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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, 2001
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
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
-----------------------------
(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
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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 13, 2002, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES WAS $41,031,270 BASED UPON A SALE PRICE OF $15.00
PER SHARE ON MARCH 13, 2002.
AS OF MARCH 13, 2002, THERE WERE 4,635,697 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 2002 ANNUAL MEETING OF SHAREHOLDERS.
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, 2001, the Company and its subsidiaries had total assets of
approximately $729,481,000, deposits of approximately $617,706,000 and
shareholders' equity of approximately $40,665,000. The Company maintains its
principal executive offices at 68149 Main Street, Blountsville, Alabama 35031,
and its telephone number is (205) 429-1000.
SUBSIDIARY BANK
At December 31, 2001, Community Bank conducted 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. At December 31, 2001 the
Bank had 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.
At December 31, 2001, Community Bank operated 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 late 2001 and early 2002, Community Bank entered into agreements to sell its
two Pulaski, Tennessee offices, its Rainsville and Ft. Payne, Alabama offices
and its Marshall County, Alabama locations. The Marshall County locations
include one banking office in Boaz, Alabama, one in Albertville, Alabama, two in
Arab, Alabama, and two in Guntersville, Alabama. Two of the total ten offices
under agreements to sell are paying and receiving offices located in Wal-Mart
stores, one in Ft. Payne, Alabama and one in Guntersville, Alabama. On March 31,
2002, the Bank closed on the sale of its Pulaski, Tennessee offices and
anticipates the sale of the others during the second quarter of 2002.
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, 2001, 1st Community Credit
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Corporation's loan portfolio totaled approximately $24,765,000.
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. Community Insurance Corp. owns 100% of the
outstanding shares of capital stock of Southern Select Insurance, Inc., a
managing general agency which brokers agricultural, commercial and personal
insurance products. Both Community Insurance Corp. and Southern Select
Insurance, Inc. are located in Huntsville, 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.
MARKET AREAS
At December 31, 2001, the Company's principal market areas were 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 and place 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: each is close enough to Huntsville, Alabama, to share in the
economic and employment benefits of that city. Huntsville is located in Madison
County. Unemployment for Madison County was 3.7% for December 2001 as compared
to 6.00% for Alabama during that period, as reported by the Alabama Department
of Industrial Relations. The 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 4.3% unemployment rate for December 2001, according
to the Alabama Department of Industrial Relations. 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. 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 9.4% for December 2001, according
to the Alabama Department of Industrial Relations. Winston County was reported
to have an unemployment rate of 10.1% for December 2001 according to the Alabama
Department of Industrial Relations.
Marengo and Perry Counties are located in west-central Alabama. 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. Marengo County's unemployment rate
reported by the Alabama Department of Industrial Relations for December 2001 was
6.8%. Perry County was reported to have an unemployment rate of 13.4% for
December 2001 as reported by the Alabama Department of Industrial Relations.
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As previously discussed, at December 31, 2001, Community Bank was under
agreements to sell ten of its bank locations. The locations are located in
DeKalb County, Alabama, Marshall County, Alabama and Giles County, Tennessee.
The sale of these bank locations will not affect the presence of 1st Community
Credit Corporation, a subsidiary of Community Bank, in its DeKalb and Marshall
County market areas. The sale of the Tennessee operations was consummated
on March 31, 2002, and the Company no longer has a presence in Tennessee.
While certain markets have experienced an 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.
COMPETITION
The banking business in Alabama 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.
Additionally, the competitive environment for both the Company and Community
Bank may be materially affected by the enactment of the Gramm-Leach-Bliley
Financial Services Modernization Act (the "GLBA"). This law modified or
eliminated many barriers between investment banking, commercial banking and
insurance underwriting and sales. See "Supervision and Regulation". These
changes in the law have created and may continue to create greater competition
for the Company and Community Bank by increasing the number and types of
competitors and by encouraging increased consolidation within the financial
services industry.
EMPLOYEES
At December 31, 2001, the Company and its subsidiaries had approximately 383
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.
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SUPERVISION AND REGULATION
The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those federal and state statutes and regulations specifically mentioned herein.
Changes in the laws and regulations applicable to the Company and its
subsidiaries can affect the operating environment of the Company and its
subsidiaries in substantial and unpredictable ways. The Company cannot
accurately predict whether legislation will ultimately be enacted, and, if
enacted, the ultimate effect that it or implementing regulations would have on
its or its subsidiaries financial condition or results of operations.
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 also
conducts 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 State Banking Department. Examinations
include a review of Community Bank's condition 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 statutes 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, up to applicable limits, by the Federal
Deposit Insurance Corporation (the "FDIC") and, therefore, Community Bank is
subject to provisions of the Federal Deposit Insurance Act ("FDIA"). Community
Bank's primary federal regulator is the FDIC, and as a result, Community Bank is
subject 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 or its directors have engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations as an insured institution, 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 or institution-affiliated party 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 or
institution-affiliated party 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
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written agreement entered into with the agency. The cease and desist order may
require the institution or institution-affiliated party to cease and desist from
the violation or practice, including requiring the institution or
institution-affiliated party to make restitution or reimbursement against loss,
restrict the institution's growth, dispose of loans or assets, rescind
agreements or contracts, employ qualified officers or employees and take other
actions determined to be appropriate by the agency. The order may also limit the
activities of the 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 is an independent federal agency established originally to insure the
deposits, up to prescribed statutory limits, of federally insured banks and to
preserve the safety and soundness of the banking industry. The FDIC maintains
two separate insurance funds: the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). Community Bank's deposit accounts are
insured by the FDIC under the BIF to the maximum extent permitted by law.
