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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-16461
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMUNITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0868361
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
MAIN STREET, P. O. BOX 1000
BLOUNTSVILLE, ALABAMA 35031
----------------------------------------
(Address of principal executive offices)
(205) 429-1000
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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
------------------- ----------------------
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 January 31, 1998 the aggregate market value of voting stock held by
non-affiliates was $ 37,854,210.
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
---------------------------- -------------------------------
Common Stock, $.10 Par Value 1,930,119
Documents Incorporated by Reference Part of 10-K in which incorporated
- --------------------------------------- ----------------------------------
Proxy Statement for 1998 annual meeting Part III
The total number of pages in this report including exhibits is 144.
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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. On August 8, 1997, the Company merged
its two bank operating subsidiaries, Community Bank, an Alabama banking
corporation ("Community Bank"), and Community Bank, a Tennessee banking
corporation ("Community Bank (Tennessee)"), with the survivor being the Alabama
banking corporation. The majority of the bank's loans are to individuals and
small to mid-size businesses in Alabama and Tennessee.
Community Bank operated through twenty-three locations in Blount, Dekalb,
Lauderdale, Limestone, Madison, Marion, Marshall, Morgan, Perry, and Winston
Counties in Alabama, and Giles County, Tennessee during all of 1997. Two
additional Alabama locations were opened during 1997: a location in the
Guntersville Wal-Mart on October 20; and Fort Payne Wal-Mart (Dekalb County) on
November 10. Additionally, another Alabama bank location was opened in the
Hartselle Wal-Mart (Morgan County) on January 20, 1998. This brings the bank
subsidiary to a total of 26 locations in 11 counties of both Alabama and
Tennessee.
Community Bank also operates three subsidiaries, Community Appraisals, Inc.,
Community Insurance Corp., and 1st Community Credit Corporation. Community
Appraisals, Inc. is engaged in the business of appraising real estate. Community
Insurance Corp. currently acts as an agent for selling title insurance, life
insurance, and property and casualty insurance. 1st Community Credit
Corporation, after opening a new office in Arab, Alabama (Marshall County) on
November 10, 1997, operates finance company offices in 7 Alabama communities.
The Company maintains its principal executive offices at Main Street, P.O. Box
1000, Blountsville, Alabama 35031.
SUBSIDIARY BANK
Community Bank conducts a general commercial banking business at twenty-six
locations in eleven counties in Alabama and Tennessee. The present locations are
Blountsville, Oneonta, Snead, West Blount, Cleveland and Oneonta (Walmart
location) in Blount County; Rainsville and Fort Payne (Walmart location) in
DeKalb County; Pulaski(Downtown) and Pulaski (East College) in Giles County,
Tennessee; Rogersville in Lauderdale County; Elkmont in Limestone County;
Gurley, Meridianville and New Hope in Madison County; Hamilton in Marion County;
Arab (Downtown), Arab (Parkway) and Guntersville (Walmart location) in Marshall
County; Falkville, Hartselle and Hartselle (Walmart location) in Morgan County;
Uniontown in Perry County; and Haleyville, Haleyville-Village East and Double
Springs in Winston County.
The subsidiary bank performs 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.
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ACQUISITIONS
On September 25, 1995, Community Bank 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
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 executed a definitive agreement with Compass Bank for a similar
acquisition, the Uniontown, Alabama location, consummated on July 16, 1996 with
the acquisition of assets of $29.7 million and payment of a premium of $261,000,
the assumption of liabilities totaling $12.3 million, and a cash payment of
$17.7 million.
On December 9, 1996, 1st Community Credit Corporation consummated an agreement
with the Charter Financial Group to acquire assets, primarily finance
receivables, totaling $1.9 million, for a cash payment, including a purchase
premium of $333 thousand, of $2.2 million.
Effective August 1, 1997, the Company's wholly-owned subsidiary, Community
Insurance, Inc., acquired a controlling interest in Southern Select Insurance,
Inc., a property and casualty insurance general agency located in Birmingham,
Alabama. Community Insurance paid $382,564 for 51% of the common stock of
Southern Select, paying a premium of $344,341. The primary purpose of the
acquisition was to acquire the management, product lines, and markets of
Southern Select. Southern Select serves as the general agent to over 140
insurance agencies across Alabama. Its operations were not material to the
consolidated financial statements of the Company as of December 31, 1997.
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, 1997, the Company and its subsidiaries had approximately 320
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, 1997.
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 subsidiary 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 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 institutions to meet the credit
needs of their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The regulations provide that the appropriate regulatory authority
will assess CRA reports in connection with applications for establishment of
domestic branches, acquisitions of banks or mergers involving bank holding
companies. Regulators are placing increased emphasis on CRA assessments. An
unsatisfactory CRA rating may serve as a basis to deny an application to acquire
or establish a new bank, to establish a new branch or to expand banking
services.
The Equal Credit Opportunity Act ("ECOA") requires non-discrimination in banking
services. The federal enforcement agencies have recently cited institutions for
red-lining (refusing to extend credit to residents of a specific geographic area
known to be comprised predominantly of minorities) or reverse red-lining
(extending credit to minority applicants on terms less favorable than those
offered to non-minority applicants). Violations can result in the assessment of
substantial civil penalties.
