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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-16461
COMMUNITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0868361
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
68149 MAIN STREET, P. O. BOX 1000
BLOUNTSVILLE, ALABAMA 35031
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 429-1000
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(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
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
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(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, 2000, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $71,862,900 BASED UPON A SALE PRICE OF $25.00
PER SHARE ON MARCH 15, 2000.
AS OF MARCH 15, 2000, THERE WERE 4,674,995 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.10 PAR VALUE SHARES, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K: PROXY
STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS.
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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 north and west-central Alabama and south-central Tennessee. At
December 31, 1999, the Company and its subsidiaries had total assets of about
$674,898,000, deposits of about $573,261,000 and shareholders' equity of about
$44,475,000.
SUBSIDIARY BANK
Community Bank currently conducts business through 30 locations in 9 counties in
north Alabama, 2 counties in west-central Alabama and 1 county in south-central
Tennessee. It offers a wide range of commercial and retail banking services,
including savings and time deposit accounts, personal and commercial loans and
personal and commercial checking accounts. The majority of loans by Community
Bank are to individuals and small to mid-sized businesses in Alabama 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
Guntersville 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.
Community Bank operates 26 full service offices as well as four paying and
receiving offices located within Wal-Mart stores, which primarily open deposit
accounts, cash checks and receive deposits and loan payments. In December 1999,
Community Bank established a real estate mortgage department as an approved
seller/servicer for the Federal Home Loan Mortgage Corporation. The real estate
mortgage department, located in the Company's headquarters in Blountsville,
Alabama, offers mortgage loan products at competitive rates to customers
referred by Community Bank and the Company's finance company offices.
SUBSIDIARIES OF COMMUNITY BANK
1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. In November 1999, 1st Community Credit Corporation established its
Oneonta office, and in December 1999, it closed its Moulton, Alabama office and
consolidated the operations into its Decatur office. At December 31, 1999, 1st
Community Credit Corporation's loan portfolio totaled approximately $29,958,000.
1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans.
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Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through four
locations in north Alabama. 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 June 1999, Community Insurance
Corp. established an office in Huntsville, Alabama through the acquisition of
certain assets and the assumption of certain liabilities of Cummings, Gazaway,
Gardner and Pate, Inc., a Huntsville-based insurance agency. In December 1999,
Community Insurance Corp. established an office in the Community Bank building
in Hamilton, Alabama. In April 1998, Community Insurance Corp. acquired 100%
ownership of the outstanding shares of capital stock of Southern Select
Insurance, Inc., a managing general agency which brokers agricultural,
commercial and personal insurance products for several insurance carriers
located outside of the state of Alabama through a network of approximately 125
insurance agencies located in Alabama. Community Insurance Corp. had acquired a
controlling interest in Southern Select Insurance, Inc. in August 1997. In
December 1999, Southern Select Insurance, Inc. relocated its offices to
Huntsville, Alabama from Birmingham, Alabama.
Community Appraisals, Inc., a subsidiary of Community Bank, operates a real
estate appraisal business through its office located at the Company's
headquarters complex in Blountsville, Alabama. This subsidiary provides
appraisal services in connection with the lending activities of Community Bank
and 1st Community Credit Corporation.
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 south 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,
investment and trust services, which are not offered by Community Bank.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries had approximately 433
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.
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SUPERVISION AND REGULATION
The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those statutes and regulations specifically mentioned herein.
The Company is a bank holding company and is registered as such with the Board
of Governors of the Federal Reserve System (the "Federal Reserve"). The Company
is subject to regulation and supervision by the Federal Reserve and is required
to file with the Federal Reserve annual reports and such other information as
the Federal Reserve may require. The Federal Reserve may also conduct
examinations of the Company.
The Federal Reserve takes the position that a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary bank
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve's position that, in serving as a source of strength to
its subsidiary bank, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary bank during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary bank.
The Company is a legal entity which is separate and distinct from its
subsidiaries. There are various legal limitations on the extent to which
Community Bank may extend credit, pay dividends or otherwise supply funds to the
Company or its affiliates. In particular, Community Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to the Company
or, with certain exceptions, other affiliates. Dividends to shareholders are
paid from dividends paid to the Company by Community Bank, which are subject to
approval by the applicable regulatory authorities.
Community Bank is incorporated under the banking laws of the State of Alabama
and is subject to the applicable provisions of Alabama banking laws and
regulation and examination by the Alabama Banking Department. 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.
Deposits in Community Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and, therefore, Community Bank is subject to the
provisions of the Federal Deposit Insurance Act ("FDIA") and to examination by
the FDIC.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides, among other things, 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 Company and Community Bank are subject to the provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
expanded the regulatory powers of federal banking agencies to permit prompt
corrective actions to resolve problems of insured depository institutions
through the regulation of banks and their affiliates, including bank holding
companies. The provisions are
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designed to minimize the potential loss to depositors and to FDIC insurance
funds if financial institutions default on their obligations to depositors or
become in danger of default. Among other things, FDICIA provides a framework for
a system of supervisory actions based primarily on the capital levels of
financial institutions. FDICIA also provides for a risk-based deposit insurance
premium structure. The FDIC charges an annual assessment for the insurance of
deposits based on the risk a particular institution poses to its deposit
insurance fund.
The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and to other tests relating to capital
adequacy which the Federal Reserve adopts from time to time. Under the
risk-based capital assessment system, assets are weighted by a risk factor and a
ratio is calculated by dividing the qualifying capital by the risk-weighted
assets. Tier I capital generally includes common stock and retained earnings.
Total capital is comprised of Tier I capital and Tier II capital, which includes
certain allowances for loan losses and certain subordinated debt. The Company's
Tier I and total capital ratios exceeded the required minimum levels as of
December 31, 1999.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company may not, following an
interstate acquisition, control more than 10% of the nation's total amount of
bank deposits or 30% of bank deposits in the relevant state (unless the state
enacts legislation to raise the 30% limit). States retain the ability to adopt
legislation to effectively lower the 30% limit. Federal banking regulators may
approve merger transactions involving banks located in different states, without
regard to laws of any state prohibiting such transactions; except that, mergers
may not be approved with respect to banks located in states that, prior to June
1, 1997, enacted legislation prohibiting mergers by banks located in such state
with out-of-state institutions. Federal banking regulators may permit an
out-of-state bank to open new branches in another state if such state has
enacted legislation permitting interstate branching. Affiliated institutions are
authorized to accept deposits for existing accounts, renew time deposits and
close and service loans for affiliated institutions without being deemed an
impermissible branch of the affiliate.
The Community Reinvestment Act of 1977 ("CRA") and its implementing regulations
are intended to encourage regulated financial institutions to meet the credit
needs of their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The regulations provide that the appropriate regulatory authority
will assess CRA reports in connection with applications for establishment of
domestic branches, acquisitions of banks or mergers involving bank holding
companies. An unsatisfactory CRA rating may serve as a basis to deny an
application to acquire or establish a new bank, to establish a new branch or to
expand banking services. At December 31, 1999, the Company had a "satisfactory"
CRA rating.
