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WASHINGTON, D.C. 20549
_______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995 Commission File No. 0-16461
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0868361
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Main Street, P. O. Box 1000
Blountsville, Alabama 35031
(Address of principal executive offices)
(205) 429-1000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
As of February 1, 1996 the aggregate market value of voting stock
held by non-affiliates was $ 26,300,300.
Indicate the number of shares outstanding of the registrant's class
of common stock, as of the latest practicable date.
Class Outstanding at February 1, 1996
---------------------------- -------------------------------
Common Stock, $.10 Par Value 1,821,935
Documents Incorporated by Reference Part of 10-K in which incorporated
- --------------------------------------- ----------------------------------
Proxy Statement for 1996 annual meeting Part III
The total number of pages in this report including exhibits is 88.
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PART 1
ITEM 1 - BUSINESS
Community Bancshares, Inc. (the "Company") is registered as a bank holding
company with the Federal Reserve Board under the Bank Holding Act. The Company
was organized in 1983 and commenced business in February, 1985, with the
acquisition of the Bank of Blountsville. As of December 31, 1994, the Company
had two operating bank subsidiaries, Community Bank, an Alabama banking
corporation ("Community Bank (Alabama)"), and Community Bank, a Tennessee
banking corporation ("Community Bank (Tennessee)"). The majority of the banks'
loans are to individuals and small to mid-size businesses in Alabama and
Tennessee.
Community Bank (Alabama) operated through thirteen locations in Blount, Dekalb,
Limestone, Madison, Marshall and Morgan Counties in Alabama during all of 1995.
A fourteenth location was opened on May 8, 1995, in Rogersville, Lauderdale
County, and a fifteenth was opened on January 17, 1995, in Haleyville,
Winston County. Community Bank (Alabama) also operates two subsidiaries,
Community Appraisals, Inc. and Community Insurance Corp. Community Appraisals,
Inc. is engaged in the business of appraising real estate; Community Insurance
Corp. currently acts as an agent for selling title insurance and life
insurance. 1st Community Credit Corporation, organized for the purpose of
establishing a finance company, was incorporated in late 1995 but remained
inactive as of December 31, 1995.
Community Bank (Tennessee) commenced operations on November 15, 1993, in
Pulaski, Tennessee. Although the Company has not previously engaged in
business beyond Alabama, the Tennessee bank is situated in an economic and
geographical area with the same characteristics as the Alabama bank subsidiary
markets.
The Company maintains its principal executive offices at Main Street, P.O. Box
1000, Blountsville, Alabama 35031.
SUBSIDIARY BANKS
Community Bank (Alabama) conducts a general commercial banking business at
fifteen locations in eight counties in Alabama. The present locations are
Blountsville, Oneonta, Snead and West Blount in Blount County; Rainsville, in
DeKalb County; Rogersville, in Lauderdale County; Elkmont in Limestone County;
Gurley, Meridianville and New Hope in Madison County; Arab (Downtown) and Arab
(Parkway) in Marshall County; and Falkville and Hartselle in Morgan County. The
fifteenth location was opened in Haleyville, Winston County, on January 17,
1996.
Community Bank (Tennessee) is similarly engaged in a general commercial banking
business in Pulaski, Tennessee, in two permanent facilities which were occupied
on December 19, 1994. Community Bank (Tennessee) was established by the Company
through the acquisition of the Charter of City and County Bank of McMinn
County, a Tennessee state bank which formerly operated in McMinn County. After
all state and federal regulatory approvals were received, the Company
consummated the purchase of the charter in November of 1993 and established
Community Bank (Tennessee) as a new state chartered bank.
The subsidiary banks perform banking services customary for full service banks
of similar size and character for their customers in Alabama and Tennessee.
Such services include the receipt of demand and time deposit accounts, the
extension of personal and commercial loans and the furnishing of personal and
commercial checking accounts. Title insurance, life insurance, and appraisal
services are available through the wholly-owned subsidiaries of Community Bank
(Alabama).
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ACQUISITIONS
During 1993, the Company received all necessary approvals from the State of
Tennessee Department of Financial Institutions, FDIC, and Federal Reserve Bank
of Atlanta to acquire the charter of City and County Bank of McMinn County, a
Tennessee state chartered bank, which had ceased operations at the close of
1991. The Company paid $149,000 for the charter pursuant to an agreement with
Sweetwater Valley Corporation entered into on February 28, 1992.
Community Bank (Tennessee) received approval from the State of Tennessee
Department of Financial Institutions to commence operations and the Federal
Deposit Insurance Corporation granted deposit insurance on November 12, 1993.
The bank was initially capitalized with $3.5 million which was obtained from
the proceeds of a loan extended to the Company by Colonial Bank.
On September 25, 1995, Community Bank (Alabama) executed a definitive agreement
to acquire certain assets and liabilities of the Haleyville, Alabama location
of Compass Bank. On January 12, 1996, the agreement was consummated, with
Community Bank (Alabama) assuming liabilities of $31.3 million in exchange for
assets of $12.4 million, a premium of $2.2 million, and cash of $16.7 million.
On November 3, 1995, Community Bank (Alabama) executed a definitive agreement
with Compass Bank for a similar acquisition of approximately $11 million in
Uniontown, Alabama. The second transaction should be consummated in the first
half of 1996.
COMPETITION
The banking business in northern Alabama and southern Tennessee is highly
competitive with respect to loans, deposits and other services and is dominated
by a number of major banks and bank holding companies which have numerous
offices and affiliates operating over wide geographic areas. The bank
subsidiaries compete 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 the subsidiaries' service areas offer services
such as international banking, and investment and trust services, which are not
offered by the subsidiaries.
EMPLOYEES
At December 31, 1995, the Company and its subsidiaries had approximately 219
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans (ESOP) and other benefit programs for their employees. The
Company maintains continuing educational and training programs for its
employees designed to prepare them for positions of increasing responsibility
in management or operations. Membership and participation in professional and
industry organizations is encouraged and supported by the Company.
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SUPERVISION AND REGULATION
THE COMPANY
The banking industry is highly regulated. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory provision.
The following factors affect the Company's operations.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and is registered with, and
subject to supervision by, the Board of Governors of the Federal Reserve System
and the Federal Reserve Bank of Atlanta (collectively, the "Federal Reserve").
The Company is required to file periodic reports and such additional
information as the Federal Reserve may require pursuant to the BHC act. The
Federal Reserve may also examine the Company and its subsidiaries.
The BHC Act requires Federal Reserve approval before the Company may acquire
substantially all the assets of any bank if by the acquisition the Company
would own or control more than five percent of the voting shares of the bank,
or for a merger or consolidation with another bank holding company. The
Company may however, engage in or acquire an interest in a company that engages
in activities which the Federal Reserve has determined by regulation or order
to be so closely related to banking or managing or controlling banks as to be
properly incident thereto.
The Federal Reserve has adopted a risk-based capital adequacy assessment system
for bank holding companies. Assets are weighted by a risk factor and a ratio
is calculated by dividing qualifying capital by the risk-weighted assets. Tier
I capital generally includes common stock and retained earnings. Total capital
is comprised of Tier I capital and Tier II capital, which includes certain
allowances for loan losses, certain subordinated debt and perpetual preferred
stock. The Company's Tier I and Total Capital ratios exceeded the required
minimum levels as of December 31, 1995.
The Company is a legal entity which is separate and distinct from its
subsidiaries. Federal law restricts extensions of credit by its subsidiary
banks to the Company or its affiliates. Dividends to shareholders of the
Company may be paid only from dividends paid to the Company by its
subsidiaries.
THE SUBSIDIARIES
Deposits in the bank subsidiaries are insured by the Federal Deposit Insurance
Corporation ("FDIC") and therefore they are subject to examination by the FDIC.
The Company can be held liable for any loss incurred by, or reasonably expected
to be incurred by, the FDIC in connection with the default of a commonly
controlled FDIC-insured subsidiary or any assistance by the FDIC to any
commonly controlled FDIC-insured subsidiary in danger of default.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented a number of provisions applicable to insured banks and bank holding
companies. Federal bank regulatory agencies are required to establish
standards for safety and soundness of banks and bank holding companies relating
to internal controls and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth and compensation. The
FDICIA also requires bank holding companies to guarantee compliance with any
capital restoration plans entered into by a subsidiary bank and the FDIC. The
activities of insured state banks, including non-subsidiary equity investment,
is generally limited under the FDICIA to those permitted for national banks.
