-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VEPPC7p0H8D/QBII+NsXskdYBvEUCkhXZuQ1CmtK0+asQSGo7rYb/gRrJZ6e+GFU stLHvQKKi03Gs2c4wpHwVA== 0000950144-99-003584.txt : 19990331 0000950144-99-003584.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003584 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0000752195 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 630868361 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16461 FILM NUMBER: 99579197 BUSINESS ADDRESS: STREET 1: MAIN ST P O BOX 1000 CITY: BLOUNTSVILLE STATE: AL ZIP: 35031 BUSINESS PHONE: 2054291000 MAIL ADDRESS: STREET 1: MAIN STREET PO BOX 1000 CITY: BLOUNTSVILLE STATE: AL ZIP: 35031 FORMER COMPANY: FORMER CONFORMED NAME: BLOUNTSVILLE BANCSHARES INC DATE OF NAME CHANGE: 19860602 10-K 1 COMMUNITY BANCSHARES, INC. 1 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, 1998 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 -------------- (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 --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OF INFORMATION STATEMENTS INCORPORATED BY REFERENCE TO PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] AS OF MARCH 15, 1999 THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES WAS $ 62,090,050. INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING AT MARCH 15, 1999 - ---------------------------- ----------------------------- COMMON STOCK, $.10 PAR VALUE 4,656,847 DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED - --------------------------------------- ---------------------------------- PROXY STATEMENT FOR 1999 ANNUAL MEETING PART III THE TOTAL NUMBER OF PAGES IN THIS REPORT INCLUDING EXHIBITS IS 162. 2 PART 1 ITEM 1 - BUSINESS GENERAL Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank holding company registered with the Board of Governors of the Federal Reserve Board (the "Federal Reserve") under the Bank Holding Act of 1956, as amended (the "Bank Holding Company Act"). The Company was organized in 1983 and commenced business in 1985. The Company has one bank subsidiary, Community Bank, an Alabama banking corporation which conducts a general commercial banking business in northern Alabama and southern Tennessee. At December 31, 1998, the Company and its subsidiaries had total assets of about $603,244,000, deposits of about $538,586,000 and shareholders' equity of about $47,233,000. SUBSIDIARY BANK Community Bank currently operates through 30 locations in 12 counties in Alabama and southern Tennessee. It offers a wide range of commercial and retail banking services, including demand and time deposit accounts, personal and commercial loans and personal and commercial checking accounts. The majority of loans by Community Bank are to individuals and small to mid-sized businesses in Alabama and Tennessee. Community Bank seeks to provide superior service to its customers and to become a vital component of each of the communities it serves. Community Bank operates in small non-urban communities, including locations in Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County, Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley, Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and Gunterville in Marshall County, Alabama; Falkville and Hartselle in Morgan County, Alabama; Uniontown in Perry County, Alabama; Double Springs and Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee. Four of these offices are located within Wal-Mart stores, including one office opened in the first quarter of 1998. In June 1998, Community Bank purchased certain assets and assumed certain liabilities of the Uniontown, Alabama office of the First National Bank of West Point, Georgia. OTHER SUBSIDIARIES 1st Community Credit Corporation, another subsidiary of the Company currently operates 12 finance company offices in nine Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman, Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Moulton, Alabama. In March 1998, 1st Community Credit Corporation acquired certain assets of Valley Finance, Inc. relating to its offices in Boaz and Gadsden, Alabama. Other subsidiaries of the Company are of Community Appraisals, Inc., which operates a real estate appraisal business, and Community Insurance Corp., which serves as an agent in the sale of title, life, automobile, homeowner's and farmowner's insurance policies. In April 1998, Community Insurance Corp. acquired 100% ownership of the outstanding shares of capital stock of Chafin Insurance Agency, Inc. and Jim Murphree Insurance Agency, Inc., insurance agencies located in Graysville and Oneonta, Alabama, respectively. Both agencies merged into Community Insurance Corp. in January 1999. In April 1998, Community Insurance Corp. acquired 100% ownership of the outstanding shares of capital stock of Southern 1 3 Select Insurance, Inc., a property and casualty insurance general agency located in Birmingham, Alabama that serves as the general agent to over 140 insurance agencies in Alabama. The Company had acquired a controlling interest in Southern Select Insurance, Inc. in August 1997. The Company maintains its principal executive offices at 68149 Main Street, P. O. Box 1000, Blountsville, Alabama 35031, and its telephone number is (205) 429-1000. COMPETITION The banking business in Alabama and 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. Community Bank competes for deposits, loans and other business with these banks as well as with savings and loan associations, credit unions, mortgage companies, insurance companies and other local financial institutions. Many of the major commercial banks operating in Community Bank's service areas offer services such as international banking, and investment and trust services, which are not offered by Community Bank. EMPLOYEES At December 31, 1998, the Company and its subsidiaries had approximately 408 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. 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. FEDERAL RESERVE The Company is a bank holding company within the meaning of the Bank Holding Company Act, and is registered with, and subject to supervision by, the Federal Reserve and the Federal Reserve Bank of Atlanta. The Company is required to file periodic reports and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act. The Federal Reserve may also examine the Company and its subsidiaries. Subject to certain exceptions, the BHC Act requires Federal Reserve approval before the Company can acquire substantially all the assets of any bank if as a result of the acquisition the Company would own or 2 4 control more than 5% of the voting shares of the bank, or for a merger or consolidation with another bank holding company. The Company may also 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 incidental 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 and certain subordinated debt. The Company's Tier I and Total Capital ratios exceeded the required minimum levels as of December 31, 1998. The Company is a legal entity which is separate and distinct from its subsidiaries. Federal law restricts extensions of credit by Community Bank 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. FEDERAL DEPOSIT INSURANCE CORPORATION Deposits in Community Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") and therefore they are subject to examination by the FDIC. Pursuant to provisions of the Federal Deposit Insurance Act, any FDIC-insured subsidiary of 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 FDIC charges an annual assessment for the insurance of deposits based upon the risk a particular institution poses to the FDIC's deposit insurance fund. FEDERAL LEGISLATION 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. The FDICIA also requires regulations to by federal banking agencies establishing minimum loan to value ratios for all real estate mortgage and construction loans. The FDICIA also 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 Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits adequately capitalized and managed bank holding companies to acquire control of banks in states other than their home states, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. IBBEA permits states to continue to require that an acquired bank have been in existence for a certain minimum time period, which may not exceed five years. A bank holding company 3 5 may not, following an interstate acquisition, control more than 10% of the nation's total amount of bank deposits or 30% of bank deposits in the relevant state (unless the state enacts legislation to raise the 30% limit). States retain the ability to adopt legislation to effectively lower the 30% limit. Federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions, except that merger 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 states with out-of-state institutions. Federal banking regulators may permit an out-of-sate bank to open new branches in another state if such state has enacted legislation permitting interstate branching. Affiliated institutions are authorized to accept deposits for existing accounts, renew time deposits, and close and service loans for affiliated institutions without being deemed an impermissible branch of the affiliate. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") permits, among other things, the acquisition by bank holding companies of savings associations, irrespective of their financial condition. FIRREA also provides that commonly controlled federally insured financial institutions must reimburse the FDIC for losses incurred by the FDIC in connection with the default of another commonly controlled financial institution or in connection with the provision of FDIC assistance to such a commonly controlled financial institution in danger of default. Reimbursement liability under FIRREA is superior to any obligations to shareholders of such federally insured institutions, including a bank holding company such as the Company, arising as a result of their status as a shareholder of a reimbursing financial institution. The 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. ALABAMA BANKING DEPARTMENT 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 Community Bank. [The remainder of this page intentionally left blank] 4 6 GOVERNMENTAL MONETARY POLICIES The Federal Reserve 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. [The remainder of this page intentionally left blank] 5 7 ITEM 1 - STATISTICAL DISCLOSURE
Page(s) ------- Loan Portfolio........................................................................................... 14 Selected Loan Maturity and Interest Rate Sensitivity..................................................... 15 Investment Portfolio and Investment Portfolio Maturity Schedule.......................................... 16 Maturities of Large Time Deposits........................................................................ 17 Maturities of Long-term Debt ............................................................................ 18 Interest Rate Sensitivity and Market Risk................................................................ 20 Capital Adequacy Ratios.................................................................................. 22 Return on Equity and Assets.............................................................................. 22 Consolidated Average Balances, Interest Income/Expense and Yields/Rates............................................................... 25-26 Rate/Volume Variance Analysis............................................................................ 27-28 Summary of Loan Loss Experience.......................................................................... 29-30 Allocation of Loan Loss Reserve.......................................................................... 30 Nonperforming Assets..................................................................................... 31 Noninterest Income....................................................................................... 32 Noninterest Expense...................................................................................... 33
6 8 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 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. Community Bank owns or leases buildings that are used in the normal course of business in eleven counties in Alabama, namely Blount, DeKalb, Lauderdale, Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston, and in Giles County, Tennessee. 1st Community Credit Corporation owns or leases buildings that are used in the normal course of business in nine counties in Alabama, namely Cullman, Marshall, Morgan, Limestone, Lawrence, Etowah, Madison, DeKalb and Walker. Community Insurance Corporation and its subsidiary, Southern Select Insurance, Inc., own or lease buildings that are used in the normal course of business in Blount, Jefferson and Shelby counties in Alabama. 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 Litigation: On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a shareholder derivative action against the directors of the Company in the Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on January 14, 1999 to add the Company and Community Bank as defendants in the action. On February 11, 1999, the complaint was again amended to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as additional plaintiffs. The complaint alleged that the directors of the Company breached their fiduciary duty to the Company and its shareholders, engaged in fraud, fraudulent concealment, suppression of material fact and suppression of the plaintiff shareholders, failed to supervise management, paid themselves excessive director fees and conspired to conceal wrongful acts from the Company's shareholders. The complaint also alleged that the Board of Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President of the Company, including alleged self dealing, payment of excessive compensation , misappropriation of corporate opportunities and misappropriation of funds. The complaint seeks an unspecified amount of compensatory and punitive damages, removal of the current directors, appointment of a new Board of Directors, and attorneys fees and costs. Management of the Company believes that the plaintiffs' allegations are false and that the action lacks merit. The Company and its directors have filed a motion with the court seeking to have the action dismissed. Management of the Company believes that the action will not have a material adverse effect on the Company's financial condition and results of operations. The Company and its subsidiaries are from time to time parties to other legal proceedings arising from the ordinary course of business. Management believes, after consultation with legal counsel, that no such proceedings will, individually or in the aggregate, have a material adverse effect on the business or consolidated financial condition of the Company. 7 9 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 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, the positions held by them with the Company and certain of its subsidiaries and their principal occupations for the last five years are as follows:
Name, Age and Position Held in the Company and its Subsidiaries Principal Experience During Past Five Years - ------------------------------------------ ------------------------------------------- Kennon R. Patterson, Sr. (56) Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer of the Company (1985-present); Chairman and of the Company; Chairman and Chief Executive Chief Executive Officer of Community Bank Officer of Community Bank; Director of (1993-present) Community Appraisals, Inc., Community Insurance Corp, 1st Community Credit Corporation and Southern Select Insurance, Inc. Bishop K. Walker, Jr. (67) Vice Chairman, Senior Executive Vice President Director, Vice Chairman, Secretary, Senior and General Counsel of the Company (1987- Executive Vice President and General Counsel of present); President and Director of Community the Company; Director, Senior Executive Vice Insurance Corporation (1987-1997) President and Secretary of Community Bank; Director of Community Insurance Corp and Southern Select Insurance, Inc. Denny G. Kelly (59) President of Community Bank (1993-present) Director and Executive Vice President of the Company; Director and President of Community Bank; Director of 1st Community Credit Corporation, Community Appraisals, Inc., Community Insurance Corp and Southern Select Insurance, Inc. Michael A. Bean (51) Executive Vice President and Chief Financial Acting Chief Accounting Officer of the Company; Officer of Community Bank (1998-present); Director, Executive Vice President and Chief Chief Accounting Officer of Compass Bancshares, Financial Officer of Community Bank; Director Inc. (1991-1998) of Community Insurance Corp and Southern Select Insurance, Inc.