Community Bank is subject to regulation and examination by the Alabama
Superintendent of Banks (the "Superintendent"). State regulations in Alabama
relate to such matters as loans, mortgages, consolidations, required reserves,
allowable investments, issuance of securities, payment of dividends,
establishment of branches, filing of periodic reports and other matters
affecting the business of 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 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 ............................... 23-24
Rate/Volume Variance Analysis ........................................... 25-26
Investment Portfolio and Investment Portfolio Maturity Schedule ......... 14-15
Loan Portfolio .......................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity .................... 13
Nonperforming Assets .................................................... 29
Summary of Loan Loss Experience ......................................... 27-28
Allocation of Loan Loss Reserve ......................................... 28
Maturities of Large Time Deposits ....................................... 16
Maturities of Long-term Debt ............................................ 16
Return on Equity and Assets ............................................. 20
Interest Rate Sensitivity Analysis ...................................... 18
Capital Adequacy Ratios ................................................. 20
Noninterest Income ...................................................... 30
Noninterest Expense ..................................................... 30-31
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ITEM 2 - PROPERTIES
The main offices of the Company are housed in a colonial style two story
building owned by Community Bank and located on U. S. Highway 231 in
Blountsville, Alabama.
The main office of Community Bank is located at 68149 Main Street, Blountsville,
Alabama, in a one story brick building constructed in 1975 and which was
extensively remodeled during 1994. The premises are owned by Community Bank.
Community Bank's administrative, operational, legal, and accounting functions
are housed in facilities built at the same location as the Company's main office
during 1997. The bank subsidiary owns or leases buildings that are used in the
normal course of business in ten counties in North Alabama, namely Blount,
DeKalb, Lauderdale, Limestone, Madison, Marion, Marshall, Morgan, Perry and
Winston, and in Giles County, Tennessee.
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 1997.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Company Common Stock ("Shares") was held by approximately 1,295 shareholders of
record at December 31, 1997. 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
---------------------
High Low
------ --------
1997:
FIRST QUARTER ...................................... $25.00 $23.00
SECOND QUARTER ..................................... 26.00 25.00
THIRD QUARTER ...................................... 30.00 26.00
FOURTH QUARTER ..................................... 30.00 28.19
1996:
First Quarter ...................................... $20.00 $20.00
Second Quarter ..................................... 20.00 20.00
Third Quarter ...................................... 20.00 20.00
Fourth Quarter ..................................... 23.00 22.00
A cash dividend of $1.00 per share was declared by the Company's Board of
Directors on January 8,1998 to shareholders of record at January 8, 1998, and
was paid on January 12, 1998. 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.
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6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years.
All averages are daily averages.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in Thousands Except Per Share Data)
Interest income ....................... $ 37,791 $ 33,600 $ 26,304 $ 20,751 $ 17,774
Interest expense ...................... 19,541 17,426 13,751 9,507 8,008
Net interest income ................... 18,250 16,174 12,553 11,244 9,766
Provision for loan losses ............. 773 834 1,088 638 418
Non-interest income ................... 4,891 4,447 3,717 3,189 2,914
Non-interest expense .................. 17,423 14,902 12,046 10,193 8,824
Net income ............................ 3,512 3,459 2,705 2,688 2,572
Per Share data:
Net income - basic ................ 1.85 1.86 1.62 1.60 1.94
Net income assuming dilution ...... 1.72 1.76 1.62 1.60 1.94
Cash dividends .................... .75 .50 .50 -0- -0-
Shareholders' equity (book value)
at period end ................... 18.65 17.25 16.26 13.91 13.49
Balance Sheet:
Loans ............................. 326,134 322,762 237,841 206,428 151,651
Deposits .......................... 440,889 400,338 320,149 263,413 227,770
Long-term debt .................... 7,398 8,281 7,920 8,713 6,392
Average equity .................... 33,428 30,079 24,839 22,672 15,723
Average assets .................... 473,381 421,839 328,244 276,063 232,340
Total assets ...................... 491,839 454,710 362,824 299,352 262,192
Ratios:
Return on average assets .......... 0.74% 0.82% 0.82% 0.97% 1.11%
Return on average equity .......... 10.51% 11.50% 10.88% 11.86% 16.36%
Dividend payout ratio ............. 40.5% 26.9% 30.9% 0.00% 0.00%
Average equity to average assets .. 7.06% 7.13% 7.57% 8.21% 6.77%
Total risk-based capital .......... 11.86% 11.45% 14.10% 13.58% 16.53%
Leverage ratio .................... 6.94% 9.20% 8.61% 7.52% 8.95%
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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, Marion,
Marshall, Morgan and Winston), Western Alabama (Perry County) 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 and Perry County, Alabama markets, 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 $3,512,278 for 1997 was 1.5 percent more than 1996's
amount of $3,458,986, which was 28 percent more than the $2,704,798 earned
during 1995. When stated as changes in earnings per share, 1997 represented a 5
percent decrease from 1996 compared to a 10 percent decrease in 1996 over 1995.
The start-up costs associated with de novo branches of the bank subsidiary have
had a significant impact on the growth of the Company's net earnings, with
operating losses of over $600,000 in both 1997 and 1996.
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 losses sustained by Community Bank in its de novo branches have been
fully anticipated and projected prior to opening. The expected growth of these
new locations 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 completed
during the first half of 1996. 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 1997 increased 11 percent over 1996 primarily as a
result of increases in the loan portfolio. The mix of average earning assets
shifted slightly from the loan portfolio during 1997 as loans averaged 77
percent of the total for 1997, up from 73 percent during 1996. As a percentage
of total average earning assets, investments securities averaged 19 percent and
other earning asset categories averaged 4 percent for 1996. In the previous
year, the comparable mix was 23 percent in investment securities and 4 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 1996 increased 28 percent over 1995.