The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on
November 12, 1999. Under the GLBA, banks are no longer prohibited by the
Glass-Steagall Act from associating with a company engaged principally in
securities activities. The GLBA also permits a bank holding company to elect to
become a "financial holding company," which would expand the powers of the bank
holding company. The repeal of the Glass-Steagall Act provisions and the
availability of financial holding company powers became effective on March 11,
2000. Financial holding company powers relate to financial activities that are
determined by the Federal Reserve to be financial in nature, incidental to an
activity that is financial in nature, or complementary to a financial activity
(provided that the complementary activity does not pose a safety and soundness
risk). The GLBA itself defines certain activities as financial in nature,
including
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lending activities, underwriting and selling insurance, providing
financial or investment advice, underwriting, dealing and making markets in
securities and merchant banking. In order to qualify as a financial holding
company, a bank holding company's depository subsidiaries must be both well
capitalized and well managed, and must have at least a satisfactory rating under
the CRA. The bank holding company must also declare its intention to become a
financial holding company to the Federal Reserve and certify that its depository
subsidiaries meet the capitalization and management requirements. The GLBA
establishes the Federal Reserve as the umbrella regulator of financial holding
companies, with subsidiaries of the financial holding company being more
specifically regulated by other regulatory authorities, such as the Securities
and Exchange Commission, the Commodity Futures Trading Commission and state
securities and insurance regulators, based upon the subsidiaries' particular
activities. The GLBA also provides for minimum federal standards of privacy to
protect the confidentiality of personal financial information of customers and
to regulate use of such information by financial institutions. A bank holding
company that does not elect to become a financial holding company remains
subject to the Bank Holding Company Act of 1956.
Community Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity and fair credit reporting.
Community Insurance Corp. is a licensed insurance agent and broker for various
insurance companies, and is subject to regulation by the Alabama Insurance
Commission.
The Federal Reserve regulates money, credit and interest rate conditions in
order to influence general economic conditions, primarily through open market
operations in U.S. Government securities, changes in discount rate, reserve
requirements on member bank's deposits and funds availability regulations. The
earnings and growth of the Company and its subsidiaries are subject to the
influence of economic conditions generally and to the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve. The nature and timing of any changes in such conditions and policies,
and their impact on the Company, cannot be predicted.
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ITEM 1 - STATISTICAL DISCLOSURE
Statistical and other information regarding the following items are set forth in
"Item 5 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on the pages indicated below.
Page(s)
Loan Portfolio and Selected Loan Maturity and Interest Rate Sensitivity.................................. 16
Investment Portfolio..................................................................................... 17
Investment Portfolio Maturity Schedule................................................................... 18
Maturities of Large Time Deposits........................................................................ 19
Maturities of Long-term Debt ............................................................................ 20
Rate Shock Analysis...................................................................................... 21
Interest Sensitivity..................................................................................... 22
Capital Adequacy Ratios.................................................................................. 24
Return on Equity and Assets.............................................................................. 24
Yields, Rates, Interest Rate Spread and Net Yield on Earning Assets...................................... 26
Consolidated Average Balances,
Interest Income/Expense and Yields/Rates............................................................... 27-28
Rate/Volume Variance Analysis............................................................................ 29-30
Summary of Loan Loss Experience.......................................................................... 32
Allocation of the Allowance for Loan Losses.............................................................. 33
Nonperforming Assets..................................................................................... 34
Noninterest Income....................................................................................... 35
Noninterest Expense...................................................................................... 36
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ITEM 2 - PROPERTIES
The corporate headquarters of the Company is housed in a colonial style
two-story building owned by Community Bank and located at 68149 Main Street
(U.S. Highway 231) in Blountsville, Alabama. Community Bank's administrative,
operational, legal and accounting functions are housed in buildings constructed
in 1997 on the same property as the corporate headquarters.
The flagship banking office of Community Bank is located at 69156 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 owns or leases buildings that are used in the normal course of
business in 11 counties in Alabama, including Blount, DeKalb, Lauderdale,
Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston
counties, and in Giles County, Tennessee. 1st Community Credit Corporation owns
or leases buildings that are used in the normal course of business in 10
counties in Alabama, including Blount, Cullman, Marshall, Morgan, Limestone,
Lawrence, Etowah, Madison, DeKalb and Walker counties. Community Insurance Corp.
and its subsidiary, Southern Select Insurance, Inc., own or lease buildings that
are used in the normal course of business in Blount, Jefferson, Madison and
Marion counties in Alabama.
For information about the amounts at which bank premises, equipment and other
real estate are recorded in the Company's financial statements and information
relating to commitments under leases, see the Company's Consolidated Financial
Statements included elsewhere in this Report.
ITEM 3 - LEGAL PROCEEDINGS
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. On December 21, 1998, the Company and its directors filed
a motion with the court seeking to have the complaint dismissed. On March 1,
1999, the Company's Board of directors appointed a special Board committee,
comprised of Roy B. Jackson, Merritt M. Robbins and R. Wayne Washam, each of
whom is a non-employee director of the Company, to review the plaintiff's
allegations in accordance with Delaware law. On April 6, 1999, each of the
parties to the action requested that the court stay the litigation and related
discovery, motions and hearings, pending completion of the special committee's
review. On April 30, 1999, the court entered an order staying the litigation and
related discovery, motions and hearing in accordance with the parties' request.
On October 15, 1999, the special committee filed its final report with the
court. On October 21, 1999, the parties forwarded to the court an agreed-upon
order governing the confidentiality of the special committee's report, which the
court entered on January 2, 2000. On January 19, 2000, the Company and its
directors filed a motion to dismiss the complaints, based upon the Special
Committee's report. The parties are awaiting a hearing on this motion. The
complaint alleged that the directors of the Company breached their fiduciary
duties 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 sought an unspecified
amount of
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compensatory and punitive damages, removal of the current directors, appointment
of a new Board of Directors, and attorneys fees and cost. 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 management of the Company believes that the action will not have
a material adverse effect on the Company's financial condition or 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, if resulting in
an outcome unfavorable to the Company, will, individually or in the aggregate,
have a material adverse effect on the results of operations or financial
condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 1999.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, the positions held by them
with the Company and certain of its subsidiaries and their principal occupations
for the last five years are as follows:
Name, Age and Position Held in the Company
and its Subsidiaries Principal Experience During Past Five Years
- -------------------- -------------------------------------------
Kennon R. Patterson, Sr. (57)
Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer
of the Company; Chairman and Chief Executive of the Company (1985-present); Chairman and
Officer of Community Bank; Director of Chief Executive Officer of Community Bank
Community Appraisals, Inc., Community (1993-present)
Insurance Corp., 1st Community Credit
Corporation and Southern Select Insurance, Inc.
Bishop K. Walker, Jr. (68)
Director, Vice Chairman, Secretary, Senior Vice Chairman, Senior Executive Vice President
Executive Vice President and General Counsel of and General Counsel of the Company (1987-
the Company; Director, Senior Executive Vice present); President and Director of Community
President and Secretary of Community Bank; Insurance Corp. (1987-1997)
Director of Community Insurance Corp. and
Southern Select Insurance, Inc.