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The FDICIA also requires regulations to be adopted by federal banking agencies
establishing minimum loan to value ratios for all real estate mortgage and
construction loans. The FDICIA requires regulations to limit risks posed by an
insured bank's "exposure" to another bank. Exposure includes extension of
credit, purchases of securities issued by the other bank, or acceptance of
securities issued by the other bank as collateral for an extension of credit.
Regulations pursuant to FDICIA limit such exposure.
The Community Reinvestment Act of 1977 ("CRA") and its implementing regulations
are intended to encourage regulated financial instiyutions to meet the credit
needs of their local community or communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of such
financial institutions. The regulations provide that the appropriate regulatory
authority will assess CRA reports in connection with applications for
establishment of domestic branches, acquisitions of banks or mergers involving
bank holding companies. Regulators are placing increased emphasis on CRA
assessments. An unsatisfactory CRA rating may serve as a basis to deny an
application to acquire or establish a new bank, to esatblish a new branch or to
expand banking services.
The Equal Credit Opportunity Act ("ECOA") requires non-discrimination in
banking services. The federal enforcement agencies have recently cited
institutions for red-lining (refusing to extend credit to residents of a
specific geographic area known to be comprised predominantly of minorities) or
reverse red-lining (extending credit to minority applicants on terms less
favorable than those offered to non-minority applicants). Violations can
result in the assessment of substantial civil penalties.
Community Bank (Alabama) is subject to regulation and examination by the
Alabama Superintendent of Banks (the "Superintendent"). Community Bank
(Tennessee) is subject to supervision, regulation and examination by the
Commissioner of the Tennessee Department of Financial Institutions (the
"Commissioner"). State regulations in Alabama and Tennessee 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 the respective banks.
The Supervisory Policy Statement on Securities Activities developed under the
auspices of the Federal Financial Institutions Examination Council ("FFIEC")
was adopted by the Federal Reserve Bank and became effective on February 10,
1992. This policy addresses the selection of securities dealers and requires
depository institutions to establish prudent policies and strategies for
securities transactions. The policy statement also addresses unsuitable
investment practices and establishes a framework for identifying when mortgage
derivative products are high-risk mortgage securities which must be reported as
securities held for sale or trading.
On September 28, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("IBBEA"). Beginning September
29, 1995, 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 transaction, control more than 10% of the
nation's total 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.
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Beginning June 1, 1997, federal banking regulators may approve merger
transactions involving banks located in different states, without regard to
laws of any state prohibiting such transactions; except that, mergers may not
be approved with respect to banks located in states that, prior to June 1,
1997, enacted legislation prohibiting mergers by banks located in such state
with out-of-state institutions. Federal banking regulators may permit an
out-of-state bank to open new branches in another state if such state has
enacted legislation permitting interstate branching. Affiliated institutions
are authorized to accept deposits for existing accounts, renew time deposits,
and close and service loans for affiliated institutions without being deemed an
impermissible branch of the affiliate.
GOVERNMENTAL MONETARY POLICIES
The Federal Reserve System regulates the national supply of bank credit. The
instruments on monetary policy used by the Federal Reserve to implement these
objectives are: open market operations in U. S. Government securities, changes
in discount rate, reserve requirements on member bank's deposits and funds
availability regulations. The Company and its subsidiaries are affected by the
credit policies of monetary authorities. These instruments are used in varying
combinations to influence the overall growth of bank loans. The earnings and
growth of the Company and subsidiaries will be subject to the influence of
economic conditions generally and also to the monetary and fiscal policies of
the United States and its agencies, particularly the Federal Reserve. The
nature and timing of any changes in such policies and their impact on the
Company cannot be predicted.
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ITEM 1 - STATISTICAL DISCLOSURE
Page(s)
-------
Consolidated Average Balances,
Interest Income/Expense and Yields/Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-25
Rate/Volume Variance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-27
Investment Portfolio and Investment Portfolio Maturity Schedule . . . . . . . . . . . . . . . . . . 14-15
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Selected Loan Maturity and Interest Rate Sensitivity . . . . . . . . . . . . . . . . . . . . . . . 13
Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-29
Allocation of Loan Loss Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Maturities of Large Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Maturities of Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Return on Equity and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Interest Rate Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Capital Adequacy Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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ITEM 2 - PROPERTIES
The main offices of the Company are housed in a colonial style two story
building owned by Community Bank (Alabama) and located on U. S. Highway 231 in
Blountsville, Alabama.
The main office of Community Bank (Alabama) is located at 69156 Main Street,
Blountsville, Alabama, in a one story brick building constructed in 1975 and
which was extensively remodeled during 1994. The premises are owned by
Community Bank (Alabama). The Alabama bank subsidiary owns or leases buildings
that are used in the normal course of business in eight counties in North
Alabama, namely Blount, DeKalb, Lauderdale, Limestone, Madison, Marshall,
Morgan, and Winston, which includes the Haleyville location which opened for
business on January 17, 1996.
The main office of Community Bank (Tennessee) is located in the historic Martin
House at 302 South Second Street, Pulaski, Tennessee. The premises are owned
by Community Bank (Tennessee). A second banking location operates at 1700 West
College Street in Pulaski.
For information with respect to the amounts at which bank premises, equipment
and other real estate are carried and relating to commitments under leases, see
Consolidated Financial Statements.
ITEM 3 - LEGAL PROCEEDINGS
While the Company and its subsidiaries are from time to time parties to various
legal proceedings arising from the ordinary course of business, management
believes, after consultation with legal counsel, that there are no proceedings
threatened or pending against the Company or its subsidiaries that will,
individually or in the aggregate, have a material adverse effect on the
business or consolidated financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1995.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Company Common Stock ("Shares") were held by approximately 1,179 shareholders
of record at December 31, 1995. There is no established trading market for
Company Shares, which have been traded inactively in private transactions.
Therefore, no reliable information is available as to trades of Company Shares,
or as to the prices at which such Shares have traded. Management has reviewed
the limited information available as to the ranges at which Shares have sold.
The following data regarding Shares is provided for information purposes only,
and should not be viewed as indicative of the actual or market value of Shares.
Estimated Price Range
Per Share (1)
---------------------------
High Low
--------- -----------
1995:
FIRST QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20.00 $ 15.00
SECOND QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00 18.00
THIRD QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00 15.00
FOURTH QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00 17.00
1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.00 $ 13.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.50 17.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.00 18.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.00 25.00
A cash dividend of $.50 per share was declared by the Company's Board of
Directors on January 9, 1996 and was paid on January 16, 1996. Management
continues to anticipate retaining substantially all earnings to finance the
Company's growth. The payment of dividends on Shares is subject to the prior
payment of principal and interest on the Company's long-term debt, sufficient
earnings and capital in the subsidiaries and to regulatory restrictions. See
"Financial and Statistical Information" and Consolidated Financial Statements
and related notes.
__________________________
(1) On October 4, 1994, the Company purchased 115,978.384 shares of Common
Stock from Jeffrey K. Cornelius, a former director and officer of the
Company, for a purchase price of approximately $25.00 per share.
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ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years.
All averages are daily averages.
