term of this
Agreement to the contrary, this Agreement is subject to the following terms and
conditions:
(a) The Company's obligations to provide compensation or other
benefits to Executive under this Agreement may be suspended if the Company has
been served with a notice of charges by the appropriate federal banking agency
under provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C.
1818) directing the Company to cease making payments required hereunder;
provided, however, that
(i) The Company shall seek in good faith with its best
efforts to oppose such notice of charges as to which there
are reasonable defenses;
(ii) In the event the notice of charges is dismissed or
otherwise resolved in a manner that will permit the Company
to resume its obligations to provide compensation or other
benefits hereunder, the Company shall immediately resume such
payments and shall also pay Executive the compensation
withheld while the contract obligations were suspended,
except to the extent precluded by such notice; and
(iii) During the period of suspension, the vested
rights of the contracting parties shall not be affected,
except to the extent precluded by such notice.
(b) The Company's obligations to provide compensation or other
benefits to Executive under this Agreement shall be terminated to the extent a
final order has been entered by the appropriate federal banking agency under
provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818)
directing the Company not to make the payments required hereunder; provided,
however, that the vested rights of the contracting parties shall not be
affected by such order, except to the extent precluded by such order.
(c) The Company's obligations to provide compensation or other
benefits to Executive under this Agreement shall be terminated or limited to
the extent required by the provisions of any final regulation or order of the
Federal Deposit Insurance Company promulgated under Section 18(k) of the
Federal Deposit Insurance Act (12 U.S.C. 1828(k)) limiting or prohibiting any
"golden parachute payment" as defined therein, but only to the extent that the
compensation or payments to be provided under this Agreement are so prohibited
or limited.
(d) Notwithstanding the foregoing, the Company shall not be required
to make any payments under this Agreement prohibited by law.
136
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officers and the Executive has
hereunto set his hand, as of the date and year first above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
---------------------------------------------
Title: Chairman, President and Chief
Executive Officer
Attest: /s/ Bishop K. Walker, Jr.
-----------------------------------
Title: Secretary
(CORPORATE SEAL)
EXECUTIVE
/s/ Michael A. Bean
--------------------------------------------
Executive Vice President
(SEAL)
--------------------------------------------
137
<PAGE> 1
------------------------------
EXHIBIT 10.36
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
KENNON R. PATTERSON, SR.
DATED MARCH 26, 1998
------------------------------
138
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: Kennon R. Patterson, Sr.
Number Shares Subject to Option: 8,334
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"),
at the option price per share set forth above, which is the Fair Market Value
per share of Stock on the date of grant. Options must be exercised in whole
shares. Capitalized terms used herein and not otherwise defined shall have the
meanings assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service
on the Board. If the Grantee's employment or membership on the Board of
Directors is terminated for cause, the Option granted hereby shall expire upon
such termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise
the Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
139
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to
its lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company.
Such written notice shall be accompanied by full payment in cash or by check
for the number of Shares specified in such written notice. To the extent
permitted under Regulation T of the Federal Reserve Board, and subject to
applicable securities laws, the Option may be exercised through a broker in a
so-called "cashless exercise" whereby the broker sells the option shares and
delivers cash sales proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by
and construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the
Grantee or the Grantee's personal representative any rights of a stockholder of
the Company unless and until shares of Stock are in fact issued to such person
in connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
140
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Bishop K. Walker, Jr.
--------------------------------------
Title: Vice Chairman, Senior Executive Vice
President and General Counsel
/s/ Kennon R. Patterson,
--------------------------------------
GRANTEE
141
<PAGE> 1
------------------------------
EXHIBIT 10.37
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
BISHOP K. WALKER, JR.
DATED MARCH 26, 1998
------------------------------
142
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: Bishop K. Walker, Jr.