Community Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all BIF-member institutions.
Under FDIC regulations, institutions are assigned to one of three capital groups
for insurance premium purposes (well capitalized, adequately capitalized and
undercapitalized). These three groups are then divided into subgroups which are
based on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Assessment rates vary depending
upon the assessment classification. In addition, regardless of the potential
risk to the insurance fund, federal law requires the FDIC to establish
assessment rates that will maintain each insurance fund's ratio of reserves to
insured deposits at 1.25%. During 2001 and for the first semiannual assessment
period of 2002, assessment rates for BIF-insured institutions ranged from 0% of
insured deposits for well-capitalized institutions with minor supervisory
concerns to .27% of insured deposits for undercapitalized institutions with
substantial supervisory concerns. The assessment rate schedule is subject to
change by the FDIC and, accordingly, the assessment rate could increase or
decrease in the future.
In addition to deposit insurance assessments, the FDIC is authorized to collect
assessments against insured deposits to be paid to the Finance Corporation
("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is
adjusted quarterly. The average annual assessment rate in 2001 was 1.90 cents
per $100 of assessable deposits. For the first quarter of 2002, the FICO
assessment rate for such deposits will be 1.82 cents per $100.
Community Bank's assessment expense for the year ended December 31, 2001 equaled
approximately $207,000.
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
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executive officer, employee, director or principal stockholder. In addition, the
agencies adopted regulations that authorize 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. If the institution
fails to submit an acceptable compliance plan or fails to implement an accepted
plan, the agency must issue an order directing action to correct the deficiency
and may issue an order directing other actions be taken, including restricting
asset growth, restricting interest rates paid on deposits, and requiring an
increase in the bank's ratio of tangible equity to assets. 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. Under certain
circumstances, an institution may be downgraded to a category lower than that
warranted by its capital levels, and subjected to the supervisory restrictions
applicable to institutions in the lower capital category. 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 institution's total assets at the time it becomes
undercapitalized or the amount necessary to bring the institution into
compliance with all applicable capital standards. 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. At December 31, 2001, Community Bank was
well capitalized for prompt corrective action purposes.
The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and 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,
2001.
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
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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 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, 2001, 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 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. Also, states may continue to require that an
acquired bank have been in existence for a certain minimum period of time, which
may not exceed five years. 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, 2001, the Company had a
"satisfactory" CRA rating.
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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.
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 the 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, 2001, 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 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 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 agreed to provide
8
the Reserve Bank 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. On March 8, 2002, the Reserve
Bank requested that the Company agree to an amendment of the Memorandum that
would disallow the Company from making any distributions of interest, principal
or other sums on subordinated debentures or trust preferred securities without
the prior written approval of the Reserve Bank. The Company expects to agree to
the amendment on or before May 3, 2002. In the interim, the Company elected to
defer the March 2002 interest payment on its junior subordinated deferrable
interest debentures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations, Borrowed Funds - Maturities of Long-term
Debt". 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.
On April 18, 2001, the Board of Directors of Community Bank, the Company's
subsidiary bank, also entered into a Memorandum of Understanding (the "Bank
Memorandum") with the Regional Director of the FDIC's Atlanta Regional Office
and the Alabama Superintendent of Banks ("State"). Major provisions of the Bank
Memorandum include requirements to reduce classified assets, restrict expansion,
adopt revised policies in the areas of lending, liquidity, interest rate risk,
loan documentation, asset/liability management and ethics, review duties and
responsibilities of key officers, review compliance with investment, liquidity
and funds management policies, reconstitute membership of its Board of
Directors, develop internal loan review and internal audit functions, maintain
capital ratio requirements, restrict dividend payments, provide to the
regulators updates on the status of litigation, other financial and managerial
information and quarterly progress reports detailing efforts to comply with the
requirements of the Bank Memorandum.
Based on an examination as of June 30, 2001, the FDIC and the State requested
the Community Bank Board of Directors to adopt a Safety and Soundness Compliance
Plan ("Plan"). The Board adopted the Plan on March 5, 2002. If accepted by the
FDIC/State, the Plan (initiated by the FDIC) would replace the Bank Memorandum
(initiated by the State).
Pursuant to the terms of the Plan, the Board will review the bank's
organizational structure and staffing requirements and hire and train any
additional personnel needed to comply with the Plan. Also the Board will review
and revise the bank's loan policy and underwriting standards, loan collection
plan, allowance for loan losses methodology, interest rate risk policy and asset
liability management policy. The Plan also provides that the Board will adopt an
internal audit program, an internal controls program, a plan to reduce
classified assets and internal and external loan documentation review
procedures. Also, pursuant to the Plan, the Board will engage an outside firm to
perform the loan review function and will adopt an internal loan review program.