Denny G. Kelly (60)
Director and Executive Vice President of the President of Community Bank (1993-present)
Company; Director and President of Community
Bank; Director of 1(st) Community Credit
Corporation, Community Appraisals, Inc.,
Community Insurance Corp. and Southern Select
Insurance, Inc.
Michael A. Bean (52)
Acting Chief Accounting Officer of the Company; Director, Executive Vice President and Chief Financial
Executive Vice President and Chief Financial Officer Officer of Community Bank (1998-present); Chief
of Community Bank; Director of Community Appraisals, Inc. Accounting Officer of Compass Bancshares, Inc.
(1991-1998)
William H. Caughran, Jr. (43)
Assistant Secretary and Treasurer of Community Senior Vice President and General Counsel of
Bancshares, Inc: Senior Vice President and Community Bank (1998-present); Associate Counsel
General Counsel of Community Bank; Director of of AmSouth Bank of Alabama (1992-1998)
1(st) Community Credit Corporation, Community
Appraisals, Inc.; Community Insurance Corp. and
Southern Select Insurance, Inc.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the common stock (the "Common Stock") of the Company were held by
approximately 2,350 shareholders of record as of March 15, 2000. 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.
Estimated Price Range
Per Share
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High Low
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1999:
FIRST QUARTER.................................................................. $ 24.00 $ 20.00
SECOND QUARTER................................................................. 24.00 24.00
THIRD QUARTER.................................................................. 24.00 24.00
FOURTH QUARTER................................................................. 24.00 24.00
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
Annual dividends of $.60 per share and $.50 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 8, 1999 and
January 12, 1998, respectively. 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 the Company's
Consolidated Financial Statements and related notes included elsewhere in this
Report.
During 1999, the following equity securities were issued by the Company without
registration under the Securities Act of 1933 (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.
In December 1999, the Company granted options to purchase an aggregate of
204,000 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 value 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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ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years.
All averages are daily averages.
Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands Except Per Share Data)
Interest income ............................... $ 52,194 $ 44,365 $ 37,791 $ 33,600 $ 26,304
Interest expense .............................. 25,522 22,693 19,541 17,426 13,751
Net interest income ........................... 26,672 21,672 18,250 16,174 12,553
Provision for loan losses ..................... 4,459 885 773 834 1,088
Non-interest income ........................... 9,155 8,102 4,891 4,447 3,717
Non-interest expense .......................... 29,208 23,784 17,423 14,902 12,046
Net income .................................... 1,658 3,579 3,512 3,459 2,705
Per Share Data:
Earnings per share - basic ................ $ .37 $ .90 $ .92 $ .93 $ .81
Earnings per share - diluted .............. .36 .88 .92 .93 .81
Cash dividends ............................ .60 .50 .38 .25 .25
Shareholders' equity (book value)
at period end ......................... 9.53 10.16 8.85 8.63 8.13
Balance Sheet:
Loans, net of unearned income ............. $498,726 $433,853 $326,134 $322,762 $237,841
Deposits .................................. 573,261 538,586 440,889 400,338 320,149
FHLB borrowings ........................... 40,000 -0- -0- -0- -0-
Long-term debt ............................ 6,637 7,569 7,398 8,281 7,920
Average equity ............................ 44,203 37,318 33,428 30,079 24,839
Average assets ............................ 632,713 538,470 473,381 421,839 328,244
Total assets .............................. 674,898 603,244 491,839 454,710 362,824
Ratios:
Return on average assets .................. 0.26% 0.67% 0.74% 0.82% 0.82%
Return on average equity .................. 3.75% 9.59% 10.51% 11.50% 10.88%
Dividend payout ratio ..................... 162.16% 55.60% 40.50% 26.90% 30.90%
Average equity to average assets .......... 6.99% 6.93% 7.06% 7.13% 7.57%
Total risk-based capital .................. 9.37% 11.03% 11.86% 11.45% 14.10%
Leverage ratio ............................ 6.39% 7.79% 6.94% 9.20% 8.61%
11
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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 1997, 1998 and 1999. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
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 Exchange 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 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 and profitability, dividends, pending litigation, non-compliant and
impaired loans originated in Community Bank's Ft. Payne, Alabama office, capital
requirements, operating strategy, consumer base allowance for loan losses,
non-performing assets, interest rate sensitivity, market risk, impact of
inflation and impact of Year 2000 issues. We caution you not to place undue
reliance on these forward-looking statements. 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, changes in prevailing
interest rates and effectiveness of the Company's interest rate strategies,
laws, regulations and regulatory authorities affecting financial institutions,
changes in and effectiveness of the Company's operating or expansion strategies,
geographic concentration of the Company's assets and operations, competition
from other financial services companies, Year 2000 compliance issues, the
Company's ability to obtain reimbursement from its fidelity bond insurance
carrier or other persons responsible for originating non-compliant and impaired
loans in Community Bank's Ft. Payne, Alabama office and other risks detailed
from time to time in the Company's press releases and filings with the
Securities and Exchange Commission. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances occurring after
the date of this Report.
SUMMARY
The Company's principal market areas are located in north Alabama (Blount,
Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marshall and Morgan
Counties), northwest Alabama (Marion and Winston Counties), west-central Alabama
(Marengo and Perry Counties) and in south-central Tennessee (Giles County). All
of the Company's banking and finance company offices are located in relatively
rural areas, placing an emphasis on personal service.
Management believes that the economies of the areas served by the Company are
healthy and expanding, but not at a pace that threatens the areas' stability.
With the exception of Blount, Marengo, Marion, Perry and Winston counties in
Alabama, the markets in which the Company operates share one common
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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.
The Huntsville Metropolitan Statistic Area (the "MSA") had a 1996 per capita
income of $22,595, 13.8% over the 1996 state per capita income of $19,864.
Huntsville is located in Madison County, which has the highest median income of
the Alabama counties at $41,855, as reported by the U.S. Census Bureau in 1995.
Unemployment for the Huntsville MSA was 2.9% in 1998 as compared to 4.2% for
Alabama during that period. The Huntsville MSA possesses a diverse economic base
with employers that include the military and aerospace industries, manufacturers
of durable goods, machinery, transportation, as well as retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also makes up a significant portion of the MSA's
economy.
Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. The Birmingham MSA had a 1998
unemployment rate of 2.8% and 1996 per capita income of $24,227, compared to the
United States per capita income of $24,169 for that period, and 22.0% above the
Alabama per capita income of $19,864 for that period. The Birmingham area still
retains some of the steel and related manufacturers that built the city, but the
economy is now more diverse with the University of Alabama in Birmingham and the
healthcare industry providing many jobs.
Marion and Winston counties lie in northwest Alabama, near the Mississippi
border. In both counties the manufacturing sector provides more jobs and higher
sales or receipts, than the wholesale, retail, and service sectors, according to
the U.S. Census Bureau's 1992 Economic Census. Manufactured housing and
furniture production are two prominent industries in these counties. Marion
County reported a median household income of $25,960 and an unemployment rate of
6.9%. Winston County reported a median household income of $24,947 and an
unemployment rate of 5.6%.
