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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, 2000
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 28, 2001, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $38,894,565 BASED UPON A SALE PRICE OF $15.00
PER SHARE ON MARCH 28, 2001.
AS OF MARCH 28, 2001, THERE WERE 4,808,331 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 2001 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
System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank,
an Alabama banking corporation which conducts a general commercial banking
business in north and west-central Alabama and south-central Tennessee. At
December 31, 2000, the Company and its subsidiaries had total assets of
approximately $713,518,000, deposits of approximately $600,901,000 and
shareholders' equity of approximately $41,190,000.
SUBSIDIARY BANK
Community Bank currently conducts business through 30 locations in nine counties
in north Alabama, two counties in west-central Alabama and one 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, offered mortgage loan products at competitive rates to
customers referred by Community Bank and the Company's finance company offices.
In the fourth quarter of 2000, management of Community Bank discontinued
offering loans through its real estate mortgage department and sold the
servicing rights associated with loans originated through the real estate
mortgage department.
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SUBSIDIARIES OF COMMUNITY BANK
1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. 1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans. At December 31, 2000, 1st Community Credit Corporation's loan portfolio
totaled approximately $28,857,000.
Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through an
office in Huntsville, Alabama. In April 1998, Community Insurance Corp. acquired
100% ownership of the outstanding shares of capital stock of Chafin Insurance
Agency, Inc. and Jim Murphree Insurance Agency, Inc., insurance agencies located
in Graysville and Oneonta, Alabama, respectively. Both agencies merged into
Community Insurance Corp. in January 1999. In April 1998, Community Insurance
Corp. acquired 100% ownership of the outstanding shares of capital stock of
Southern 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 170 insurance agencies located in Alabama. Community Insurance
Corp. 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. 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 October 2000, Community
Insurance Corp. closed its office in Hamilton, Alabama and in November 2000 sold
its offices located in Oneonta and Graysville, 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.
MARKET AREAS
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.
With the exception of Blount, Marengo, Marion, Perry and Winston Counties in
Alabama, the markets in which the Company operates share one common
characteristic: they are separate and distinct economies, but each is close
enough to Huntsville, Alabama, to share in the economic and employment benefits
of that city. Huntsville is located in Madison County, which has the highest
median income of the Alabama counties at $43,239, as reported by the U.S. Census
Bureau in the March 1998 Current Population Survey (the "1998 Census Bureau
Survey"). Unemployment for Madison County was 2.4% for December 2000 as compared
to 4.5% for Alabama during that period, as reported by the Alabama Department of
Industrial Relations. The
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Huntsville Metropolitan Statistical Area (MSA) possesses a diverse economic base
with employers that include the military and aerospace industries, manufacturers
of durable goods, machinery, transportation, as well as retailers and service
industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco,
dairy and poultry farming, also makes up a significant portion of the Huntsville
MSA's economy.
Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. Jefferson County, in which
Birmingham is located, had a 2.7% unemployment rate for December 2000, according
to the Alabama Department of Industrial Relations, and a median household income
of $35,565, 15.5% above the Alabama per capita income of $30,790, according to
the 1998 Census Bureau Survey. 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, and both
industries have experienced recent economic slowdowns. Marion County was
reported to have an unemployment rate of 9.3% for December 2000, according to
the Alabama Department of Industrial Relations. Median income of $26,919, 13%
below the state average was reported for the county in the 1998 Census Bureau
Survey. Winston County was reported to have a median household income of $25,418
in the 1998 Census Bureau Survey and an unemployment rate of 11% for December
2000 according to the Alabama Department of Industrial Relations.
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 reported as
$25,504 in the 1998 Census Bureau Survey and its unemployment rate reported by
the Alabama Department of Industrial Relations for December 2000 was 3.7%. Perry
County was reported to have a median household income of $18,069, according to
the 1998 Census Bureau Survey and an unemployment rate of 11.3% for December
2000 as reported by the Alabama Department of Industrial Relations.
While certain markets have experienced economic downturn, overall, the Company
remains optimistic about current economic prospects in its market areas, and the
Company attempts to assist those local economies by returning the deposits of
its customers to the communities from which they come in the form of loans.
LENDING ACTIVITIES
Community Bank's lending activities include commercial, real estate and consumer
loans. Community Bank's commercial loan services include term loans, lines of
credit and agricultural loans. A broad range of short to medium term commercial
loans, both secured and unsecured, are made available to businesses for working
capital, business expansion and the purchase of equipment and machinery.
Community Bank's real estate lending activities include fixed and adjustable
rate residential mortgage loans, construction loans, second mortgages, home
improvement loans and home equity lines of credit. Community Bank's consumer
lending services include loans for automobiles, recreation vehicles and boats,
as well as personal (secured and unsecured) and deposit account secured loans.
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COMPETITION
The banking business in Alabama and south Tennessee is highly competitive with
respect to loans, deposits and other financial services and is dominated by a
number of major banks and bank holding companies which have numerous offices and
affiliates operating over wide geographic areas. Community Bank competes for
deposits, loans and other business with these banks as well as with savings and
loan associations, credit unions, mortgage companies, insurance companies and
other local financial institutions. Many of the major commercial banks operating
in Community Bank's service areas offer services such as international banking
and investment and trust services, which are not offered by Community Bank.
EMPLOYEES
At December 31, 2000, the Company and its subsidiaries had approximately 397
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.
SUPERVISION AND REGULATION
The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those federal and state statutes and regulations specifically mentioned herein.
The Company is a bank holding company and is registered as such with the Federal
Reserve. The Company is subject to regulation and supervision by the Federal
Reserve and is required to file with the Federal Reserve annual reports and such
other information as the Federal Reserve may require. The Federal Reserve 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.
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 to
regulation and examination by the Alabama Banking Department. Examinations
include a review of Community Bank's conditions and resources, its mode of
conducting and managing its affairs, the actions of its directors, the
investment of its funds, the safety and prudence of its management, compliance
with its charter and law in the administration of its affairs and other aspects
of Community Bank's operations. State 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
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to examination and regulation by the FDIC. The FDIC is authorized to terminate
the deposit insurance of any depository institution, such as Community Bank,
whose deposits are insured by the FDIC if the FDIC determines, after a hearing,
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition or continue operations, or has violated any
applicable law, regulation, order, condition imposed in writing by the FDIC in
connection with the granting of any application or other request by the
depository institution or any written agreement entered into with the FDIC.