The Plan also places restrictions on extending credit to borrowers who have
classified loans with the bank. Under the Plan, prior to submission of Reports
of Condition and Income, the Board must review the adequacy of the allowance for
loan losses and provide for an adequate balance. Under the Plan, the Board
committed to maintaining a Tier I capital ratio of at least 7% and to obtain the
prior approval of the regulators before paying dividends. In addition, the Plan
requires the submission of a budget and profit plan and the engagement of an
outside accounting firm to perform the bank's internal audit function and the
formation of a bank administration department to strengthen internal controls.
Finally, the Plan requires management to make monthly reports to the Board of
Directors regarding the status in meeting the requirements of the Plan, and to
submit quarterly progress reports to the regulators.
9
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)
--------
Loan Portfolio and Selected Loan Maturity................................................................ 22
Investment Portfolio..................................................................................... 23
Investment Portfolio Maturity Schedule................................................................... 24
Average Deposit Balances and Rates Paid.................................................................. 25
Maturities of Large Time Deposits........................................................................ 26
Short-term Borrowings.................................................................................... 27
Maturities of Long-term Debt ............................................................................ 28
Rate Shock Analysis...................................................................................... 30
Interest Sensitivity..................................................................................... 31
Capital Adequacy Ratios and Return on Equity and Assets.................................................. 32
Yields, Rates, Interest Rate Spread and Net Interest Margin.............................................. 35
Consolidated Average Balances,
Interest Income/Expense and Yields/Rates............................................................... 36
Rate/Volume Variance Analysis............................................................................ 37
Summary of Loan Loss Experience.......................................................................... 40
Allocation of the Allowance for Loan Losses.............................................................. 41
Nonperforming Assets..................................................................................... 42
Noninterest Income....................................................................................... 43
Noninterest Expense...................................................................................... 45
10
ITEM 2 - PROPERTIES
The corporate headquarters of the Company is owned by Community Bank and located
at 68149 Main Street (U.S. Highway 231) in Blountsville, Alabama. Community
Bank's administrative, operational, accounting and legal functions are housed in
three buildings constructed in 1997, all of which are located on the same
property as the corporate headquarters.
The main banking office of Community Bank is located at 69156 Main Street,
Blountsville, Alabama. The premises are owned by Community Bank.
At December 31, 2001, Community Bank owned or leased buildings that were 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 owned or leased buildings that were used in the normal course of
business in ten 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.,
owned 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
Background
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. The joint committee has informed the Boards of Directors of
the Company and Community Bank of its findings and recommendations. The joint
committee 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.
Benson Litigation
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 duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of
11
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. On June 8, 2001,
the special litigation committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the confidentiality of the
special committee's report. On June 28, 2001, the Company, Community Bank and
various other defendants filed a motion with the court to adopt the report of
the special committee, for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit. Following a hearing on August
29, 2001, the court denied these motions on November 8, 2001. The court also
ruled that the plaintiffs were entitled to conduct discovery except as it
related to one of the subcontractor defendants and granted the plaintiffs'
motion to unseal the report of the special litigation committee. On November 14,
2001, the directors of the Company filed a motion for the court to alter, amend
or vacate its November 8, 2001 rulings. On February 7, 2002, the Company and
Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C., the
law firm representing the plaintiffs, due to conflicts of interest. The court
held a hearing on these motions on February 22, 2002 and the parties are
awaiting a ruling. On February 25, 2002, the Company and Community Bank filed a
motion for limited discovery relating to its motion to disqualify the
plaintiffs' law firm. 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.
12
Towns Derivative Litigation
On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a
shareholder derivative action against the directors of the Company in the state
Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on
January 14, 1999 to add the Company and Community Bank as defendants in the
action. On February 11, 1999, the complaint was again amended to add Mr. Pat
Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as
additional plaintiffs. The complaint alleged that the directors of the Company
breached their fiduciary duty to the Company and its shareholders, engaged in
fraud, fraudulent concealment, suppression of material fact and suppression of
the plaintiff shareholders, failed to supervise management, and conspired to
conceal wrongful acts from the Company's shareholders and paid themselves
excessive director fees. The complaint also alleged that the Board of Directors
acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the
Chairman of the Board, Chief Executive Officer and President of the Company,
including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint 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 costs.
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.
Corr Family Litigation
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 Bryan A. Corr and
six other related 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.
13
Auto Loan Litigation
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. 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. On October 10,
2001, the court granted a joint motion to bifurcate the trial into separate
stages of liability and damages. On October 23 and November 19, 2001, the court
granted Community Bank's motion to dismiss without prejudice three of the
employees of the automobile dealership as defendants in the action.
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."
Employee Litigation
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
14
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.
Conspiracy Litigation
On November 6, 2001 the Company and Community Bank filed a lawsuit in the United
States District Court for the Northern District of Alabama against Bryan A.
Corr, Doris J. Corr, individually and as executrix of the Estate of R.C. Corr,
Jr., Tina M. Corr, Corr, Inc., George M. Barnett, Michael A. Bean, Michael W.