Marengo and Perry counties are located in west-central Alabama. According to the
U.S. Census Bureau's 1992 Economic Census, manufacturing provides more jobs in
these counties than the wholesale, retail, and service sectors. In addition,
catfish farming and the timber industry are important components in the economy
of these counties. Median household income for Marengo County was $23,722 and
the unemployment rate was 7.3%. Perry County reported a median household income
of $17,324 and an unemployment rate of 8.4%.
The average of the median household incomes in the counties served by the
Company is 6% above the Alabama median income of $27,357. Based on 1998
estimates, the average population for the counties served by the Company and its
subsidiaries exceeds 70,000 persons per county. The current economic prospects
in the Company's markets are good, and the Company attempts to assist those
prospects by returning the deposits of its customers to the communities from
which they come in the form of loans.
The Company's net income of $1,658,000 for 1999 represented a 53.7% decline from
1998's net income of $3,579,000, which was 1.9% more than the net income of
$3,512,000 for 1997. When stated as changes in basic earnings per share, 1999
basic earnings per share of $.92 represented a 58.9% decrease from 1998 basic
earnings per share of $.90, which represented a 2.2% decrease from 1997 basic
earnings per share of $.92. The decrease in earnings per share for 1999 resulted
primarily from additional provisions to the Company's
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15
allowance for loan losses in connection with impaired loans originated in
Community Bank's Ft. Payne, Alabama office and a significant increase in
non-interest expenses associated with the Company's 1999 annual meeting of
shareholders. In addition, the average number of shares outstanding increased
10.9% during 1999, compared to 1998, due to the issuance of an additional
500,000 shares of Common Stock in the Company's public offering during the
fourth quarter of 1998. Other factors that have impacted the Company's basic
earnings per share during 1999 and 1998 include increases in non-interest
expenses associated with expansion of Community Bank's 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 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 in the Company's future earnings.
In 1993, 1995 and 1998, the Company raised capital through the sale of shares of
its Common Stock. All three offerings were closed upon being fully subscribed.
The Company sold to the public, in the fourth quarter of 1998, 500,000 newly
issued shares of Common Stock at a price of $19.00 per share raising
approximately $9,467,000 after reduction for offering expenses. 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.
The Company plans to issue approximately $10,000,000 of fixed rate capital
securities. Although there can be no assurances, management believes the closing
of this transaction will take place by the end of the first quarter of the year
2000.
EARNING ASSETS
The Company's average earning assets in 1999 increased 17.2% over that for 1998,
primarily as a result of increases in the loan portfolio, and accounted for
approximately 88.7% of the Company's average total assets for 1999. This is
compared to an increase during 1998 of 13.3% in average earning assets, which
represented 89.0% of the Company's average total assets for 1998.
During 1999, the Company's mix of average earning assets continued to shift to
the loan portfolio as average loans, net of unearned income, increased 22.5% in
1999 and represented 82.5% of the total average earning assets for 1999, up from
78.9% for 1998 and 76.8% for 1997. Investment securities averaged 16.9%, 18.5%
and 19.4% during 1999, 1998 and 1997, respectively. The other earning assets
category accounted for less than 4.0% of total earning assets for all three
periods. The increased volume in earning assets contributed to the higher net
interest income reported by the Company during these three periods.
Total loans, net of unearned income, outstanding at year-end 1999 increased
15.0% compared to year-end 1998, with no concentration of the increase in any
one specific loan category. Commercial, financial and agricultural loans
increased 32.1% in 1999 over year-end 1998, while consumer loans increased 11.7%
from year-end 1998 to year-end 1999. Real estate-mortgage loans, which made up
44.9% of the total loans, increased 9.1% at year-end 1999 when compared to
year-end 1998. Real estate-construction loans increased
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16
5.2% at year-end 1999 when compared to year-end 1998, but had little effect due
to representing only 1.3% of total loans outstanding at year-end 1999.
The Company's current strategy is to avoid the national market in loans to
finance leveraged buy-outs, intending not to participate in nationally
syndicated leveraged buy-out loans. The Company's strategy also includes
avoiding exposure to lesser developed country ("LDC") debt, and it currently has
no LDC loans in its portfolio.
[The remainder of this page intentionally left blank]
15
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The following table shows the classification of loans by major category at
December 31, 1999 and at the end of 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
December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
(Dollars in Thousands)
Commercial,
financial and
agricultural ..... $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6% $ 65,634 20.2% $ 44,686 18.6%
Real estate -
construction ..... 6,470 1.3 6,153 1.4 3,499 1.1 5,262 1.6 5,624 2.3
Real estate -
mortgage ......... 224,129 44.9 205,457 47.2 172,504 52.7 162,994 50.2 116,289 48.4
Consumer ........... 144,453 28.9 129,334 29.7 86,945 26.6 90,682 27.9 73,479 30.6
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
499,297 100.0% 435,001 100.0% 327,084 100.0% 324,572 100.0% 240,078 100.0%
====== ====== ====== ======= ======
Less: Unearned
income ........... 571 1,148 950 1,810 2,237
Allowance for
loan losses ...... 2,603 2,971 2,131 2,425 2,209
-------- -------- -------- -------- --------
Net loans .......... $496,123 $430,882 $324,003 $320,337 $235,632
======== ======== ======== ======== ========
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
December 31, 1999
----------------------------------------------------------------------------------------
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)
Commercial, financial
and agricultural ..... $ 51,835 $ 30,805 $ 41,605 $124,245 $ 50,995 $ 21,415
Real estate -
construction ......... 5,030 1,440 0 6,470 1,087 353
-------- -------- -------- -------- -------- --------
$ 56,865 $ 32,245 $ 41,605 $130,715 $ 52,082 $ 21,768
======== ======== ======== ======== ======== ========
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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 1999, gross
investment securities sales were $11,628,000 and maturities were $10,778,000,
representing 12.2% and 11.3%, respectively, of the average portfolio for the
year. Net gains associated with the sales totaled $179,000 during 1999,
accounting for 2.0% of noninterest income during 1999. At December 31, 1999,
gross unrealized gains in the portfolio were $72,000 while gross unrealized
losses amounted to $2,827,000.
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, 1999 and 1998 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
1999 was $242,000. 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.
The carrying amount of investment securities at the end of each of the last
three years is set forth in the following table:
INVESTMENT PORTFOLIO
December 31,
-----------------------------------------------
1999 1998 1997
------------ ----------- ------------
(in Thousands)
U. S. Treasury and U.S. Government agencies................... $ 55,870 $ 49,145 $ 51,153
Mortgage-backed securities.................................... 30,521 31,324 21,241
State and municipal securities................................ 8,356 15,187 12,698
Equity securities............................................. 2,100 1,736 -0-
------------ ----------- ------------
Total investment securities............................... $ 96,847 $ 97,392 $ 85,092
============ =========== ============
Average investment securities increased 7.6% and 8.0% during 1999 and 1998,
respectively. Average taxable securities accounted for 83.8% of the investment
portfolio in 1999 and 84.7% in 1998 while average tax-exempt securities were
16.2% of the investment portfolio in 1999 and 15.3% in 1998. During 1999, the
Company experienced actual growth in taxable investment securities and an actual
decline in non-taxable investment securities. Period-end securities for 1999
declined 0.6% from the previous year-end.