8 10 PART II ITEM 5 - MARKET OF REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Shares of the common stock ( the "Common Stock") of the Company were held by approximately 2,200 shareholders of record as of March 1, 1999. There is no established trading market for the Common Stock, which has been purchased and sold infrequently in private transactions. Therefore, no reliable information is available as to trades of the Common Stock, or as to the prices at which such Common Stock has traded. Management has reviewed the limited information available to the Company as to the ranges at which shares of the Common Stock has been sold. The following data regarding the Common Stock is provided for information purposes only, and should not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price Range Per Share -------------------------- High Low ---------- --------- 1998: FIRST QUARTER.................................................................. $ 15.00 $ 15.00 SECOND QUARTER................................................................. 19.00 15.00 THIRD QUARTER.................................................................. 19.00 19.00 FOURTH QUARTER................................................................. 20.00 19.00 1997: First Quarter.................................................................. $ 12.50 $ 11.50 Second Quarter................................................................. 13.00 12.50 Third Quarter.................................................................. 15.00 13.00 Fourth Quarter................................................................. 15.00 14.10
Annual dividends of $.50 per share and $.38 per share were declared by the Board of Directors on the Company's Common Stock and paid on January 12, 1998 and January 10, 1997, respectively. Management continues to anticipate retaining substantially all earnings to finance the Company's growth. The payment of dividends on the Common Stock is subject to the prior payment of principal and interest on the Company's long-term debt, the retention of sufficient earnings and capital in the Company's operating subsidiaries and regulatory restrictions. See Consolidated Financial Statements and related notes. During 1998, the following equity securities were sold by the Company without registration under the Securities Act of 1993 (the "Securities Act"): In February 1998, the Company issued an aggregate of 12,642 shares of Common Stock to certain of Community Bank's city directors in payment of director fees, in reliance upon an exemption from registration under Section 4(2) of the Securities Act. In March 1998, the Company granted options to purchase an aggregate of 203,221 shares of Common Stock to the directors and certain senior officers of the Company and Community Bank. The exercise price for each of such options is equal to the market price of the Common Stock on the date of grant. The Company did not receive any payment in exchange for granting any of such options, which were granted in reliance upon an exemption from registration under Section 4(2) of the Securities Act. 9 11 In April 1998, the Company issued 22,306 shares of Common Stock to the holders, other than the Company, of capital stock of Southern Select Insurance, Inc., as a portion of the consideration for the purchase of all of the outstanding shares of capital stock of Southern Select Insurance, Inc. that were not already held by the Company. In August 1997, the Company issued 11,770 shares of Common Stock to the holders of capital stock of Southern Select Insurance, Inc. as a portion of the consideration for the purchase of 51% of the outstanding shares of such capital stock. The Company issued shares of the Common Stock in each of these transactions in reliance upon an exemption from registration under Section 4(2) of the Securities Act. In April 1998, the Company issued 10,833 shares of Common Stock to the holders of capital stock of Chafin Insurance Agency, Inc. as a portion of the consideration for the purchase of all of the outstanding shares of such capital stock. The Company issued shares of Common Stock in this transaction in reliance upon an exemption from registration under Section 4(2) of the Securities Act. In April 1998, the Company issued 6,667 shares of Common Stock to the holder of capital stock of Jim Murphree Insurance Agency, Inc. as a portion of the consideration for the purchase of all of the outstanding shares of such capital stock. The Company issued shares of Common Stock in this transaction in reliance upon an exemption from registration under Section 4(2) of the Securities Act. In March 1999, the Company issued an aggregate of 8.923 shares of Common Stock to certain of Community Bank's city directors in payment of director fees, in reliance upon an exemption from registration under Section 4(2) of the Securities Act. [The remainder of this page intentionally left blank] 10 12 ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years. All averages are daily averages.
Year Ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands Except Per Share Data) Interest income.................................. $ 44,365 $ 37,791 $ 33,600 $ 26,304 $ 20,751 Interest expense................................. 22,693 19,541 17,426 13,751 9,507 Net interest income.............................. 21,672 18,250 16,174 12,553 11,244 Provision for loan losses........................ 885 773 834 1,088 638 Non-interest income.............................. 8,102 4,891 4,447 3,717 3,189 Non-interest expense............................. 23,784 17,423 14,902 12,046 10,193 Net income....................................... 3,579 3,512 3,459 2,705 2,688 Per Share data: Net income - basic........................... .90 .92 .93 .81 .80 Net income - diluted......................... .88 .92 .93 .81 .80 Cash dividends............................... .50 .38 .25 .25 -0- Shareholders' equity (book value) at period end............................ 10.16 8.85 8.63 8.13 6.96 Balance Sheet: Loans........................................ $433,853 $326,134 $322,762 $237,841 $206,428 Deposits..................................... 538,586 440,889 400,338 320,149 263,413 Long-term debt............................... 7,569 7,398 8,281 7,920 8,713 Average equity............................... 37,318 33,428 30,079 24,839 22,672 Average assets............................... 538,470 473,381 421,839 328,244 276,063 Total assets................................. 603,244 491,839 454,710 362,824 299,352 Ratios: Return on average assets..................... 0.67% 0.74% 0.82% 0.82% 0.97% Return on average equity..................... 9.59% 10.51% 11.50% 10.88% 11.86% Dividend payout ratio........................ 55.60% 40.50% 26.90% 30.90% 0.00% Average equity to average assets............. 6.93% 7.06% 7.13% 7.57% 8.21% Total risk-based capital..................... 11.03% 11.86% 11.45% 14.10% 13.58% Leverage ratio............................... 7.79% 6.94% 9.20% 8.61% 7.52%
11 13 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. Certain statements in this Report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Act of 1934, as amended. These forward-looking statements are not based on historical facts and may be identified by their reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "estimate," "expect," "may" and should." These forward-looking statements include, without limitation, those relating to the Company's future growth, dividend payments, deposit base, economies, long-term obligations, loan losses, interest sensitivity, market risk, impact of inflation and impact of Year 2000 issues. Actual results could differ materially from those indicated in such forward-looking statements due to a variety of factors. These factors include, but are not limited to, economic conditions, government fiscal and monetary policies, prevailing interest rates and effectiveness of the Company's interest rate strategies, laws and regulations affecting financial institutions, changes in and effectiveness of the Company's operating or expansion strategies, geographic concentration of assets and operations, competition from other financial services companies, Year 2000 compliance issues, and other risks detailed from time to time in the Company's press releases and filings with the Securities and Exchange Commission. SUMMARY The Company's principal market areas are located in North Central Alabama (Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marion, Marshall, Morgan, and Winston Counties), Western Alabama (Marengo and Perry Counties) and in South Central Tennessee (Giles County). All of the Company's banking and finance company 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 Blount County, Alabama and Marengo and Perry Counties, Alabama, the markets in which the Company operates share one common characteristic: they are separate and distinct economies, but each is close enough to Huntsville, Alabama to share in the economic and employment benefits of that city. Similarly, Blount County is close enough to Birmingham, Alabama to share in the economic and employment benefits of that city. Despite the apparent dependency upon the military and aerospace industries, the Huntsville Metropolitan Statistical Area (the "MSA") possesses a diverse economic base. Significant employers include manufacturers of durable goods, machinery, and transportation equipment, as well as in retailers and service industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco, dairy and poultry farming, also 12 14 makes up a significant portion of the economy. In 1997, the Huntsville MSA and Madison County had an average unemployment rate of 2.7%, and the counties served by the Company and its subsidiaries had unemployment averaging 5.6%, both lower than the average of 6.5% experienced in the entire State of Alabama. In 1995, the average per capita income in the Company's markets surpassed the rate for the average per capita income in the State of Alabama by approximately 5.5%. Based on 1998 projections, the average population for the counties served by the Company and its subsidiaries exceeds 70,000 persons per county. 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 $3,579,493 for 1998 was 1.9 percent more than 1997's amount of $3,512,278, which was 1.5 percent more than the $3,458,986 earned during 1996. When stated as changes in the basic earnings per share, 1998 represented a 2.2 percent decrease from 1997 compared to a 1.1 percent decrease in 1997 over 1996. The decrease in earnings per share resulted primarily from increases in non-interest expenses associated with expansion of the bank office network, new finance company facilities and additional insurance offices. Management continues to emphasize quality loans and investments with good yields while keeping expenses in line. The losses sustained by Community Bank in its new branches were fully anticipated and projected prior to the openings of these facilities. The growth of these new locations is expected by management to become a significant factor to the Company's future earnings. The Company raised approximately $15,000,000 in two public offerings of Common Stock that closed in 1994 and 1996 after being fully subscribed. In the fourth quarter of 1998, the Company offered to the public 500,000 newly issued shares of Common Stock, at a price of $19.00 per share, in accordance with the Company's Prospectus dated August 14, 1998. The offering was closed on December 1, 1998 upon full subscription of all shares offered, raising approximately $9,469,000 of capital net of offering costs. This additional capital and internally generated retained earnings have allowed the Company to remain in a strong capital position to support current, as well as anticipated future, growth and expansion. EARNING ASSETS Average earning assets in 1998 increased 13.3 percent over 1997 primarily as a result of increases in the loan portfolio and accounted for approximately 89.0 percent of the Company's average total assets. This is compared to an increase, during 1997, of 11.3 percent in average earning assets, which represented 89.3 percent of average total assets. During 1998, the Company's mix of average earning assets continued to shift to the loan portfolio as loans averaged 78.9 percent of the total average earning assets for 1998, up from 76.8 percent during 1997 and 72.9 percent during 1996. Investment securities averaged 18.5 percent, 19.4 percent and 23.4 percent during 1998, 1997 and 1996, respectively. The other earning assets category accounted for less than 4.0 percent of the total mix for all three periods. The increased volume in earning assets contributed to the higher net interest income reported by the Company. Average loans increased 16.5 percent in 1998, with no concentration of the increase in any one specific loan 13 15 type. Total loans, net of unearned income, outstanding at year-end 1998 were up 33.0 percent over the previous year-end level. Commercial, financial and agricultural loans increased 46.7 percent in 1998 over year-end 1997, while consumer loans increased 48.8 percent from year-end 1997 to year-end 1998. Real estate-mortgage loans, which made up 47.2 percent of the total loans, increased 19.1 percent at year-end 1998 when compared to the previous year. Real estate-construction loans increased 75.8 percent at year-end 1998 when compared to the previous year, but had little effect due to representing only 1.4 percent of total loans outstanding in 1998. Total loans, net of unearned income, at year-end 1998 grew 33.0 percent over year-end 1997 and average loans, net of unearned income, grew 16.5 percent over the same period. The Company's current strategy is to avoid the growing national market in loans to finance leveraged buy-outs, participating in no nationally syndicated leveraged buy-out loans. The Company's strategy also includes avoiding exposure to lesser developed country ("LDC") debt, having no LDC loans in its portfolio. The following table shows the classification of loans by major category at December 31, 1998 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, ------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ----------------- ------------------- ------------------- ------------------- PERCENT Percent Percent Percent Percent AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------- -------- (Dollars in Thousands) Commercial, financial and agricultural.... $ 94,057 21.7% $ 64,136 19.6% $ 65,634 20.2% $ 44,686 18.6% $ 46,892 22.1% Real estate - construction.... 6,153 1.4 3,499 1.1 5,262 1.6 5,624 2.4 3,972 1.9 Real estate - mortgage........ 205,457 47.2 172,504 52.7 162,994 50.2 116,289 48.4 103,194 48.6 Consumer.......... 129,334 29.7 86,945 26.6 90,682 28.0 73,479 30.6 58,051 27.4 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 435,001 100.0% 327,084 100.0% 324,572 100.0% 240,078 100.0% 212,109 100.0% ===== ===== ===== ===== ===== Less: Unearned income.......... 1,148 950 1,810 2,237 5,681 Allowance for loan losses..... 2,971 2,131 2,425 2,209 1,548 -------- -------- -------- -------- -------- Net loans......... $430,882 $324,003 $320,337 $235,632 $204,880 ======== ======== ======== ======== ========