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in Thousands Except Per Share Data)
Interest income . . . . . . . . . . . . . . . $ 26,304 $ 20,751 $ 17,774 $ 17,798 $ 17,794
Interest expense . . . . . . . . . . . . . . 13,751 9,507 8,008 8,949 10,774
Net interest income . . . . . . . . . . . . . 12,553 11,244 9,766 8,849 7,020
Provision for loan losses . . . . . . . . . . 1,088 638 418 539 423
Non-interest income . . . . . . . . . . . . . 3,717 3,189 2,914 2,618 1,740
Non-interest expense . . . . . . . . . . . . 12,046 10,193 8,824 7,297 6,279
Net income . . . . . . . . . . . . . . . . . 2,705 2,688 2,572 2,699 1,619
Per Share data:
Net income . . . . . . . . . . . . . . . 1.62 1.60 1.94 2.19 1.29
Cash dividends . . . . . . . . . . . . . .50 -0- -0- -0- -0-
Shareholders' equity (book value)
at period end . . . . . . . . . . . . 16.26 13.91 13.49 10.80 8.61
Balance Sheet:
Loans . . . . . . . . . . . . . . . . . . 237,841 206,428 151,651 135,782 120,636
Deposits . . . . . . . . . . . . . . . . 320,149 263,413 227,770 198,312 185,050
Long-term debt . . . . . . . . . . . . . 7,920 8,713 6,392 3,745 4,275
Average equity . . . . . . . . . . . . . 24,839 22,672 15,723 12,493 9,891
Average assets . . . . . . . . . . . . . 328,244 276,063 232,340 209,169 191,992
Total assets . . . . . . . . . . . . . . 362,824 299,352 262,192 219,812 203,676
Ratios:
Return on average assets . . . . . . . . 0.82% 0.97% 1.11% 1.29% 0.84%
Return on average equity . . . . . . . . 10.89% 11.86% 16.36% 21.60% 16.37%
Dividend payout ratio . . . . . . . . . . 0.31% 0.00% 0.00% 0.00% 0.00%
Average equity to average assets . . . . 7.57% 8.21% 6.77% 5.97% 5.15%
Total risk-based capital . . . . . . . . 14.10% 13.58% 16.53% 11.20% 10.72%
Leverage ratio . . . . . . . . . . . . . 8.00% 7.52% 8.95% 6.60% 5.82%
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. This discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
The discussion of net interest income in this financial review is presented on
a taxable equivalent basis to facilitate performance comparisons among various
taxable and tax-exempt assets.
SUMMARY
The Company's principal market areas are located in North Central Alabama (in
the counties of Blount, Dekalb, Lauderdale, Limestone, Madison, Marshall,
Morgan and Winston) and in South Central Tennessee (in Giles County). All of
the Company's banking facilities are located in relatively rural areas, placing
an emphasis on personal service. None of the banks are located in urban areas.
Management believes that the economies of the areas in which we serve are
healthy and expanding, but not at a pace that threatens stability. With the
exception of the Blount County, Alabama market, each of the markets shares one
common characteristic: they are separate and distinct economies, but are close
enough to Huntsville, Alabama to share in the economic and employment benefits
of that city. Blount County is close enough to Birmingham, Alabama for the same
circumstances to apply.
Despite the apparent dependency upon the military and aerospace industries, the
Huntsville MSA possesses a significant diversity. Jobs are created in
significant proportion in the manufacture of durable goods, machinery, and
transportation equipment, as well as in retail and services. Agriculture, in
the form of soybeans, hay, corn, cotton, tobacco, dairy and poultry farming
makes up a significant portion of the economy as well. The Huntsville MSA had
an average unemployment rate of 5.2% in 1994, and the counties served by the
Company had unemployment averaging 5.6%, both lower than the average of 6.0%
experienced in the entire state of Alabama. In the Company's markets, the
increase in the per capita income over the last ten years has surpassed the
rate for the state, as has population growth over the last year. The current
economic prospects in our markets are good, and the Company attempts to assist
those prospects by returning the deposits of our customers to the communities
from which they come in the form of loans.
The Company's net income of $2,704,798 for 1995 was 1 percent more than 1994's
amount of $2,687,954, which was 5 percent more than the $2,572,366 earned
during 1993. When stated as changes in net income per share, 1995 represented
a 1 percent increase from 1994 compared to a 17 percent decrease in 1994 over
1993. The initial costs of opening the new Tennessee bank subsidiary, resulting
in net losses of $153,193 and $281,099 in 1995 and 1994, respectively, have had
a significant impact on the growth of the Company's net earnings, as did
operating losses of over $400,000 during 1995 in three Community Bank (Alabama)
startups.
The continued growth in Company earnings is a response to management's emphasis
on quality loans and investments with good yields while keeping expenses in
line. The loss sustained by Community Bank (Tennessee) and the new locations
of Community Bank (Alabama) was fully anticipated and projected prior to
opening. The expected growth of the Tennessee bank and the new Alabama
locations should become a significant factor to the Company's future earnings.
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A stock offering of $9 million commenced in October, 1993 and closed fully sold
in February, 1994. Another offering of approximately $6 million was begun in
1995 and had generated over $3.2 million in new capital as of December 31,
1995. This additional capital and the retained earnings generated have placed
the Company in the strongest capital position since its inception for future
growth and expansion.
EARNING ASSETS
Average earning assets in 1995 increased 18 percent over 1994 primarily as a
result of increases in the loan portfolio. The mix of average earning assets
shifted toward the loan portfolio during 1995 as loans averaged 75 percent of
the total for 1995, up from 70 percent during 1994. As a percentage of total
average earning assets, investments securities averaged 22 percent and other
earning asset categories averaged 3 percent for 1995. In the previous year,
the comparable mix was 28 percent in investment securities and 2 percent in the
other earning asset categories. The increased volume in earning assets
contributed to the higher net interest income reported by the Company. Average
earning assets for 1994 increased 19 percent over 1993.
Average loans increased 25 percent in 1995 with much of the increase
concentrated in the real estate financing areas. Total loans outstanding at
year-end were up 15 percent over the previous year-end level. Real
estate-mortgage loans increased 13 percent and consumer loans increased 27
percent from year-end 1994 to year-end 1993. Commercial, financial and
agricultural loans, which made up 19 percent of the total loans, decreased 5
percent when compared to the previous year. Real estate-construction loans
increased 42 percent but had little effect due to representing only 2 percent
of total loans.
Total loans at year-end 1994 grew 36 percent over 1993 and average loans grew
27 percent over the same period.
The Company has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans. Concurrently, it has avoided exposure to lesser developed
country ("LDC") debt, having no LDC loans in its portfolio.
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The following table shows the classification of loans by major category at
December 31, 1995 and for each of the preceding four years. The second table
provides maturities of certain loan classifications and an analysis of these
loans maturing in over one year.
LOAN PORTFOLIO
December 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- ------------------ ------------------ ------------------ -----------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(in Thousands)
Commercial,
financial and
agricultural . . . $ 44,686 18.6% $ 46,892 22.1% $ 34,200 22.0% $ 32,261 23.1% $ 30,918 24.9%
Real estate -
construction . . . 5,624 2.4 3,972 1.9 2,186 1.4 2,294 1.7 2,794 2.2
Real estate -
mortgage . . . . 116,289 48.4 103,194 48.6 75,835 48.7 64,846 46.5 52,998 42.6
Consumer . . . . . 73,479 30.6 58,051 27.4 43,470 27.9 39,988 28.7 37,630 30.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
240,078 100.0% 212,109 100.0% 155,691 100.0% 139,389 100.0% 124,340 100.0%
===== ===== ===== ===== =====
Less: Unearned
income . . . . . 2,237 5,681 4,040 3,607 3,704
Allowance for
loan losses . . . 2,209 1,548 1,255 1,062 940
-------- -------- -------- -------- --------
Net loans . . . . . $235,632 $204,880 $150,693 $134,720 $119,696
======== ======== ======== ======== ========
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans
Maturity Maturing Over One Year
------------------------------------- ---------------------------
Over One
Year
One Through Over Predetermined Floating or
Year or Five Five Interest Adjustable
Less Years Years Total Rate Rate
---------- --------- --------- -------- ------------ ------------
(in Thousands)
Commercial, financial
and agricultural . . . . . $ 18,664 $ 8,142 $ 17,880 $ 44,686 $ 16,547 $ 9,475
Real estate -
construction . . . . . . . 4,902 82 640 5,624 395 327
---------- --------- --------- -------- ------------ -----------
$ 23,566 $ 8,224 $ 18,520 $ 50,310 $ 16,942 $ 9,802
========== ========= ========= ======== ============ ===========
13
15
INVESTMENT PORTFOLIO
The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk
and liquidity considerations. The primary objectives of the Company's
investment strategy are to maintain an appropriate level of liquidity and
provide a tool to assist in controlling the Company's interest rate position
while at the same time producing adequate levels of interest income. For
securities classified as investment securities, it is the intention to hold
such securities for the foreseeable future. On January 1, 1994, the Company
transferred selected securities to an available for sale category to
appropriately reflect the nature of the Company's holdings that are available
for sale should liquidity needs dictate, and on December 1, 1995, the entire
portfolio was classified as available for sale. Management of the maturity of
the portfolio is necessary to provide liquidity and to control interest rate
risk. During 1995 gross investment securities sales were $8.0 million and
maturities were $12.7 million, representing 12.3 percent and 19.5 percent,
respectively, of the average portfolio for the year. Gains associated with the
sales totaled $265,939, accounting for 7.2 percent of noninterest income.