Alred, R. Wayne Washam, M. Lewis Benson, Doris E. Benson, John M. Packard and
Andy Mann seeking damages in excess of $50 million. The complaint also alleges
that, by knowingly making false statements and unsupported allegations to
regulatory and law enforcement authorities and in certain lawsuits discussed
above, the defendants abused the civil legal process to further their plan to
discredit and dislodge the directors and management of the Company and Community
Bank and gain control of those companies. The complaint further alleges that
certain of the defendants who are former directors and/or executive officers of
Community Bank breached their fiduciary duties to Community Bank by
participating in, and taking action in the furtherance of, the conspiracy.
Finally, the complaint alleges that the defendants failed to make filings which
are required by the Federal securities laws to disclose that the group is acting
in concert to acquire control of the Company. The complaint seeks compensatory
and punitive damages as well as an order barring the defendants from voting
their shares of Company stock, purchasing additional Company stock, soliciting
proxies and submitting shareholder proposals for at least three years.
On December 5, 2001, the Company, Community Bank and R. Wayne Washam entered
into a stipulation pursuant to which Mr. Washam would be dismissed as a
defendant. The court granted the stipulation on December 6, 2001. During the
time between December 3 and December 7, 2001 the other defendants filed various
motions to dismiss, abate or stay the lawsuit. On January 4, 2002, the Company
and Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C.
from representing M. Lewis Benson, Doris E. Benson, John M. Packard and Andy
Mann due to a conflict of interest. On January 22, 2002 Maynard, Cooper & Gale,
P.C. filed a motion to withdraw from the suit, which motion was granted by the
court on January 24, 2002. On January 29, 2002 the Company and Community Bank
filed an amended complaint to reflect the dismissal of Wayne Washam as a
defendant and to add a claim for defamation against two of the defendants. 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.
Indemnification and Routine Proceedings
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.
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.
15
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 2001.
[The remainder of this page intentionally left blank]
16
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. (59) 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. (70)* Vice Chairman, Senior Executive Vice President and
Director, Vice Chairman, Secretary, Senior Executive Vice General Counsel of the Company (1987-2002); President
President and General Counsel of the Company; Director, and Director of Community Insurance Corp. (1987-1997)
Senior Executive Vice President and Secretary of Community Bank;
Chairman of Community Insurance Corp. and Southern Select
Insurance, Inc.
Denny G. Kelly (62)* President of Community Bank (1993-2001)
Director and Executive Vice President of the Company; Vice 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.
Loy McGruder (61) President of Community Bank (2002-Present);
Director of the Company; Director and President of Community Bank Executive Vice President of Community Bank (1994-2002);
City President of Community Bank-Blountsville (1994-1997);
Senior Vice President of Community Bank (1993-1994)
Kerri Newton (32) Chief Financial Officer of the Company and Community
Chief Financial Officer of the Company and Community Bank Bank (2001-Present); Senior Risk Consultant for Compass
Bank, Birmingham, Alabama (2001); Chief Accounting
Officer of Frontier National Corporation, Sylacauga,
Alabama (1998-2000); Chief Financial Officer of Frontier
National Bank, Lanett, Alabama (1997-2000); Vice President
and Controller of The County Bank, Greenwood, South
Carolina (1993-1997)
*Mr. Walker and Mr. Kelly were executive officers of the Company on December 31,
2001, but retired in January, 2002.
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
2001, Mr. Patterson, Mr. Walker and Mr. Kelly were elected by the Company's
Board of Directors to serve a term of one year and until his successor has been
elected and qualified.
17
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 2,334 shareholders of record as of March 13, 2002. 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 are 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
---------- ----------
2001:
FIRST QUARTER.................................................................. $ 22.00 $ 15.00
SECOND QUARTER................................................................. 22.00 15.00
THIRD QUARTER.................................................................. 15.00 15.00
FOURTH QUARTER................................................................. 18.00 12.00
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 were neither declared nor paid in 2001. Annual dividends of
$.75 per share were declared by the Board of Directors on the Company's Common
Stock and paid on January 5, 2000. Generally, 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 2002, due to regulatory constraints
and the Company's results of operations and financial condition for 2001.
Currently, the Company is under a memorandum of understanding with the Federal
Reserve that, among other restrictions, disallows the declaration or payment of
any dividends without the prior written approval of the Federal Reserve. The
Board of Directors does not currently anticipate declaring or paying a dividend
in 2002. 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 16 to the Company's Consolidated
Financial Statements included elsewhere in this Report.