14 16 SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans Maturity Maturing Over One Year ------------------------------------------------ ------------------------------ Over One Year Through Over Predetermined Floating or Year or Five Five Interest Adjustable Less Years Years Total Rate Rate -------- -------- ----- ----- ------------- ----------- (in Thousands) Commercial, financial and agricultural . $42,445 $18,368 $ 33,244 $ 94,057 $37,491 $14,121 Real estate - construction ..... 5,240 110 803 6,153 582 331 ------- ------- -------- -------- ------- ------- $47,685 $18,478 $ 34,047 $100,210 $38,073 $14,452 ======= ======= ======== ======== ======= =======
INVESTMENT PORTFOLIO The composition of the Company's investment securities portfolio reflects the Company's investment strategy of maximizing portfolio yields subject to risk and liquidity considerations. The primary objectives of the Company's investment strategy are to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company's interest rate position while at the same time producing adequate levels of interest income. The Company's entire portfolio is classified as available for sale to appropriately reflect the nature of the Company's holdings that are available for sale should liquidity needs dictate. Management of the maturity of the portfolio is necessary to provide liquidity and to control interest rate risk. During 1998, gross investment securities sales were $24,045,000 and maturities were $21,786,000, representing 27.2 percent and 24.6 percent, respectively, of the average portfolio for the year. Net gains associated with the sales totaled $465,982, accounting for 5.8 percent of noninterest income during 1998. Gross unrealized gains in the portfolio amounted to $1,085,098 at year-end 1998 and unrealized losses amounted to $346,866. Average investment securities for 1998 increased 8.0 percent from 1997. Mortgage-backed securities have varying degrees of risk of impairment of principal, as opposed to U.S. Treasury and U.S. government agency obligations, which are considered to contain virtually no default or prepayment risk. Impairment risk is primarily associated with accelerated prepayments, particularly with respect to longer maturities purchased at a premium and interest-only strip securities. The Company's mortgage-backed securities portfolio as of December 31, 1998 and 1997 contained no interest-only strips and the amount of unamortized premium on mortgage-backed securities at December 31, 1998 was only $343,164. The recoverability of the Company's investment in mortgage-backed securities is reviewed periodically by management, and if necessary, appropriate adjustments would be made to income for impaired values. 15 17 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, --------------------------------- 1998 1997 1996 ---- ---- ---- (in Thousands) U. S. Treasury and U.S. Government agencies $49,145 $51,153 $45,135 Mortgage-backed securities ................ 31,324 21,241 26,298 State and municipal securities ............ 15,187 12,698 15,478 Equity securities ......................... 1,736 -0- -0- ------- ------- ------- Total investment securities ............ $97,392 $85,092 $86,911 ======= ======= =======
Average investment securities increased 8.0 percent during 1998 compared to a decline of 8.0 percent during 1997. Average taxable securities accounted for 84.7 percent of the investment portfolio in 1998 and 84.8 percent in 1997 while tax-exempt securities were 15.3 percent in 1998 and 15.2 percent in 1997. During 1998, the Company experienced growth in both taxable and non-taxable investment securities. Period-end securities for 1998 increased 14.5 percent from the previous year. The maturities and weighted average yields of the investments in the 1998 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 at December 31, 1998 was 10.92 years with an average yield of 6.03 percent. Mortgage-backed securities have been included in the maturity table based upon the guaranteed payoff date of each security. INVESTMENT PORTFOLIO MATURITY SCHEDULE
December 31, 1998 --------------------------------------------------------------------------------------- Maturing --------------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ----------------- ----------------- ---------------- --------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Securities- All Available for Sale: - ----------------------------------- U. S. Treasury......... $ 6,224 6.25% $ 9,624 5.84% $26,408 6.11% $20,321 6.66% U. S. Government agencies............. 3,519 5.38 14,374 5.58 -0- 0.00 -0- 0.00 State and municipal securities........... 1,343 3.69 1,148 5.33 4,010 6.05 8,685 5.58 Equity securities...... -0- 0.00 -0- 0.00 -0- 0.00 1,736 7.50 ------- ------- ------- ------- Total.................. $11,086 5.66 $25,146 5.67 $30,418 6.10 $30,742 6.40 ======= ======= ======= =======
There were no securities held by the Company, whose aggregate value on December 31, 1998 exceeded 10.0 percent of the Company's consolidated shareholders' equity at that date. 16 18 Average Federal Funds sold decreased 15.7 percent during 1998 , reflecting the increased cash available from deposit growth in excess of loan growth. During 1997, average Federal Funds sold increased 21.1 percent from 1996 levels. As a percentage of average earning assets, these funds represented 2.4 percent for 1998 compared to 3.2 percent for 1997. Interest-bearing deposits with other banks has accounted for less than 1.0 percent of the Company's average earning assets during 1998 . The average balance of interest-bearing deposits with other banks have reflected declines of 59.5 percent and 1.6 percent during 1998 and 1997, 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 1998 and 1997 by 14.6 percent and 13.6 percent, respectively. Average interest-bearing demand deposits and average time deposits increased 28.3 percent and 15.5 percent, respectively, during 1998, while average saving deposits decreased 8.0 percent during this same period. Average noninterest-bearing demand deposits increased 8.4 percent and 8.8 percent during 1998 and 1997, respectively. Customer confidence and satisfaction is evidenced by the increase in total average deposits of 13.8 percent in 1998 and 12.9 percent in 1997. The two categories of lowest cost deposits comprised the following percentages of total deposits during 1998 and 1997, respectively: average noninterest-bearing demand deposits - 12.4 percent and 13.0 percent; and average interest-bearing demand deposits - 17.6 percent and 15.6 percent. During 1998, interest-bearing demand accounts increased $18,365,000, or 25.7 percent, while certificates of deposit of less than $100,000 increased $39,501,000, or 22.1 percent. Certificates of deposit of $100,000 or more increased $22,023,000, or 32.2 percent, during this same period. Of total time deposits at December 31, 1998, approximately 33.3 percent were large denomination certificates of deposit, up slightly from 32.7 percent at December 31, 1997. The maturities of the time certificates of deposit and other time deposits of $100,000 or more issued by the Company at December 31, 1998 are summarized in the table below. MATURITIES OF LARGE TIME DEPOSITS
December 31, 1998 ----------------------------------- Time Other Certificates Time of Deposit Deposits Total ------------ -------- ----- (in Thousands) Three months or less ............. $17,537 $18,535 $ 36,072 Over three through six months..... 10,578 -0- 10,578 Over six through twelve months.... 23,990 -0- 23,990 Over twelve months ............... 38,345 -0- 38,345 ------- ------- -------- Total ......................... $90,450 $18,535 $108,985 ======= ======= ========
17 19 Borrowed funds consist primarily of short-term borrowings and long-term debt. Short-term borrowings at year-end 1998 and 1997 consisted of the U. S. Treasury Tax and Loan Note Option account, Federal Funds purchased, overnight funds purchased from the Federal Home Loan Bank (1998 only), and securities sold under agreements to repurchase. Community Bank had $10,000,000 in available lines to purchase Federal Funds, on an unsecured basis, from commercial banks. At December 31, 1998, Community Bank had no funds advanced against these lines. In addition, in the fourth quarter of 1998, Community Bank became a member of the Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atlanta) and was approved to borrow up to $70,000,000 under various short-term and long-term programs offered by the FHLB-Atlanta. These borrowings are secured under a blanket lien agreement on certain qualifying mortgage instruments in Community Bank's loan and investment portfolios. While Community Bank drew up to a maximum of $11,000,000 under the FHLB-Atlanta's "Overnight Borrowings" program during the fourth quarter 1998, no funds were advanced against its line as of December 31, 1998. 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, 1998.
MATURITIES OF LONG-TERM DEBT 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- (in Thousands) Interest on indebtedness... $ 540 $ 467 $ 394 $ 319 $256 Repayment of principal .... 933 949 968 988 298 ------ ------ ------ ------ ---- $1,473 $1,416 $1,362 $1,307 $554 ====== ====== ====== ====== ====
LIQUIDITY MANAGEMENT Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss. Liquidity management involves maintaining the Company's ability to meet the day-to-day cash flow requirements of Community Bank's customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the production and growth needs of the communities it serves. The primary function of assets and liabilities management is not only to assure adequate liquidity in order for the Company to meet the needs of its customer base, but to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can also meet the investment 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 shareholders and other needs. Certain restrictions exist regarding the ability of Community Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the Alabama Superintendent of Banks is required to pay dividends in excess of Community Bank's earnings retained in the current year plus retained net profits for the preceding two years less any required transfers to surplus. At December 31, 1998, Community Bank could have declared dividends of approximately $7,640,960 without approval of regulatory authorities. 18 20 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 $ 47,685,000, or 11.0 percent of the total loan portfolio, at December 31, 1998 and investment securities maturing in one year or less equaled $11,086,000, or 11.2 percent of the investment portfolio, at December 31, 1998. 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 and borrowings against available line through the FHLB-Atlanta. Liquidity management involves the daily monitoring of the sources and uses of funds to maintain an acceptable Company cash position. INTEREST RATE SENSITIVITY AND MARKET RISK The Company's net interest income, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. Interest rate sensitivity is a function of the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities. Management monitors its interest rate risk exposure through the use of a Static Gap analysis and an Interest Rate Shock analysis. The static gap analysis measures the amount of repricing risk embedded in the balance sheet at a specific point in time, by comparing the difference in the volume of interest-earning assets and interest-bearing liabilities that are subject to repricing within specific time periods. Community Bank was liability sensitive at year-end 1998, indicating that it had more liabilities than assets repricing during 1999. The cumulative static gap position of rate sensitive assets to rate sensitive liabilities at December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180 days; and iv) .43% at 365 days. The interest rate shock analysis measures the impact on Community Bank's net interest income as a result of immediate and sustained shift in interest rates. The movement in market rates are based on statistical regression analyses while management makes assumptions concerning balance sheet growth and the magnitude of interest rate movements for certain interest earning asset and interest-bearing liabilities. Using actual maturity and repricing opportunities of Community Bank's portfolio, in conjunction with management's assumptions, a rate shock analysis is performed using a +200 basis points shift and a -200 basis points shift in interest rates. [The remainder of this page intentionally left blank] 19 21 The following tables estimate the impact of shifts in interest rates on Community Bank's net interest income for the twelve months ending December 31, 1999: RATE SHOCK ANALYSIS
-200 +200 Basis Basis Points Level Points ------------------------------------------------- (Dollars in thousands) Prime Rate.................................................... 5.75% 7.75% 9.75% Interest Income............................................... $ 50,182 $ 51,750 $ 55,988 Interest Expense.............................................. 20,996 23,693 28,562 -------------- -------------- -------------- Net Interest Income........................................ $ 29,186 $ 28,057 $ 27,426 ============== ============== ============== Dollar change from Level...................................... $ 1,129 $ (631) Percentage change from Level.................................. 4.03% (2.25%)
INTEREST SENSITIVITY
Percentage Increase (Decrease) in Interest Income/Expense Principal Amount of Given Immediate and Sustained Earning Assets, Interest Rate Shifts Interest-bearing ------------------------------- Liabilities at Down 200 Up 200 December 31, 1998 Basis Points Basis Points ------------------- ------------- ------------ (Dollars in Thousands) Assets which reprice in: One year or less.............. $ 154,840 (4.31)% 9.61% Over one year................. 375,631 (2.62) 7.73 ----------------------- $ 530,471 (3.03) 8.19 ======================= Liabilities which reprice in: One year or less.............. $ 360,085 (11.78) 21.31 Over one year................. 125,699 (10.78) 19.39 ----------------------- $ 485,784 (11.38) 20.55 ======================= Total net interest income sensitivity........................................ 4.03 (2.25)
While movement of interest rates cannot be predicted with any certainty, management expects interest rates to be relatively stable to slightly lower during 1999 and believes that Community Bank's current interest rate sensitivity analysis fairly reflects its interest rate risk exposure during the twelve months ending December 31. 1999. 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. 20 22 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. In 1993 and again in 1995, the Company raised capital through the sale of shares of its $.10 par value Common Stock. Both offerings were closed upon being fully subscribed. The Company offered to the public, beginning in the third quarter of 1998, a maximum of 500,000 newly issued shares of its $.10 par value Common Stock at a price of $19.00 per share. The offering was closed on December 1, 1998 upon full subscription of all shares offered for sale, raising approximately $9,467,000 of capital after reduction for offering costs. The proceeds from all offerings has been available for debt reduction, capital enhancement, growth and expansion of the Company and general corporate purposes. Bank regulatory authorities have issued risk-based capital guidelines that take into consideration risk factors associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. The Company's Tier I capital, which consists of common equity, amounted to $41,521,000 at December 31, 1998. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus the Tier II capital components are referred to as Total Risk-based Capital and was $46,083,000 at year-end 1998. The percentage ratios, as calculated under the guidelines, were 9.94 percent and 11.03 percent for Tier I and Total Risk-based Capital, respectively, at year-end 1998. Both levels currently exceed the minimum ratios of four percent and eight percent, respectively and the well capitalized ratios of six percent and ten percent, respectively. Applying the current guidelines to 1997 and 1996 also resulted in capital ratios exceeding both the regulatory minimum requirements and requirements to be considered a well capitalized bank. Another important indicator of capital adequacy in the banking industry is the leverage ratio. The leverage ratio is defined as the ratio the Company's shareholders' equity, minus goodwill, bears to total average assets minus goodwill. The Company's leverage ratios as of December 31, 1998, 1997 and 1996 exceeded the regulatory minimum requirement of 4 percent. [The remainder of this page intentionally left blank] 21 23 The following table illustrates the company's regulatory capital ratios at December 31, 1998, 1997 and 1996: CAPITAL ADEQUACY RATIOS