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The maturities and weighted average yields of the investments in the year-end
1999 portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34% tax rate) have been made in calculating yields on
tax-exempt obligations. The average maturity of the investment portfolio at
December 31, 1999 was 6.13 years with an average yield of 5.94%. Mortgage-backed
securities have been included in the maturity table based upon the guaranteed
payoff date of each security.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
December 31, 1999
------------------------------------------------------------------------------------------------
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:
- -----------------------------------
U. S. Treasury .... $10,175 5.59% $ 6,997 5.66% $ -0- 0.00% $ -0- 0.00%
U. S. Government
agencies ......... 12,059 5.72 7,747 5.65 23,123 5.44 26,290 6.31
State and municipal
securities ...... 361 6.98 798 7.26 2,013 8.11 5,184 7.81
Equity securities . -0- 0.00 -0- 0.00 -0- 0.00 2,100 4.18
------- ---- ------- ---- ------- ---- ------- ----
Total .......... $22,595 5.68 $15,542 5.73 $25,136 5.65 $33,574 6.41
======= ==== ======= ==== ======= ==== ======= ====
There were no securities held by the Company whose aggregate value on December
31, 1999 exceeded 10.0% of the Company's consolidated shareholders' equity at
that date. Average Federal Funds sold decreased 84.9% during 1999 , reflecting
growth in loans and investment securities in excess of deposit growth. During
1998, average Federal Funds sold increased 15.7% from 1997 levels. As a
percentage of average earning assets, these funds represented 0.3% for 1999
compared to 2.4% for 1998.
Interest-bearing deposits with other banks has accounted for less than 0.2% of
the Company's average earning assets during 1999 . The average balance of
interest-bearing deposits with other banks have reflected an increase of 33.5%
during 1999 compared to a decline of 59.5% during 1998.
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
Community Bank's primary source of funds is its deposits and dividends from
Community Bank are the Company's primary source of funds. 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 1999 and 1998 by 12.3% and 14.6%, respectively.
Average interest-bearing demand deposits, average savings and average time
deposits increased 11.4%, 15.9% and 12.0%, respectively, during 1999. Average
18
20
noninterest-bearing demand deposits increased 15.1% and 8.4% during 1999 and
1998, respectively. Customer confidence and satisfaction is evidenced by the
increase in total average deposits of 12.7% in 1999 and 13.8% in 1998. The two
categories of lowest cost deposits comprised the following percentages of total
average deposits during 1999 and 1998, respectively: average noninterest-bearing
demand deposits - 12.7% and 12.4%; and average interest-bearing demand deposits
- - 17.4% and 17.6%. During 1999, interest-bearing demand accounts increased
$8,589,000, or 9.6%, while certificates of deposit of less than $100,000
increased $8,503,000, or 3.9%. Certificates of deposit of $100,000 or more
increased $6,868,000, or 7.6%, during this same period. Of total time deposits
at December 31, 1999, approximately 34.2% were large denomination certificates
of deposit and other time deposits of $100,000 or more, up slightly from 33.3%
at December 31, 1998. The maturities of the time certificates of deposit and
other time deposits of $100,000 or more issued by the Company at December 31,
1999 are summarized in the table below.
MATURITIES OF LARGE TIME DEPOSITS
December 31, 1999
-------------------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
-------------- ------------- --------------
(in Thousands)
Three months or less.......................................... $ 18,678 $ 20,850 $ 39,528
Over three through six months................................. 20,884 -0- 20,884
Over six through twelve months................................ 30,815 -0- 30,815
Over twelve months............................................ 26,941 -0- 26,941
-------------- ------------- --------------
Total...................................................... $ 97,318 $ 20,850 $ 118,168
============== ============= ==============
Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and long-term debt.
Short-term borrowings at year-end 1999 and 1998 consisted of the U. S. Treasury
Tax and Loan Note Option account, Federal Funds purchased, overnight funds
purchased from the FHLB-Atlanta (1998 only), and securities sold under
agreements to repurchase. Community Bank had $11,000,000 at year-end 1999 and
$10,000,000 at year-end 1998 in available lines to purchase Federal Funds, on an
unsecured basis, from commercial banks. At December 31, 1999 and 1998, Community
Bank had no funds advanced against these lines.
In the fourth quarter of 1998, Community Bank became a member of the
FHLB-Atlanta and was approved to borrow up to $65,000,000 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 has drawn up to a maximum of $20,000,000 under the FHLB-Atlanta's
"Overnight Borrowings" program since becoming a member of the FHLB-Atlanta, no
funds were advanced against its line as of December 31, 1999 and 1998. On June
1, 1999, Community Bank borrowed $30,000,000 under the FHLB-Atlanta's
"Convertible Advance Program." This advance had a final maturity of June 1, 2009
(120 months), with a call feature every three months during the life of the
obligation, and carried a fixed rate of 4.62% per annum. These funds were used
to replace $20,000,000 in FHLB-Atlanta overnight borrowings and to fund loan
growth. This obligation was called on September 1, 1999 due to an increase in
market interest rates. As a result of this call, Community Bank refinanced the
original advance and borrowed an additional $10,000,000, to fund anticipated
loan growth, under the same "Convertible Advance Program." This advance,
totaling $40,000,000 at December 31, 1999, has a final maturity of September 1,
2009 (120 months), with a call feature every six months during the life of the
obligation, and carries a fixed rate of 4.99% per annum. Principal is due at
final maturity or on a call date, with interest payable each quarter. The first
call date for this advance was March 1, 2000.
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21
Long-term debt consisted of various commitments with scheduled maturities from 1
to 20 years. The following table sets forth expected debt service for the next
five years based on interest rates and repayment provisions as of December 31,
1999. A more detailed explanation of long-term debt is included in the
accompanying notes to the Company's Consolidated Financial Statements included
elsewhere in this Report.
MATURITIES OF LONG-TERM DEBT
--------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ----------- ----------- ----------- -----------
(in Thousands)
Interest on indebtedness....................... $ 502 $ 422 $ 341 $ 286 $ 261
Repayment of principal......................... 942 961 982 293 318
---------- ----------- ----------- ----------- -----------
$ 1,444 $ 1,383 $ 1,323 $ 579 $ 579
========== =========== =========== =========== ===========
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 objectives of its shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both its customers' needs and its shareholders' objectives. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.
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 Banking Department 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, 1999, Community Bank could have declared
dividends of approximately $4,258,000 without approval of regulatory
authorities.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and paydowns of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $56,865,000, or
11.4% of loans, net of unearned income, at December 31, 1999, and investment
securities maturing in one year or less totaled $22,595,000, or 23.3% of the
investment portfolio, at December 31, 1999. 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
20
22
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 1999, indicating
that it has more liabilities than assets repricing during 2000. The cumulative
static gap position of rate sensitive assets to rate sensitive liabilities at
December 31, 1999 was: i) .27% at 30 days; ii) .36% at 90 days; iii) .37% at 180
days; and iv) .37% at 365 days.