18
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,
2001 2000 1999 1998 1997
----------- ----------- --------- --------- ---------
(Dollars in thousands except per share data)
Interest income.......................................... $ 58,486 $ 61,075 $ 52,194 $ 44,365 $ 37,791
Interest expense......................................... 31,588 33,856 25,522 22,693 19,541
Net interest income...................................... 26,898 27,219 26,672 21,672 18,250
Provision for loan losses................................ 6,314 9,289 4,459 885 773
Non-interest income...................................... 9,538 9,906 9,155 8,102 4,891
Non-interest expense..................................... 31,972 31,755 29,208 23,784 17,423
Net income (loss)........................................ (1,100) (2,215) 1,658 3,579 3,512
Per Share Data:
Earnings/(loss) per share - basic..................... $ (0.24) $ (0.50) $ 0.37 $ 0.90 $ 0.92
Earnings/(loss) per share - diluted................... (0.24) (0.47) 0.36 0.88 0.92
Cash dividends........................................ - 0.75 0.60 0.50 0.38
Balance Sheet:
Loans, net of unearned income......................... $501,520 $528,316 $498,726 $ 433,853 $326,134
Deposits.............................................. 617,706 600,901 573,261 538,586 440,889
FHLB borrowings....................................... 38,000 38,000 40,000 - -
Capitalized lease obligations......................... 5,766 5,850 - - -
Long-term debt........................................ 4,667 5,675 6,637 7,569 7,398
Guaranteed preferred beneficial interest
in the Company's junior subordinated
deferrable interest debentures...................... 10,000 10,000 - - -
Average equity........................................ 42,938 41,776 44,203 37,318 33,428
Average assets........................................ 725,461 710,915 632,713 538,470 473,381
Period end assets..................................... 729,482 713,518 674,898 603,244 491,839
Ratios:
Return on average assets.............................. (0.15)% (0.31)% 0.26% 0.67% 0.74%
Return on average equity.............................. (2.56)% (5.30)% 3.75% 9.59% 10.51%
Dividend payout ratio................................. - (150.00)% 162.16% 55.56% 40.50%
Average equity to average assets...................... 5.92% 5.88% 6.99% 6.93% 7.06%
Total risk-based capital.............................. 11.59% 10.54% 9.37% 11.03% 11.86%
Leverage ratio........................................ 6.70% 6.44% 6.39% 7.79% 6.94%
19
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 1999, 2000 and 2001. 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, branch office divestitures, non-compliant or impaired loans, 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 $1,100,000 for 2001 represented a
$1,115,000 decrease from its net loss of approximately $2,215,000 for 2000 which
represented a $3,873,000 decline from 1999's net income of approximately
$1,658,000. When stated as changes in basic earnings per share, the 2001 basic
loss per share of $0.24 represented a $0.26 decrease from the 2000 basic loss
per share of $0.50 which represented a $0.87 decrease from the 1999 basic
earnings per share of $0.37. The decrease in loss per share for 2001 primarily
resulted from a reduction in the provision for loan losses. The decline in 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 branch. In 2001,
2000 and 1999, the Company has experienced higher than normal legal and
accounting fees associated with legal proceedings.
20
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 "Borrowed
Funds--Maturities of Long-term Debt and Note 9 to the Company's Consolidated
Financial Statements" included elsewhere in this Report.
EARNING ASSETS
The Company's average earning assets in 2001 increased 3.1% over that for 2000,
primarily as a result of increases in the investment portfolio and federal funds
sold. Earning assets accounted for approximately 89.5% of the Company's average
total assets for 2001. This growth of average earning assets in 2001 compared to
a 12.2% increase during 2000 over that for 1999, primarily as a result of
increases in the loan portfolio. During 1999, average earning assets increased
17.2%. Earning assets represented 88.6% and 88.7% of the Company's average total
assets for 2000 and 1999 respectively.
Average loans, net of unearned income, represented 79.6%, 82.9% and 82.5% of
average earning assets during 2001, 2000 and 1999, respectively. Average
investment securities represented 17.6% of average earning assets in 2001,
compared to 16.4% in 2000 and 16.9% in 1999. The change in the mix of loans and
securities during 2001 compared to 2000 was primarily attributable to a decrease
in loans during 2001. 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 during 2001 helped offset the decrease in interest income due to
the fall in interest rates.
Total loans, net of unearned income, decreased approximately $26,796,000, or
5.1%, to approximately $501,520,000 at December 31, 2001, from $528,316,000 at
December 31, 2000, which represented an increase of $29,590,000, or 5.9%, from
$498,726,000 at December 31, 1999. These decreases were spread across the loan
type categories. Commercial, financial and agricultural loans decreased by
approximately $5,437,000, or 3.9%, to approximately $146,210,000 at December 31,
2001, from approximately $140,773,000 at December 31, 2000, which represented an
increase of approximately $16,528,000, or 13.3%, from approximately $124,245,000
at December 31, 1999. Commercial, financial and agricultural loans represented
29.1% of total loans at December 31, 2001, compared to 26.6% at December 31,
2000 and 24.9% at December 31, 1999. Real estate - mortgage loans decreased by
approximately $3,376,000, or 1.4%, to approximately $233,216,000 at December 31,
2001, from $236,592,000 at December 31, 2000, which represented an increase of
approximately $12,463,000, or 5.6%, from approximately $224,129,000 at December
31, 1999. As a percentage of total loans, real estate - mortgage loans increased
to 46.5% at December 31, 2001, from 44.8% at December 31, 2000 and 44.9% at
December 31, 1999. Consumer loans decreased by approximately $26,642,000, or
18.3%, to approximately $119,031,000 at December 31, 2001, from approximately
$145,673,000 at December 31, 2000, which represented an increase of
approximately $1,220,000, or 0.9%, from approximately $144,453,000 at December
31, 1999. As a percentage of total loans, consumer loans decreased to 23.8% at
December 31, 2001, from 27.6% at December 31, 2000 and 28.9% at December 31,
1999. Real estate - construction loans decreased by approximately $2,303,000, or
42.4%, to approximately $3,126,000 at December 31, 2001, from approximately
$5,429,000 at December 31, 2000, which represented a decrease of approximately
$1,041,000, or 16.1%, from approximately $6,470,000 at December 31, 1999. As a
percentage of total loans, real estate - construction loans decreased to 0.6% at
December 31, 2001, from 1.0% at December 31, 2000 and 1.3% at December 31, 1999.