December 31, 1998 1997 1996 -------------- ------------- -------------- (Dollars in thousands) Tier I Capital.............................................. $ 41,521 $ 32,638 $ 29,941 Tier II Capital............................................. 4,562 3,773 4,135 -------------- ------------- -------------- TOTAL QUALIFYING CAPITAL............................. $ 46,083 $ 36,411 $ 34,076 ============== ============= ============== Risk Adjusted Total Assets (including off-balance-sheet exposures).............................. $ 417,945 $ 306,947 $ 297,650 ============== ============= ============== Tier I Risk-Based Capital Ratio............................. 9.94% 10.63% 10.06% ============== ============= ============== Total Risk-Based Capital Ratio.............................. 11.03% 11.86% 11.45% ============== ============= ============== Leverage Ratio.............................................. 7.79% 6.94% 9.20% ============== ============= ==============
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, --------------------------------------- 1998 1997 1996 ----- ---- ---- Return on average assets.......................................... 0.67% 0.74% 0.82% Return on average equity.......................................... 9.59 10.51 11.50 Dividend payout ratio............................................. 55.60 40.50 26.90 Average equity to average assets ratio............................ 7.79 7.06 7.13
[The remainder of this page intentionally left blank] 22 24 RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is the principal source of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest-bearing liabilities impact net interest income. All discussions in this section assume a taxable equivalent basis unless otherwise noted. Net interest income for 1998 increased 18.0 percent from 1997 and 11.9 percent in 1997 over 1996. An increase in average earning asset and average interest-bearing liabilities in 1998 and 1997 accounted for the majority of the increase. The "Rate/Volume Variance Analysis" table provides the detail changes in interest income, interest expense and net interest income due to changes in average balances and rates. Interest income increased 17.1 percent in 1998 and 12.0 percent in 1997. The 1998 increase is due both to the 13.3 percent increase in average earning assets and the 30 basis point rise in the average yield on earning assets. The increase in interest income in 1997 was attributable to the 11.3% increase in average earning assets. Interest income on loans increased 20.7 percent primarily due to a 16.5 percent increase in the average balances outstanding coupled with a 36 basis point increase in the average yield. Interest income on investment securities increased 2.5 percent from 1997 to 1998 primarily as a result of the 8.0 percent increase in the average balances outstanding. Total interest expense increased 16.1 percent primarily due to the effect of a 14.2 percent increase in average interest-bearing liabilities, coupled with the effect of a 9 basis point increase in the rate paid. The rise of interest on deposits and short-term borrowings was due to an increase in average balances 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 1998 was 4.64 percent as compared to 4.46 percent for 1997. 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 1998 increased 21 basis points to 4.15 percent from the 1997 spread of 3.94 percent, as the yields on earning assets increased as the cost of interest-bearing liabilities decreased. See the accompanying tables entitled "Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" and "Rate/Volume Variance Analysis" for more information. [The remainder of this page intentionally left blank] 23 25 The following tabulation presents certain net interest income data without modification for assumed tax equivalency:
Years Ended December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Rate earned on earning assets..................... 9.15% 8.94% 8.85% 8.82% 8.20% Rate paid on borrowed funds....................... 5.23 5.14 5.18 5.17 4.33 Interest rate spread.............................. 3.92 3.80 3.67 3.65 3.87 Net yield on earning assets....................... 4.41 4.32 4.26 4.21 4.44
During 1998, the banking industry experienced a declining interest rate environment as evidenced by two drops, of 25 basis points each, in the prime rate during October 1998 and an additional drop of 25 basis points in the prime rate again in November 1998. Despite the declining interest rate environment, the Company's net interest income increased by 18.8 percent due to the 13.3 percent increase in average earning assets. This is in contrast to a relatively flat interest rate environment during 1997. Absolute changes in net interest income from 1997 to 1998 and from 1996 to 1997 were $3,422,000 and $2,076,000, respectively, as reported in the Consolidated Statements of Income. The net interest margin increased to 4.52 percent in 1998 from 4.32 percent in 1997 and the interest rate spread increased to 4.04 percent for 1998 from 3.80 percent for 1997. [The remainder of this page intentionally left blank] 24 26 CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES Taxable Equivalent Basis (Dollars in Thousands)
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 -------------------------------------- AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE ------- ------- ---- ASSETS Earning assets: Loans, net of unearned income (1) ......... $ 378,189 $38,616 10.21% Investment securities: Taxable .................................. 74,952 4,488 5.99 Tax-exempt ............................... 13,488 1,139 8.44 --------- ------- Total investment securities ............. 88,440 5,627 6.36 Time deposits in other banks ............. 1,006 91 9.05 Federal funds sold ....................... 11,558 611 5.29 -------- ------ Total interest-earning assets (2) .......... 479,193 44,945 9.38 Noninterest-earning assets: Cash and due from banks ................... 21,609 Premises and equipment .................... 26,986 Accrued interest and other assets ......... 13,642 Allowance for loan losses ................. (2,960) --------- Total assets ............................. $ 538,470 ========= LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits ........................... $ 85,044 3,286 3.86 Savings deposits .......................... 46,374 1,651 3.56 Time deposits ............................. 292,357 17,026 5.82 --------- ------- 423,775 21,963 5.18 Other short-term borrowings ............... 3,258 164 5.03 Long-term debt ............................ 6,878 566 8.23 --------- ------- Total interest-bearing liabilities ....... 433,911 22,693 5.23 ------- ---- Noninterest-bearing liabilities: Demand deposits ........................... 60,147 Accrued interest and other liabilities .... 7,094 Shareholders' equity ...................... 37,318 --------- Total liabilities and shareholders' equity $ 538,470 ========= Net interest income/net interest spread ...... 22,252 4.15% ==== Net yield on earning assets .................. 4.64% ==== Taxable equivalent adjustment: Loans ...................................... 374 Investment securities ...................... 752 ------- Total taxable equivalent adjustment ....... 1,126 ------- Net interest income .......................... $21,126 =======
- ------------------ (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. 25 27
Years Ended December 31, - ----------------------------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------- ------------------------------------------------ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- $324,745 $31,999 9.85% $276,878 $27,468 9.92% 69,432 4,410 6.35 73,011 4,702 6.44 12,475 1,080 8.66 16,049 1,380 8.60 -------- ------- -------- ------- 81,907 5,490 6.70 89,060 6,082 6.83 2,483 113 4.55 2,522 122 4.84 13,704 796 5.81 11,319 604 5.34 -------- ------- -------- ------- 422,839 38,398 9.08 379,779 34,276 9.03 19,732 20,276 20,126 15,187 13,156 8,931 (2,472) (2,334) -------- -------- $473,381 $421,839 ======== ======== $ 66,265 2,722 4.11 $ 55,990 2,106 3.76 50,393 1,784 3.54 50,844 1,924 3.78 253,095 14,258 5.63 218,720 12,565 5.74 -------- ------- -------- ------- 369,753 18,764 5.07 325,554 16,595 5.10 2,524 146 5.78 2,824 155 5.49 7,833 631 8.06 8,053 676 8.39 -------- ------- -------- ------- 380,110 19,541 5.14 336,431 17,426 5.18 ------- ------- ------- ----- 55,466 51,003 4,377 4,326 33,428 30,079 -------- -------- $473,381 $421,839 ======== ======== 18,857 3.94% 16,850 3.85% ======= ===== 4.46% 4.44% ======= ===== 240 206 367 470 ------- ------- 607 676 $18,250 $16,174 ======= =======
26 28 RATE/VOLUME VARIANCE ANALYSIS TAXABLE EQUIVALENT BASIS
Average Volume Change in Volume --------------------------------- ------------------------- 1998 1997 1996 1998-1997 1997-1996 ---- ---- ---- --------- --------- (Dollars in Thousands) EARNING ASSETS: Loans, net of unearned income ............ $378,189 $324,745 $276,878 $ 53,444 $ 47,867 Investment securities: Taxable ............................... 74,952 69,432 73,011 5,520 (3,579) Tax exempt ............................ 13,488 12,475 16,049 1,013 (3,574) -------- -------- -------- -------- -------- Total investment securities ......... 88,440 81,907 89,060 6,533 (7,153) Interest-bearing deposits with other banks 1,006 2,483 2,522 (1,477) (39) Federal funds sold ....................... 11,558 13,704 11,319 (2,146) 2,385 -------- -------- -------- -------- -------- Total earning assets ............... $479,193 $422,839 $379,779 $ 56,354 $ 43,060 ======== ======== ======== ======== ======== INTEREST-BEARING LIABILITIES: Deposits: Demand ................................ $ 85,044 $ 66,265 $ 55,990 $ 18,779 $ 10,275 Savings ............................... 46,374 50,393 50,844 (4,019) (451) Time .................................. 292,357 253,095 218,720 39,262 34,375 -------- -------- -------- -------- -------- Total interest-bearing deposits .... 423,775 369,753 325,554 54,022 44,199 Other short-term borrowings .............. 3,258 2,524 2,824 734 (300) Long-term borrowings ..................... 6,878 7,833 8,053 (955) (220) -------- -------- -------- -------- -------- Total interest-bearing liabilities . $433,911 $380,110 $336,431 $ 53,801 $ 43,679 ======== ======== ======== ======== ======== Net interest income/net interest spread............................................................................ Net yield on earning assets........................................................................................ Net cost of funds..................................................................................................
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 27 29
Variance Attributed to (1) ---------------------------------- Average Rate Interest Income/Expense Variance 1998 1997 ----------------------- ------------------------- ---------------------- --------------- --------------- 1998 1997 1996 1998 1997 1996 1998-1997 1997-1996 VOLUME RATE Volume Rate ---- ---- ---- ---- ---- ---- --------- --------- ------ ---- ------ ---- (Dollars in Thousands) 10.21% 9.85% 9.92% $38,616 $31,999 $27,468 $6,617 $4,531 $5,415 $1,202 $4,726 $(195) 5.99 6.35 6.44 4,488 4,410 4,702 78 (292) 337 (259) (227) (65) 8.44 8.66 8.60 1,139 1,080 1,380 59 (300) 87 (28) (310) 10 ------- ------- ------- ------ ------ ------ ---- ------ ----- 6.36 6.70 6.83 5,627 5,490 6,082 137 (592) 424 (287) (537) (55) 9.05 4.55 4.84 91 113 122 (22) (9) (92) 70 ( 2) (7) 5.29 5.81 5.34 611 796 604 (185) 192 (118) (67) 135 57 ------- ------- ------- ------ ------ ------ ---- ------ ----- 9.38 9.08 9.03 44,945 38,398 34,276 6,547 4,122 5,629 918 4,322 (200) 3.86 4.11 3.76 3,286 2,722 2,106 564 616 737 (173) 409 207 3.56 3.54 3.78 1,651 1,784 1,924 (133) (140) (143) 10 (17) (123) 5.82 5.63 5.74 17,026 14,258 12,565 2,768 1,693 2,273 495 1,938 (245) ------- ------- ------- ------ ------ ------ ---- ------ ----- 5.18 5.07 5.10 21,963 18,764 16,595 3,199 2,169 2,867 332 2,330 (161) 5.03 5.78 5.49 164 146 155 18 (9) 39 (21) (17) 8 8.23 8.06 8.39 566 631 676 (65) (45) (78) 13 (18) (27) ------- ------- ------- ------ ------ ------ ---- ------ ----- 5.23 5.14 5.18 22,693 19,541 17,426 3,152 2,115 2,828 324 2,295 (180) ---- ---- ---- ------- ------- ------- ------ ------ ------ ---- ------ ----- 4.15% 3.94% 3.85% $22,252 $18,857 $16,850 $3,395 $2,007 $2,801 $594 $2,027 $ (20) ==== ==== ==== ======= ======= ======= ====== ====== ====== ==== ====== ===== 4.64% 4.46% 4.44% ==== ==== ==== 4.74% 4.62% 4.59% ==== ==== ====
28 30 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 was $885,000, $773,000 and $834,000 in 1998, 1997 and 1996, respectively. This represents an increase of $112,000, or 14.4 percent, in 1998, compared to declines of $61,000, or 7.4 percent, in 1997, and $254,000, or 23.3 percent, in 1996. There was a 39.4 percent increase in the allowance for loan losses at December 31, 1998 as compared to December 31, 1997, in contrast to a decrease of 12.1 percent at December 31, 1997 as compared to December 31, 1996. The increase in the allowance for loan losses during 1998 was due primarily to reserves purchased through acquisitions. Net loan charge-offs increased 23.1 percent in 1998 after decreasing 6.1 percent in 1997. Net charge-offs on consumer loans amounted to 82.7 percent of total net charge-offs for 1998 compared to 63.7 percent in 1997 and 53.0 percent in 1996. Management believes that the $2,971,000 in the allowance for loan losses at December 31, 1998 (.68% 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, 1998. SUMMARY OF LOAN LOSS EXPERIENCE