Average loans increased 17 percent in 1997 with much of the increase
concentrated in the real estate financing areas. Total loans outstanding at
year-end were up 1 percent over the previous year-end level. Real
estate-mortgage loans increased 6 percent and consumer loans decreased 4 percent
from year-end 1996 to year-end 1997. Commercial, financial and agricultural
loans, which made up 20 percent of the total loans, decreased 2 percent when
compared to the previous year. Real estate-construction loans decreased 34
percent but had little effect due to representing only 1 percent of total loans.
Total loans at year-end 1996 grew 36 percent over 1995 and average loans grew 24
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, 1997 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,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- --------------------- -------------------- -------------------- ------------------
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 ..... $ 64,136 19.6% $ 65,634 20.2% $ 44,686 18.61% $ 46,892 22.1% $ 34,200 22.0%
Real estate -
construction ..... 3,499 1.1 5,262 1.6 5,624 2.4 3,972 1.9 2,186 1.4
Real estate -
mortgage ......... 172,504 52.7 162,994 50.2 116,289 48.4 103,194 48.6 75,835 48.7
Consumer ........... 86,945 26.6 90,682 28.0 73,479 30.6 58,051 27.4 43,470 27.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
327,084 100.0% 324,572 100.0% 240,078 100.0% 212,109 100.0% 155,691 100.0%
===== ===== ===== ===== =====
Less: Unearned
income 950 1,810 2,237 5,681 4,040
Allowance for
loan losses ...... 2,131 2,425 2,209 1,548 1,255
-------- -------- -------- -------- --------
Net loans .......... $324,003 $320,337 $235,632 $204,880 $150,369
======== ======== ======== ======== ========
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... $31,979 $ 9,860 $23,105 $64,944 $22,369 $10,596
Real estate -
construction....... 2,685 223 591 3,499 497 317
------- ------- ------- ------- ------- -------
$34,664 $10,083 $23,696 $68,443 $22,866 $10,913
======= ======= ======= ======= ======= =======
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INVESTMENT PORTFOLIO
The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and provide a tool to
assist in controlling the Company's interest rate position while at the same
time producing adequate levels of interest income. 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 1997 gross investment securities sales were $5.0 million and
maturities were $6.6 million, representing 6.1 percent and 8.1 percent,
respectively, of the average portfolio for the year. Losses associated with the
sales totaled $2,590, accounting for 0.1 percent of noninterest income. Gross
unrealized gains in the portfolio amounted to $964,038 at year end 1997 and
unrealized losses amounted to $247,883. Average investment securities decreased
8.0 percent from 1996.
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, 1997 or 1996 contains no interest-only strips and the amount
of unamortized premium on mortgage-backed securities is only $281,029. 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. All securities have been
classified as securities available for sale since December 1, 1995.
INVESTMENT PORTFOLIO
December 31,
--------------------------
1997 1996 1995
------ ------ -------
(in Thousands)
U. S. Treasury and U.S. Government agencies .. $51,153 $45,135 $30,431
Mortgage-backed securities ................... 21,241 26,298 22,848
State and municipal securities ............... 12,698 15,478 16,711
------- ------- -------
Total investment securities ................ $85,092 $86,911 $69,990
======= ======= =======
Average taxable securities were 84.8 percent of the portfolio in 1997 and 82.0
percent in 1996 while tax-exempt securities were 15.2 percent in 1997 and 18.0
percent in 1996. Average taxable securities decreased 4.9 percent while average
tax-exempt securities decreased 22.3 percent in 1997. Average investment
securities for 1997 decreased 8.0 percent from 1996 average levels. Period-end
securities for 1997 decreased 2.1 percent from the previous year due to deposit
growth in excess of loan demand growth.
14
16
The maturities and weighted average yields of the investments in the 1997
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
9.66 years with an average yield of 6.22 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 .......... $ 4,891 5.57% $22,888 5.67% $ 6,096 5.61% $ -0- 0.00%
U. S. Government
agencies ............... -0- 0.00 9,700 6.13 10,016 6.59 18,803 7.27
State and municipal
securities ............. 668 5.61 270 4.69 5,390 6.15 6,370 5.87
------- ------- ------- -------
Total .................. $ 5,559 5.57 $32,858 5.80 $21,502 6.20 $25,173 6.91
======= ======= ======= =======
There were no securities held by the Company, whose aggregate value on December
31, 1997 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.
Average Federal funds sold increased 21.1 percent, reflecting the increased cash
available from deposit growth in excess of loan growth. During 1996, average
Federal Funds increased 48.8 percent from 1995 levels. As a percentage of
average earning assets, these funds represented 3.2 percent for 1997 compared to
3.0 percent for 1996.
The average balance of interest-bearing deposits with other banks decreased 1.5
percent from 1996 to 1997. The average balance from 1995 to 1996 decreased 18.3
percent. Total average earning assets as compared to total average assets for
1997 and 1996 were 89.3 and 90.0 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.
15
17
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 1997 and 1996 by 13.6 percent and 27.5 percent,
respectively. During the same periods, average noninterest-bearing deposits
increased 8.8 percent and 50.1 percent, respectively. Customer confidence and
satisfaction is evidenced by the increase in total average deposits of 12.9
percent in 1997 and 30.2 percent in 1996. The largest dollar increase was in the
time deposits category.
Average interest-bearing demand deposits rose 18.4 percent while average savings
deposits decreased 0.9 percent, and average time deposits increased 15.7
percent. The two categories of lowest cost deposits comprised the following
percentages of total deposits during 1997 and 1996, respectively: average
noninterest-bearing demand deposits - 13.0 percent and 13.5 percent; and average
interest-bearing demand deposits - 15.6 percent and 14.9 percent. Of total time
deposits, approximately 32.7 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, 1997 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 ............ $16,968 $18,555 $35,523
Over three through six months ... 9,266 -0- 9,266
Over six through twelve months .. 21,554 -0- 21,554
Over twelve months .............. 20,639 -0- 20,639
------- ------- -------
Total .......................... $68,427 $18,555 $86,982
======= ======= =======
Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1997 and 1996 consisted of the U. S. Treasury
Tax and Loan Note Option account, federal funds purchased (1996 only), 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, 1997.