Gross unrealized gains in the portfolio amounted to $1.4 million at year end
1995 and unrealized losses amounted to $158 thousand. Average investment
securities decreased 7.7 percent from 1994.
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 security
portfolio as of December 31, 1995 or 1994 contains no interest-only strips and
the amount of unamortized premium on mortgage-backed securities is only
$159,115. The recoverability of the Company's investment in mortgage-backed
securities is reviewed periodically, and if necessary, appropriate adjustments
would be made to income for impaired values.
The carrying amount of investment securities at the end of each of the last
three years is set forth in the following table.
INVESTMENT PORTFOLIO
December 31,
---------------------------------------------
1995 1994 1993
----------- ------------ -----------
(in Thousands)
Securities Held to Maturity:
- ----------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $ -0- $ 12,345 $ 10,564
Mortgage-backed securities . . . . . . . . . . . . . . . . -0- 12,680 16,479
State and municipal securities . . . . . . . . . . . . . . -0- 16,508 14,962
Foreign debt securities . . . . . . . . . . . . . . . . . -0- -0- 485
---------- ------------ -----------
Total securities held to maturity . . . . . . . . . . $ -0- $ 41,533 $ 42,490
========== ============ ==========
Securities Available for Sale:
- ------------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $ 30,431 $ 15,719 $ 24,655
Mortgage-backed securities . . . . . . . . . . . . . . . . 22,848 2,331 12,226
State and municipal securities . . . . . . . . . . . . . . 16,711 2,804 2,862
Foreign debt securities . . . . . . . . . . . . . . . . . -0- -0- -0-
---------- ------------ -----------
Total securities available for sale . . . . . . . . . $ 69,990 $ 20,854 $ 39,743
========== ============ ==========
14
16
Total Investment Securities:
- ----------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $ 30,431 $ 28,064 $ 35,219
Mortgage-backed securities . . . . . . . . . . . . . . . . 22,848 15,011 28,705
State and municipal securities . . . . . . . . . . . . . . 16,711 19,312 17,824
Foreign debt securities . . . . . . . . . . . . . . . . . -0- -0- 485
---------- ------------ ----------
Total investment securities . . . . . . . . . . . . . $ 69,990 $ 62,387 $ 82,233
========== ============ ==========
Average taxable securities were 70.9 percent of the portfolio in 1995 and 73.5
percent in 1994 while tax-exempt securities were 29.1 percent in 1995 and 26.5
percent in 1994. Average taxable securities decreased 11.0 percent while
average tax-exempt securities increased 1.6 percent in 1995. Average
investment securities for 1994 increased 6.0 percent from 1993 average levels.
Period-end securities for 1995 increased 12.2 percent from the previous year
due to deposit growth in excess of loan demand growth.
The maturities and weighted average yields of the investments in the 1995
portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34 percent tax rate) have been made in calculating yields
on tax-exempt obligations. The average maturity of the investment portfolio is
11.4 years with an average yield of 6.5 percent. Mortgage-backed securities
have been included in the maturity table based upon the guaranteed payoff date
of each security.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
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
------ ----- ------ ----- ------ ----- ------ -----
(in Thousands)
Securities- All Available for Sale:
- -----------------------------------
U. S. Treasury . . . . . . . . . . . $ 903 7.20% $ 14,568 5.55% $ 3,633 5.66% $ -0- -0-%
U. S. Government agencies . . . . . . 2,483 6.15 7,587 6.85 4,708 7.03 19,397 5.80
State and municipal securities . . . 15 6.60 630 6.76 4,379 8.67 11,687 8.06
------- -------- -------- --------
Subtotal $ 3,401 6.43 $ 22,785 6.01 $ 12,720 7.21 $ 31,084 6.65
======= ======== ======== ========
There were no securities held by the Company, whose aggregate value on December
31, 1995 exceeded ten percent of the Company's consolidated shareholders'
equity at that date. (1)
___________________
(1) Securities which are payable from and secured by the same source of revenue
or taxing authority are considered to be securities of a single issuer.
Securities of the U. S. Government and U. S. Government agencies and
corporations are not included.
15
17
Average Federal funds sold increased 282.8 percent, reflecting the increased
cash available from deposit growth. During 1994, average Federal Funds
decreased 62.4 percent from 1993 levels. As a percentage of average earning
assets, these funds represented 2.6 percent for 1995 compared to .8 percent for
1994.
The average balance of interest-bearing deposits with other banks decreased
17.4 percent from 1994 to 1995. The average balance from 1993 to 1994 increased
75.6 percent. Total average earning assets as compared to total average assets
for 1995 and 1994 were 90.8 and 91.7 percent, respectively.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No.
119, Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments.
DEPOSITS AND BORROWED FUNDS
The Company's primary source of funds is derived from its deposits. Continued
enhancement of existing products and emphasis upon better customer service
fuels the growth in the deposit base. Emphasis has been placed upon attracting
consumer deposits. It is the Company's intent to expand its consumer base in
order to continue to fund asset growth.
The portion of the Company's average liabilities represented by
interest-bearing deposits increased in both 1995 and 1994 by 21.1 percent and
15.0 percent, respectively. During the same periods, average
noninterest-bearing deposits increased 8.3 percent and 21.7 percent,
respectively. Customer confidence and satisfaction is evidenced by the
increase in total average deposits of 19.4 percent in 1995 and 15.8 percent in
1994. The largest dollar increase was in the time deposits category.
Average interest-bearing demand deposits rose 1.9 percent while average savings
deposits decreased 6.3 percent, and average time deposits increased 37.6
percent. The two categories of lowest cost deposits comprised the following
percentages of total deposits during 1995 and 1994, respectively: average
noninterest-bearing demand deposits - 11.7 percent and 13.0 percent; and
average interest-bearing demand deposits - 15.9 percent and 18.7 percent. Of
total time deposits, approximately 24.2 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit
and other time deposits of $100,000 or more issued by the Company at December
31, 1995 are summarized in the table below.
MATURITIES OF LARGE TIME DEPOSITS
Time Other
Certificates Time
of Deposit Deposits Total
------------- ------------ ------------
(in Thousands)
Three months or less . . . . . . . . . . . . . . . . . . $ 5,368 $ 15,278 $ 20,646
Over three through six months . . . . . . . . . . . . . . 7,910 -0- 7,910
Over six through twelve months . . . . . . . . . . . . . 11,163 -0- 11,163
Over twelve months . . . . . . . . . . . . . . . . . . . 20,754 -0- 20,754
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 45,195 $ 15,278 $ 60,473
============ ============ ============
16
18
Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1995 and 1994 consisted of the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Long-term debt consisted of various commitments with scheduled
maturities from one to twenty years.
The following table sets forth expected debt service for the next five years
based on interest rates and repayment provisions as of December 31, 1995.
MATURITIES OF LONG-TERM DEBT
1996 1997 1998 1999 2000
---------- ---------- ----------- ---------- -----------
(in Thousands)
Interest on indebtedness . . . . . . . . . $ 586 $ 508 $ 431 $ 354 $ 277
Repayment of principal . . . . . . . . . . 1,065 $ 931 935 939 944
---------- ---------- ----------- ---------- -----------
$ 1,651 $ 1,439 $ 1,366 $ 1,293 $ 1,221
========== ========== =========== ========== ===========
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Company's ability to meet the day-to-day cash flow requirements
of the subsidiary Banks' customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs. Without
proper liquidity management, the Company would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the production and growth needs of the communities it serves.
The primary function of assets and liabilities management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment requirements of its shareholders. Daily monitoring of the sources
and uses of funds is necessary to maintain an acceptable cash position that
meets both requirements. In a banking environment, both assets and liabilities
are considered sources of liquidity funding and both are, therefore, monitored
on a daily basis.