1998 1997 1996 1995 1994 --------- -------- --------- --------- ---------- (Dollars in Thousands) Allowance for loan losses at beginning of year............ $ 2,131 $ 2,425 $ 2,209 $ 1,548 $ 1,255 Loans charged off: Commercial, financial and agricultural.................. 190 80 392 110 91 Real Estate - mortgage.................................. 50 325 158 -0- -0- Consumer................................................ 1,223 783 680 399 319 --------- -------- --------- --------- ---------- Total loans charged off............................... 1,463 1,188 1,230 509 410 --------- -------- --------- --------- ---------- Recoveries on loans previously charged off: Commercial, financial and agricultural.................. 11 5 10 22 52 Real Estate - mortgage.................................. -0- 9 1 1 2 Consumer................................................ 126 97 72 59 11 --------- -------- --------- --------- ---------- Total recoveries...................................... 137 111 83 82 65 --------- -------- --------- --------- ---------- Net loans charged off..................................... 1,326 1,077 1,147 427 345 Reserves acquired through purchase........................ 1,281 10 529 -0- -0- Provision for loan losses................................. 885 773 834 1,088 638 --------- -------- --------- --------- ---------- Allowance for loan losses at end of period................ $ 2,971 $ 2,131 $ 2,425 $ 2,209 $ 1,548 ========= ======== ========= ========= ========== Loans, net of unearned income, at end of period........... $ 433,853 $326,134 $ 322,762 $ 237,841 $ 206,428 ========= ======== ========= ========= ========== Average loans, net of unearned income, outstanding for the period.............................. $ 378,189 $324,745 $ 276,878 $ 223,222 $ 178,123 ========= ======== ========= ========= ==========
29 31
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Ratios: Allowance at end of period to loans, net of unearned income....................................... .68% .65% .75% .93% .75% Allowance at end of period to average loans, net of unearned income................................ .79 .66 .88 .99 .87 Net charge-offs to average loans, net of unearned income....................................... .35 .33 .41 .19 .19 Net charge-offs to allowance at end of period........... 44.63 50.54 47.30 19.33 22.29 Recoveries to prior year charge-offs.................... 11.53 9.02 16.31 20.00 21.96
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 historical 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. Community Bank allocates its allowance for loan losses to specific loan categories based on an average of the previous five years net losses for each loan type. Management allocated the allowance for loan losses to specific loan classes as follows: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, -------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------- ------------------- ------------------ ----------------- ----------------- PERCENT Percent Percent Percent Percent AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Domestic loans Commercial, financial and and agricultural $ 526 17.7% $ 149 7% $ 800 33% $ 442 20% $ 170 11% Real estate - mortgage ....... 357 12 618 29 340 14 -- -- -- -- Consumer ........ 2,088 70.3 1,364 64 1,285 53 1,767 80 1,378 89 ------ ------ ------ ----- ------ --- -------- ---- ------ -- $2,971 100% $2,131 100% $2,425 100% $ 2,209 100% $1,548 100% ====== ====== ====== ===== ====== === ======== ==== ====== ===
30 32 NONPERFORMING ASSETS Nonperforming assets as of December 31, 1998 increased 71.9 percent from year-end 1997. 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, 1998. The following table summarizes the Company's nonperforming assets for each of the last five years. NONPERFORMING ASSETS
December 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- -------- -------- --------- (Dollars in Thousands) Nonaccruing loans................................. $ 1,600 $ 1,093 $ 565 $ 491 $ 422 Loans past due 90 days or more.................... 2,384 975 470 317 343 Restructured loans................................ -0- -0- -0- -0- -0- --------- --------- -------- -------- --------- Total nonperforming loans......................... 3,984 2,068 1,035 808 765 Other real estate................................. 699 656 791 417 290 --------- --------- -------- -------- --------- Total nonperforming assets...................... $ 4,683 $ 2,724 $ 1,826 $ 1,225 $ 1,055 ========= ========= ======== ======== ========= Ratios: Loan loss allowance to total nonperforming assets...................... 0.63 0.78 1.33 1.80 1.47 ========= ========= ======== ======== ========= Total nonperforming loans to total loans (net of unearned interest)................ 0.009 0.006 0.003 0.003 0.004 ========= ========= ======== ======== ========= Total nonperforming assets to total assets................................. 0.008 0.006 0.004 0.003 0.004 ========= ========= ======== ======== =========
The ratio of loan loss allowance to total nonperforming assets decreased by 19.2 percent to 0.63 during 1998, compared to a decrease of 41.4 percent, to 0.78 percent, during 1997. The ratio of total nonperforming loans to total loans increased 50.0 percent, to 0.009, during 1998, and total nonperforming assets to total assets increased by 0.2% from 1997 to 1998, 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, 1998, 1997 and 1996, 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 immaterial. There were no concentrations of loans exceeding 10 percent of total loans which are not otherwise disclosed as a category of loans. 31 33 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 1998 totaled $8,102,398, as compared to $4,890,980 in 1997 and $4,447,235 in 1996. These amounts are primarily from service charges on deposit accounts, insurance commissions, Bank club dues ( a deposit account packaged with other financial services) and debt cancellation fees. Service charge increases are primarily a reflection of the deposit growth of the Company as it has expanded into new markets. The insurance commissions increased in 1998 as a result of the activities of the Company's Community Insurance unit in the areas of title insurance and life insurance. Service charges and Bank club dues were up a combined 19.8%, 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. The Company also recognized a gain on the sale of investment securities in connection with a restructuring of its investment portfolio in October 1998. NONINTEREST INCOME
Years Ended December 31, Percent Change -------------------------------------- ------------------------ 1998 1997 1996 1998/1997 1997/1996 ---------- ---------- ----------- --------- --------- (Dollars in Thousands) Service charges on deposits............... $ 3,055 $ 2,512 $ 2,229 26.6% 12.7% Insurance commissions..................... 2,269 796 656 185.1 21.3 Investment securities gains (losses)...... 466 (3) 8 15633.3 (137.5) Bank club dues............................ 631 562 498 12.3 12.9 Debt cancellation fees.................... 688 275 388 150.2 (29.1) Other..................................... 993 749 668 32.6 12.1 ---------- ---------- ----------- $ 8,102 $ 4,891 $ 4,447 65.7 10.0 ========== ========== ===========
NONINTEREST EXPENSES Noninterest expenses totaled $23,783,885 in 1998, which represents a 36.5 percent increase over 1997 noninterest expenses, which were 16.9 percent higher than in 1996. Salaries and benefits increased $3,786,442, or 36.4 percent to $14,189,168 in 1998, reflecting the increased personnel costs of completing the staffing of the new Alabama bank locations and finance offices. Director and committee fees, which were $638,120 in 1997 and $465,775 in 1996, increased 11.4% in 1998 to $711,358. Occupancy expense increased 44.3% to $2,113,400 in 32 34 1998 primarily as a result of the building and renovation of several bank locations. Furniture and equipment expense increased 27.2% in 1998 from the 1997 amount, to $1,543,634, compared to a 20.8% increase in 1997. Other operating expenses increased 41.6% to $5,226,325 during 1998. From 1996 to 1997, other operating expenses increased 13.0%. NONINTEREST EXPENSES
Years Ended December 31, Percent Change -------------------------------------- ------------------------ 1998 1997 1996 1998/1997 1997/1996 ---------- ---------- ----------- --------- --------- (Dollars in Thousands) Salaries and employee benefits............ $ 14,189 $ 10,403 $ 9,135 36.4% 13.9% Occupancy expense......................... 2,113 1,478 1,031 43.0 43.4 Furniture and equipment expense........... 1,544 1,214 1,005 27.2 20.8 Director and committee fees............... 711 638 466 11.4 36.9 Amortization of intangibles............... 440 328 275 34.2 19.3 Advertising............................... 93 238 229 (60.9) 3.9 Insurance................................. 130 283 224 (54.1) 26.3 Professional fees......................... 360 273 250 31.9 1.0 Supplies.................................. 471 537 547 (12.3) (1.8) Postage................................... 364 280 257 30.0 9.0 Telephone................................. 554 357 298 55.2 19.8 Training and Education.................... 256 98 45 161.2 117.8 Other..................................... 2,559 1,296 1,140 97.5 13.6 ---------- ---------- ----------- $ 23,784 $ 17,423 $ 14,902 36.5 16.9 ========== ========== ===========
INCOME TAXES The Company attempts to maximize its net income through active tax planning. This planning resulted in a provision for income taxes of $1,526,204 (29.9%) for 1998, on pre-tax income of $5,105,697. The tax for 1997 was $1,451,419 (29.3%) on income of $4,945,355 and for 1996 was $1,426,344 (29.2%) on income of $4,885,330. 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. 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 1998 the effective tax rate was 87.9 percent of the statutory Federal tax rate, compared to 86.2 percent in 1997. 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. 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. 33 35 YEAR 2000 ISSUES The Year 2000 issue is the result of potential problems with computer systems or other equipment with computer chips using dates that have been sorted as two digits rather than four (e.g. "98" for 1998). On January 1, 2000, any clock or date recording mechanism, including date sensitive software, which uses only two digits to represent the year may recognize a date using "00" as the year 1900. This could result in system failures or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices or perform similar tasks. The Company initiated a program in 1997 to identify and review all of the information technology ("IT") and non-IT systems used by the Company and its subsidiaries in order to determine whether the systems were Year 2000 compliant. This study involved identifying any required modifications or replacements of certain hardware and software maintained by the Company. In addition, the Company has taken steps to obtain assurance from third party vendors that appropriate actions have been taken or are being taken to remedy any Year 2000 issues for computer systems that the vendors are responsible for maintaining and that are relied upon by the Company. As a financial institution, the Company's compliance has been closely monitored by federal regulatory agencies, which have completed a phase one and phase two examination of the Company and its Year 2000 readiness in the past nine months. As of December 31, 1998, no regulatory restriction had been imposed on the Company by federal regulatory authorities in connection with the Company's current Year 2000 plan and implementation. Prior to year-end 1998, the Company had identified its mission critical and non-mission critical systems and had completed the assessment phase of each system's Year 2000 readiness. Mission critical systems are those systems that are vital to the core business activity of the Company and include mainframe computer applications such as deposit, loan and general ledger systems as well as the system operating software. In July 1998, the Company purchased and installed new Year 2000 compliant hardware and software systems to support all core application processing which were deemed to be mission critical. Non-mission critical systems typically include embedded technology, such as a micro-controller in elevators. As of December 31, 1998, all mission critical systems have been validated and it is anticipated that all remaining non-critical systems will be validated by March 31, 1999. The Company has also evaluated all significant credit customer relationships to determine any risk represented to the Company by the impact of Year 2000 on customers' operations. Based on this evaluation, the Company is not aware of more than normal credit risk associated with these relationships and management does not believe that any special additions to the allowance for loan losses are necessary. The Company's assessment of these parties will be ongoing throughout 1999 in order to identify any changes in the readiness of its credit customers that could negatively impact the Company. During 1998, the Company spent approximately $415,000 related to the purchase of new hardware and software to correct Year 2000 problems. These costs have been capitalized and will be amortized over the life of the related assets. The Company spent an additional $5,000 for testing of the core system and estimates it will spend approximately $15,000 during 1999 for third party reviews of test results. Since this is an ongoing process involving continual evaluation, the Company could incur additional unanticipated cost associated with its Year 2000 readiness. However, management believes that these cost would be material to the Company's financial condition or results of operations. Throughout 1998, the Company worked to assess Year 2000 readiness of vendors, business partners, and other counter parties, focusing on those considered critical to the Company's operations. The Company began assessing the Year 2000 readiness of depositors and other funds providers during the third quarter of 34 36 1998. The Company will continue to monitor and evaluate the Year 2000 readiness of third parties and take appropriate measures, including development of contingency plans, to mitigate the risk to the Company where Year 2000 noncompliance by third parties could have a material adverse impact on the Company's financial condition or results of operations. However, the impact of Year 2000 noncompliance by all third parties with which the Company transacts business cannot be assessed at this time. Management expects its remediation efforts to occur in a timely manner and does not anticipate significant disruptions in its operations. Failure to complete such remediations in a timely fashion could have an adverse impact on the Company's financial condition and results of operations. Management is currently developing a contingency plan to address any potential failures. [The remainder of this page intentionally left blank] 35 37 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's net interest income, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. Interest rate sensitivity is a function of the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities. Management monitors its interest rate risk exposure through the use of a Static Gap analysis and an Interest Rate Shock analysis. The static gap analysis measures the amount of repricing risk embedded in the balance sheet at a specific point in time, by comparing the difference in the volume of interest-earning assets and interest-bearing liabilities that are subject to repricing within specific time periods. Community Bank was liability sensitive at year-end 1998, indicating that it had more liabilities than assets repricing during 1999. The cumulative static gap position of rate sensitive assets to rate sensitive liabilities at December 31, 1998 was: i) .38% at 30 days; ii) .36% at 90 days; iii) .42% at 180 days; and iv) .43% at 365 days. The interest rate shock analysis measures the impact on Community Bank's net interest income as a result of immediate and sustained shift in interest rates. The movement in market rates are based on statistical regression analyses while management makes assumptions concerning balance sheet growth and the magnitude of interest rate movements for certain interest earning asset and interest-bearing liabilities. Using actual maturity and repricing opportunities of Community Bank's portfolio, in conjunction with management's assumptions, a rate shock analysis is performed using a +200 basis points shift and a -200 basis points shift in interest rates. The following tables estimate the impact of shifts in interest rates on Community Bank's net interest income for the twelve months ending December 31, 1999: RATE SHOCK ANALYSIS