Each federal banking regulatory agency is authorized to issue a cease and desist
order to any financial institution for which the agency is the primary federal
banking regulator (which in the case of Community Bank, is the FDIC and, in the
case of the Company, is the Federal Reserve) if the agency determines, after a
hearing, that the institution has engaged, is engaging or is reasonably believed
to be about to engage, in unsafe or unsound practices, or has violated, is
violating or is reasonably believed to be about to violate a law, rule or
regulation, or any condition imposed in writing by the agency in connection with
the granting of any application or other request by the institution or any
written agreement entered into with the agency. The cease and desist order may
require the institution to cease and desist from the violation or practice,
including requiring the institution to make restitution or reimbursement against
loss, restrict its growth, dispose of loans or assets, rescind agreements or
contracts, employ qualified officers or employees and other actions determined
to be appropriate by the agency. The order may also limit the activities of the
institution.
The federal 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 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 federal banking regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the agencies
adopted regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance plan, the
agency must issue an order directing action to correct the deficiency and may
issue an
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order directing other actions of the types to which an undercapitalized
institution is subject under the prompt corrective action provisions of FDICIA.
If an institution fails to comply with such an order, the agency may seek to
enforce such order in judicial proceedings and to impose civil money penalties.
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system the federal banking
regulatory agencies are required to rate supervised institutions on the basis of
five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three under-capitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires a federal banking regulatory agency to appoint
a receiver or conservator for an institution that is critically
undercapitalized. The federal banking regulatory agencies have specified by
regulation the relevant capital level for each category.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institutions's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply without determining among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
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, 2000.
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.
The primary source of funds for dividends paid to the Company's shareholders is
dividends paid to the Company by Community Bank. Various federal and state laws
limit the amount of dividends that Community Bank may pay to the Company without
regulatory approval. Under Alabama law, an Alabama state bank, such as Community
Bank, may not pay a dividend in excess of 90% of its net earnings until the
bank's surplus is equal to at least 20% of its capital. Community Bank is also
required by Alabama law to obtain the prior approval of the Superintendent of
the Alabama State Banking Department in order to pay
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a dividend if the total of all the dividends declared by Community Bank in any
calendar year will exceed the total of Community Bank's net earnings (as defined
by statute) for that year and its retained net earnings for the preceding two
years, less any required transfers to surplus. At December 31, 2000, Community
Bank could not have declared or paid any dividend without such approval. In
addition, no dividends may be paid from Community Bank's surplus without the
prior written approval of the Superintendent of the Alabama State Banking
Department. Under FDICIA, Community Bank may not pay any dividends, if after
paying the dividend, it would be undercapitalized under applicable capital
requirements. The FDIC also has the authority to prohibit Community Bank from
engaging in business practices which the FDIC considers to be unsafe or unsound,
which, depending on the financial condition of Community Bank, could include the
payment of dividends.
In addition, the Federal Reserve has the authority to prohibit the payment of
dividends by a bank holding company, such as the Company, if its actions
constitute unsafe or unsound practices. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies,
which outlined the Federal Reserve's view that a bank holding company that is
experiencing earnings weaknesses or other financial pressures should not pay
cash dividends that exceed its net income, that are inconsistent with its
capital position or that could only be funded in ways that weaken its financial
health, such as by borrowing or selling assets. The Federal Reserve indicated
that, in some instances, it may be appropriate for a bank holding company to
eliminate its dividends.
The federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company may not, following an
interstate acquisition, control more than 10% of the nation's total amount of
bank deposits or 30% of bank deposits in the relevant state (unless the state
enacts legislation to raise the 30% limit). States retain the ability to adopt
legislation to effectively lower the 30% limit. Federal banking
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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 federal Community Reinvestment Act of 1977 ("CRA") and its implementing
regulations are intended to encourage regulated financial institutions to meet
the credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
such financial institutions. The regulations provide that the appropriate
regulatory authority will assess CRA reports in connection with applications for
establishment of domestic branches, acquisitions of banks or mergers involving
bank holding companies. An unsatisfactory CRA rating may serve as a basis to
deny an application to acquire or establish a new bank, to establish a new
branch or to expand banking services. At December 31, 2000, the Company had a
"satisfactory" CRA rating.
The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions
in the Glass-Steagall Act against a bank associating with a company engaged
principally in securities activities. The GLBA also permits a bank holding
company to elect to become a "financial holding company," which would expand the
powers of the bank holding company. The repeal of the Glass-Steagall Act
provisions and the availability of financial holding company powers became
effective on March 11, 2000. Financial holding company powers relate to
financial activities that are determined by the Federal Reserve to be financial
in nature, incidental to an activity that is financial in nature, or
complementary to a financial activity (provided that the complementary activity
does not pose a safety and soundness risk). The GLBA itself defines certain
activities as financial in nature, including lending activities, underwriting
and selling insurance, providing financial or investment advice, underwriting,
dealing and making markets in securities and merchant banking. In order to
qualify as a financial holding company, a bank holding company's depository
subsidiaries must be both well capitalized and well managed, and must have at
least a satisfactory rating under the CRA. The bank holding company must also
declare its intention to become a financial holding company to the Federal
Reserve and certify that its depository subsidiaries meet the capitalization and
management requirements. The GLBA establishes the Federal Reserve as the
umbrella regulator of financial holding companies, with subsidiaries of the
financial holding company being more specifically regulated by other regulatory
authorities, such as the Securities and Exchange Commission, the Commodity
Futures Trading Commission and state securities and insurance regulators, based
upon the subsidiaries' particular activities. The GLBA also provides for minimum
federal standards of privacy to protect the confidentiality of personal
financial information of customers and to regulate use of such information by
financial institutions. A bank holding company that does not elect to become a
financial holding company remains subject to the Bank Holding Company Act. The
Company has not determined whether it will elect to become a financial holding
company.
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.
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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.
On April 9, 2000, the Company's Board of Directors entered into a memorandum of
understanding (the "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve Bank"), which outlines actions to be taken by the Company to address
concerns identified by the Reserve Bank. In the Memorandum, the Company agreed
that, without the prior written approval of the Reserve Bank, it would not
declare or pay any dividends, repurchase shares of its common stock, incur any
additional indebtedness, alter the terms of existing indebtedness or increase
the amount of management fees paid to the Company by Community Bank. In
addition, the Company agreed to maintain a quarterly Tier I leverage ratio (the
ratio of Tier I capital to average assets, less goodwill) of at least 6.5%
during the period in which the Memorandum is in effect, and to periodically
update the Company's plan for maintaining capital and earnings at adequate
levels. The Company also agreed to establish by June 8, 2001, a policy that
provides for target levels of capital and guidelines for payment of dividends
and a plan to strengthen the Company's internal audit program. The Company
further agreed that a committee of non-employee directors of the Company will
review and report by June 8, 2001 on the appropriateness of the compensation
provided under the employment agreement of Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company. In
addition, the Company is to provide the Reserve Bank by May 9, 2001 with a
contingency plan for conserving or raising cash and information about loans
extended by Community Bank to facilitate purchases of the Company's common
stock, and to periodically provide the Reserve Bank with certain financial and
other information and a report of actions taken by the Company to ensure
compliance with the Memorandum. Management of the Company cannot currently
estimate the period during which the Company will remain subject to the terms of
the Memorandum, or the effect of the Memorandum on the Company's financial
condition, liquidity and results of operations.