The Company has
21
experienced these decreases in loans because of economic downturns, the
tightening of the Company's credit standards, and increased charge-offs of loans
made in previous years.
The following table shows the classification of loans by major category at
December 31, 2001, and at the end of each of the preceding four years.
LOAN PORTFOLIO
December 31,
---------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ----------------- -------------------- ------------------- ----------------------
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..... $146,210 29.1% $140,773 26.6% $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6%
Real estate -
construction..... 3,126 0.6 5,429 1.0 6,470 1.3 6,153 1.4 3,499 1.1
Real estate -
mortgage......... 233,216 46.5 236,592 44.8 224,129 44.9 205,457 47.3 172,504 52.7
Consumer........... 119,031 23.8 145,673 27.6 144,453 28.9 129,334 29.7 86,945 26.6
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
501,583 100.0% 528,467 100.0% 499,297 100.0% 435,001 100.0% 327,084 100.0%
Less: Unearned
income........... 64 151 571 1,148 950
Allowance for
loan losses...... 7,292 7,107 2,603 2,971 2,131
-------- -------- -------- -------- --------
Net loans.......... $494,227 $521,209 $496,123 $430,882 $324,003
======== ======== ======== ======== ========
The following table provides maturities of certain loan classifications and an
analysis of these loans maturing in over one year as of December 31, 2001.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------- --------------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
-------- ------------- ----------- -------- --------------- --------------
(In thousands)
Commercial, financial
and agricultural............... $58,454 $ 41,815 $ 45,941 $ 146,210 $ 74,088 $ 72,122
Real estate - construction....... 2,802 269 55 3,126 1,950 1,176
------- -------- -------- --------- -------- --------
Total.......................... $61,256 $ 42,084 $ 45,996 $ 149,336 $ 76,038 $ 73,298
======= ======== ======== ========= ======== ========
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 Company's entire portfolio is classified as
available for sale. 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
22
while at the same time producing adequate levels of interest income. Management
of the maturity of the portfolio is necessary to provide liquidity and to
control interest rate risk. During 2001, gross investment securities sales were
approximately $85,134,000 and maturities were approximately $2,500,000
representing 74.6% and 2.2%, respectively, of the average portfolio for the
year, compared to gross investment securities sales of $16,230,000 in 2000 and
approximately $11,628,000 in 1999 and maturities of approximately $25,210,000 in
2000 and approximately $10,778,000 in 1999. Net gains realized on the sales
totaled approximately $1,284,000 during 2001, compared to approximately $5,000
in 2000 and approximately $179,000 in 1999. At December 31, 2001, gross
unrealized gains in the portfolio were approximately $486,000, compared to
approximately $1,419,000 at December 31, 2000 and approximately $72,000 at
December 31, 1999, while gross unrealized losses amounted to approximately
$893,000 at December 31, 2001, compared to approximately $756,000 at December
31, 2000 and approximately $2,827,000 at December 31, 1999. These fluctuations
in the gross unrealized gains and losses in the Company's investment portfolio
resulted primarily from changing bond prices.
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, 2001 and 2000 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
2001, was $928,710, compared to $190,096 at December 31, 2000. The
recoverability of the Company's investment in mortgage-backed securities is
reviewed periodically by management, and if necessary, appropriate adjustments
for impaired value are made to income.
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,
-------------------------------------------
2001 2000 1999
-------------- ------------ -----------
(In thousands)
U. S. Treasury and U.S. Government agencies................. $ 16,948 $ 46,830 $ 55,870
Mortgage-backed securities.................................. 90,647 31,341 30,521
State and municipal securities.............................. 11,684 19,499 8,356
Equity securities........................................... 2,400 3,900 2,100
---------- --------- --------
Total investment securities............................... $ 121,679 $ 101,570 $ 96,847
========== ========= ========
Total investment securities increased approximately $20,109,000, or 19.8%, to
approximately $121,679,000 at December 31, 2001, compared to approximately
$101,570,000 at December 31, 2000 and approximately $96,847,000 at December 31,
1999. During 2001, non-taxable investment securities decreased $7,815,000, or
40.1%, to approximately $11,684,000 from $19,499,000 at December 31, 2000, which
represented an increase of $11,143,000 or 133.4%, from $8,356,000 at December
31, 1999. Taxable investment securities increased approximately $27,924,000, or
34.0% during 2001 to $109,995,000 from approximately $82,071,000 at December 31,
2000, which represented a decline of $6,420,000, or 7.3%, from approximately
$88,491,000 at December 31, 1999. The composition of the investment securities
portfolio changed during 2001 primarily as excess funds were invested in
mortgage-backed securities. At December 31, 2001, U.S. government and
23
agency securities represented 13.9% of the total investment securities portfolio
compared to 46.1% at year-end 2000, while state and municipal securities
represented 9.6% and 19.2% of the investment securities portfolio at year-end
2001 and 2000, respectively. In 2001, as investable funds increased due to
diminished loan demand and bonds redeemed prior to maturity, Community Bank
invested more heavily in mortgage-backed securities to enhance cash flow and
reduce call risk.