-200 +200 Basis Basis Points Level Points ------------------------------------------------- (Dollars in thousands) Prime Rate.................................................... 5.75% 7.75% 9.75% Interest Income............................................... $ 50,182 $ 51,750 $ 55,988 Interest Expense.............................................. 20,996 23,693 28,562 -------------- -------------- -------------- Net Interest Income........................................ $ 29,186 $ 28,057 $ 27,426 ============== ============== ============== Dollar change from Level...................................... $ 1,129 $ (631) Percentage change from Level.................................. 4.03% (2.25%)
36 38 INTEREST SENSITIVITY
Percentage Increase (Decrease) in Interest Income/Expense Principal Amount of Given Immediate and Sustained Earning Assets, Interest Rate Shifts Interest-bearing -------------------------------- Liabilities at Down 200 Up 200 December 31, 1998 Basis Points Basis Points --------------------- ------------ ------------ (Dollars in Thousands) Assets which reprice in: One year or less.............. $ 154,840 (4.31)% 9.61% Over one year................. 375,631 (2.62) 7.73 ----------------------- $ 530,471 (3.03) 8.19 ======================= Liabilities which reprice in: One year or less.............. $ 360,085 (11.78) 21.31 Over one year................. 125,699 (10.78) 19.39 ----------------------- $ 485,784 (11.38) 20.55 ======================= Total net interest income sensitivity........................................ 4.03 (2.25)
While movement of interest rates cannot be predicted with any certainty, management expects interest rates to be relatively stable to slightly lower during 1999 and believes that Community Bank's current interest rate sensitivity analysis fairly reflects its interest rate risk exposure during the twelve months ending December 31. 1999. 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. [The remainder of this page intentionally left blank] 37 39 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. 38 40 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................................................................................ 40 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................. 41 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.......................................................................... 42 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.......................................................................... 43 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................................................................... 44-45 Notes to Consolidated Financial Statements - December 31, 1998, 1997 and 1996.......................................................................... 46-83 Quarterly Results (Unaudited)............................................................................... 84
39 41 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Birmingham, Alabama March 2, 1999 /S/ DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP 40 42 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
December 31, -------------------------------- 1998 1997 ------------- ------------- ASSETS Cash .................................................................. $ 6,204,531 $ 6,359,331 Due from banks ........................................................ 19,348,639 13,292,647 Interest-bearing deposits with banks .................................. 950,000 2,514,558 Federal funds sold .................................................... -0- 26,600,000 Securities available for sale ......................................... 97,391,609 85,092,069 Loans ................................................................. 435,000,601 327,084,688 Less: Unearned income ................................................. 1,147,965 950,205 Allowance for loan losses ....................................... 2,970,597 2,131,354 ------------- ------------- NET LOANS ............................................. 430,882,039 324,003,129 Premises and equipment, net ........................................... 29,545,798 22,362,432 Accrued interest ...................................................... 5,991,588 5,089,765 Intangibles, net ...................................................... 6,355,833 4,117,825 Other real estate ..................................................... 699,014 656,271 Other assets .......................................................... 5,874,546 1,750,819 ------------- ------------- TOTAL ASSETS .......................................... $ 603,243,597 $ 491,838,846 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ................................................ $ 62,562,296 $ 52,356,858 Interest-bearing ................................................... 476,023,225 388,531,773 ------------- ------------- TOTAL DEPOSITS ........................................ 538,585,521 440,888,631 Other short-term borrowings ........................................... 2,191,841 2,630,387 Accrued interest ...................................................... 3,580,934 2,912,286 Long-term debt ........................................................ 7,568,716 7,397,612 Other liabilities ..................................................... 4,083,184 2,012,500 ------------- ------------- TOTAL LIABILITIES ..................................... 556,010,196 455,841,416 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY ............................ -0- 18,382 Shareholders' equity Preferred stock, par value $.01 per share, 200,000 shares authorized, no shares issued ................................... -0- -0- Common stock, par value $.10 per share, 20,000,000 and 5,000,000 shares authorized, 4,647,924 and 2,031,606 shares issued, as of December 31, 1998 and 1997, respectively ......... 464,792 203,161 Capital surplus .................................................... 29,100,383 18,524,301 Retained earnings .................................................. 20,169,519 18,824,795 Unearned ESOP shares - 241,350 and 102,376 shares as of December 31, 1998 and 1997, respectively ................. (2,944,232) (2,002,902) Accumulated other comprehensive income ............................. 442,939 429,693 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY ............................ 47,233,401 35,979,048 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 603,243,597 $ 491,838,846 ============= =============
See notes to consolidated financial statements 41 43 CONSOLIDATED STATEMENTS OF INCOME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Years Ended December 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- INTEREST INCOME Interest and fees on loans..................................... $ 38,422,899 $ 31,759,123 $ 27,261,734 Interest on investment securities: Taxable securities........................................... 4,488,336 4,410,193 4,701,656 Securities exempt from federal income taxes.................. 752,013 712,565 910,822 Interest on federal funds sold................................. 611,030 795,620 604,111 Interest on deposits in other banks............................ 90,641 113,523 121,568 -------------- ------------- -------------- TOTAL INTEREST INCOME.......................... 44,364,919 37,791,024 33,599,891 -------------- ------------- -------------- INTEREST EXPENSE Interest on deposits........................................... 21,963,493 18,764,865 16,595,417 Interest on other short-term borrowings........................ 163,673 145,991 154,982 Interest on long-term debt..................................... 565,887 630,553 675,706 -------------- ------------- -------------- TOTAL INTEREST EXPENSE......................... 22,693,053 19,541,409 17,426,105 -------------- ------------- -------------- NET INTEREST INCOME.............................................. 21,671,866 18,249,615 16,173,786 Provision for loan losses........................................ 884,682 772,579 834,140 -------------- ------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.............. 20,787,184 17,477,036 15,339,646 NONINTEREST INCOME Service charges on deposits 3,055,298 2,511,501 2,228,762 Insurance commissions.......................................... 2,268,680 795,805 656,134 Bank club dues................................................. 630,427 562,552 498,282 Debt cancellation fees......................................... 688,859 274,989 387,876 Other operating income......................................... 993,152 748,723 668,672 Investment securities gains (losses)........................... 465,982 (2,590) 7,509 --------------- ------------- -------------- TOTAL NONINTEREST INCOME....................... 8,102,398 4,890,980 4,447,235 -------------- ------------- -------------- NONINTEREST EXPENSES Salaries and employee benefits................................. 14,189,168 10,402,726 9,135,335 Occupancy expense.............................................. 2,113,400 1,477,721 1,030,522 Furniture and equipment expense................................ 1,543,634 1,213,978 1,004,804 Director and committee fees.................................... 711,358 638,120 465,775 Other operating expenses....................................... 5,226,325 3,690,116 3,265,115 -------------- ------------- -------------- TOTAL NONINTEREST EXPENSES..................... 23,783,885 17,422,661 14,901,551 -------------- ------------- -------------- Income before income taxes....................................... 5,105,697 4,945,355 4,885,330 Provision for income taxes....................................... 1,526,204 1,451,419 1,426,344 -------------- ------------- -------------- NET INCOME BEFORE MINORITY INTEREST............ 3,579,493 3,493,936 3,458,986 Minority interest in consolidated subsidiary..................... -0- 18,342 -0- -------------- ------------- -------------- NET INCOME..................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 ============== ============= ============== EARNINGS PER COMMON SHARE - basic................................ $ .90 $ .92 $ .93 EARNINGS PER COMMON SHARE - diluted.............................. $ .88 $ .92 $ .93
See notes to consolidated financial statements 42 44 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Accumulated Unearned Other Common Capital Retained ESOP Comprehensive Comprehensive Stock Surplus Earnings Shares Income Total Income ---------- ------------ ------------- ----------- ----------- ----------- ------------- Balance at January 1,1996.... $ 184,927 $ 14,821,302 $ 14,262,319 $ (995,198) $ 745,887 $29,019,237 Net Income - 1996............ 3,458,986 3,458,986 $3,458,986 Other Comprehensive Income, net: Net Change in Unrealized Gains (Losses) on Securities .... (899,449) (899,449) (899,449) ---------- Comprehensive Income......... $2,559,537 ========== Cash dividends: Common....... (908,788) (908,788) Issuance of Common Stock..... 15,073 2,998,420 3,013,493 Release of ESOP shares ...... 135,314 135,314 Pledging of additional ESOP shares ................... (1,260,007) (1,260,007) ---------- ------------ ------------- ----------- ----------- ----------- Balance at December 31, 1996. 200,000 17,819,722 16,812,517 (2,119,891) (153,562) 32,558,786 Net Income - 1997............ 3,512,278 3,512,278 $3,512,278 Other comprehensive income, net: Net Change in Unrealized Gains (Losses) on Securities .... 583,255 583,255 583,255 ---------- Comprehensive Income......... $4,095,533 ========== Cash dividends: Common....... (1,500,000) (1,500,000) Issuance of Common Stock..... 3,161 704,579 707,740 Release of ESOP shares....... 116,989 116,989 ---------- ------------ ------------- ----------- ----------- ----------- Balance at December 31, 1997 203,161 18,524,301 18,824,795 (2,002,902) 429,693 35,979,048 NET INCOME - 1998............ 3,579,493 3,579,493 $3,579,493 OTHER COMPREHENSIVE INCOME, NET: NET CHANGE IN UNREALIZED GAINS (LOSSES) ON SECURITIES .... 13,246 13,246 13,246 ---------- COMPREHENSIVE INCOME......... $3,592,739 ========== CASH DIVIDENDS: COMMON....... (2,031,608) (2,031,608) 2:1 STOCK SPLIT.............. 203,161 (203,161) -0- ISSUANCE OF COMMON STOCK..... 58,470 10,576,082 10,634,552 RELEASE OF ESOP SHARES....... 135,628 135,628 PLEDGING OF ADDITIONAL ESOP SHARES.................... (1,076,958) (1,076,958) ---------- ------------ ------------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1998. $ 464,792 $ 29,100,383 $ 20,169,519 $(2,944,232) $ 442,939 $47,233,401 ========== ============ ============= =========== =========== ===========
See notes to consolidated financial statements 43 45 CONSOLIDATED STATEMENTS OF CASH FLOWS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Years Ended December 31, ------------------------------------------------- 1998 1997 1996 ------------- ------------ ------------ OPERATING ACTIVITIES: Net income ...................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................... 884,682 772,579 834,140 Provision for depreciation and amortization .................. 1,990,250 1,577,243 1,251,145 Amortization of investment security premiums and accretion of discounts ........................ 166,455 82,839 (44,943) Deferred tax expense ......................................... 308,759 386,061 61,324 Realized investment security (gains) losses .................. (465,982) 2,590 (7,509) Loss (gain) on sale of premises and equipment ................ 26,599 (64,787) 39,866 Increase in accrued interest receivable ...................... (901,823) (242,457) (1,009,584) Increase in accrued interest payable ......................... 668,648 369,461 233,690 Other ........................................................ (3,520,039) (439,836) 1,217,000 ------------- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 2,737,042 5,955,971 6,034,115 ------------- ------------ ------------ INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............ 24,045,040 5,007,863 20,014,380 Proceeds from maturity of securities available for sale ......... 21,785,801 6,636,625 15,569,562 Purchase of securities available for sale ....................... (57,808,777) (8,938,589) (53,952,015) Net decrease (increase) in interest-bearing deposits with other banks ..................................... 1,564,558 (740,780) 138,510 Cash used in acquisition of bank branches and finance offices ... (5,321,041) -0- (929,639) Net increase in loans to customers .............................. (99,903,246) (5,349,333) (43,823,086) Proceeds from sale of premises and equipment .................... 87,630 250,596 115,319 Capital expenditures ............................................ (8,452,082) (6,420,709) (5,352,381) Net proceeds from sale of other real estate ..................... 1,119,355 240,000 380,508 ------------- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES ................... (122,882,762) (9,314,327) (67,838,842) ------------- ------------ ------------ FINANCING ACTIVITIES: Net increase in demand deposits, NOW accounts, and savings accounts .......................................... 30,636,345 8,114,624 19,052,113 Net increase in certificates of deposit ......................... 61,416,395 31,022,542 15,686,984 Net (decrease) increase in short-term borrowings ................ (438,546) (5,275,058) 6,897,972 Repayment of long-term debt ..................................... (770,226) (766,848) (763,117) Issuance of common stock ........................................ 10,634,552 402,897 3,013,493 Cash dividends .................................................. (2,031,608) (1,500,000) (908,788) ------------- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 99,446,912 31,998,157 42,978,657 ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents .............. (20,698,808) 28,639,801 (18,826,070) Cash and cash equivalents at beginning of year .................... 46,251,978 17,612,177 36,438,247 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $ 25,553,170 $ 46,251,978 $ 17,612,177 ============= ============ ============