MATURITIES OF LONG-TERM DEBT
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
(in Thousands)
Interest on indebtedness ....... $ 567 $ 492 $ 415 $ 338 $ 257
Repayment of principal ......... 897 913 929 947 967
------ ------ ------ ------ ------
$1,464 $1,405 $1,344 $1,285 $1,224
====== ====== ====== ====== ======
16
18
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 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, 1997, Community Bank could
have declared dividends of $7,105,317 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 $34.7 million or 10.6 percent of the
total loan portfolio at December 31, 1997 and investment securities maturing in
one year or less equaled $5.3 million or 6.2 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 other commercial banks
from available lines 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.
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 basis. The
following tables show interest sensitivity gaps for these different intervals as
of December 31, 1997.
17
19
INTEREST RATE SENSITIVITY ANALYSIS
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
------- ------- -------- -------- -------- --------
At December 31, 1997 (in Thousands)
- -----------------------------------
Interest-earning assets (1)
Loans ............................ $29,324 $34,841 $ 60,298 $139,454 $ 62,217 $326,134
Investment Securities:
Taxable ........................ -0- -0- 4,490 32,989 34,915 72,394
Tax-exempt ..................... -0- 126 543 270 11,759 12,698
Time deposits in other banks ..... 1,565 -0- 750 200 -0- 2,515
Federal funds sold ............... 26,600 -0- -0- -0- -0- 26,600
------- ------- -------- -------- -------- --------
57,489 34,967 66,081 172,913 108,891 440,341
------- ------- -------- -------- -------- --------
Interest-bearing liabilities (2)
Demand deposits (3) .............. 23,815 23,814 23,814 -0- -0- 71,443
Savings deposits (3) ............. 17,017 17,017 17,017 -0- -0- 51,051
Time deposits .................... 20,141 51,935 122,388 71,550 24 266,038
Other short-term borrowings ...... 2,630 -0- -0- -0- -0- 2,630
Long term debt ................... 74 149 674 3,756 2,745 7,398
------- ------- -------- -------- -------- --------
63,677 92,915 163,893 75,306 2,769 398,560
------- ------- -------- -------- -------- --------
Interest sensitivity gap .......... $(6,188) $(57,948) $ (97,812) $ 97,607 $106,122 $ 41,781
======= ======== ========= ======== ======== ========
Cumulative interest
sensitivity gap .................. $(6,188) $(64,136) $(161,948) $(64,341) $ 41,781
======= ======== ========= ======== ========
Ratio of interest-earning assets
to interest-bearing liabilities .. 0.90 0.38 0.40 2.30 39.33
======= ======== ========= ======== ========
Cumulative ratio .................. 0.90 0.59 0.49 0.84 1.10
======= ======== ========= ======== ========
Ratio of cumulative gap to
total interest-bearing assets .... (0.11) (0.69) (1.02) (0.19) 0.09
======= ======== ========= ======== ========
- -----------------
(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.
As seen in the preceding table, for the first 30 days of repricing opportunity
there is an excess of interest-bearing liabilities over earning assets of $6.2
million. For the first 365 days, interest-bearing liabilities exceed earning
assets by $161.9 million. During this one year time frame, 80.4 percent of all
interest bearing will reprice compared to 21.0 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.
18
20
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. On June 13, 1996 the offering was closed
upon full subscription of all shares offered for sale, raising $6,175,898 of
capital after reduction for 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 $32.6 million at December 31, 1997. 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 $36.4 million at year-end
1997. The percentage ratios, as calculated under the guidelines were 10.63
percent and 11.86 percent for Tier I and Total Risk-based capital, respectively,
at year-end 1997. 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.
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
average assets minus goodwill. The Company's leverage ratios as of December 31,
1997, 1996, and 1995 exceeded the regulatory minimum requirement of 4%.
The table following illustrates the company's regulatory capital ratios at
December 31, 1997, 1996 and 1995 under the year end 1997 requirements.
19
21
CAPITAL ADEQUACY RATIOS
1997 1996 1995
-------- -------- --------
(in thousands)
Tier 1 Capital ............................ $ 32,638 $ 29,941 $ 28,273
Tier 2 Capital ............................ 3,773 4,135 3,983
-------- -------- --------
TOTAL QUALIFYING CAPITAL .................. $ 36,411 $ 34,076 $ 32,256
======== ======== ========
Risk Adjusted Total Assets (including
off-balance-sheet exposures) ............. $306,947 $297,650 $228,714
======== ======== ========
Tier 1 Risk-Based Capital Ratio ........... 10.63% 10.06% 12.36%
======== ======== ========
Total Risk-Based Capital Ratio ............ 11.86% 11.45% 14.10%
======== ======== ========
Leverage Ratio ............................ 6.94% 9.20% 8.61%
======== ======== ========
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,
------------------------------
1997 1996 1995
------ ------ ------
Return on average assets ................ 0.74% 0.82% 0.82%
Return on average equity ................ 10.51 11.50 10.89
Dividend payout ratio ................... 44.1 27.9 30.9
Average equity to average assets ratio .. 7.06 7.13 7.57
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 1997 increased 12.8 percent from 1996 and 28.8 percent
in 1996 over 1995. Increased volume in 1997 and 1996 accounted for the majority
of the increase. The schedule on pages 25 and 26 provides the detail changes in
interest income, interest expense and net interest income due to changes in
volume and rate.