Number Shares Subject to Option: 6,667
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"), at
the option price per share set forth above, which is the Fair Market Value per
share of Stock on the date of grant. Options must be exercised in whole shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service on
the Board. If the Grantee's employment or membership on the Board of Directors
is terminated for cause, the Option granted hereby shall expire upon such
termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise the
Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
143
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to its
lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company. Such
written notice shall be accompanied by full payment in cash or by check for the
number of Shares specified in such written notice. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, the Option may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the option shares and delivers cash sales
proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by and
construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the Grantee
or the Grantee's personal representative any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
144
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
----------------------------------------------
Title: Chairman, President and Chief Executive
Officer
/s/ Bishop K. Walker, Jr.
---------------------------------------------
GRANTEE
145
<PAGE> 1
------------------------------
EXHIBIT 10.38
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
DENNY KELLY
DATED MARCH 26, 1998
------------------------------
146
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: Denny Kelly
Number Shares Subject to Option: 5,000
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"), at
the option price per share set forth above, which is the Fair Market Value per
share of Stock on the date of grant. Options must be exercised in whole shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service on
the Board. If the Grantee's employment or membership on the Board of Directors
is terminated for cause, the Option granted hereby shall expire upon such
termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise the
Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
147
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to its
lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company. Such
written notice shall be accompanied by full payment in cash or by check for the
number of Shares specified in such written notice. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, the Option may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the option shares and delivers cash sales
proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by and
construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the Grantee
or the Grantee's personal representative any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
148
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
-----------------------------------------
Title: Chairman, President and Chief Executive
Officer
/s/ Denny Kelly
--------------------------------------------
GRANTEE
149
<PAGE> 1
------------------------------
EXHIBIT 10.39
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
HODGE PATTERSON, III
DATED MARCH 26, 1998
------------------------------
150
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: Hodge Patterson, III
Number Shares Subject to Option: 3,334
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"), at
the option price per share set forth above, which is the Fair Market Value per
share of Stock on the date of grant. Options must be excerised in whole shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service on
the Board. If the Grantee's employment or membership on the Board of Directors
is terminated for cause, the Option granted hereby shall expire upon such
termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise the
Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
151
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to its
lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company. Such
written notice shall be accompanied by full payment in cash or by check for the
number of Shares specified in such written notice. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, the Option may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the option shares and delivers cash sales
proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by and
construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the Grantee
or the Grantee's personal representative any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
152
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
---------------------------------------------
Title: Chairman, President and Chief Executive
Officer
/s/ Hodge Patterson, III
---------------------------------------------
GRANTEE
153
<PAGE> 1
------------------------------
EXHIBIT 10.40
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
LOY MCGRUDER
DATED MARCH 26, 1998
------------------------------
154
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: Loy McGruder
Number Shares Subject to Option: 3,334
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"), at
the option price per share set forth above, which is the Fair Market Value per
share of Stock on the date of grant. Options must be exercised in whole shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service on
the Board. If the Grantee's employment or membership on the Board of Directors
is terminated for cause, the Option granted hereby shall expire upon such
termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise the
Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
155
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to its
lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company. Such
written notice shall be accompanied by full payment in cash or by check for the
number of Shares specified in such written notice. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, the Option may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the option shares and delivers cash sales
proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by and
construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the Grantee
or the Grantee's personal representative any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
156
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By: /s/ Kennon R. Patterson, Sr.
------------------------------------------
Title: Chairman, President and Chief Executive
Officer
/s/ Loy McGruder
-------------------------------------------
GRANTEE
157
<PAGE> 1
------------------------------
EXHIBIT 10.41
FORM OF
STOCK OPTION AGREEMENT BETWEEN
COMMUNITY BANCSHARES, INC. AND
-----------------------------
GRANTEE
DATED MARCH 26, 1998
-----------------------------
158
<PAGE> 2
NONQUALIFIED STOCK OPTION AGREEMENT
UNDER THE
COMMUNITY BANCSHARES, INC.
1998 STOCK OPTION PLAN FOR DIRECTORS
Grantee: _________________________
Number Shares Subject to Option: ________
Option Price per Share: $30.00
Date of Grant: March 26, 1998
1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to
the Grantee named above (the "Grantee"), under the Community Bancshares, Inc.
1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option
to purchase, on the terms and conditions set forth in this agreement (this
"Option Agreement"), the dollar amount for the market value of shares indicated
above the Company's Common Stock of the par value of $.10 each (the "Stock"), at
the option price per share set forth above, which is the Fair Market Value per
share of Stock on the date of grant. Options must be exercised in whole shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Plan.