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STATISTICAL DISCLOSURE
Statistical and other information regarding the following items are set forth in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on the pages indicated below.
Page(s)
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Loan Portfolio and Selected Loan Maturity and Interest Rate Sensitivity.................................. 22
Investment Portfolio..................................................................................... 24
Investment Portfolio Maturity Schedule................................................................... 25
Average Deposit Balances and Rates Paid.................................................................. 26
Maturities of Large Time Deposits........................................................................ 27
Short-term Borrowings.................................................................................... 29
Maturities of Long-term Debt ............................................................................ 30
Rate Shock Analysis...................................................................................... 32
Interest Sensitivity..................................................................................... 33
Capital Adequacy Ratios and Return on Equity and Assets.................................................. 35
Yields, Rates, Interest Rate Spread and Net Interest Margin.............................................. 38
Consolidated Average Balances, Interest Income/Expense and Yields/Rates.................................. 40-41
Rate/Volume Variance Analysis............................................................................ 42-43
Summary of Loan Loss Experience.......................................................................... 46
Allocation of the Allowance for Loan Losses.............................................................. 47
Nonperforming Assets..................................................................................... 48
Noninterest Income....................................................................................... 50
Noninterest Expense...................................................................................... 52
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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 and legal functions are housed in three buildings constructed in
1997 and the accounting function is located in the annex building, all of which
are located 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 a building that is used
in the normal course of business in Madison County, Alabama.
For information about the amounts at which bank premises, equipment and other
real estate are recorded in the Company's financial statements and information
relating to commitments under leases, see the Company's Consolidated Financial
Statements included elsewhere in this Report.
ITEM 3 - LEGAL PROCEEDINGS
At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office. Management of the Company commenced an investigation of the
expenditures. At the request of management, the architects and subcontractors
involved in the construction project made presentations to the Boards of
Directors of the Company and Community Bank on July 15 and July 18, 2000,
respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. Upon completion of its investigation, the joint committee
is to inform the Boards of Directors of the Company and Community Bank of its
findings and recommendations. The joint committee has retained legal counsel and
an independent accounting firm to assist the committee in its investigation.
Management has also been informed that the directors of Community Bank who
alleged the construction overcharges have contacted bank regulatory agencies and
law enforcement authorities. Management believes that these agencies and
authorities either have conducted or are currently conducting investigations
regarding this matter.
On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary
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duties, failed to properly supervise officers and agents of the Company and
Community Bank, and permitted waste of corporate assets by allegedly permitting
the subcontractor defendants to overcharge Community Bank in connection with the
construction of two new Community Bank offices, and to perform the construction
work without written contracts, budgets, performance guarantees and assurances
of indemnification. In addition, the complaint alleges that Kennon R. Patterson,
Sr., the Chairman, President and Chief Executive Officer of the Company,
breached his fiduciary duties by allegedly permitting the two named
subcontractors to overcharge for work performed on the two construction projects
in exchange for allegedly discounted charges for work these subcontractors
performed in connection with the construction of Mr. Patterson's residence. The
complaint further alleges that the director defendants knew or should have known
of this alleged arrangement between Mr. Patterson and the subcontractors. The
complaint also alleges that Mr. Patterson, the Community Bank employee and the
two subcontractor defendants made false representations and suppressed
information about the alleged overcharges and arrangement between Mr. Patterson
and the subcontractors. On August 15, 2000, the plaintiffs filed an amended
complaint adding Andy C. Mann, a shareholder of the Company, as a plaintiff and
adding a former director of the Company and Community Bank as a defendant. The
amended complaint generally reiterates the allegations of the original
complaint. In addition, the amended complaint alleges that Community Bank was
overcharged on all construction projects from January 1997 to the present. The
amended complaint also alleges that the defendants breached their fiduciary
duties and are guilty of gross financial mismanagement, including allegations
concerning the making or approval of certain loans and taking allegedly improper
actions to conceal the fact that certain loans were uncollectible. On September
18, 2000 the plaintiffs filed a second amended complaint. The second amended
complaint generally reiterates the allegations of the original and first amended
complaints. In addition, the second amended complaint alleges that the
plaintiffs were improperly denied their rights to inspect and copy certain
records of the Company and Community Bank. The second amended complaint also
alleges that the directors of the Company abdicated their roles as directors
either by express agreement or as a result of wantonness and gross negligence.
The second amended complaint asserts that the counts involving inspection of
corporate records and director abdication are individual, nonderivative claims.
The second amended complaint seeks, on behalf of the Company, an unspecified
amount of compensatory damages in excess of $1 million, punitive damages,
disgorgement of allegedly improperly paid profits and appropriate equitable
relief. Upon motion of the defendants, the case was transferred to the state
Circuit Court in Blount County, Alabama by order dated September 21, 2000, as
amended on October 12, 2000. On August 24, 2000, the Board of Directors of the
Company designated the directors of the Company who serve on the joint
investigative committee as a special litigation committee to investigate and
evaluate the allegations and issues raised in this lawsuit and to arrive at such
decisions and take such action as the special litigation committee deems
appropriate. At a hearing on February 23, 2001 the court stayed discovery with
respect to the Company, Community Bank and the directors, officers and employees
of each until May 24, 2001, at which time the court expects to receive a report
from the special litigation committee. Because the special litigation committee
has not yet completed its investigation, and as a result of the inherent
uncertainties of the litigation process, the Company is unable at this time to
predict the outcome of this lawsuit and its effect on the Company's financial
condition and results of operations. Regardless of the outcome, however, this
lawsuit could be costly, time-consuming and a diversion of management's
attention.
On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders
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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 compensatory and
punitive damages, removal of the current directors, appointment of a new Board
of Directors, and attorneys fees and cost. 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 non-employee directors of the Company, to
review the plaintiffs' 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 August 3,
2000, the Company, Community Bank and the Company's directors filed a motion to
stay the proceedings until the Company's and Community Bank's joint
investigative committee had completed its investigation of the alleged
construction overcharges discussed above. At the request of the Company and the
other defendants in the action, the court continued a hearing on the motion to
dismiss. On February 23, 2001, the court indicated that there was no reason to
continue the stay of this action. The parties are awaiting a hearing on the
defendants' motion to dismiss the case. 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. Regardless of the
outcome, however, this lawsuit could be costly, time consuming and a diversion
of management's attention.