Dividends paid by Community Bank (Alabama) are the primary source of funds
available to the Company for debt repayment, payment of dividends to its
stockholders and other needs. Certain restrictions exist regarding the ability
of the Bank to transfer funds to the Company in the form of cash dividends,
loans or advances. The approval of the Alabama Superintendent of Banks is
required to pay dividends in excess of the Bank's earnings retained in the
current year plus retained net profits for the preceding two years. At
December 31, 1995, Community Bank (Alabama) could have declared dividends of
$6,760,949 without approval of regulatory authorities.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments or sales of investment and trading account
securities. Real estate-construction and commercial, financial and
agricultural loans that mature in one year or less equaled approximately $23.6
million or 9.8 percent of the total loan portfolio at December 31, 1995 and
investment securities maturing in one year or less equaled $3.4 million or 4.9
percent of the portfolio. Other sources of liquidity include short-term
investments such as Federal funds sold and maturing interest-bearing deposits
with other banks.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds
are also available through the purchase of federal funds from another
commercial bank from an available line of up to $7,000,000. Liquidity
management involves the daily monitoring of the sources and uses of funds to
maintain an acceptable company cash position.
17
19
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities
are subject to change in interest rates either at replacement or maturity
during the life of the instruments. Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The differences are
known as interest sensitivity gaps and are usually calculated separately for
segments of time ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis. The following tables show interest sensitivity gaps for
these different intervals as of December 31, 1995.
INTEREST RATE SENSITIVITY ANALYSIS
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
---------- ---------- ---------- ----------- ---------- -----------
At December 31, 1995 (in Thousands)
Interest-earning assets (1)
- ---------------------------
Loans . . . . . . . . . . . . $ 27,478 $ 23,428 $ 40,358 $ 111,334 $ 34,752 $ 237,350
Investment Securities:
Taxable . . . . . . . . . . 1,997 323 1,067 22,155 27,737 53,279
Tax-exempt . . . . . . . . -0- -0- 15 630 16,066 16,711
Time deposits in other banks 859 103 250 700 -0- 1,912
Federal funds sold . . . . . 20,350 -0- -0- -0- -0- 20,350
---------- ---------- ---------- ----------- ---------- -----------
50,684 23,854 41,690 134,819 78,555 329,602
---------- ---------- ---------- ----------- ---------- -----------
Interest-bearing liabilities (2)
Demand deposits (3) . . . . . 16,212 16,212 16,212 -0- -0- 48,636
Savings deposits (3) . . . . 14,476 14,475 14,475 -0- -0- 43,426
Time deposits . . . . . . . . 6,355 31,871 80,767 67,867 40 186,900
Other short-term borrowings . 2,009 -0- -0- -0- -0- 2,009
Long term debt . . . . . . . 77 292 696 3,749 3,106 7,920
---------- ---------- ---------- ----------- ---------- -----------
39,129 62,850 112,150 71,616 3,146 288,891
---------- ---------- ---------- ----------- ---------- -----------
Interest sensitivity gap . . . $ 11,555 $ (38,996) $ (70,460) $ 63,203 $ 75,409 $ 40,711
========== ========== ========= ========== ========== ===========
Cumulative interest
sensitivity gap . . . . . . . $ 11,555 $ (27,441) $ (97,901) $ (34,698) $ 40,711
========== ========== ========= ========== ==========
Ratio of interest-earning assets
to interest-bearing liabilities 1.30 0.38 0.37 1.88 24.97
========== ========== ========== =========== ==========
Cumulative ratio . . . . . . . 1.30 0.73 0.54 0.88 1.14
========== ========== ========== =========== ==========
Ratio of cumulative gap to
total interest-bearing assets 0.04 (0.08) (0.30) (0.11) 0.12
========== ========== ========== =========== ==========
_________________
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits are assumed to be subject to movement into
other deposit instruments In equal amounts during the 0-30 day period, the
31-90 day period, and the 91-365 day period.
The above table indicates that in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets.
18
20
As seen in the preceding table, for the first 30 days of repricing opportunity
there is an excess of earning assets over interest-bearing liabilities of $11.6
million. For the first 365 days, interest-bearing liabilities exceed earning
assets by $97.9 million. During this one year time frame, 74.1 percent of all
interest bearing liabilities will reprice compared to 35.3 percent of all
interest-earning assets. Changes in the mix of earning assets or supporting
liabilities can either increase or decrease the net interest margin without
affecting interest rate sensitivity. In addition, the interest rate spread
between an asset and its supporting liability can vary significantly while the
timing of repricing for both the asset and the liability remain the same, thus
impacting net interest income. It should be noted, therefore, that a matched
interest-sensitive position by itself will not ensure maximum net interest
income. Management continually evaluates the condition of the economy, the
pattern of market interest rates and other economic data to determine the types
of investments that should be made and at what maturities. Using this
analysis, management from time to time assumes calculated interest sensitivity
gap positions to maximize net interest income based upon anticipated movements
in the general level of interest rates.
CAPITAL RESOURCES
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. The Company has
provided the majority of its capital requirements through the retention of
earnings.
During the last quarter of 1993 and the first quarter of 1994, the Company
offered a maximum of 600,000 shares of its $.10 par value common stock at $15
per share with the anticipation of raising up to $9,000,000 of capital. On
February 11, 1994 the offering was closed upon full subscription of all 600,000
shares offered for sale, raising $8,916,742 of capital after reduction for
offering costs. During 1995, the Company began a stock offering of up to
312,161 shares of its $.10 par value stock at $20 per share with the
anticipation of raising up to $6.2 million of capital. As of December 31, 1995,
$3,162,405 of capital had been raised, net of offering costs.
The proceeds of both offerings are available for debt reduction, capital
enhancement and future growth and expansion of the Company.
Bank regulatory authorities are placing increased emphasis on the maintenance
of adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the risk-
based capital ratios. The Company's Tier 1 capital, which consists of common
equity, amounted to $28.3 million at December 31, 1995. Tier II capital
components include supplemental capital components such as qualifying allowance
for loan losses and qualifying subordinated debt. Tier I capital plus the Tier
II capital components is referred to as Total Risk-based capital and was $32.3
million at year-end 1995. The percentage ratios, as calculated under the
guidelines were 12.36 percent and 14.10 percent for Tier I and Total Risk-based
capital, respectively, at year-end 1995. Both levels currently exceed the
minimum ratios of four percent and eight percent, respectively.
Applying the current guidelines to the preceding two years also resulted in
capital ratios exceeding the minimum requirements.
19
21
Other important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as the ratio the Company's shareholders equity, minus goodwill bears to total
assets minus goodwill. The tangible leverage ratio is defined as the Company's
shareholders equity, minus all intangibles, divided by total assets minus all
intangibles. The Company's leverage ratios as of December 31, 1995, 1994, and
1993 exceeded the regulatory minimum requirements which are generally 3% plus
an additional cushion of at least 100-200 basis points depending on risk
profiles and other factors.
The table below illustrates the company's regulatory capital ratios at December
31, 1995, 1994 and 1993 under the year end 1995 requirements.
CAPITAL ADEQUACY RATIOS
1995 1994 1993
------------- ------------- -------------
(in thousands)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . $ 28,273 $ 23,182 $ 23,465
Tier 2 Capital . . . . . . . . . . . . . . . . . . . . . 3,983 3,381 1,255
------------ ------------ ------------
TOTAL QUALIFYING CAPITAL . . . . . . . . . . . . . $ 32,256 $ 26,563 $ 24,720
============ ============ ============
Risk Adjusted Total Assets (including
off-balance-sheet exposures) . . . . . . . . . . . . . $ 228,714 $ 195,646 $ 149,576
============ ============ ============
Tier 1 Risk-Based Capital Ratio . . . . . . . . . . . . 12.36% 11.85% 15.69%
============ ============ ============
Total Risk-Based Capital Ratio . . . . . . . . . . . . . 14.10% 13.58% 16.53%
============ ============ ============
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . 8.00% 7.52% 8.95%
============ ============ ============
Tangible Leverage Ratio . . . . . . . . . . . . . . . . 7.60% 7.00% 8.35%
============ ============ ============
In addition to regulatory requirements, a certain level of capital growth must
be achieved to maintain appropriate ratios of equity to total assets. The
following table summarizes these and other key ratios for the Company for each
of the last three years.
RETURN ON EQUITY AND ASSETS
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
Return on average assets . . . . . . . . . . . . . . . . . . 0.82% 0.97% 1.11%
Return on average equity . . . . . . . . . . . . . . . . . . 10.89 11.84 16.36
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . ----- ----- -----
Average equity to average assets ratio . . . . . . . . . . . 7.57 8.21 6.77
20
22
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest-bearing liabilities materially
impact net interest income. All discussions in this section assume a taxable
equivalent basis unless otherwise noted.