2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock
Option granted hereby will, to the extent not previously exercised, lapse at
5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary
of the date of grant (the "Expiration Date") unless sooner terminated in whole
or in part as follows:
(a)Termination of Directorship. Upon termination of the Grantee's employment by
the Company or its subsidiaries or membership on the Board of Directors of the
Company for any reason other than for cause or death, the Option granted hereby
shall terminate ninety (90) days following the date of termination of the
Grantee's employment or membership on the board or, if earlier, on the
Expiration Date. If the Grantee exercises the Option after termination of the
Grantee's employment or service on the Board of Directors, the Grantee may
exercise the Option only with respect to the shares that were otherwise
exercisable on the date of termination on the Grantee's employment or service on
the Board. If the Grantee's employment or membership on the Board of Directors
is terminated for cause, the Option granted hereby shall expire upon such
termination.
(b)Death. In the event of the death of the Grantees, the Grantee's personal
representatives, heirs or legatees (the "Grantee's Successors") may exercise the
Option granted hereby on the date of death, upon proof satisfactory to the
company of their authority. The Grantee's Successors must exercise such Option
within one (1) year after the Grantee's death and in any event prior to the
Expiration Date.
159
<PAGE> 3
3.Exercise of Option. The terms, times and conditions of exercise of the
Nonqualified Stock Option granted hereby are as follows:
The Option shall be exercisable at any time after the date of grant prior to its
lapse as stated in paragraph "2.".
The Option granted hereby shall be exercised by written notice directed to the
Secretary of the Company at the principal executive offices of the Company. Such
written notice shall be accompanied by full payment in cash or by check for the
number of Shares specified in such written notice. To the extent permitted under
Regulation T of the Federal Reserve Board, and subject to applicable securities
laws, the Option may be exercised through a broker in a so-called "cashless
exercise" whereby the broker sells the option shares and delivers cash sales
proceeds to the Company in payment of the exercise price.
Subject to the terms of this Option Agreement, the Nonqualified Stock Option
granted hereby may be exercised at any time and without regard to any other
option held by the Grantee to purchase stock of the Company.
In addition, the terms contained in the Plan are incorporated into and made a
part of this Option Agreement and this Option Agreement shall be governed by and
construed in accordance with the Plan.
4.Nontransferability. The Option granted hereby is not assignable or
transferable by the Grantee other than by will or the laws of descent and
distribution and is subject to the provisions of Section 8 hereof. The Option
may be exercised during the lifetime of the Grantee only by the Grantee.
5.Limitation of Rights. The Option granted hereby does not confer to the Grantee
or the Grantee's personal representative any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such person in
connection with the exercise of the Option. Nothing in this Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the Grantee's directorship at any time, nor confer upon
the Grantee any right to continue in as a director of the Company or any
Subsidiary.
6.Stock Reserve. The Company shall at all times during the term of this Option
Agreement reserve and keep available such number of shares of Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts
to serve as a director of the Company in a diligent and loyal manner and to
promote the Company's interests.
8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in
the Option granted hereby may be pledged, encumbered, or hypothecated to or in
favor of any party other than the Company or a subsidiary, or shall be subject
to any lien, obligation, or liability of the Grantee to any other party other
than the Company or a Subsidiary.
160
<PAGE> 4
9.Restrictions on Issuance of Shares. If at any time the Board shall determine
in its discretion, that listing, registration or qualification of the shares of
Stock covered by the Option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been affected or
obtained free of any conditions not acceptable to the Board.
10.Plan Controls. In the event of any actual or alleged conflict between the
provisions of the Plan and the provisions of this Option Agreement, the
provisions of the Plan shall be controlling and determinative.
11.Successors. This Option Agreement shall be binding upon any successor of the
Company, in accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly
authorized officers, has caused this Option Agreement to be executed, and the
Grantee has executed this Option Agreement, all as of the day and year first
above written.
COMMUNITY BANCSHARES, INC.