On September 14, 2000, another action was filed in the state Circuit Court of
Blount County, Alabama, against the Company, Community Bank and certain
directors and officers of the Company and Community Bank by seven shareholders
of the Company alleging that the directors actively participated in or ratified
the misappropriation of corporate income. The action was not styled as a
shareholder derivative action. On January 3, 2001, the defendants filed a motion
for summary judgment on the basis that these claims are derivative in nature and
cannot be brought on behalf of individual shareholders. The court has not ruled
on the motion. The Company and its directors believe that this lawsuit is
without merit and intend to defend the action vigorously. Although management
currently believes that this action will not have a material adverse effect on
the Company's financial condition or results of operations, regardless of the
outcome, the action could be costly, time consuming and a diversion of
management's attention.
The Company's Certificate of Incorporation provides that, in certain
circumstances, the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements and legal expenses incurred as a result
of their service as officers and directors of the Company. Community Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.
On June 28, 2000, Community Bank filed an action in the United States District
Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc.,
an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug
Broaddus, the owners of the dealership, several employees and former employees
of the dealership and Gerald Scot Parrish, a former employee of Community Bank,
with respect to certain loans originated during 1998 in Community Bank's
Wal-Mart office in Ft. Payne, Alabama. In the complaint Community Bank alleged
that the defendants willingly and knowingly conducted, participated in, were
employed by or associated with, or aided and abetted an enterprise within the
meaning of the Racketeer Influenced and Corrupt Organizations Act (RICO) for the
purpose of defrauding Community Bank.
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15
The complaint also asserted that the defendants committed fraud,
misrepresentation and deceit by submitting to Community Bank and/or approving
applications for automobile loans which contained false and/or fraudulent
information for the purpose of deceiving, influencing and persuading Community
Bank to provide loans to customers of the automobile dealership who were
otherwise not qualified to receive such loans, and suppressed material facts
regarding the veracity of information contained in loan applications and the
ability of persons seeking the loans to repay them. Community Bank also alleged
in the complaint that the automobile dealership is responsible for the acts of
its officers, agents and employees, and that the dealership and its management
failed to adequately train and/or supervise its employees. The complaint stated
that the defendants participated in a conspiracy to violate RICO and Alabama
statutes dealing with fraud, misrepresentation and suppression of material
facts, and asserted civil liability under Alabama law for violation of federal
statutes dealing with financial institution fraud, mail and wire fraud and
making false statements for the purpose of influencing the actions of a
financial institution upon an application or loan. On June 29, 2000 and August
31, 2000 the court granted Community Bank's motions to dismiss without prejudice
two of the employees of the automobile dealership as defendants in the action.
On September 13, 2000, the court granted Mr. Parrish's motion to dismiss the
complaint, but granted Community Bank 15 days to amend the complaint. On
September 27, 2000, Community Bank filed an amended complaint which generally
reiterated the allegations of the original complaint and added specific
information concerning the allegedly fraudulent activity and the use of the
United States mail, telephone and other wire transmissions in the conduct of
such activity. On December 1, 2000, the court dismissed Community Bank's claims
based upon mail and wire fraud in the amended complaint but otherwise denied Mr.
Parrish's motion to dismiss the complaint. The defendants have filed answers to
the amended complaint which generally deny the material allegations in the
complaint and allege that any injury suffered by Community Bank was the result
of the contributory negligence of Community Bank, its officers, employees and
agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to
recover losses incurred in connection with the loans made at Community Bank's
Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the
lawsuit. Any amounts received by Community Bank as a result of this litigation
will be treated as a recovery on loan losses. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses."
On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors
and executive officers of Community Bank, filed suit against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The
complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without merit
and intend to defend the action vigorously. Management of the Company believes
that this 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 Company's financial condition or results
of operations.
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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 2000.
[The remainder of this page intentionally left blank]
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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 Currently Held with the
Company and its Subsidiaries Principal Experience During Past Five Years
- ---------------------------------------------------------- --------------------------------------------------------
Kennon R. Patterson, Sr. (58) Chairman, President and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the Company (1985-present); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of Officer of Community Bank (1993-present)
Community Bank; Chairman of 1st Community Credit
Corporation; Vice Chairman of Community Appraisals, Inc.;
Director of Community Insurance Corp., and Southern Select
Insurance, Inc.
Bishop K. Walker, Jr. (69)
Director, Vice Chairman, Secretary, Senior Executive Vice Vice Chairman, Senior Executive Vice President and
President and General Counsel of the Company; Director, General Counsel of the Company (1987-present); President
Senior Executive Vice President and Secretary of Community and Director of Community Insurance Corp. (1987-1997)
Bank; Chairman of Community Insurance Corp. and Southern
Select Insurance, Inc.
Denny G. Kelly (61)
Director and Executive Vice President of the Company; Vice President of Community Bank (1993-present)
Chairman and President of Community Bank; Vice Chairman
and President of 1st Community Credit Corporation; Director
of Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.
William E. Blackmon (50) Senior Vice President and Controller of Community Bank
Acting Chief Financial Officer of the Company; Senior Vice (1998-present); Vice President and Operations Officer of
President and Controller of Community Bank First National Bank of West Point, West Point, Georgia
(1996- 1998); Vice President and Controller of AuburnBank,
Auburn, Alabama (1989-1996)
William H. Caughran, Jr. (44)
Assistant Secretary and Treasurer of the Company; Senior Vice Senior Vice President and General Counsel of Community
President, General Counsel and Secretary to the Board of Bank (1998-present); Associate Counsel of AmSouth Bank
Directors of Community Bank; Secretary of 1st Community of Alabama (1992-1998)
Credit Corporation, Community Appraisals, Inc., Community
Insurance Corp. and Southern Select Insurance, Inc.
The Company's bylaws provide that the term of office of an executive officer of
the Company is as provided in the officer's employment agreement with the
Company or, if the officer is not a party to an employment agreement or if the
officer's employment agreement does not specify a term of office, as determined
by the Company's Board of Directors and until the officer's successor is elected
and qualified or until the officer's earlier resignation or removal. In May
2000, each of the Company's executive officers was elected by the Company's
Board of Directors to serve a term of one year and until his successor has been
elected and qualified.
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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 28, 2001. 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
-----------------------
High Low
------- -------
2000:
FIRST QUARTER.................................... $ 25.00 $ 24.00
SECOND QUARTER................................... 25.00 19.00
THIRD QUARTER.................................... 25.00 20.00
FOURTH QUARTER................................... 26.00 20.00
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
Annual dividends of $.75 per share and $.60 per share were declared by the Board
of Directors on the Company's Common Stock and paid on January 5, 2000 and
January 8, 1999, 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. The Board of
Directors determined that it was in the Company's best interests not to declare
or pay a dividend in the first quarter of 2001, due to regulatory constraints
and the Company's results of operations and financial condition for 2000. The
Board of Directors intends to reassess the Company's financial condition and
results of operations in subsequent quarters to determine whether the Company is
able to declare and pay a dividend under applicable laws, regulations and
restrictions, and, if so, whether such a dividend would be prudent and advisable
at that time. The Board of Directors does not currently anticipate declaring or
paying a dividend in the second or third quarters of 2001. There can be no
assurance that the Company will pay any dividends in the foreseeable future. See
"Item 1 - Business - Supervision and Regulation," "Item 7 - Management's
Discussion of Financial Condition and Results of Operations - Liquidity
Management" and Note 17 to the Company's Consolidated Financial Statements
included elsewhere in this Report.