Interest income increased 12 percent in 1997 and 27.7 percent in 1996. The 1997
increase is due both to the 11.3 percent increase in average earning assets and
the 5 basis point rise in the average yield on earning assets. The increase in
interest income in 1996 was attributable to the 27.4% increase in average
earning assets. Interest income on loans increased 16.5 percent primarily due to
increased volume. Interest income on investment securities decreased 9.7 percent
from 1996 to 1997 as a result of decreased average balances outstanding.
Total interest expense increased 12.1 percent due to the effect of a 13.0
percent increase in volume of average interest-bearing liabilities, offset by
the effect of a 4 basis point decrease in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in volume which
exceeded declines in deposit rates.
The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield returned on average earning
assets and the average rate paid for funds used to support those earning assets,
including both interest-bearing and noninterest-bearing sources. The net
interest margin for 1997 was 4.46 percent as compared to 4.44 percent for 1996.
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 1997 increased 9 basis points to 3.94 percent from
the 1996 spread of 3.85 percent as the yields on earning assets increased as the
cost of interest-bearing liabilities decreased. See the accompanying schedules
entitled "Rate/Volume Variance Analysis" and "Consolidated Average Balances,
Interest Income/Expenses and Yields/Rates" for more information.
21
23
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
Years Ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Rate earned on earning assets .. 8.94% 8.85% 8.82% 8.20% 8.32%
Rate paid on borrowed funds .... 5.14 5.18 5.17 4.33 4.25
Interest rate spread ........... 3.80 3.67 3.65 3.87 4.07
Net yield on earning assets .... 4.32 4.26 4.21 4.44 4.58
1997 was characterized by relatively stable interest rates. Despite the flat
rate environment, net interest income increased by 12.8 percent due to the 11.3
percent increase in average earning asset volume.
Absolute changes in net interest income from 1996 to 1997 and from 1995 to 1996
were $2.1 million and $3.6 million, respectively, as reported in the
Consolidated Statements of Income. The net interest margin increased to 4.32
percent in 1997 from 4.26 percent in 1996 and the interest rate spread increased
to 3.80 percent for 1997 from 1996's 3.67 percent.
[The remainder of this page intentionally left blank]
22
24
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (in Thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997
-------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
--------- ------- --------
ASSETS
Earning assets:
Loans, net of unearned income (1) ............ $324,745 $31,999 9.85%
Investment securities:
Taxable ..................................... 69,432 4,410 6.35
Tax-exempt .................................. 12,475 1,080 8.66
-------- -------
Total investment securities ................ 81,907 5,490 6.70
Time deposits in other banks ................ 2,483 113 4.55
Federal funds sold .......................... 13,704 796 5.81
-------- -------
Total interest-earning assets (2) .......... 422,839 38,398 9.08
Non interest-earning assets:
Cash and due from banks ...................... 19,732
Premises and equipment ....................... 20,126
Accrued interest and other assets ............ 13,156
Allowance for loan losses .................... (2,472)
--------
Total assets ................................ $473,381
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................. $ 66,265 2,722 4.11
Savings deposits ............................ 50,393 1,784 3.54
Time deposits ............................... 253,095 14,258 5.63
-------- -------
369,753 18,764 5.07
Other short-term borrowings ................. 2,524 146 5.78
Long-term debt .............................. 7,833 631 8.06
-------- -------
Total interest-bearing liabilities ......... 380,110 19,541 5.14
------- ----
Noninterest-bearing liabilities:
Demand deposits ............................. 55,466
Accrued interest and other liabilities ...... 4,377
Shareholders' equity ........................ 33,428
--------
Total liabilities and shareholders' equity . $473,381
========
Net interest income/net interest spread ....... 18,857 3.94%
====
Net yield on earning assets ................... 4.46%
====
Taxable equivalent adjustment:
Loans ........................................ 240
Investment securities ........................ 367
-------
Total taxable equivalent adjustment .......... 607
-------
Net interest income ........................... $18,250
=======
- --------------------
(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.
23
25
Years Ended December 31,
---------------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- ------ -------- ------- ------
$276,878 $27,468 9.92% $223,222 $21,837 9.78%
73,011 4,702 6.44 46,155 2,952 6.40
16,049 1,380 8.60 18,962 1,710 9.02
-------- ------- -------- -------
89,060 6,082 6.83 65,117 4,662 7.16
2,522 122 4.84 2,132 107 5.02
11,319 604 5.34 7,607 441 5.80
-------- ------- -------- -------
379,779 34,276 9.03 298,078 27,047 9.07
20,276 14,460
15,187 11,518
8,931 5,817
(2,334) (1,629)
-------- --------
$421,839 $328,244
======== ========
$ 55,990 2,106 3.76 $ 46,092 1,738 3.77
50,844 1,924 3.78 39,762 1,524 3.83
218,720 12,565 5.74 169,413 9,551 5.64
-------- ------- -------- ------
325,554 16,595 5.10 255,267 12,813 5.02
2,824 155 5.49 2,818 166 5.89
8,053 676 8.39 8,123 772 9.50
-------- ------- -------- -------
336,431 17,426 5.18 266,208 13,751 5.17
------- ---- ------- ----
51,003 33,974
4,326 3,223
30,079 24,839
-------- --------
$421,839 $328,244
======== ========
16,850 3.85% 13,296 3.90%
==== ====
4.44% 4.46%
==== ====
206 162
470 581
------- -------
676 743
------- -------
$16,174 $12,553
======= =======
24
26
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume
---------------------------- -------------------------
1997 1996 1995 1997-1996 1996-1995
-------- -------- -------- ----------- -----------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned income ............... $324,745 $276,878 $223,222 $47,867 $58,656
Investment securities:
Taxable .................................. 69,432 73,011 46,155 (3,579) (26,856)
Tax exempt ............................... 12,475 16,049 18,962 (3,574) (2,913)
-------- -------- -------- -------- -------
Total investment securities .............. 81,907 89,060 65,117 (7,153) 23,943
Interest-bearing deposits with other banks .. 2,483 2,522 2,132 (39) 390
Federal funds sold .......................... 13,704 11,319 7,607 2,385 3,712
-------- -------- -------- ------- -------
Total earning assets ..................... $422,839 $379,779 $298,078 $43,060 $81,701
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand .................................. $ 66,265 $ 55,990 $ 46,092 $10,275 $ 9,898
Savings ................................. 50,393 50,844 39,762 (451) 11,082
Time ........................................ 253,095 218,720 169,413 34,375 49,307
-------- -------- -------- ------- -------
Total interest-bearing deposits ......... 369,753 325,554 255,267 44,199 70,287
Other short-term borrowings ................. 2,524 2,824 2,818 (300) 6
Long-term debt .............................. 7,833 8,053 8,123 (220) (70)
-------- -------- -------- ------- -------
Total interest-bearing liabilities ........ $380,110 $336,431 $266,208 $43,679 $70,223
======== ======== ======== ======= =======
Net interest income/net interest spread............................................................