The maturities and weighted average yields of the investments in the year-end
2001 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
5.20 years at year-end 2001 compared to 6.71 years at year-end 2000 with an
average yield of 6.22% and 6.71% at December 31, 2001 and 2000, respectively.
Mortgage-backed securities have been included in the maturity table based upon
the guaranteed payoff date of each security.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
December 31, 2001
------------------------------------------------------------------------------------
Maturing
------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------ ------------------ ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- --------- ------- --------- ------- -------- -------
(Dollars in thousands)
SECURITIES - ALL AVAILABLE-FOR-SALE:
U. S. Government agencies.......... $ 2,001 6.62% $ 57,003 5.93% $ 21,093 6.05% $ 26,406 6.37%
State and municipal securities..... 180 7.17 3,557 6.06 670 7.27 8,368 7.89
Equity securities.................. - - - - - - 2,400 6.74
------- -------- -------- --------
$ 2,181 6.67% $ 60,560 5.94% $ 21,763 6.09% $ 37,174 6.73%
======= ======== ======== ========
With the exception of some securities issued by U.S. Government agencies, the
Company held one municipal bond issued by Hartselle Utilities, whose amortized
cost of $4,854,027 exceeded 10% of the Company's consolidated shareholders'
equity on December 31, 2001.
Federal Funds Sold increased 900.0% during 2001, from $3,000,000 at December 31,
2000 to $30,000,000 at December 31, 2001. This increase resulted from a decrease
in loan demand coupled with an increase in deposit balances.
The average balance of interest-bearing deposits with other banks reflected a
decrease of 62.4% during 2001, compared to a decrease of 31.9% during 2000 and
an increase of 33.5% during 1999.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments.
DEPOSITS
Community Bank's primary source of funds is its deposits. Dividends from
Community Bank are the Company's primary source of funds. Historically,
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. The Company does not presently anticipate further
geographic expansion. Rather emphasis has been placed upon attracting consumer
deposits and the Company's intent is to expand its consumer base in its market
areas in order to continue to fund future asset growth.
24
During 2001, the Company's average total deposits increased approximately
$6,247,000, or 1.0%, to approximately $608,390,000 from approximately
$602,143,000 in 2000, which represented an increase of approximately
$56,921,000, or 10.4%, from approximately $545,222,000 in 1999. At December 31,
2001, the Company's total deposits were approximately $617,706,000, an increase
of approximately $16,805,000, or 2.8%, from approximately $600,901,000 at
December 31, 2000.
The following table presents the average deposit balances and the average rates
paid for each of the major classifications of deposits for the 12 month periods
ending December 31, 2001, 2000 and 1999:
Average Deposit Balances and Rates Paid
--------------------------------------------------------------------------------
2001 2000 1999
----------------------- ---------------------- --------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------------ --------- --------- -------- ------------ -----------
(Dollars in thousands)
Noninterest-bearing demand........ $ 70,002 0.00% $ 68,785 0.00% $ 69,248 0.00%
Interest-bearing demand........... 92,360 3.50 102,254 4.92 94,763 4.36
Savings........................... 58,875 3.31 55,983 4.39 53,730 3.51
Time.............................. 387,153 5.70 375,121 5.92 327,481 5.37
---------- ---------- ----------
Total (1)...................... $ 608,390 5.06% $ 602,143 5.57% $ 545,222 4.96%
========== ========== ==========
- ----------------------------
(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 0.9%, 12.1% and
12.3% in 2001, 2000 and 1999, respectively. Average interest-bearing demand
deposits decreased 9.7% compared to an increase of 7.9% during 2000 and 11.4%
during 1999. Average savings and average time deposits increased 5.2% and 3.2%,
respectively, during 2001 compared to increases of 4.2% and 14.5%, respectively,
during 2000 and an increase of 15.9% and 12.0%, respectively, during 1999.
Average noninterest-bearing demand deposits increased 1.8% during 2001 compared
to a decrease of 0.7% during 2000 and an increase of 15.1% during 1999. Customer
confidence and satisfaction are evidenced by the increase in total average
deposits of 1.0% in 2001, the increase in total average deposits of 10.4% in
2000 and 12.7% in 1999. 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 2001, 2000
and 1999, respectively: (i) Average noninterest-bearing demand deposits - 11.5%,
11.4%, and 12.7%; and (ii) average interest-bearing demand deposits - 15.2%,
17.0% and 17.4%. Community Bank experienced a shift in its deposit mix during
2001 as interest-bearing demand deposits increased $14,619,000, or 17.1%, while
savings and certificates of deposits increased $1,776,000, or .4%. This is as
compared to increases in interest-bearing demand deposits by $7,491,000, or
7.9%, in 2000 and by $8,589,000, or 9.6%, in 1999, increases in savings accounts
by $2,253,000, or 4.2%, in 2000 and by $6,123,000, or 10.4%, in 1999, and
increases in certificate of deposits by $47,640,000, or 14.5%, in 2000 and by
$8,503,000, or 3.9%, in 1999. Of total time deposits at December 31, 2001,
approximately 31.5 % were large denomination certificates of deposit and other
time deposits of $100,000 or more, up from 20.7% at December 31, 2000.