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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.
Years Ended December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(Dollars in Thousands Except Per Share Data)
Interest income .................................. $ 61,075 $ 52,194 $ 44,365 $ 37,791 $ 33,600
Interest expense ................................. 33,856 25,522 22,693 19,541 17,426
Net interest income .............................. 27,219 26,672 21,672 18,250 16,174
Provision for loan losses ........................ 9,289 4,459 885 773 834
Non-interest income .............................. 9,906 9,155 8,102 4,891 4,447
Non-interest expense ............................. 31,755 29,208 23,784 17,423 14,902
Net income/(loss) ................................ (2,215) 1,658 3,579 3,512 3,459
Per Share Data:
Earnings/(loss) per share - basic ............ $ (.50) $ .37 $ .90 $ .92 $ .93
Earnings/(loss) per share - diluted .......... (.47) .36 .88 .92 .93
Cash dividends ............................... .75 .60 .50 .38 .25
Shareholders' equity (book value)
at period end ............................ 8.81 9.53 10.16 8.85 8.63
Balance Sheet:
Loans, net of unearned income ................ $ 528,316 $498,726 $433,853 $326,134 $322,762
Deposits ..................................... 600,901 573,261 538,586 440,889 400,338
FHLB borrowings .............................. 38,000 40,000 -0- -0- -0-
Capitalized lease obligations ................ 5,850 -0- -0- -0- -0-
Long-term debt ............................... 5,675 6,637 7,569 7,398 8,281
Guaranteed preferred beneficial interest
in the Company's junior subordinated
deferrable interest debentures ............. 10,000 -0- -0- -0- -0-
Average equity ............................... 41,776 44,203 37,318 33,428 30,079
Average assets ............................... 710,915 632,713 538,470 473,381 421,839
Total assets ................................. 713,518 674,898 603,244 491,839 454,710
Ratios:
Return on average assets ..................... (0.31)% 0.26% 0.67% 0.74% 0.82%
Return on average equity ..................... (5.30)% 3.75% 9.59% 10.51% 11.50%
Dividend payout ratio ........................ (150.00)% 162.16% 55.56% 40.50% 26.90%
Average equity to average assets ............. 5.88% 6.99% 6.93% 7.06% 7.13%
Total risk-based capital ..................... 10.54% 9.37% 11.03% 11.86% 11.45%
Leverage ratio ............................... 6.44% 6.39% 7.79% 6.94% 9.20%
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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 1998, 1999 and 2000. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
consolidated financial statements and related notes and the selected financial
data presented elsewhere in this Report.
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 1933, 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, economic prospects of market areas, dividends, pending
litigation, non-compliant and impaired loans originated in Community Bank's Ft.
Payne, Alabama office, capital requirements, operating strategy, deposits,
consumer base, allowance for loan losses, non-performing assets, interest rate
sensitivity, market risk and impact of inflation. 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, changes in
economic conditions and 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, unexpected
financial results or outcomes of legal proceedings, 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 net loss of approximately $2,215,000 for 2000 represented a 233.6%
decline from 1999's net income of approximately $1,658,000, which was a 53.7%
decline from net income of approximately $3,579,000 for 1998. When stated as
changes in basic earnings per share, the 2000 basic loss per share of $0.50
represented a 235.1% decrease from the 1999 basic earnings per share of $0.37,
which represented a 58.9% decrease from the 1998 basic earnings per share of
$0.90. The decline in earnings per share for 2000 primarily resulted from
additional provisions to the Company's allowance for loan losses in connection
with an increase in loans charged-off and certain loans originated in Community
Bank's Double Springs, Alabama location that were determined by management to be
impaired at December 31, 2000, while the decrease in earnings per share for 1999
was primarily due to the recognition of losses associated with certain loans
originated in 1998 in Community Bank's Ft. Payne, Alabama Wal-Mart location that
were determined to be impaired in the fourth quarter of 1999. In 2000 and 1999,
the Company also experienced higher than normal legal and accounting fees
associated with legal proceedings. Basic earnings per share for 1999 were also
negatively impacted by a significant increase in legal, accounting, public
relations and printing costs in connection with the Company's 1999 annual
meeting of shareholders and a related proxy contest. The Company's basic loss
per share during 2000 and basic earnings per share during 1999 and 1998 were
also negatively impacted by increases in non-interest expenses associated with
expansion of Community Bank's
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office network, new finance company facilities and additional insurance offices.
See "Noninterest Expenses" below. 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.
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 and the Company's Employee Stock Ownership Plan
("ESOP"), 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
expenses of the offering.
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines. See Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this
Report.
EARNING ASSETS
The Company's average earning assets in 2000 increased 12.2% over that for 1999,
primarily as a result of increases in the loan portfolio, and accounted for
approximately 88.6% of the Company's average total assets for 2000. This is
compared to a 17.2% increase during 1999 in average earning assets, which
represented 88.7% of the Company's average total assets for 1999, and a 13.3%
increase during 1998 in average earning assets, which represented 89.0% of the
Company's average total assets for 1998.
The Company's mix of average earning assets changed only slightly during 2000,
compared to 1999. Average loans, net of unearned income, represented 82.9%,
82.5% and 78.9% of average earning assets during 2000, 1999 and 1998,
respectively. Average investment securities represented 16.4% of average earning
assets in 2000, compared to 16.9% in 1999 and 18.5% in 1998. The change in the
mix during 1999, compared to 1998, was primarily attributable to an increase in
commercial, financial and agricultural loans during 1999. The other earning
asset categories accounted for less than 3.0% of average 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, increased approximately $29,590,000, or
5.9%, to approximately $528,316,000 at December 31, 2000 from $498,726,000 at
December 31, 1999, which represented an increase of $64,873,000, or 15.0%, from
$433,853,000 at December 31, 1998. These increases were primarily attributable
to increases in commercial, financial and agricultural loans and real estate -
mortgage loans. Commercial, financial and agricultural loans increased by
approximately $16,528,000, or 13.3%, to approximately $140,773,000 at December
31, 2000 from approximately $124,245,000 at December 31, 1999, which represented
an increase of approximately $30,188,000, or 32.1%, from approximately
$94,057,000 at December 31, 1998. Commercial, financial and agricultural loans
represented 26.6% of total loans at December 31, 2000, compared to 24.9% at
December 31, 1999 and 21.6% at December 31, 1998. In addition, real estate -
mortgage loans increased by approximately $12,463,000, or 5.6%, to approximately
$236,592,000 at December 31, 2000 from $224,129,000 at December 31, 1999, which
represented an increase of approximately $18,672,000, or 9.1%, from
approximately $205,457,000 at December 31, 1998.