Net yield on earning assets........................................................................
Net cost of funds..................................................................................
25
27
Variance Attributed to (1)
---------------------------------------
AVERAGE RATE Interest Income/Expense Variance 1997 1996
- --------------------------- ------------------------- ------------------- ------------------ -----------------
1997 1996 1995 1997 1996 1995 1997-1996 1996-1995 VOLUME RATE Volume Rate
- ---- ---- ---- ---- ---- ---- ------------------- ------ ---- ------ ----
(in Thousands)
9.85% 9.92% 9.78% $31,999 $27,468 $21,837 $4,531 $5,631 $4,726 (195) $5,315 316
6.35 6.44 6.40 4,410 4,702 2,952 (292) 3,150 (227) (65) 1,731 19
8.66 8.60 9.02 1,080 1,380 1,710 (300) 1,719 (310) 10 (253) (77)
------- ------ ------- ------ ------ ------ ----- ------ ----
6.70 6.83 7.16 5,490 6,082 4,662 (592) 1,420 (537) (55) 1,478 (58)
4.55 4.84 5.02 113 122 108 (9) 15 (2) (7) 19 (4)
5.81 5.34 5.80 796 604 441 192 163 135 57 200 (37)
------- ------ ------- ------ ------ ------ ----- ------ ----
9.08 9.03 9.07 38,398 34,276 27,048 4,122 7,229 4,322 (200) 7,012 217
4.11 3.76 3.77 2,722 2,106 1,738 616 368 409 207 373 (5)
3.54 3.78 3.83 1,784 1,924 1,524 (140) 400 (17) (123) 420 (20)
5.63 5.74 5.64 14,258 12,565 9,551 1,693 3,014 1,938 (245) 2,841 173
------- ------ ------- ------ ------ ------ ----- ------ ----
5.07 5.10 5.02 18,764 16,595 12,813 2,169 3,782 2,330 (161) 3,634 148
5.78 5.49 5.89 146 155 166 (9) (11) (17) 8 -0- (11)
8.06 8.39 9.50 631 676 772 (45) (96) (18) (27) (7) (89)
------- ------ ------- ------ ------ ------ ----- ------ ----
5.14 5.18 5.17 19,541 17,426 13,751 2,115 3,675 2,295 (180) 3,627 48
- ---- ---- ---- ------- ------ ------- ------ ------ ------ ----- ------ ----
3.94% 3.85% 3.90% $18,857 $16,850 $13,296 $2,007 $3,554 $2,027 $ (20) $3,385 $169
==== ==== ==== ======= ======= ======= ====== ====== ====== ===== ====== ====
4.46% 4.44% 4.46%
==== ==== ====
4.62% 4.59% 4.61%
==== ==== ====
(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.
26
28
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 decreased 7.4 percent
in 1997 compared to a decrease of 23.3 percent in 1996; there was a decrease of
12.1 percent in the allowance for loan losses at December 31, 1997 as compared
to December 31, 1996. Net loan charge-offs decreased 6.1 percent in 1997 after
increasing 168.6 percent in 1996. Net charge-offs on consumer loans amounted to
64 percent of total net charge-offs for 1997 compared to 53 percent in 1996 and
80 percent in 1995. Management believes that the $2,131,354 in the allowance for
loan losses at December 31, 1997 (.65% 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, 1997.