See notes to consolidated financial statements 44 46 CONSOLIDATED STATEMENTS OF CASH FLOWS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Years Ended December 31, -------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest..................................................... $ 22,024,405 $ 19,171,945 $ 16,956,814 Income taxes................................................. 843,623 1,933,488 601,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Other real estate of $792,518, $808,150 and $1,328,284 was acquired in 1998, 1997 and 1996, respectively, through foreclosure. Other assets acquired by foreclosure amounted to $277,675 in 1998 and $471,027 in 1997. Upon the pledging of additional shares to obtain additional ESOP debt of $1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996, long-term debt was increased and equity was decreased. The debt was reduced and shares were released by $135,628, $116,989, and $135,314, respectively, during each of the years ended December 31, 1998, 1997, and 1996 as a result of payments made by the Company's ESOP on the outstanding ESOP debt. In August 1997, the Company issued 11,770 shares of its common stock to the owners of Southern Select Insurance, Inc. as a portion of the consideration given in exchange for 51% of its issued and outstanding common stock. The Company issued an additional 22,306 shares of its common stock, in April 1998, to the owners of Southern Select Insurance, Inc. as a portion of the consideration in exchange for the remaining 49% of its issued and outstanding common stock. In April 1998 the Company issued 10,833 shares of its common stock to the owners of Chafin Insurance Agency, Inc. as a portion of the consideration given in exchange for 100% of the issued and outstanding shares of common stock. The Company also issued 6,667 shares of its common stock to the owner of the Jim Murphree Insurance Agency, Inc. as a portion of the consideration given in exchange for 100% of the issued and outstanding shares of common stock. [The remainder of this page intentionally left blank] See notes to consolidated financial statements 45 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Community Bancshares, Inc. and its wholly owned subsidiaries (the "Company"), Community Bank, Community Appraisals, Inc., Community Insurance Corp. and 1st Community Credit Corporation (collectively, the "Bank.") All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowances based on their judgements about information available to them at the time of their examination. Investments in Securities The Company's investments in securities must be classified as either "Investment Securities Held to Maturity" or "Investment Securities Available for Sale" and accounted for as follows: - Securities Held to Maturity. Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using methods which approximate level yields over the period to maturity. - Securities Available for Sale. Securities available for sale consist of bonds, notes, debentures, and certain equity securities not classified as securities held to maturity. The Company and its subsidiaries have no trading securities. Effective December 1, 1995, the Company reclassified all of its investments in securities as securities available for sale. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of shareholders's equity (Accumulated Other Comprehensive Income) until realized. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. 46 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Revenue Recognition Interest on loans is accrued and credited to operations based upon the principal amount outstanding, except for interest on certain consumer loans which is recognized over the term of the loan using a method which approximates level yields. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the loan is impaired. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential loan losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current domestic and international economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. Loan Fees The Company accounts for loan fees and origination costs in accordance with FASB Statement No. 91, entitled: Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Direct Costs of Leases. The basic requirement of this statement calls for the Company to treat loan fees, net of direct costs, as an adjustment to the yield of the related loan over the term of the loan. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. The carrying value of assets traded in are used to adjust the carrying values of the new assets acquired by trade. Assets which are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations. Depreciation is provided generally by accelerated and straight-line methods based on the estimated useful lives of the respective assets. Other Real Estate Other real estate comprises properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value at the date acquired. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. 47 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Earnings Per Common Share Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock, as prescribed by SFAS No. 128, Earnings per Share. The following reconciles the weighted average number of shares outstanding:
1998 1997 1996 --------- --------- --------- Weighted average of common shares outstanding ... 3,994,798 3,807,232 3,727,506 Effect of dilutive options ...................... 57,461 22,999 -0- --------- --------- --------- Weighted average of common shares Outstanding effected for dilution ............ 4,052,259 3,830,231 3,727,506 ========= ========= =========
Income Taxes Provisions for income taxes are based on amounts reported in the statement of income (after exclusion of non-taxable income such as interest on state and municipal securities) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiaries file a consolidated federal income tax return. Each subsidiary provides for income taxes on a separate-return basis, and remits to the Company amounts determined to be currently payable. Pension and Employee Stock Ownership Plans The Company and its subsidiaries have various employee benefit plans which cover substantially all employees. Pension expense is determined based on an actuarial valuation. The Company contributes amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act. Contributions to the Employee Stock Ownership Plan are determined by the Board of Directors but may not be less than the amount required to cover the debt service on the ESOP loan. In February 1998, the Financial Accounting Standards Board issued Financial Accounting Statement SFAS No. 132, Employer's Disclosures about Pensions and Other Postretirement Benefits. This Statement standardizes the disclosure requirement for pensions and other postretirement benefits to the extent practicable, and requires additional information on changes in the benefits obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain other disclosures previously required. The adoption of this statement had no material impact on the financial condition or results of operations of the Company. 48 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Intangibles Intangibles consist primarily of legal organizational costs and goodwill. Organizational costs are generally amortized over 5 years using the straight-line method. The goodwill intangible represents premiums paid on the purchase of assets and deposit liabilities. The asset is stated at cost, net of accumulated amortization, which is provided using the straight-line method over the estimated useful life of approximately 15 and 20 years. Off Balance Sheet Financial Instruments In the ordinary course of business the Company has entered into off balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The Company also has available as a source of short-term financing the purchase of federal funds from other commercial banks from available lines of up to $10,000,000. In addition, the Company has an available overnight funds line of up to $70,000,000 from the Federal Home Loan Bank of Atlanta (FHLB-Atlanta). Debt Cancellation Contracts The Company began issuing debt cancellation contracts on certain loans to customers as of October 1, 1995. The contract represents an agreement by the Company to cancel the debt of the borrower upon said borrower's death. Contracts may not be written on loans in excess of $15,000 per borrower. The Company charges fees equivalent to that authorized by the state banking authorities and establishes a reserve account, from fees collected, to cover potential claims. The reserve for debt cancellation contracts totaled $137,803 and $135,139 at December 31, 1998 and 1997. Cash Flow Information For purposes of the statements of cash flows, the Company considers cash, due from banks and federal funds sold as cash and cash equivalents. Stock Based Compensation The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. SFAS No. 123, became effective for years beginning after December 15, 1995, and allows for the option of continuing to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and the related Interpretations or selecting the fair value method of expense recognition as described in SFAS No. 123. The Company has elected to follow APB No. 25 in accounting for its employee stock options. Repurchase Agreements In June 1996, the Financial Accounting Standards board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, relating to repurchase agreements, securities lending and other similar transactions, and pledged collateral. This statement established new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral. Subsequently, SFAS No. 127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125 was issued and deferred 49 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED implementation of certain aspects of the original statement until January 1, 1998. The adoption of these provisions did not have a material impact on the Company's financial position or results of operations. Net Income Per Share The Company also adopted SFAS No. 128, Earnings Per Share, during 1997. See Note 1 - Earnings per Share, and Note 11 - Prior Period Restatement. Reclassification Certain amounts in 1997 and 1996 have been reclassified to conform with the 1998 presentation. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Financial Accounting Statement No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes reporting and presentation standards for comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during the period from transactions and other events and circumstances arising from nonowner sources. The adoption of this statement, on January 1, 1998, had no material impact on the Company's financial condition or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The provisions of this statement establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. This statement is effective for financial statements for periods beginning after December 15, 1997. All of the Company's subsidiaries offer similar products and services, are located in the same geographic region, and serve the same customer segments of the market. As a result, management considers all units as one operating segment and therefore feels that the basic financial statements and related footnotes provide details related to segment reporting. In February 1998, the FASB issued SFAS No 132, Employer's Disclosures about Pension and Other Postretirement Benefits. This statement standardizes the disclosure requirement for pensions and other Postretirement benefits to the extent practicable, and requires additional information on changes in the benefits obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain other disclosures previously required. The adoption of this statement had no material impact on the financial condition or results of operations of the Company. 50 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Bank is required to maintain average reserve balances either in vault cash or on deposit with the Federal Reserve. The amount of those reserves required at December 31, 1998 was approximately $1,481,000. During 1998 the Bank implemented a system, which under Regulation D and recent Federal Reserve Rulings, allows the Bank to segregate its transaction accounts into a transaction sub-account component and a non-transaction sub-account component. The transaction sub-account component remains subject to the higher 10% reserve requirement while the non-transaction sub-account component is subject to a 3% reserve requirement. This process allows the Bank to maintain lower reserves required by the Federal Reserve System. NOTE 3 - INVESTMENT SECURITIES At December 31, 1998 and 1997, the Company's investment securities are categorized as available for sale and, as a result, are stated at fair value based generally on quoted market prices. Unrealized holding gains and losses, net of applicable deferred taxes, are included as a component of shareholders' equity, (Accumulated Other Comprehensive Income) until realized. At December 31, 1998, the Company's available-for-sale securities reflected net unrealized gains of $738,232, which resulted in an increase in shareholders' equity of $ 442,939, net of deferred tax expense, compared to net unrealized gains of $716,155 and a resultant increase in stockholders' equity of $429,693, net of deferred tax liability, at December 31, 1997. At December 31, 1996, the investment securities reflected $255,937 of net unrealized losses in available for sale securities, with a decrease in shareholders' equity, net of deferred tax benefit, of $153,562. [The remainder of this page intentionally left blank] 51 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 3 - INVESTMENT SECURITIES - CONTINUED The carrying amounts of investment securities as shown in the consolidated statements of financial condition of the Company and their approximate fair values at December 31, 1998 and 1997 are presented below.