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As a percentage of total loans, real estate - mortgage loans decreased slightly
to 44.8% at December 31, 2000 from 44.9% at December 31, 1999 and 47.2% at
December 31, 1998. Consumer loans increased by approximately $1,220,000, or
0.9%, to approximately $145,673,000 at December 31, 2000 from approximately
$144,453,000 at December 31, 1999, which represented an increase of
approximately $15,119,000, or 11.7%, from approximately $129,334,000 at December
31, 1998. As a percentage of total loans, consumer loans decreased to 27.6% at
December 31, 2000 from 28.9% at December 31, 1999 and 29.7% at December 31,
1998. Real estate - construction loans decreased by approximately $1,041,000, or
16.1%, to approximately $5,429,000 at December 31, 2000 from approximately
$6,470,000 at December 31, 1999, which represented an increase of approximately
$317,000, or 5.2%, from approximately $6,153,000 at December 31, 1998. As a
percentage of total loans, real estate - construction loans decreased to 1.0% at
December 31, 2000 from 1.3% at December 31, 1999 and 1.4% at December 31, 1998.
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.
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21
23
The following table shows the classification of loans by major category at
December 31, 2000 and at the end of each of the preceding four years.
LOAN PORTFOLIO
December 31,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------ ------------------ -------------------- --------------------
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 ..... $140,773 26.6% $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6% $ 65,634 20.2%
Real estate -
construction ..... 5,429 1.0 6,470 1.3 6,153 1.4 3,499 1.1 5,262 1.6
Real estate -
mortgage ......... 236,592 44.8 224,129 44.9 205,457 47.3 172,504 52.7 162,994 50.3
Consumer ........... 145,673 27.6 144,453 28.9 129,334 29.7 86,945 26.6 90,682 27.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
528,467 100.0% 499,297 100.0% 435,001 100.0% 327,084 100.0% 324,572 100.0%
====== ====== ====== ====== ======
Less: Unearned
income ........... 151 571 1,148 950 1,810
Allowance for
loan losses ...... 7,107 2,603 2,971 2,131 2,425
-------- -------- -------- -------- --------
Net loans .......... $521,209 $496,123 $430,882 $324,003 $320,337
======== ======== ======== ======== ========
The following table provides maturities of certain loan classifications and an
analysis of these loans maturing in over one year as of December 31, 2000.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
December 31, 2000
----------------------------------------------------------------------------
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- ----------------------------
Year
Through Over Predetermined Floating or
Year or Five Five Interest Adjustable
Less Years Years Total Rate Rate
------- ------- ------- -------- ------------- -----------
(in Thousands)
Commercial, financial
and agricultural ...... $56,443 $36,003 $48,327 $140,773 $54,634 $29,696
Real estate -
construction .......... 3,244 2,185 -0- 5,429 884 1,301
------- ------- ------- -------- ------- -------
$59,687 $38,188 $48,327 $146,202 $55,518 $30,997
======= ======= ======= ======== ======= =======
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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 2000, gross
investment securities sales were approximately $16,230,000 and maturities were
approximately $25,210,000, representing 15.7% and 24.5%, respectively, of the
average portfolio for the year, compared to gross investment securities sales of
$11,628,000 in 1999 and approximately $24,045,000 in 1998 and maturities of
approximately $10,778,000 in 1999 and approximately $21,786,000 in 1998. Net
gains realized on the sales totaled approximately $5,000 during 2000, compared
to approximately $179,000 in 1999 and approximately $466,000 in 1998. At
December 31, 2000, gross unrealized gains in the portfolio were approximately
$1,419,000, compared to approximately $72,000 at December 31, 1999 and
approximately $1,085,000 at December 31, 1998, while gross unrealized losses
amounted to approximately $756,000 at December 31, 2000, compared to
approximately $2,827,000 at December 31, 1999 and approximately $347,000 at
December 31, 1998. These fluctuations in the gross unrealized gains and losses
in the Company's investment portfolio resulted primarily as bond prices reacted
to changes in market interest rates.
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, 2000 and 1999 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
2000 was $190,096, compared to $242,000 at December 31, 1999. 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.
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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,
-----------------------------------------
2000 1999 1998
--------- -------- --------
(in Thousands)
U.S. Treasury and U.S. Government agencies............ $ 46,830 $ 55,870 $ 49,145
Mortgage-backed securities............................ 31,341 30,521 31,324
State and municipal securities........................ 19,499 8,356 15,187
Equity securities..................................... 3,900 2,100 1,736
--------- -------- --------
Total investment securities........................ $ 101,570 $ 96,847 $ 97,392
========= ======== ========
Average investment securities increased 8.4%, 7.6% and 8.0% during 2000, 1999
and 1998, respectively. Average taxable securities accounted for 85.1% of the
investment portfolio in 2000, compared to 83.8% in 1999 and 84.7% in 1998, while
average tax-exempt securities were 14.9% of the investment portfolio in 2000,
compared to 16.2% in 1999 and 15.3% in 1998. Total investment securities
increased approximately $4,723,000, or 4.9%, to approximately $101,570,000 at
December 31, 2000, compared to approximately $96,847,000 at December 31, 1999
and approximately $97,392,000 at December 31, 1998. During 2000, non-taxable
investment securities increased $11,143,000, or 133.4%, to approximately
$19,499,000 from $8,356,000 at December 31, 1999, which represented a decrease
of $6,831,000 or 45.0%, from $15,187,000 at December 31, 1998, while taxable
investment securities declined approximately $6,420,000, or 7.3% during 2000 to
$82,071,000 from approximately $88,491,000 at December 31, 1999, which
represented an increase of $6,286,000, or 7.7%, from approximately $82,205,000
at December 31, 1998. The composition of the investment securities portfolio
changed during 2000 primarily as monies from the sale, pay downs and maturities
of U.S. government and agency securities were reinvested in state and municipal
securities. At December 31, 2000, U.S. government and agency securities
represented 46.1% of the total investment securities portfolio compared to 57.7%
at year-end 1999, while state and municipal securities represented 19.2% and
8.6% of the investment securities portfolio at year-end 2000 and 1999,
respectively. This increase in state and municipal investment securities
resulted as management took advantage of several opportunities to invest in
higher yielding securities while only slightly extending the average maturity of
the investment securities portfolio. In addition, approximately 37.3% of the
funds realized from this increase were reinvested in municipal securities within
Alabama, primarily in markets served by the Company's subsidiaries.