The interest rate shock analysis measures the impact on the Company'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 the Company'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 the
Company's net interest income for the 12 months ending December 31, 2000:
RATE SHOCK ANALYSIS
-200 +200
Basis Basis
Points Level Points
---------------------------------------------------
(Dollars in thousands)
Prime Rate ............................. 6.50% 8.50% 10.50%
Interest Income ........................ $ 57,095 $ 59,084 $ 62,778
Interest Expense ....................... 26,136 29,633 34,714
-------- -------- --------
Net Interest Income ................. $ 30,959 $ 29,451 $ 28,064
======== ======== ========
Dollar change from Level ............... $ 1,508 $ (1,387)
Percentage change from Level ........... 5.12% (4.71)%
[The remainder of this page intentionally left blank]
21
23
INTEREST SENSITIVITY
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, 1999 Basis Points Basis Points
---------------------- ------------------------------
(Dollars in Thousands)
Assets which reprice in:
One year or less ............... $ 182,131 (2.43)% 9.12%
Over one year .................. 416,897 (3.71) 5.20
------------
$ 599,028 (3.37) 6.25
============
Liabilities which reprice in:
One year or less ............... $ 486,233 (13.62) 14.22
Over one year .................. 71,318 (4.19) 29.39
------------
$ 557,551 (11.80) 17.15
============
Total net interest income sensitivity.................................. 5.12 (4.71)
While movement of interest rates cannot be predicted with any certainty,
management expects interest rates to move slightly higher during 2000 and
believes that the Company's current interest rate sensitivity analysis fairly
reflects its interest rate risk exposure during the 12 months ending December
31, 2000. 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.
CAPITAL RESOURCES
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and shareholder confidence and provides a
solid foundation for future growth of the organization.
In 1993, 1995 and 1998, the Company raised capital through the sale of shares
of its Common Stock. All three offerings were closed upon being fully
subscribed. The Company sold to the public, in the fourth quarter of 1998,
500,000 newly issued shares of Common Stock at a price of $19.00 per share
raising approximately $9,467,000 after reduction for offering expenses.
The Company plans to issue approximately $10,000,000 of fixed rate capital
securities. Although there can be no assurances, management believes the
closing of this transaction will take place by the end of the first quarter of
the year 2000.
The net proceeds from all offerings have 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
22
24
risk-based capital ratios. The Company's Tier I capital, which consists of
common equity, amounted to approximately $39,976,000 at December 31, 1999
compared 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, which was
approximately $44,067,000 and $46,083,000 at year-end 1999 and 1998,
respectively. The percentage ratios, as calculated under the guidelines, for
Tier I and Total Risk-based capital, respectively, were 8.50% and 9.37% at
December 31, 1999, compared to 9.94% and 11.03% at year-end 1998. While Tier I
capital exceeded the regulatory well capitalized ratio of 6% at year-end 1999,
the Company was considered adequately capitalized at December 31, 1999, as both
Tier I and Total Risk-based capital exceeded the regulatory minimum ratios of
4% and 8%, respectively. Applying the current guidelines to 1998 and 1997
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 that the Company's
shareholders' equity, minus goodwill, bears to total average assets minus
goodwill. The Company's leverage ratios as of December 31, 1999, 1998 and 1997
exceeded the regulatory minimum requirement of 4%.
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23
25
The following table illustrates the Company's regulatory capital ratios at
December 31, 1999, 1998 and 1997:
CAPITAL ADEQUACY RATIOS
December 31,
` ----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
Tier I Capital ......................... $ 39,976 $ 41,521 $ 32,638
Tier II Capital ........................ 4,091 4,562 3,773
------------ ------------ ------------
Total Qualifying Capital ........ $ 44,067 $ 46,083 $ 36,411
============ ============ ============
Risk-weighted Total Assets (including
off-balance-sheet exposures) ......... $ 470,305 $ 417,945 $ 306,947
============ ============ ============
Tier I Risk-based Capital Ratio ........ 8.50% 9.94% 10.63%
Total Risk-based Capital Ratio ......... 9.37% 11.03% 11.86%
Leverage Ratio ......................... 6.39% 7.79% 6.94%
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
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------ ------ ------
Return on average assets .................... 0.26% 0.67% 0.74%
Return on average equity .................... 3.75 9.59 10.51
Dividend payout ratio ....................... 162.16 55.56 40.50
Average equity to average assets ratio ...... 6.99 6.93 7.06
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24
26
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 1999, on a fully taxable equivalent (FTE) basis,
increased 22.6% from 1998, compared to an increase of 18.0% in 1998 over 1997.
An increase in average earning assets and average interest-bearing liabilities
in 1999 and 1998 accounted for the majority of the increase. The "Rate/Volume
Variance Analysis" table in the section below provides the detail changes in
interest income, interest expense and net interest income due to changes in
average balances and rates.
The Company's FTE interest income increased 17.5% in 1999 and 17.1% in 1998.
The increase in 1999 was due almost entirely to the 17.2% increase in average
earning assets as the FTE yield on average earning assets rose only two basis
points. The 1998 increase was due both to the 13.3% increase in average earning
assets and the 30 basis point rise in the FTE yield on average earning assets.
During 1999, the FTE interest income on loans increased 20.5% primarily due to
the 22.5% increase in the average loan balances outstanding as the FTE yield on
loans declined 16 basis points. The FTE interest income on loans increased
20.7% during 1998, due primarily to an increase in the average loan balances
outstanding of 16.5% coupled with an increase in the FTE yield on loans of 36
basis points. Interest income on investment securities increased 8.2% from 1998
to 1999 and 2.3% from 1997 to 1998, due primarily to changes in the average
investment security balances outstanding.
During 1999, total interest expense increased 12.5%. While the Company
experienced a 17.7% increase in average interest-bearing liabilities
outstanding during this period, the rate paid on the Company's interest-bearing
liabilities declined by 23 basis points during 1999. The 16.1% increase in
total interest expense in 1998 was due primarily to the effect of a 14.2%
increase in average interest-bearing liabilities, coupled with the effect of a
9 basis point increase in the rate paid. Interest-bearing deposits are the
major component of interest bearing liabilities, representing 93.2% in 1999,
97.7% in 1998 and 97.3% in 1997 of average total interest-bearing liabilities
outstanding. While average interest-bearing deposits outstanding increased
12.3% and 14.6% during 1999 and 1998, respectively, the rate paid on these
average balances reflected a decline of 22 basis points during 1999 compared to
an increase of 11 basis points during 1998. The rise in interest expense on
short-term borrowings and long-term debt was due primarily to an increase in
average balances outstanding as opposed to changes in rates paid. A new
component of interest expense resulted during 1999 when Community Bank borrowed
funds under the FHLB-Atlanta's "Convertible Advance Program" (FHLB borrowings).
The average FHLB borrowings outstanding during 1999 were approximately
$20,932,000, which represented 4.1% of the Company's average total
interest-bearing liabilities.
The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing net
interest income by average earning assets. This ratio represents the difference
between the average yield returned on average earning assets and the average
rate paid for funds used to support those earning assets, including both
interest-bearing and noninterest-bearing sources. The Company's FTE net
interest margin for 1999 was 4.86% compared to 4.64% and 4.46% for 1998 and
1997, respectively.