Net interest income for 1995 increased 9.7 percent from 1994 and 15.4 percent
in 1994 over 1993. Increased volume in 1995 and 1994 accounted for the majority
of the increase. The schedule on pages 24 and 25 provides the detail changes in
interest income, interest expense and net interest income due to changes in
volume and rate.
Interest income increased 25.1 percent in 1995 and 16.9 percent in 1994. The
1995 increase is due both to the 17.7 percent increase in average earning
assets and the 53 basis point decline in the average yield on earning assets.
The increase in interest income in 1994 was attributable to the 18.6% increase
in average earning assets. Interest income on loans increased 31.4 percent due
to increased volume. Interest income on investment securities decreased 3.4
percent from 1994 to 1993 as a result of decreased rates.
Total interest expense increased 44.6 percent due to the effect of a 21.1
percent increase in volume of average interest-bearing liabilities added to the
effect of an 84 basis point increase in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in volume and in
deposit rates.
The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield returned on average earning
assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The
net interest margin for 1995 was 4.46 percent as compared to 4.79 percent for
1994.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate
movements. The net interest spread for 1995 decreased 31 basis points to 3.90
percent from the 1994 spread of 4.21 percent as the yields on earning assets
increased at a slower pace than the cost of interest-bearing liabilities.
See the accompanying schedules entitled "Rate/Volume Variance Analysis" and
"Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" for
more information.
Federal income tax laws applicable to banks during 1995 and 1994 were
substantially different from those applicable in prior years. Imposition of
the alternative minimum tax, changes in tax rates and the effective elimination
of the tax-exempt status of certain previously tax-exempt income, resulted in
the distortion of the comparability of yields, interest rate spreads and
margins presented on an assumed tax equivalency basis.
21
23
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
Years Ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Rate earned on earning assets . . . . . . . . 8.82% 8.20% 8.32% 9.22% 10.03%
Rate paid on borrowed funds . . . . . . . . . 5.17 4.33 4.25 5.21 6.73
Interest rate spread . . . . . . . . . . . . 3.65 3.87 4.07 4.01 3.30
Net yield on earning assets . . . . . . . . . 4.21 4.44 4.58 4.58 3.96
1995 was characterized by interest rates which were higher than the last few
years, steadily increasing during the course of the year. Despite the
increasing rate environment, which saw interest-bearing liabilities reprice at
a faster pace than that of interest-earning assets, net interest income
increased by 11.6 percent due to the 17.7 percent increase in average earning
asset volume.
Absolute changes in net interest income from 1994 to 1995 and from 1993 to 1994
were $1.3 million and $1.5 million, respectively, as reported in the
Consolidated Statements of Income. The net interest margin decreased to 4.21
percent in 1995 from 4.44 percent in 1994 and the interest rate spread
decreased to 3.65 percent for 1995 from 1994's 3.87 percent.
[The remainder of this page intentionally left blank]
22
24
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23
25
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (in Thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995
-----------------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
------------ ------------- -------------
ASSETS
Earning assets:
Loans, net of unearned income (1) . . . . . . . . . . $ 223,222 $ 21,837 9.78%
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . 46,155 2,952 6.40
Tax-exempt . . . . . . . . . . . . . . . . . . . . . 18,962 1,710 9.02
------------ ------------
Total investment securities . . . . . . . . . . . . 65,117 4,662 7.16
Time deposits in other banks . . . . . . . . . . . . 2,132 107 5.02
Federal funds sold . . . . . . . . . . . . . . . . . 7,607 441 5.80
------------ ------------
Total interest-earning assets (2) . . . . . . . . . 298,078 27,047 9.07
Non interest-earning assets:
Cash and due from banks . . . . . . . . . . . . . . . 14,460
Premises and equipment . . . . . . . . . . . . . . . . 11,518
Accrued interest and other assets . . . . . . . . . . 5,817
Allowance for loan losses . . . . . . . . . . . . . . (1,629)
------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 328,244
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . $ 46,092 1,738 3.77
Savings deposits . . . . . . . . . . . . . . . . . . . 39,762 1,524 3.83
Time deposits . . . . . . . . . . . . . . . . . . . . 169,413 9,551 5.64
------------ ------------
255,267 12,813 5.02
Other short-term borrowings . . . . . . . . . . . . . 2,818 166 5.89
Long-term debt . . . . . . . . . . . . . . . . . . . . 8,123 772 9.50
------------ ------------
Total interest-bearing liabilities . . . . . . . . . 266,208 13,751 5.17
------------ ----------
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . 33,974
Accrued interest and other liabilities . . . . . . . . 3,223
Shareholders' equity . . . . . . . . . . . . . . . . . 24,839
------------
Total liabilities and shareholders' equity . . . . . $ 328,244
============
Net interest income/net interest spread . . . . . . . . . 13,296 3.90%
==========
Net yield on earning assets . . . . . . . . . . . . . . . 4.46%
==========
Taxable equivalent adjustment:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 162
Investment securities . . . . . . . . . . . . . . . . . 581
------------
Total taxable equivalent adjustment . . . . . . . . . 743
------------
Net interest income . . . . . . . . . . . . . . . . . . . $ 12,553
============
______________________________
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
24
26
Years Ended December 31,
- --------------------------------------------------------------------------------------------------
1994 1993
- ----------------------------------------------- -----------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------- ------------- ------------- ------------- ------------- -------------
$ 178,123 $ 16,614 9.33% $ 140,294 $ 13,319 9.49%
51,846 3,105 5.99 51,436 3,528 6.86
18,667 1,719 9.21 15,089 1,462 9.69
- ------------- ------------- ------------- -------------
70,513 4,824 6.84 66,525 4,990 7.50
2,581 108 4.18 1,470 41 2.79
1,987 81 4.08 5,281 158 2.99
- ------------- ------------- ------------- -------------
253,204 21,627 8.54 213,570 18,508 8.67
11,780 9,256
8,251 6,457
4,251 4,216
(1,423) (1,159)
- ------------- -------------
$ 276,063 $ 232,340
============= =============
$ 45,249 1,509 3.33 $ 36,580 1,189 3.25
42,425 1,400 3.30 39,686 1,296 3.27
123,124 5,940 4.82 107,054 5,230 4.89
- ------------- ------------- ------------- -------------
210,798 8,849 4.20 183,320 7,715 4.21
1,554 112 7.21 949 22 2.32
7,403 546 7.38 4,102 272 6.63
- ------------- ------------- ------------- -------------
219,755 9,507 4.33 188,371 8,009 4.25
------------- ------------- ------------- -------------
31,369 25,779
2,241 2,467
22,698 15,723
- ------------- -------------
$ 276,063 $ 232,340
============= =============
12,120 4.21% 10,499 4.42%
============= =============
4.79% 4.92%
============= =============
291 233
585 500
------------- -------------
876 733
------------- -------------
$ 11,244 $ 9,766
============= =============
25
27
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume
--------------------------------- ----------------------
1995 1994 1993 1995-1994 1994-1993
--------------------- -------- ----------------------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned income . . . . . . . . . . $223,222 $178,123 $140,294 $ 45,099 $ 37,829
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . 46,155 51,846 51,436 (5,691) 410
Tax exempt . . . . . . . . . . . . . . . . . . 18,962 18,667 15,089 295 3,578
-------- -------- -------- --------- --------
Total investment securities . . . . . . . . . 65,117 70,513 66,525 (5,396) 3,988