The maturities and weighted average yields of the investments in the year-end
2000 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 was
6.71 years at year-end 2000 compared to 6.13 years at year-end 1999 with an
average yield of 6.71% and 6.40% at December 31, 2000 and 1999, respectively.
Mortgage-backed securities have been included in the maturity table based upon
the guaranteed payoff date of each security.
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INVESTMENT PORTFOLIO MATURITY SCHEDULE
December 31, 2000
-----------------------------------------------------------------------------------------------
Maturing
-----------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------------- --------------------- --------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ -------- ------- -------- ------- -------- ------- -----
(Dollars in Thousands)
Securities- All Available for Sale:
U.S. Treasury .......... $2,500 5.60% $ 3,574 5.63% $ -0- 0.00% $ -0- 0.00%
U.S. Government
agencies .............. 4,990 5.34 35,947 6.49 29,829 6.61 1,331 5.84
State and municipal
securities ........... 200 6.78 523 7.60 1,349 8.70 17,427 8.33
Equity securities ...... -0- 0.00 -0- 0.00 -0- 0.00 3,900 7.02
------ ------- ------- -------
Total ............... $7,690 5.46 $40,044 6.43 $31,178 6.71 $22,658 7.96
====== ======= ======= =======
At December 31, 2000, the Company held two Government National Mortgage
Association ("GNMA") pool securities and one municipal bond whose amortized cost
exceeded 10% of the Company's consolidated shareholders' equity at that date.
Average Federal Funds sold increased 108.9% during 2000, as compared to a
decline of 84.9% during 1999 and an increase of 15.7% during 1998. These
fluctuations resulted from ordinary increases and decreases in loan demand and
the level of deposit balances as well as the short term reinvestment of funds
associated with restructuring of the Company's investment securities portfolio.
As a percentage of average earning assets, these funds represented 0.6% for
2000, compared to 0.3% for 1999 and 2.4% for 1998.
Interest-bearing deposits with other banks accounted for less than 0.3% of the
Company's average earning assets during 2000, 1999 and 1998. The average
balances of interest-bearing deposits with other banks reflected a decrease of
31.9% during 2000, compared to an increase of 33.5% during 1999 and a decrease
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.
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25
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DEPOSITS
Community Bank's primary source of funds is its deposits. Dividends from
Community Bank are the Company's primary source of funds. Continued enhancement
of existing products, emphasis upon better customer service and expansion into
new market areas have fueled the growth in Community Bank's deposit base.
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.
During 2000, the Company's average total deposits increased approximately
$56,921,000, or 10.4%, to approximately $602,143,000 from approximately
$545,222,000 in 1999, which represented an increase of approximately
$61,300,000, or 12.7%, from approximately $483,922,000 in 1998. At December 31,
2000, the Company's total deposits were approximately $600,901,000, an increase
of approximately $27,640,000, or 4.8%, from approximately $573,261,000 at
December 31, 1999.
The following table presents the average amounts outstanding and the average
rates paid for each of the major classifications of deposits for the 12 month
periods ending December 31, 2000, 1999 and 1998:
Average Deposit Balances and Rates Paid
------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
(Dollars in Thousands)
AVERAGE Average Average
AVERAGE RATE Average Rate Average Rate
BALANCE PAID Balance Paid Balance Paid
--------- ------- --------- ------- --------- -------
Noninterest-bearing demand ..... $ 68,785 0.00% $ 69,248 0.00% $ 60,147 0.00%
Interest-bearing demand ........ 102,254 4.92% 94,763 4.36% 85,044 3.86%
Savings ........................ 55,983 4.39% 53,730 3.51% 46,374 3.56%
Time ........................... 375,121 5.92% 327,481 5.37% 292,357 5.82%
--------- --------- ---------
Total(1) ................... $ 602,143 5.57% $ 545,222 4.96% $ 483,922 5.18%
========= ========= =========
- ----------------------------
(1) The rate paid on total average deposits represents the rate paid on
total average interest-bearing deposits only.
The Company's average interest-bearing deposits increased by 12.1%, 12.3% and
14.6% in 2000, 1999 and 1998, respectively. Average interest-bearing demand
deposits, average savings and average time deposits increased 7.9%, 4.2% and
14.6%, respectively, during 2000 compared to an increase of 11.4%, 15.9% and
12.0%, respectively, during 1999, and an increase of 28.3%, a decrease of 8.0%
and an increase of 15.5%, respectively, during 1998. Average noninterest-bearing
demand deposits decreased 0.7% during 2000 compared to an increase of 15.1%
during 1999, and an increase of 8.4% during 1998. Customer confidence and
satisfaction is evidenced by the increase in total average deposits of 10.4% in
2000, 12.7% in 1999, and 13.8% in 1998. The two categories of lowest cost
deposits, noninterest-bearing demand deposits and interest-bearing demand
deposits, comprised the following percentages of total average deposits during
2000, 1999 and 1998, respectively: (i) Average noninterest-bearing demand
deposits - 11.4%, 12.7% and 12.4%; and (ii) average interest-bearing demand
deposits - 17.0%, 17.4% and 17.6%. Community Bank experienced a shift in its
deposit mix during 2000 as interest-bearing demand deposits and savings accounts
decreased $12,922,000, or 13.1%, and $1,242,000, or 1.9%, respectively, while
certificates of deposit of less than $100,000 increased $33,160,000, or 14.6%.
This is as compared to increases in interest-bearing demand deposits by
$8,589,000, or 9.6%, in 1999 and by $18,365,000, or 25.7%, in 1998, increases in
savings accounts by $6,123,000, or 10.4%, in 1999 and by $7,672,000, or 15.0%,
in 1998, and increases in certificates of deposit of less than $100,000 by
$8,503,000, or 3.9%, in 1999 and by $39,451,000, or 22.0%,
26
28
in 1998. Certificates of deposit of $100,000 or more increased $3,694,000, or
3.8%, during 2000, compared to an increase of $6,868,000, or 7.6%, during 1999
and $22,023,000, or 32.2%, during 1998. Of total time deposits at December 31,
2000, approximately 20.7% were large denomination certificates of deposit and
other time deposits of $100,000 or more, down from 34.2% at December 31, 1999.
The maturities of the time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 2000 are summarized in
the table below.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2000
-----------------------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
------------- ------------- -------------
(in Thousands)
Maturing in three months or less ............... $ 17,208,818 $ 23,353,824 $ 40,562,642
Maturing in over three through six months ...... 25,788,184 -0- 25,788,184
Maturing in over six through twelve months ..... 34,884,751 -0- 34,884,751
Maturing in over twelve months ................. 23,130,128 -0- 23,130,128
------------- ------------- -------------
Total ....................................... $ 101,011,881 $ 23,353,824 $ 124,365,705
============= ============= =============
BORROWED FUNDS
Community Bank also uses borrowed funds as a source of funds for asset growth in
excess of deposit growth and for short-term liquidity needs. The mixture of
borrowed funds and deposits as sources of funds depends on the relative
availability and costs of those funds and Community Bank's need for funding.
Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and long-term debt.
Short-term borrowings at year-end 2000 and 1999 consisted of the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Community Bank had $6,000,000 at year-end 2000 and $11,000,000 at
year-end 1999 in available lines to purchase Federal Funds, on an unsecured
basis, from commercial banks. At December 31, 2000 and 1999, 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 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. Community Bank's maximum credit
availability with FHLB-Atlanta is established at 10% of Community Bank's total
assets, based on the most recent quarterly financial information submitted to
the FDIC. At December 31, 2000, the maximum credit availability, based on
Community Bank's Consolidated Reports of Condition and Income as of the close of
business September 30, 2000, was approximately $71,000,000. 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 under the "Overnight Borrowings" program at December 31, 2000 and 1999.
Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's
"Convertible Advance Program." These advances have had original maturities of 10
years, with stated call features during the life of the obligation, at fixed
interest rates for the life of the obligations. Principal is due at final
maturity or on stated call dates, with interest payable each quarter. On June 1,
1999, Community Bank borrowed $30,000,000 under the FHLB-Atlanta's "Convertible
Advance Program." This advance had a final maturity
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29
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, had a final maturity of
September 1, 2009 (120 months), with a call feature every six months during the
life of the obligation, and carried a fixed rate of 4.99% per annum. Principal
was 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. Due to the call of this
obligation on March 1, 2000, Community Bank made a $2,000,000 reduction in the
amount advanced under the FHLB-Atlanta "Convertible Advance Program" and
refinanced $38,000,000. This new obligation has a final maturity of March 1,
2010 (120 months), a call feature every 12 months during the life of the
obligation, and a fixed interest rate of 5.93% per annum. At December 31, 2000,
outstanding funds advanced to Community Bank under the FHLB-Atlanta "Convertible
Loan Program" totaled $38,000,000. The first call date for this advance was
March 1, 2001; the advance was not called on that date.
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28
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The following table sets forth, for the periods indicated, certain information
about the Company's short-term borrowings:
SHORT-TERM BORROWINGS
At December 31,
------------------------- Maximum
Weighted Outstanding
Average Average Average At Any
Balance Rate Balance Rate Month-end
-------------- -------- ------------ ---------- --------------
(Dollars in thousands)
2000:
FEDERAL FUNDS PURCHASED............... $ -0- 0.00% $ 402,000 6.47% $ 3,000,000
SHORT-TERM FHLB BORROWINGS............ -0- 0.00% 325,000 6.86% -0-
SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE........................ 862,000 6.17% 818,000 6.17% 1,072,000
U.S. TREASURY TAX AND LOAN, NOTE
OPTION............................ 1,403,000 5.72% 1,044,000 6.14% 2,456,000
------------- ------------- --------------
TOTAL....................... $ 2,265,000 5.89% $ 2,589,000 6.30% $ 6,528,000
============= ============= ==============
1999:
Federal funds purchased............... $ -0- 0.00% $ 751,000 5.10% $ 5,000,000
Short-term FHLB borrowings............ -0- 0.00% 4,331,000 5.60% 20,000,000
Securities sold under agreement to
repurchase........................ 264,000 5.26% 558,000 5.08% 353,000
U.S. Treasury Tax and Loan, note
option............................ 2,230,000 4.78% 1,074,000 4.04% 2,230,000
------------- ------------- --------------
Total........................ $ 2,494,000 4.83% $ 6,714,000 4.96% $ 27,583,000
============= ============= ==============
1998:
Federal funds purchased............... $ -0- 0.00% $ 290,000 5.60% $ -0-
Short-term FHLB borrowings............ -0- 0.00% 1,104,000 5.02% 6,000,000
Securities sold under agreement to
repurchase........................ 152,000 6.23% 881,000 6.02% 599,000
U.S. Treasury Tax and Loan, note
option............................ 2,040,000 4.26% 983,000 3.97% 2,040,000
------------- ------------- --------------
Total....................... $ 2,192,000 4.40% $ 3,258,000 5.03% $ 8,639,000
============= ============= ==============
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29
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Long-term debt consisted of various commitments with scheduled maturities from
one to 20 years. The following table sets forth expected debt service for the
next five years based on interest rates and repayment provisions as of December
31, 2000. A more detailed explanation of long-term debt is included in Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this
Report.
MATURITIES OF LONG-TERM DEBT
2001 2002 2003 2004 2005
------- ------- ------- -------- --------
(in Thousands)
Interest on indebtedness....................... $ 458 $ 368 $ 308 $ 282 $ 253
Repayment of principal......................... 950 972 284 310 339
------- ------- ----- ----- -----
$ 1,408 $ 1,340 $ 592 $ 592 $ 592
======= ======= ===== ===== =====
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines.
The Capital Securities accrue and pay distributions semiannually at a rate of
10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Company's ability to meet the day-to-day cash flow requirements
of Community Bank's customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Company would not be able to perform the primary
function of a financial intermediary and would, therefore, not be able to meet
the production and growth needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment objectives
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32
of its shareholders. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both its customers'
needs and its shareholders' objectives. In a banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis. The Company's Board of Directors has
historically declared and paid cash dividends on the Company's Common Stock on
an annual basis. Payment of dividends by the Company is at the discretion of the
Company's Board of Directors, and is dependent upon, among other things, the
Company's earnings, financial condition and capital ratios, as well as
applicable legal and regulatory restrictions and prior payment of principal and
interest on the Company's long-term debt.
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 earnings for the preceding two years less any required
transfers to surplus. At December 31, 2000, Community Bank could not have
declared any dividends without approval of regulatory authorities. See "Item 1 -
Business - Supervision and Regulation."
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and pay downs of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $59,687,000, or
11.3% of loans, net of unearned income, at December 31, 2000, and investment
securities maturing in one year or less totaled $7,690,000, or 7.6% of the
investment portfolio, at December 31, 2000. Other sources of liquidity include
cash on deposit with other banks and short-term investments such as Federal
Funds sold and maturing interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of Federal Funds from other commercial banks
and borrowings against Community Bank's credit availability through the FHLB-
Atlanta. Liquidity management involves the daily monitoring of the sources and
uses of funds to maintain an acceptable Company cash position.
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. During 2000, Community Bank
saw its interest earning assets repricing within one year increase while its
interest bearing liabilities repricing during this same period decreased. While
these changes reflect a slight improvement in the Company's static gap position,
as compared to year-end 1999, the Company remained liability sensitive at
December 31,