25
27
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 FTE net interest spread for 1999 increased 25 points to 4.40%
from the Company's 1998 spread of 4.15% as the FTE yield on earning assets
increased and the cost of interest-bearing sources of funds decreased. The FTE
net interest spread for 1997 was 3.94%. See the tables in this section below
entitled "Consolidated Average Balances, Interest Income/Expenses and
Yields/Rates" and "Rate/Volume Variance Analysis" for more information.
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
Years Ended December 31,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Rate earned on earning assets ..... 9.30% 9.26% 8.94% 8.85% 8.82%
Rate paid on borrowed funds ....... 5.00 5.23 5.14 5.18 5.17
Interest rate spread .............. 4.30 4.03 3.80 3.67 3.66
Net yield on earning assets ....... 4.75 4.52 4.32 4.26 4.21
During 1999, the banking industry experienced an increasing interest rate
environment, as evidenced by increases in the prime interest rate, of 25 basis
points each, in July, August and November. This is in contrast to 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. The Company's net interest income
increased 23.1% during 1999 and 17.2% in 1998. These increases were due
primarily to the 17.2% and 13.3% increases in average earning assets
outstanding during 1999 and 1998, respectively. The interest rate environment
during 1997 was relatively flat.
Net interest income was $26,672,000, $21,672,000 and $18,250,000 for the 12
months ended December 31, 1999, 1998 and 1997, respectively. This represented
changes of $5,000,000 from 1998 to 1999 and $3,422,000 from 1997 to 1998, as
reported in the Company's Consolidated Statements of Income included elsewhere
in this Report. The net interest margin, not modified for assumed tax
equivalency, increased to 4.75% in 1999 from 4.52% in 1998 and the interest
rate spread, not modified for assumed tax equivalency, increased to 4.30% for
1999 from 4.03% for 1998. The net interest margin and interest rate spread, not
modified for assumed tax equivalency, were 4.32% and 3.80%, respectively, for
1997.
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26
28
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (Dollars in Thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999
-----------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-----------------------------------------
ASSETS
Earning assets:
Loans, net of unearned income (1) ............. $ 463,298 $ 46,549 10.05%
Investment securities:
Taxable ...................................... 79,733 4,782 6.00
Tax-exempt ................................... 15,412 1,305 8.47
---------- ----------
Total investment securities ................. 95,145 6,087 6.40
Interest bearing deposits in other banks ..... 1,343 74 5.51
Federal funds sold ........................... 1,740 88 5.06
---------- ----------
Total interest-earning assets (2) .............. 561,526 52,798 9.40
Noninterest-earning assets:
Cash and due from banks .................... 22,332
Premises and equipment ..................... 32,527
Accrued interest and other assets .......... 19,087
Allowance for loan losses .................. (2,759)
----------
Total assets .............................. $ 632,713
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................... $ 94,763 4,131 4.36
Savings deposits .............................. 53,730 1,886 3.51
Time deposits ................................. 327,481 17,577 5.37
---------- ----------
475,974 23,594 4.96
Other short-term borrowings ................... 6,714 333 4.96
FHLB borrowings ............................... 20,932 1,037 4.95
Long-term debt ................................ 7,100 558 7.86
---------- ----------
Total interest-bearing liabilities ........... 510,720 25,522 5.00
----------
Noninterest-bearing liabilities:
Demand deposits ............................ 69,248
Accrued interest and other liabilities ..... 8,542
Shareholders' equity ....................... 44,203
----------
Total liabilities and shareholders' equity $ 632,713
==========
Net interest income/net interest spread .......... $ 27,276 4.40%
==========
Net yield on earning assets ...................... 4.86%
Taxable equivalent adjustment:
Loans .......................................... $ 159
Investment securities .......................... 444
----------
Total taxable equivalent adjustment ........... 603
----------
Net interest income .............................. $ 26,673
==========
- ---------------
(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%, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning
assets.
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29
Years Ended December 31,
- -------------------------------------------------------------------------------
1998 1997
- ------------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------- -----------------------------------
$ 378,189 $ 38,616 10.21% $ 324,745 $ 31,999 9.85%
74,952 4,488 5.99 69,432 4,410 6.35
13,488 1,139 8.44 12,475 1,080 8.66
- ---------- ---------- ---------- ----------
88,440 5,627 6.36 81,907 5,490 6.70
1,006 91 9.05 2,483 113 4.55
11,558 611 5.29 13,704 796 5.81
- ---------- ---------- ---------- ----------
479,193 44,945 9.38 422,839 38,398 9.08
21,609 19,732
26,986 20,126
13,642 13,156
(2,960) (2,472)
- ---------- ----------
$ 538,470 $ 473,381
========== ==========
$ 85,044 3,286 3.86 $ 66,265 2,722 4.11
46,374 1,651 3.56 50,393 1,784 3.54
292,357 17,026 5.82 253,095 14,258 5.63
- ---------- ---------- ---------- ----------
423,775 21,963 5.18 369,753 18,764 5.07
3,258 164 5.03 2,524 146 5.78
0 0 0 0
6,878 566 8.23 7,833 631 8.06
- ---------- ---------- ---------- ----------
433,911 22,693 5.23 380,110 19,541 5.14
- ---------- ---------- ---------- ----------
60,147 55,466
7,094 4,377
37,318 33,428
- ---------- ----------
$ 538,470 $ 473,381
========== ==========
$ 22,252 4.15% $ 18,857 3.94%
========== ==========
4.64% 4.46%
$ 193 $ 240
387 367
---------- ----------
580 607
$ 21,672 $ 18,250
========== ==========
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30
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
Average Volume Change in Volume
---------------------------------------- -------------------------
1999 1998 1997 1999-1998 1998-1997
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
EARNING ASSETS:
Loans, net of unearned income ............... $ 463,298 $ 378,189 $ 324,745 $ 85,109 $ 53,444
Investment securities:
Taxable .................................. 79,733 74,952 69,432 4,781 5,520
Tax exempt ............................... 15,412 13,488 12,475 1,924 1,013
---------- ---------- ---------- ---------- ----------
Total investment securities ............ 95,145 88,440 81,907 6,705 6,533
Interest-bearing deposits with other banks .. 1,343 1,006 2,483 337 (1,477)
Federal funds sold .......................... 1,740 11,558 13,704 (9,818) (2,146)
---------- ---------- ---------- ---------- ----------
Total earning assets .................. $ 561,526 $ 479,193 $ 422,839 $ 82,333 $ 56,354
========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand ................................... $ 94,763 $ 85,044 $ 66,265 $ 9,719 $ 18,779
Savings .................................. 53,730 46,374 50,393 7,356 (4,019)
Time ..................................... 327,481 292,357 253,095 35,124 39,262
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ....... 475,974 423,775 369,753 52,199 54,022
Other short-term borrowings ................. 6,714 3,258 2,524 3,456 734
FHLB borrowings ............................. 20,932 0 0 20,932 0
Long-term borrowings ........................ 7,100 6,878 7,833 222 (955)
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities .... $ 510,720 $ 433,911 $ 380,110 $ 76,809 $ 53,801
========== ========== ========== ========== ==========
Net interest income/net interest spread................................................................................
Net yield on earning assets............................................................................................
Net cost of funds......................................................................................................
(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.