By:
------------------------------------------
Title:
--------------------------------------
---------------------------------------------
GRANTEE
161
<PAGE> 1
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
COMMUNITY BANCSHARES, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
The following tabulation presents the calculation of primary and fully diluted
earnings per common share for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Reported net income.................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986
============= ============ =============
Earnings on common shares.............................................. $ 3,579,493 $ 3,512,278 $ 3,458,986
============= ============ =============
Weighted average common shares outstanding - basic..................... 3,994,798 3,807,232 3,727,506
============= ============ =============
Earnings per common share- basic
Income from continuing operations.................................... $ .90 $ .92 $ .93
============= ============ =============
Net income............................................................ $ .90 $ .92 $ .93
============= ============ =============
Weighted average common shares outstanding - diluted.................... 4,052,259 3,830,231 3,727,506
============= ============ =============
Earnings per common share- diluted
Income from continuing operations..................................... $ .88 $ .92 $ .93
============= ============ =============
Net income............................................................ $ .88 $ .92 $ .93
============= ============ =============
</TABLE>
{The remainder of this page intentionally left blank]
162
<PAGE> 1
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS
COMMUNITY BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885
Add fixed charges:
Interest on deposits............................................... 21,963 18,765 16,595
Interest on borrowings............................................. 730 777 831
Portion of rental expense representing interest expense............ 180 78 59
------------ ------------ -------------
Total fixed charges............................................ 22,873 19,620 17,485
------------ ------------ -------------
Income before fixed charges............................................ $ 27,979 $ 24,565 $ 22,370
============ ============ =============
Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885
Add fixed charges:
Interest on borrowings............................................. 730 777 831
Portion of rental expense representing interest expense............ 180 78 59
------------ ------------ -------------
Total fixed charges............................................ 910 855 890
------------ ------------ -------------
Income before fixed charges (excluding interest on deposits)........... $ 6,016 $ 5,800 $ 5,775
============ ============ =============
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits..................................... 1.22X 1.25x 1.28x
Excluding interest on deposits..................................... 6.61X 6.78x 6.49x
</TABLE>
163
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ----------------------
<S> <C>
Community Bank Alabama
Subsidiaries - Indirect/wholly-owned by Community Bank
- ------------------------------------------------------
Community Appraisals, Inc. Alabama
1st Community Credit Corporation Alabama
Community Insurance Corp Alabama
Subsidiaries - Indirect/wholly-owned by Community Insurance Corp
- -----------------------------------------------------------------
Southern Select Insurance, Inc. Alabama
</TABLE>
164
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMMUNITY BANCSHARES, INC. FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,553,170
<INT-BEARING-DEPOSITS> 950,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,391,609
<INVESTMENTS-CARRYING> 97,391,609
<INVESTMENTS-MARKET> 97,391,609
<LOANS> 433,852,636
<ALLOWANCE> 2,970,597
<TOTAL-ASSETS> 603,243,597
<DEPOSITS> 538,585,521
<SHORT-TERM> 2,191,841
<LIABILITIES-OTHER> 7,664,118
<LONG-TERM> 7,568,716
0
0
<COMMON> 464,792
<OTHER-SE> 46,768,609
<TOTAL-LIABILITIES-AND-EQUITY> 603,243,597
<INTEREST-LOAN> 38,422,899
<INTEREST-INVEST> 5,240,349
<INTEREST-OTHER> 701,671
<INTEREST-TOTAL> 44,364,919
<INTEREST-DEPOSIT> 21,963,493
<INTEREST-EXPENSE> 22,693,053
<INTEREST-INCOME-NET> 21,671,866
<LOAN-LOSSES> 884,682
<SECURITIES-GAINS> 465,982
<EXPENSE-OTHER> 5,226,325
<INCOME-PRETAX> 5,105,697
<INCOME-PRE-EXTRAORDINARY> 5,105,697
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,579,493
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,600,000
<LOANS-PAST> 2,384,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,131,000
<CHARGE-OFFS> 1,463,000
<RECOVERIES> 137,000
<ALLOWANCE-CLOSE> 2,971,000
<ALLOWANCE-DOMESTIC> 2,971,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