Interest-bearing deposits with other banks . . . 2,132 2,581 1,470 (449) 1,111
Federal funds sold . . . . . . . . . . . . . . . 7,607 1,987 5,281 5,620 (3,294)
-------- -------- -------- --------- --------
Total earning assets . . . . . . . . . . . . $298,078 $253,204 $213,570 $ 44,874 $ 39,634
======== ======== ======== ========= ========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . $ 46,092 $ 45,249 $ 36,580 $ 843 $ 8,669
Savings . . . . . . . . . . . . . . . . . . . . 39,762 42,425 39,686 (2,663) 2,739
Time . . . . . . . . . . . . . . . . . . . . . 169,413 123,124 107,054 46,289 16,070
-------- -------- -------- --------- --------
Total interest-bearing deposits . . . . . . . 255,267 210,798 183,320 44,469 27,478
Other short-term borrowings . . . . . . . . . . . 2,818 1,554 949 1,264 605
Long-term debt . . . . . . . . . . . . . . . . . 8,123 7,403 4,102 720 3,301
-------- -------- -------- --------- --------
Total interest-bearing liabilities . . . . . $266,208 $219,755 $188,371 $ 46,453 $ 31,384
======== ======== ======== ========= ========
Net interest income/net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net yield on earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cost of funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
28
Variance Attributed to (1)
--------------------------------------
AVERAGE RATE Interest Income/Expense Variance 1995 1994
-------------------------- ---------------------------- --------------------- ------------------ ------------------
1995 1994 1993 1995 1994 1993 1995-1994 1994-1993 VOLUME RATE Volume Rate
------ ------ ------ ------ ------ ------ --------- --------- -------- ------ -------- ------
(in Thousands)
9.78% 9.33% 9.49% $21,837 $16,614 $13,319 $5,223 $3,295 $4,387 836 $3,524 (229)
6.40 5.99 6.86 2,952 3,105 3,528 (153) (423) (356) 203 28 (451)
9.02 9.21 9.69 1,710 1,719 1,462 (9) 257 27 (36) 332 (75)
------- ------- ------- ------ ------ ------ ----- ------ -----
7.16 6.84 7.50 4,662 4,824 4,990 (162) (166) (329) 167 360 (526)
5.02 4.18 2.79 107 108 41 (1) 67 (21) 20 40 27
5.80 4.08 2.99 441 81 158 360 (77) 313 47 (121) 44
------- ------- ------- ------ ------ ------ ----- ------ -----
9.07 8.54 8.67 27,047 21,627 18,508 5,420 3,119 4,350 1,070 3,803 (684)
3.77 3.33 3.25 1,738 1,509 1,189 229 320 28 201 290 30
3.83 3.30 3.27 1,524 1,400 1,296 124 104 (92) 216 92 12
5.64 4.82 4.89 9,551 5,940 5,230 3,611 710 2,486 1,125 785 (75)
------- ------- ------- ------ ------ ------ ----- ------ -----
5.02 4.20 4.21 12,813 8,849 7,715 3,964 1,134 2,422 1,542 1,167 (33)
5.89 7.21 2.32 166 112 22 54 90 78 (24) 21 69
9.50 7.38 6.63 772 546 272 226 274 57 169 240 34
------- ------- ------- ------ ------ ------ ----- ------ -----
5.17 4.33 4.25 13,751 9,507 8,009 4,244 1,498 2,557 1,687 1,428 70
---- ---- ---- ------- ------- ------- ------ ------ ------ ----- ------ -----
3.90% 4.21% 4.42% $13,296 $12,120 $10,499 $1,176 $1,621 $1,793 $(617) $2,375 $(754)
==== ==== ==== ======= ======= ======= ====== ====== ====== ===== ====== =====
4.46% 4.79% 4.92%
==== ==== ====
4.61% 3.75% 3.75%
==== ==== ====
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
27
29
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses, which is charged to operations, is based on the
growth of the loan portfolio, the amount of net loan losses incurred and
management's estimation of potential future losses based on an evaluation of
the risk in the loan portfolio. The provision for loan losses increased 70.5
percent in 1995 compared to an increase of 52.6 percent in 1994, providing an
increase of 42.7 percent in the allowance for loan losses. Net loan charge-offs
increased 23.8 percent in 1995 after increasing 53.3 percent in 1994. Net
charge-offs on consumer loans amounted to 20.6 percent of total net charge-offs
for 1995 compared to 89.3 percent in 1994 and 31.6 percent in 1993. Management
believes that the $2,209,000 in the allowance for loan losses at December 31,
1995 (.93% of total net outstanding loans at that date) was adequate to absorb
known risks in the portfolio based upon the Company's historical experience.
No assurance can be given, however, that increased loan volume, adverse
economic conditions or other circumstances will not result in increased losses
in the Company's loan portfolio.
The following table sets forth certain information with respect to the
Company's loans, net of unearned income, and the allowance for loan losses for
the five years ended December 31, 1995.
Summary of Loan Loss Experience
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
(in Thousands)
Allowance for loan losses at beginning of year . . . $ 1,548 $ 1,255 $ 1,062 $ 940 $ 777
Loan charged off
Commercial, financial and agricultural . . . . . . 110 91 129 112 82
Real Estate - Mortgage . . . . . . . . . . . . . . -0- -0- 33 143 53
Consumer . . . . . . . . . . . . . . . . . . . . . . 399 319 134 226 221
-------- -------- -------- -------- ---------
Total loans charged off . . . . . . . . . . . . . 509 410 296 481 356
-------- -------- -------- -------- ---------
Recoveries on loans previously charged off
Commercial, financial and agricultural . . . . . . 22 52 8 2 14
Real Estate - Mortgage . . . . . . . . . . . . . . 1 2 -0- 9 4
Consumer . . . . . . . . . . . . . . . . . . . . . . 59 11 63 53 78
-------- -------- -------- -------- ---------
Total recoveries . . . . . . . . . . . . . . . . 82 65 71 64 96
-------- -------- -------- -------- ---------
Net loans charged off . . . . . . . . . . . . . . . . 427 345 225 417 260
Provision for loan losses . . . . . . . . . . . . . . 1,088 638 418 539 423
-------- -------- -------- -------- ---------
Allowance for loan losses at end of period . . . . . $ 2,209 $ 1,548 $ 1,255 $ 1,062 $ 940
======== ======== ======== ======== =========
Loans, net of unearned income, at end of period . . . $237,841 $206,428 $151,651 $135,782 $ 120,636
======== ======== ======== ======== =========
Average loans, net of unearned income,
outstanding for the period . . . . . . . . . . . . $223,222 $178,123 $140,294 $128,167 $ 113,920
======== ======== ======== ======== =========
28
30
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
Ratios:
Allowance at end of period to loans, net of
unearned income . . . . . . . . . . . . . . . . . .93% .75% .83% .78% .78%
Allowance at end of period to average loans,
net of unearned income . . . . . . . . . . . . . .99 .87 .89 .83 .83
Net charge-offs to average loans, net of
unearned income . . . . . . . . . . . . . . . . . .19 .19 .16 .33 .23
Net charge-offs to allowance at end of period . . . 19.33 22.29 17.93 39.27 27.66
Recoveries to prior year charge-offs . . . . . . . 20.00 21.96 14.76 17.98 24.37
In assessing adequacy, management relies predominantly on its ongoing review of
the loan portfolio, which is undertaken both to ascertain whether there are
probable losses which must be charged off and to assess the risk
characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers and senior
management, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process.
In evaluating the allowance, management also considers the loan loss experience
of Community Bank, the amount of past due and nonperforming loans, current and
anticipated economic conditions, lender requirements and other appropriate
information.
Management allocated the reserve for loan losses to specific loan classes as
follows:
ALLOCATION OF LOAN LOSS RESERVE
December 31,
--------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ---------------- ---------------- ----------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------- -------- ------ -------- ------ -------- ------ -------- ------ --------
(in Thousands)
Domestic loans
Commercial,
financial and
and agricultural . . . $ 442 20% $ 170 11% $ 678 54% $ 276 26% $ 244 26%
Real estate -
mortgage . . . . . . . -- -- -- -- 188 15 340 32 179 19
Consumer . . . . . . . 1,767 80 1,378 89 389 31 446 42 517 55
------- --- ------- --- ------- --- ------- --- ----- ---
$ 2,209 100% $ 1,548 100% $ 1,255 100% $ 1,062 100% $ 940 100%
======= === ======= === ======= === ======= === ===== ===
(1) The Company had no foreign loans.