Summary of Loan Loss Experience
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in Thousands)
Allowance for loan losses at beginning of year ............. $ 2,425 $ 2,209 $ 1,548 $ 1,255 $ 1,062
Loan charged off
Commercial, financial and agricultural ................... 80 392 110 91 129
Real Estate - mortgage ................................... 325 158 -0- -0- 33
Consumer ................................................. 783 680 399 319 134
-------- -------- -------- -------- --------
Total loans charged off ................................ 1,188 1,230 509 410 296
-------- -------- -------- -------- --------
Recoveries on loans previously charged off
Commercial, financial and agricultural ................... 5 10 22 52 8
Real Estate - mortgage ................................... 9 1 1 2 -0-
Consumer ................................................... 97 72 59 11 63
-------- -------- -------- -------- --------
Total recoveries ........................................... 111 83 82 65 71
-------- -------- -------- -------- --------
Net loans charged off ...................................... 1,077 1,147 427 345 225
Reserves acquired through purchase ......................... 10 529 -0- -0- -0-
Provision for loan losses .................................. 773 834 1,088 638 418
-------- -------- -------- -------- --------
Allowance for loan losses at end of period ................. $ 2,131 $ 2,425 $ 2,209 $ 1,548 $ 1,255
======== ======== ======== ======== ========
Loans, net of unearned income, at end of period ............ $326,134 $322,762 $237,841 $206,428 $151,651
======== ======== ======== ======== ========
Average loans, net of unearned income,
outstanding for the period ................................ $324,745 $276,878 $223,222 $178,123 $140,294
======== ======== ======== ======== ========
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29
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Ratios:
Allowance at end of period to loans, net of
unearned income ............................. .65% .75% .93% .75% .83%
Allowance at end of period to average loans,
net of unearned income ...................... .66 .88 .99 .87 .89
Net charge-offs to average loans, net of
unearned income ............................. .33 .41 .19 .19 .16
Net charge-offs to allowance at end of period . 50.54 47.30 19.33 22.29 17.93
Recoveries to prior year charge-offs .......... 9.02 16.31 20.00 21.96 14.76
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,
---------------------------------------------------------------------------------------------------------
1997 1995 1995 1994 1993
------------------- -------------------- -------------------- -------------------- -----------------
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 ... $ 149 7% $ 800 33% $ 442 20% $ 170 11% $ 678 54%
Real estate -
mortgage ........... 618 29 340 14 -- -- -- -- 188 15
Consumer ............ 1,364 64 1,285 53 1,767 80 1,378 89 389 31
------ --- ------ --- ------ --- ------ --- ------ ---
$2,131 100% $2,425 100% $2,209 100% $1,548 100% $1,255 100%
====== === ====== === ====== === ====== === ====== ===
(1) The Company had no foreign loans.
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30
NONPERFORMING ASSETS
Nonperforming assets as of December 31, 1997 increased 49.2 percent from
year-end 1996. 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, 1997. The following table
summarizes the Company's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS
December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(in Thousands)
Nonaccruing loans .................. $1,093 $ 565 $ 491 $ 422 $ 265
Loans past due 90 days or more ..... 975 470 317 343 154
Restructured loans ................. -0- -0- -0- -0- -0-
------ ------ ------ ------ -----
Total nonperforming loans .......... 2,068 1,035 808 765 419
Nonaccruing securities ............. -0- -0- -0- -0- -0-
Other real estate .................. 656 791 417 290 284
------ ------ ------ ------ -----
Total nonperforming assets ........ $2,724 $1,826 $1,225 $1,055 $ 703
====== ====== ====== ====== =====
Ratios:
Loan loss allowance to
total nonperforming assets ........ 0.78 1.33 1.80 1.47 1.79
====== ====== ====== ====== =====
Total nonperforming loans to total
loans (net of unearned interest) .. 0.006 0.003 0.003 0.004 0.003
====== ====== ====== ====== =====
Total nonperforming assets
to total assets ................... 0.006 0.004 0.003 0.004 0.003
====== ====== ====== ====== =====
The ratio of loan loss allowance to total nonperforming assets decreased by
41.4% from 1996 to 1997, to 0.78. The ratio of total nonperforming loans to
total loans doubled from 1996 to 1997, and total nonperforming assets to total
assets increased by 0.2% from 1996 to 1997, placing it at a slightly higher
level than in the previous three years. Each of these ratios compare favorably
with industry averages, and management is aware of no factors which should
suggest that they are prone to increases in future periods.
For the years ended December 31, 1997, 1996 and 1995, 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.
29
31
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 1997 totaled $4,890,980 as compared to $4,447,235 in 1996
and $3,716,891 in 1995. These amounts are primarily from service charges on
deposit accounts, debt cancellation fees 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 deposit growth
has on deposit account service charges and NSF income. The insurance commissions
increased in 1997 as a result of the activities of the Company's Community
Insurance unit in the areas of title insurance and life insurance, overcoming
significant decreases in credit life insurance commissions. Service charges and
bank club dues were up a combined 12.7%, primarily due to the continued
geographic expansion of the Company's bank subsidiary, leading to increases in
the types of transaction accounts which create these kinds of fees.
NONINTEREST INCOME
Years Ended December 31, Percent Change
------------------------------ --------------------
1997 1996 1995 1997/1996 1996/1995
------- ------- ------- --------- ---------
(in Thousands)
Service charges on deposits ................. $ 2,512 $ 2,229 $ 1,751 12.7% 27.3%
Insurance commissions ....................... 796 656 637 21.3 3.0
Investment securities gains (losses) ........ (3) 8 266 (137.5) (97.0)
Bank club dues .............................. 562 498 427 12.9 16.6
Debt cancellation fees ...................... 275 388 112 (29.1) 246.4
Other ....................................... 749 668 524 12.1 27.5
------- ------- -------
$ 4,891 $ 4,447 $ 3,717 10.0 19.6
======= ======= =======
NONINTEREST EXPENSES
Noninterest expenses totaled $17,422,661 in 1997 which represents a 16.9 percent
increase over 1996 noninterest expenses, which were 23.7 percent higher than in
1995. Salaries and benefits increased $1,267,391 (13.9%) to in 1997 reflecting
the increased personnel costs of completing the staffing of the new Alabama bank
locations and finance offices. Director and committee fees, which were $465,775
in 1996 and $286,550 in 1995 increased 37.0% in 1997 to $638,120. Occupancy
expense increased 43.4% to $1,477,721 in 1997 primarily as a result of the
building and renovation of several bank locations. Furniture and equipment
expense increased 20.8% in 1997 from the 1996 amount, to $1,213,978, compared to
a 20.6% increase in 1996. Other operating expenses increased 13.0% to $3,690,116
during 1997. From 1995 to 1996, other operating expenses increased 14.5%.