25
The maturities of the time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 2001 are summarized in
the table below.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2001
---------------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
-------------- -------------- ----------
(In thousands)
Maturing in three months or less.............................. $ 5,864 $ 19,148 $ 25,012
Maturing in over three through six months..................... 45,218 - 45,218
Maturing in over six through twelve months.................... 28,671 - 28,671
Maturing in over twelve months................................ 20,635 - 20,635
--------- -------- ---------
Total...................................................... $ 100,388 $ 19,148 $ 119,536
========= ======== =========
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 $5,000,000 at year end 2001 in available lines to
purchase Federal Funds on a secured basis from a commercial bank and $6,000,000
at year-end 2000 in available lines to purchase Federal Funds, on an unsecured
basis, from a commercial bank. At December 31, 2001 and 2000, Community Bank had
no funds advanced against these lines. In May 2001, Community Bank borrowed
funds of $8,000,000 under the FHLB "fixed rate credit" plan. The advance was for
six months bearing interest at 4.15% and matured in November 2001.
[The remainder of this page intentionally left blank]
26
The following table sets forth, for the periods indicated, certain information
about the Company's short-term borrowings:
SHORT-TERM BORROWINGS
At December 31,
--------------------------
Weighted Maximum
Average Average Average Outstanding At
Balance Rate Balance Rate Any Month End
---------- ------------ ----------- ---------- ---------------
(Dollars in thousands)
2001:
FEDERAL FUNDS PURCHASED.................. $ - 0.00% $ 74 6.11% $ 3,000
SHORT-TERM FHLB BORROWINGS............... - 0.00% 3,967 4.30% 8,000
SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE............................. 2,538 2.13% 2,274 3.59% 391
U.S. TREASURY TAX AND LOAN, NOTE
OPTION................................. 1,822 1.51% 1,021 3.21% 814
-------- ------- --------
TOTAL................................ $ 4,360 1.87% $ 7,336 3.95% $ 12,205
======== ======= ========
2000:
Federal funds purchased.................. $ - 0.00% $ 402 6.47% $ 3,000
Short-term FHLB borrowings............... - 0.00% 325 6.86% -
Securities sold under agreement to
repurchase............................. 862 6.17% 818 6.17% 1,072
U.S. Treasury Tax and Loan, note
option................................. 1,403 5.72% 1,044 6.14% 2,456
-------- -------- --------
Total................................ $ 2,265 5.89% $ 2,589 6.30% $ 6,528
======== ======= ========
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 fixed at $72,210,000. At December 31, 2000,
Community Bank's maximum credit availability with FHLB-Atlanta was 10% of
Community Bank's total assets, based upon the most recent quarterly financial
information submitted to the FDIC. Based on Community Bank's Consolidated Report
of Condition and Income as of the close of business on September 30, 2000,
Community Bank's maximum credit availability at December 31, 2000 was
approximately $74,000,000.
Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's
"Convertible Advance Program." Community Bank had $38,000,000 outstanding at
both December 31, 2001 and 2000 under the FHLB-Atlanta's "Convertible Advance
Program". This obligation has a final maturity of March 1, 2010 (120 months), a
call feature every quarterly payment date during the life of the obligation, and
a fixed interest rate of 5.93% per annum. The first call date for this advance
was March 1, 2001; the advance was not called on that date nor has been since.
Advances obtained by Community Bank under the "Convertible Advance Program" are
subject to the terms of an agreement for Advances and Security Agreement with
Blanket Floating Lien. Among other things, this agreement provides that upon an
event of default, the FHLB may declare all or any part of the indebtedness
27
and accrued interest thereon, including any prepayment fees, to be immediately
due and payable. Included in the list of "events of default" is where the FHLB
reasonably and in good faith determines that a material adverse change has
occurred in the financial condition of Community Bank from that disclosed at the
time of the making of any advance or from the condition of Community Bank as
most recently disclosed to the FHLB.
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, 2001. 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
2002 2003 2004 2005 2006
--------- --------- --------- --------- --------
(in Thousands)
Interest on indebtedness............................. $ 233 $ 194 $ 173 $ 150 $ 126
Repayment of principal............................... 1,089 398 420 442 466
-------- ----- ----- ----- -----
$ 1,322 $ 592 $ 593 $ 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%. Under
the terms of the indenture, the Company may elect to defer payments of interest
for up to ten semiannual payment periods. The Company elected to defer its March
2002 interest payment and may elect to do so again based on the liquidity needs
of the Company when future payments become due. For the duration of such
deferral period, the Company is restricted from paying dividends to shareholders
or paying debt that is junior to the debenture. 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 mandatoril