29
31
NONPERFORMING ASSETS
Nonperforming assets as of December 31, 1995 increased 16.1 percent from
year-end 1994. Nonperforming loans include loans classified as nonaccrual or
renegotiated and those past due 90 days or more for which interest is still
being accrued. There were no commitments to lend any additional funds on
nonaccrual or renegotiated loans at December 31, 1995. The following table
summarizes the Company's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS
December 31,
1995 1994 1993 1992 1991
--------- -------- -------- --------- ---------
(in Thousands)
Nonaccruing loans . . . . . . . . . . . . . . $ 491 $ 422 $ 265 $ 276 $ 374
Loans past due 90 days or more . . . . . . . 317 343 154 604 255
Restructured loans . . . . . . . . . . . . . -0- -0- -0- -0- -0-
-------- -------- -------- --------- --------
Total nonperforming loans . . . . . . . . . . 808 765 419 880 629
Nonaccruing securities . . . . . . . . . . . -0- -0- -0- 260 260
Other real estate . . . . . . . . . . . . . . 417 290 284 60 532
-------- -------- -------- --------- --------
Total nonperforming assets . . . . . . . . $ 1,225 $ 1,055 $ 703 $ 1,200 $ 1,421
======== ======== ======== ========= ========
Ratios:
Loan loss allowance to
total nonperforming assets . . . . . . . . 1.81 1.47 1.79 0.89 0.66
======== ======== ======== ========= ========
Total nonperforming loans to total
loans (net of unearned interest) . . . . . 0.003 0.004 0.003 0.006 0.005
======== ======== ======== ========= ========
Total nonperforming assets
to total assets . . . . . . . . . . . . . . 0.003 0.004 0.003 0.005 0.007
======== ======== ======== ========= ========
The ratio of loan loss allowance to total nonperforming assets increased by
23.1% from 1994 to 1995, to 1.81, significantly higher than the ratios for
1993, 1992 and 1991. Both the ratios of total nonperforming loans to total
loans and total nonperforming assets to total assets decreased by 0.1% from
1994 to 1995, remaining below the levels of the previous three years. Each of
these ratios compare favorably with industry averages, and management is aware
of no factors which should suggest that they are prone to increases in future
periods.
For the years ended December 31, 1995, 1994 and 1993, the difference between
the gross interest income that would have been recorded in such period if
nonaccruing loans had been current in accordance with their original terms and
the amount of interest income on those loans that was included in such period's
net income was negligible.
There were no concentrations of loans exceeding 10% of total loans which are
not otherwise disclosed as a category of loans.
30
32
It is the general policy of the Company's subsidiary bank to stop accruing
interest income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is past due as to principal or
interest and the ultimate collection of either is in doubt. Accrual of
interest income on consumer installment loans is suspended when any payment of
principal or interest, or both, is more than ninety days delinquent. When a
loan is placed on a nonaccrual basis any interest previously accrued but not
collected is reversed against current income unless the collateral for the loan
is sufficient to cover the accrued interest or a guarantor assures payment of
interest.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, or Statement of
Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures.
NONINTEREST INCOME
Noninterest income for 1995 totaled $3,716,891 as compared to $3,188,760 in
1994 and $2,914,015 in 1993. These amounts are primarily from service charges
on deposit accounts, insurance commissions and fees on services to customers.
Service charge increases are primarily a reflection of the deposit growth of
the Company as it has expanded into new markets, and the result that that
deposit growth has on deposit account service charges and NSF income. The
insurance commissions increased significantly in 1994 as a result of the
activities of the Company's Community Insurance unit in the areas of title
insurance and life insurance, as well as increased credit life insurance
commissions as a result of a significant rise in loan activity. Thet decreased
in 1995 partly due to the shift from credit life insurance to debt cancellation
contracts on a portion of the Company's loan portfolio.
Investment securities gains were unusually high in 1993 as a result of
recoveries made, as a result of a favorable federal Court ruling in the favor
of bondholders, on municipal bonds backed by guaranteed investment contracts
issued by Executive life Insurance Company. Losses had been recognized on these
bonds originally in 1991.
NONINTEREST INCOME
Years Ended December 31 Percent Change
------------------------------------- --------------------------
1995 1994 1993 1995/1994 1994/1993
---------- ---------- ----------- ------------ ----------
(in Thousands)
Service charges on deposits . . . . . . $ 1,751 $ 1,521 $ 1,333 15.1% 14.1%
Insurance commissions . . . . . . . . . 637 828 527 (23.1) 57.1
Investment securities gains (losses) . 266 21 471 1166.7 (95.5)
Bank club dues . . . . . . . . . . . . 427 306 258 39.5 18.6
Other . . . . . . . . . . . . . . . . . 636 513 325 24.0 57.8
---------- ---------- ---------- ------ -----
$ 3,717 $ 3,189 $ 2,914 16.6 9.4
========== ========== ========== ====== =====
31
33
NONINTEREST EXPENSES
Noninterest expenses totaled $12,046,422 in 1995 which represents an 18.2
percent increase over 1994 noninterest expenses, which were 15.5 percent higher
than in 1993. Salaries and benefits increased $1,332,338 (22.7%) to $7,209,254
in 1995 reflecting the increased personnel costs of completing the staffing of
the new Tennessee and Alabama locations. Director and committee fees, which
were $241,300 in 1993 and $286,650 in 1994, remained constant in 1995 at
$286,550. Occupancy expense increased 14.5% to $865,876 in 1995 primarily as
a result of the building and renovation of several bank locations. Furniture
and equipment expense increased 36.3% in 1995 from the 1994 amount of $611,510,
compared to a 20.0% increase in 1994. Other operating expenses increased 7.1%
to $2,851,522 during 1995. From 1993 to 1994, other operating expenses
increased 12.4%.
NONINTEREST EXPENSES
Years Ended December 31 Percent Change
------------------------------------- -------------------------
1995 1994 1993 1995/1994 1994/1993
---------- ---------- ---------- ------------ ----------
(in Thousands)
Salaries and employee benefits . . . . $ 7,209 $ 5,877 $ 4,974 22.7% 18.2%
Occupancy expense . . . . . . . . . . . 866 756 731 14.6 3.4
Furniture and equipment expense . . . . 833 612 510 36.1 20.0
Director and committee fees . . . . . . 287 287 241 -0- 19.1
Amortization of intangibles . . . . . . 123 127 84 (3.1) 51.2
Advertising . . . . . . . . . . . . . . 197 250 239 (21.2) 4.6
Insurance . . . . . . . . . . . . . . . 495 725 507 (31.7) 43.0
Professional fees . . . . . . . . . . . 247 218 222 13.3 (1.8)
Supplies . . . . . . . . . . . . . . . 380 213 223 78.4 (4.5)
Other . . . . . . . . . . . . . . . . . 1,409 1,128 1,094 24.9 3.1
---------- ---------- ----------
$ 12,046 $ 10,193 $ 8,825 18.2 15.5
========== ========== ==========
INCOME TAXES
The Company attempts to maximize its net income through active tax planning.
This planning resulted in a provision for income taxes of $430,997 (13.7%) for
1995, on income of $3,135,795. The tax for 1994 was $913,802 (25.4%) on income
of $3,601,756 and for 1993 was $865,238 (25.2%) on income of $3,437,604. These
tax amounts and rates are lower than the statutory Federal tax rate of 34
percent primarily due to investments in loans and securities earning interest
income that is exempt from Federal taxation.
The effective tax rate for 1995 decreased primarily due to a decrease in the
deferred tax valuation allowance and the recognition of a deferred tax benefit
from the donation of a capital asset which exceeded its tax basis by
approximately $290,000. As proportionately fewer available funds are invested
in tax-exempt assets, the effective tax rate will more closely approximate the
statutory Federal tax rate. In 1995 the effective tax rate was 40 percent of
the statutory Federal tax rate compared to 75 percent in 1994 and 74 percent in
1993. A more detailed explanation of income tax expense is included in the
accompanying notes to the Consolidated Financial Statements.
32
34
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and by such reaction to reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the composition of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.
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33
35
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34
36
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
Community Bancshares, Inc.
The management of Community Bancshares, Inc. is responsible for the
preparation, integrity, and objectivity of the consolidated financial
statements, related financial data, and other information in this annual
report. The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's best estimates and judgement where appropriate. Financial
information appearing throughout this annual report is consistent with the
consolidated financial statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost
of internal control systems should not exceed the related benefits. As an
integral part of internal control systems, the Company maintains a professional
staff of internal auditors who monitor compliance and assess the effectiveness
of internal control systems and coordinate audit coverage with independent
certified public accountants.
The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the
consolidated financial statements presented. Their opinion is based on an audit
conducted in accordance with generally accepted auditing standards as described
in their report.
The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the consolidated financial statements. The
Audit Committee meets periodically with both managemen