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31
Average Rate Interest Income/Expense
- ------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
- -------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
10.05% 10.21% 9.85% $ 46,549 $ 38,616 $ 31,999
6.00 5.99 6.35 4,782 4,488 4,410
8.47 8.44 8.66 1,305 1,139 1,080
---------- ---------- ----------
6.40 6.36 6.70 6,087 5,627 5,490
5.51 9.05 4.55 74 91 113
5.06 5.29 5.81 88 611 796
---------- ---------- ----------
9.40 9.38 9.08 52,798 44,945 38,398
4.36 3.86 4.11 4,131 3,286 2,722
3.51 3.56 3.54 1,886 1,651 1,784
5.37 5.82 5.63 17,577 17,026 14,258
---------- ---------- ----------
4.96 5.18 5.07 23,594 21,963 18,764
4.96 5.03 5.78 333 164 146
4.95 0.00 0.00 1,037 0 0
7.86 8.23 8.06 558 566 631
---------- ---------- ----------
5.00 5.23 5.14 25,522 22,693 19,541
- ------ ------ ------ ---------- ---------- ----------
4.40% 4.15% 3.94% $ 27,276 $ 22,252 $ 18,857
====== ====== ====== ========== ========== ==========
4.86% 4.64% 4.46%
4.54% 4.74% 4.62%
Variance Attributed to (1)
------------------------------------------------
Variance 1999 1998
- --------------------- ---------------------- -----------------------
1999-1998 1998-1997 VOLUME RATE Volume Rate
- --------- --------- --------- ----------- ---------- -----------
(Dollars in Thousands)
$7,933 $6,617 $8,548 $ (615) $ 5,415 $ 1,202
294 78 287 7 337 (259)
166 59 162 4 87 (28)
------ ------ ------ ---------- ---------- ----------
460 137 449 11 424 (287)
(17) (22) 25 (42) (92) 70
(523) (185) (498) (25) (118) (67)
------ ------ ------ ---------- ---------- ----------
7,853 6,547 8,524 (671) 5,629 918
845 564 396 449 737 (173)
235 (133) 258 (23) (143) 10
551 2,768 1,936 (1,385) 2,273 495
------ ------ ------ ---------- ---------- ----------
1,631 3,199 2,590 (959) 2,867 332
169 18 171 (2) 39 (21)
1,037 0 1,037 0 0 0
(8) (65) 18 (26) (78) 13
------ ------ ------ ---------- ---------- ----------
1,792 3,152 2,779 (987) 2,828 324
------ ------ ------ ---------- ---------- ----------
$6,061 $3,395 $5,745 $ 316 $ 2,801 $ 594
====== ====== ====== ========== ========== ==========
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32
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 1999, unpaid balances on certain loans originated through
Community Bank's Ft. Payne, Alabama office and identified as not being in
compliance with Community Bank's lending policy totaled approximately
$2,631,000. Management has determined that these unpaid balances are impaired
and has therefore, made an appropriate charge to the allowance for loan losses.
Concurrently, a one-time charge, in the same amount, was made to the provision
for loan losses in order to return the allowance for loan losses to its balance
prior to the charge for the impaired loans. Management currently believes that
Community Bank has a valid claim and the right to receive reimbursement from
its fidelity bond insurance carrier or through litigation against persons
involved in originating the impaired loans. Any future reimbursements will be
considered recoveries and the resulting effect will be an increase to the
Company's 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 $4,459,000,
$885,000 and $773,000 in 1999, 1998 and 1997, respectively. This represents
increases of $3,574,000, or 403.8%, in 1999 and $112,000, or 14.5%, in 1998,
compared to a decline of $61,000, or 7.4%, in 1997. Excluding the effect of the
impaired loans in the Ft. Payne office, the provision for loan losses would
have increased $942,000, or 106.4%, during 1999. This increase in the provision
during 1999 is due primarily to an increase in the monthly provision for
Community Bank, based on anticipated loan growth, and an increase in the
provision for 1st Community Credit Corporation due to an increase in consumer
loan charge-offs. There was a $368,000, or 12.4%, decline in the allowance for
loan losses at December 31, 1999 as compared to December 31, 1998, in contrast
to an increase of $840,000, or 39.4%, in the allowance for loan losses at
year-end 1998 over year-end 1997 and a decrease of $294,000, or 12.1%, at
year-end 1997 as compared to year-end 1996. The decline in the allowance for
loan losses at December 31, 1999 was due primarily to an increase in net
charge-offs in consumer loans. The increase in the allowance for loan losses
during 1998 was due primarily to reserves acquired through acquisitions,
coupled with an increase in net charge-offs of consumer loans. During 1999, net
loan charge-offs increased $3,500,000, or 264.0%, compared to an increase in
net loan charge-offs of $249,000, or 23.1%, in 1998 and a decrease of $70,000,
or 6.1%, in 1997. Excluding the effect of the isolated occurrence of the
impaired loans in the Ft. Payne office, net loan charge-offs for 1999 would
have increased $869,000, or 65.5%. Net charge-offs of consumer loans
represented 96.9% of total net charge-offs for 1999, compared to 82.7% for 1998
and 63.7% in 1997. Management believes that the $2,603,000 in the allowance for
loan losses at December 31, 1999 (.52% of total net outstanding loans at that
date) is 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.
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31
33
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, 1999.
SUMMARY OF LOAN LOSS EXPERIENCE
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Allowance for loan losses at beginning of year ........ $ 2,971 $ 2,131 $ 2,425 $ 2,209 $ 1,548
Loans charged off:
Commercial, financial and agricultural .............. 282 190 80 392 110
Real Estate - mortgage .............................. 92 50 325 158 -0-
Consumer ............................................ 4,814 1,223 783 680 399
---------- ---------- ---------- ---------- ----------
Total loans charged off ........................... 5,188 1,463 1,188 1,230 509
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off:
Commercial, financial and agricultural .............. 220 11 5 10 22
Real Estate - mortgage ................................ 4 -0- 9 1 1
Consumer .............................................. 138 126 97 72 59
---------- ---------- ---------- ---------- ----------
Total recoveries ...................................... 362 137 111 83 82
---------- ---------- ---------- ---------- ----------
Net loans charged off ................................. 4,826 1,326 1,077 1,147 427
Reserves acquired through acquisitions ................ -0- 1,281 10 529 -0-
Provision for loan losses ............................. 4,458 885 773 834 1,088
---------- ---------- ---------- ---------- ----------
Allowance for loan losses at end of period ............ $ 2,603 $ 2,971 $ 2,131 $ 2,425 $ 2,209
========== ========== ========== ========== ==========
Loans, net of unearned income, at end of period ....... $ 498,726 $ 433,853 $ 326,134 $ 322,762 $ 237,841
========== ========== ========== ========== ==========
Average loans, net of unearned income,
outstanding for the period .......................... $ 463,298 $ 378,189 $ 324,745 $ 276,878 $ 223,222
========== ========== ========== ========== ==========
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Ratios:
Allowance at end of period to loans, net of
unearned income ................................... .52% .68% .65% .75% .93%
Allowance at end of period to average loans,
net of unearned income ............................ .56 .79 .66 .88 .99
Net charge-offs to average loans, net of
unearned income ................................... 1.04