30
32
NONINTEREST EXPENSES
Years Ended December 31, Percent Change
------------------------- ---------------------
1997 1996 1995 1997/1996 1996/1995
------- ------- ------- --------- ---------
(in Thousands)
Salaries and employee benefits ... $10,403 $ 9,135 $ 7,209 13.9% 26.7%
Occupancy expense................. 1,478 1,031 866 43.4 19.1
Furniture and equipment expense .. 1,214 1,005 833 20.8 20.6
Director and committee fees ...... 638 466 287 36.9 62.4
Amortization of intangibles ...... 328 275 123 19.3 123.6
Advertising ...................... 238 229 197 3.9 16.2
Insurance ........................ 283 224 495 26.3 (54.7)
Professional fees ................ 273 250 247 1.0 1.2
Supplies ......................... 537 547 380 (1.8) 43.9
Other ............................ 2,031 1,740 1,409 16.7 23.5
------- ------- -------
$17,423 $14,902 $12,046 16.9 23.7
======= ======= =======
INCOME TAXES
The Company attempts to maximize its net income through active tax planning.
This planning resulted in a provision for income taxes of $1,451,419 (29.3%) for
1997, on pre-tax income of $4,945,355. The tax for 1996 was $1,426,344 (29.2%)
on income of $4,885,330 and for 1995 was $430,997 (13.7%) on income of
$3,135,795. 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 also decreased due to an adjustment 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 1997 the
effective tax rate was 86.2 percent of the statutory Federal tax rate compared
to 85.9 percent in 1996. A more detailed explanation of income tax expense is
included in the accompanying notes to the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
31
33
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.
[The remainder of this page intentionally left blank]
32
34
================================================================================
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
Community Bancshares, Inc.
The management of Community Bancshares, Inc. is responsible for the preparation,
integrity, and objectivity of the consolidated financial statements, related
financial data, and other information in this annual report. The consolidated
financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's best estimates
and judgement where appropriate. Financial information appearing throughout this
annual report is consistent with the consolidated financial statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company maintains a professional staff of
internal auditors who monitor compliance and assess the effectiveness of
internal control systems and coordinate audit coverage with independent
certified public accountants.
The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the consolidated
financial statements presented. Their opinion is based on an audit conducted in
accordance with generally accepted auditing standards as described in their
report.
The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the consolidated financial statements. The Audit
Committee meets periodically with both management and the independent certified
public accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and Board of Directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.
33
35
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below.
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Financial Statements
Page(s)
------
Independent Auditor's Report............................................................... 35
Consolidated Statements of Financial Condition as of December 31, 1997 and 1996............ 36
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995......................................................... 37
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995......................................................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995......................................................... 39-40
Notes to Consolidated Financial Statements -
December 31, 1997, 1996 and 1995......................................................... 41-69
Quarterly Results (Unaudited).............................................................. 70
34
36
[DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Community Bancshares, Inc.
We have audited the consolidated statements of financial condition of Community
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Birmingham, Alabama
February 13, 1998
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
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37
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
December 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Cash.................................................................. $ 6,359,331 $ 5,096,892
Due from banks........................................................ 13,292,647 12,515,285
Interest-bearing deposits with banks.................................. 2,514,558 1,773,778
Federal funds sold.................................................... 26,600,000 -0-
Securities available for sale......................................... 85,092,069 86,911,305
Loans................................................................. 327,084,688 324,571,991
Less: Unearned income................................................. 950,205 1,809,698
Allowance for loan losses....................................... 2,131,354 2,424,847
------------ ------------
NET LOANS............................................. 324,003,129 320,337,446
Premises and equipment, net........................................... 22,362,432 17,076,220
Accrued interest...................................................... 5,089,765 4,847,308
Intangibles, net...................................................... 4,117,825 4,101,306
Other real estate..................................................... 656,271 791,435
Other assets.......................................................... 1,750,819 1,258,720
------------ ------------
TOTAL ASSETS.......................................... $491,838,846 $454,709,695
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing................................................ $ 52,356,858 $ 50,245,130
Interest-bearing................................................... 388,531,773 350,092,545
------------ ------------
TOTAL DEPOSITS........................................ 440,888,631 400,337,675
Other short-term borrowings........................................... 2,630,387 8,376,472
Accrued interest...................................................... 2,912,286 2,542,825
Long-term debt........................................................ 7,397,612 8,281,449
Other liabilities..................................................... 2,012,500 2,612,488
------------ ------------
TOTAL LIABILITIES..................................... 455,841,416 422,150,909
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY............................ 18,382 -0-
Shareholders' equity
Common stock, par value $.10 per share, 5,000,000
shares authorized, 2,031,606 and 2,000,000 shares
issued, respectively........................................... 203,161 200,000
Capital surplus.................................................... 18,524,301 17,819,722
Retained earnings.................................................. 18,824,795 16,812,517
Unearned ESOP shares - 102,305 and 112,121 shares
as of December 31, 1997 and 1996............................... (2,002,902) (2,119,891)
Unrealized gains (losses) on investment securities
available for sale, net of deferred tax or tax benefit......... 429,693 (153,562)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................ 35,979,048 32,558,786
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $491,838,846 $454,709,695
============ ============
See notes to consolidated financial statements
36
38
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans..................................... $31,759,123 $27,261,734 $21,675,669
Interest on investment securities:
Taxable securities........................................... 4,410,193 4,701,656 2,951,706