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ----------- ----------- AS OF DECEMBER 31, 1998: - ------------------------ SECURITIES AVAILABLE FOR SALE: U. S. GOVERNMENT AND AGENCY SECURITIES .... $48,877,741 $ 484,437 $ 217,017 $49,145,161 STATE AND MUNICIPAL SECURITIES ............ 14,640,733 545,949 -0- 15,186,682 MORTGAGE-BACKED SECURITIES ................ 31,399,003 54,712 129,849 31,323,866 EQUITY SECURITIES ......................... 1,735,900 -0- -0- 1,735,900 ----------- ---------- ----------- ----------- $96,653,377 $1,085,098 $ 346,866 $97,391,609 =========== ========== =========== =========== As of December 31, 1997: - ------------------------ Securities available for sale: U. S. government and agency securities .... $51,267,361 $ 117,694 $ 231,651 $51,153,404 State and municipal securities ............ 12,118,830 578,983 -0- 12,697,813 Mortgage-backed securities ................ 20,989,723 267,361 16,232 21,240,852 ----------- ---------- ----------- ----------- $84,375,914 $ 964,038 $ 247,883 $85,092,069 =========== ========== =========== ===========
52 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 3 - INVESTMENT SECURITIES - CONTINUED The contractual maturities of securities available for sale at December 31, 1998 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair Cost Value ----------- ----------- AS OF DECEMBER 31, 1998: - ------------------------ SECURITIES AVAILABLE FOR SALE: DUE IN ONE YEAR OR LESS ..................... $11,104,481 $11,086,181 DUE AFTER ONE YEAR THROUGH FIVE YEARS ....... 24,744,893 25,145,548 DUE AFTER FIVE YEARS THROUGH TEN YEARS ...... 30,285,147 30,417,673 DUE AFTER TEN YEARS ......................... 28,782,956 29,006,307 EQUITY SECURITIES ........................... 1,735,900 1,735,900 ----------- ----------- $96,653,377 $97,391,609 =========== ===========
Mortgage-backed securities have been included in the maturity tables based upon the guaranteed payoff date of each security. Gross realized gains and losses on investments in debt securities available for sale for each of the three years in the period ended December 31, 1998 were as follows:
1998 1997 1996 -------- ------- -------- Gross realized gains ......... $472,904 $48,454 $136,304 Gross realized losses ........ 6,922 51,044 128,795
The carrying value of investment securities pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law amounted to approximately $80,163,283 and $73,920,000 at December 31, 1998 and 1997, respectively. 53 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 4 - LOANS The Bank grants loans to customers primarily in North Central Alabama and South Central Tennessee. The major classifications of loans as of December 31, 1998 and 1997 were as follows:
1998 1997 ------------ ------------ Commercial, financial and agricultural ......... $ 94,056,615 $ 64,136,607 Real estate - construction ..................... 6,152,759 3,498,853 Real estate - mortgage ......................... 205,457,289 172,504,056 Consumer ....................................... 129,333,938 86,945,172 ------------ ------------ 435,000,601 327,084,688 Unearned income ................................ 1,147,965 950,205 Allowance for loan losses ...................... 2,970,597 2,131,354 ------------ ------------ Net loans ...................................... $430,882,039 $324,003,129 ============ ============
As of December 31, 1998, there were no loans which the Bank had specifically classified as impaired. Other nonaccrual loans at December 31, 1998 and 1997 amounted to approximately $1,599,439 and $1,093,000, respectively. For the years ended December 31, 1998 and 1997, the difference between 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 immaterial. The Bank has no commitments to loan additional funds to the borrowers of nonaccrual loans. [The remainder of this page intentionally left blank] 54 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 5 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for each of the three years in the period ended December 31, 1998 were as follows:
1998 1997 1996 ----------- ----------- ----------- Balance at beginning of year ................ $ 2,131,354 $ 2,424,847 $ 2,208,798 Charge-offs ................................. (1,463,450) (1,187,263) (1,229,976) Recoveries .................................. 137,264 112,417 82,081 ----------- ----------- ----------- Net charge-offs ........................... (1,326,186) (1,074,846) (1,147,895) Provision for loan losses ................... 884,682 772,579 834,140 Reserves acquired through acquisitions ...... 1,280,747 8,774 529,804 ----------- ----------- ----------- Balance at end of year ...................... $ 2,970,597 $ 2,131,354 $ 2,424,847 =========== =========== ===========
NOTE 6 - PREMISES AND EQUIPMENT Premises and equipment at December 31, 1998 and 1997 is as follows:
1998 1997 ----------- ----------- Land ....................................................... $ 3,911,361 $ 2,426,678 Buildings, land improvements and construction in process ... 19,904,561 15,761,915 Furniture and equipment .................................... 10,123,164 7,851,306 Automobiles ................................................ 1,925,544 1,498,323 Leasehold improvements ..................................... 927,894 684,178 ----------- ----------- 36,792,524 28,222,400 Less allowance for depreciation ............................ 7,246,726 5,859,968 ----------- ----------- $29,545,798 $22,362,432 =========== ===========
The provisions for depreciation charged to occupancy and furniture and equipment expense for the years ended December 31, 1998, 1997 and 1996 were $1,549,920, $1,249,420 and $976,519, respectively. The Bank capitalized $123,099 in interest cost related to building construction in 1998. 55 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 7 - DEPOSITS The major classifications of deposits as of December 31, 1998 and 1997 were as follows:
1998 1997 ------------- -------------- Noninterest-bearing demand...................................................... $ 62,562,296 $ 52,356,858 Interest-bearing demand......................................................... 89,808,368 71,442,832 Savings......................................................................... 58,722,767 51,050,582 Time............................................................................ 218,507,099 179,055,956 Certificates of deposit of $100,000 or more..................................... 90,449,991 68,427,403 Other time deposits............................................................. 18,535,000 18,555,000 ------------- -------------- $ 538,585,521 $ 440,888,631 ============= ==============
The maturities of time certificates of deposit and other time deposits of $100,000 or more issued by the Company at December 31, 1998 are as follows:
TIME OTHER CERTIFICATES TIME OF DEPOSIT DEPOSITS TOTAL ------------- ------------- -------------- Three months or less............................................. $ 17,537,343 $ 18,535,000 $ 36,072,343 Over three through six months.................................... 10,577,684 -0- 10,577,684 Over six through twelve months................................... 23,990,216 -0- 23,990,216 Over twelve months............................................... 38,344,748 -0- 38,344,748 ------------- ------------- -------------- $ 90,449,991 $ 18,535,000 $ 108,984,991 ============= ============= ==============
NOTE 8 - LONG TERM DEBT At December 31, 1998 and 1997, the Company had notes payable totaling $7,568,716 and $7,397,612, respectively. On December 17, 1992, the Company entered into a loan agreement with a regional bank for amounts up to $6,500,000. At December 31, 1998 and 1997, the amounts outstanding were $2,846,631 and $3,557,509, respectively, due December 17, 2002, bearing interest at a floating prime rate, collateralized by 100% of the common stock of the subsidiary bank. The note agreement contains provisions which limit the Company's right to transfer or issue shares of the subsidiary bank's stock. Principal payments of $59,292 are due monthly; however, the Company has the option of postponing up to twenty-four monthly principal payments, provided that no more than six consecutively scheduled installments are deferred. 56 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 8 - LONG TERM DEBT - CONTINUED On November 3, 1993, the Trustees of the Company's ESOP executed a promissory note of $1,200,000 in order to purchase common stock from the Company's public offering of new common stock. The note was originally secured by 80,000 shares of purchased stock. The promissory note had been refinanced in years subsequent to 1993 as additional shares were purchased by the ESOP. On December 1, 1998, this note was refinanced and an additional 56,682 shares of the Company's common stock were obtained by the ESOP. This debt, in the original amount of $2,963,842, was secured by 261,433 shares of the Company's common stock. The note bears interest at a floating rate, with principal and interest payments of $31,677 due monthly through November 16, 2010, with all remaining principal, if any, due upon that date. The Company has guaranteed this debt and in accordance with the applicable accounting and reporting guidelines the debt has been recognized on the Company's statement of condition, with an offsetting charge against equity. As principal payments are made by the ESOP, the debt and offsetting charge against equity are reduced. The shares securing the note are released on a prorata basis by the lender as monthly payments of principal and interest are made. The outstanding balance of this note was $2,944,232 at December 31, 1998, secured by 241,350 of unreleased shares of Company stock. See Note 16. On October 4, 1994, the Company entered into a twenty year, subordinated installment capital note due October 1, 2014 for the purchase of treasury stock. Monthly principal and interest payments of $15,506 are made on the note, which bears interest at the fixed rate of 7%. The Company maintains the right to prepay the note at its sole discretion. The balance of the note was $ 1,777,853 and $1,837,201 at December 31, 1998 and 1997, respectively. Maturities of long-term debt following December 31, 1998 are as follows: 1999............................ $ 932,661 2000............................ 949,238 2001............................ 967,784 2002............................ 987,779 2003............................ 297,837 Thereafter...................... 3,433,417 ----------- $ 7,568,716 ===========
[The remainder of this page intentionally left blank] 57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 9 - OTHER OPERATING EXPENSES Other operating expenses consist of the following:
Years Ended December 31, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Amortization of intangibles ....... $ 440,330 $ 327,823 $ 274,826 Advertising ....................... 92,663 237,887 229,087 Insurance ......................... 129,572 282,791 223,696 Professional fees ................. 359,981 272,999 250,105 Supplies .......................... 471,676 537,374 546,697 Postage ........................... 363,948 280,346 257,071 Telephone ......................... 553,693 357,048 298,437 Training and Education ............ 255,497 98,337 44,515 Other ............................. 2,558,965 1,295,511 1,140,681 ---------- ---------- ---------- $5,226,325 $3,690,116 $3,265,115 ========== ========== ==========
NOTE 10 - INCOME TAXES Federal and state income taxes receivable and (payable) as of December 31, 1998 and 1997 included in other assets and other liabilities, respectively, were as follows:
1998 1997 --------- -------- Current Federal ........................................ $ (30,282) $225,520 ========= ======== State .......................................... $(162,232) $ 33,316 ========= ========
The components of the net deferred income tax asset and (liability) included in other assets and other liabilities, respectively, are as follows:
1998 1997 ------------ -------------- DEFERRED TAX ASSET: Federal..................................................................... $ 652,659 $ 667,885 State....................................................................... 114,763 116,176 ------------ -------------- Total gross deferred income tax asset...................................... 767,422 784,061 ------------ -------------- Deferred tax liability: Federal..................................................................... (1,194,959) (898,021) State....................................................................... (159,583 (158,978) ------------ -------------- Total gross deferred income tax liability.................................. (1,354,542) (1,056,999) ------------ -------------- Net deferred income tax asset (liability)..................................... $ (587,120) $ (272,938) ============ ==============
58 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 10 - INCOME TAXES - CONTINUED The tax effects of each type of income and expense item that gave rise to deferred taxes are:
1998 1997 ------------ -------------- Net unrealized losses (gains) on securities available for sale.......................................................... $ (295,293) $ (286,462) Depreciation.................................................................. (945,316) (739,956) Pension expense............................................................... 260,079 150,521 Provision for loan losses..................................................... 335,450 469,998 Deferred compensation......................................................... 15,152 49,419 Provision for debt cancellation............................................... 55,121 52,922 Other......................................................................... (12,313) 30,620 ------------ -------------- $ (587,120) $ (272,938) ============ ==============
The components of income tax expense for each of the years ended December 31, 1998, 1997 and 1996 were:
1998 1997 1996 ---------------------------- ------------------------------ ------------------------------ CURRENT DEFERRED Current Deferred Current Deferred ------------ ------------ ------------- ------------- ------------ -------------- Federal........ $ 1,070,862 $ 264,234 $ 1,041,065 $ 322,262 $ 1,164,205 $ 59,451 State.......... 146,583 44,525 24,293 63,799 200,815 1,873 ------------ ------------ ------------- ------------- ------------ -------------- $ 1,217,445 $ 308,759 $ 1,065,358 $ 386,061 $ 1,365,020 $ 61,324 ============ ============ ============= ============= ============ ==============
The principal sources of temporary differences resulting in deferred income taxes included in the accompanying consolidated statements of income and the tax effect of each are as follows:
1998 1997 1996 ------------- ------------- ------------ Depreciation............................ $ 205,360 $ 140,117 $ 88,004 Provision for loan losses............... 135,538 159,886 36,173 Pension expense......................... (109,558) (61,630) 50,372 Alternative minimum tax credit............................ -0- -0- 29,293 Other................................... 77,419 147,688 (142,518) ------------- ------------- ------------ $ 308,759 $ 386,061 $ 61,324 ============= ============= ============
59 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 10 - INCOME TAXES - CONTINUED Tax effects of securities transactions resulted in an increase (decrease) in income taxes for 1998, 1997 and 1996 of $167,940, ($1,036) and $3,004, respectively. The following is a reconciliation of the difference in the effective tax rate and the federal statutory rate:
Years Ended December 31, -------------------------- 1998 1997 1996 ----- ---- ---- Statutory federal income tax rates.................. 34.0% 34.0% 34.0% Effect on rate of: Tax-exempt securities............................. (5.0) (4.9) (6.3) Tax-exempt loan income............................ (2.5) (3.2) (2.8) State income tax, net of federal tax benefit...... -- --- 2.2 Interest expense disallowance..................... 0.6 0.7 0.9 Other items....................................... 2.8 2.7 1.2 ----- ----- ----- Effective income tax rate......................... 29.9% 29.3% 29.2% ===== ===== =====
NOTE 11 - PRIOR PERIOD RESTATEMENT Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, was adopted by the Company during 1997. Earnings per share amounts for 1997 and 1996 have been restated to give effect for the 2:1 stock split effective March 26, 1998. NOTE 12 - SHAREHOLDERS' EQUITY In 1998, the Board of Directors passed a resolution authorizing the preparation of a Registration Statement for the proposed sale of up to 500,000 newly issued shares of the Company's $.10 par value common stock. Shares were offered to the public, at a purchase price of $19.00 per share, in accordance with the Company's Prospectus dated August 14, 1998. The offering was closed on December 1, 1998 upon full subscription of all shares offered for sale, raising $9,468,655 of capital after reduction for offering costs. On March 28, 1996, the Company issued a total of 135,000 options to its directors to purchase its common shares. The options were distributed among the directors based upon their years of service and their positions of leadership with the Company. Each of the stock option agreements contained an option price of $10.00 per share, the market value of the shares at the time of issuance. The options are exercisable between April 1, 1996 and March 31, 2001 (1996 options). In March 1997, an additional 103,000 options were issued to the Company's directors with an option price of $12.50 per share. These options were exercisable between April 1, 1997 and March 31, 2002 (1997 options). In March 1998, 203,331 options were issued to directors and certain senior officers with an option price of $15.00 per share. These options are exercisable between April 1, 1998 and March 31, 2003 (1998 options). Options under the plan are treated as non-qualified options under the provisions of the Internal Revenue Code. The agreements also contain a provision whereby the Company shall compensate the optionee in cash for any federal or state tax liability incurred upon the exercise of the options. 60 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED The following sets forth certain information regarding stock options for the years ended December 31, 1998, 1997 and 1996:
Number Wgt. Average of Shares Exercise Price ----------- --------------- Balance, December 31, 1995.................................... -0- $ -0- Granted, Year Ended December 31, 1996......................... 270,000 10.00 Exercised, Year Ended December 31, 1996....................... -0- -0- ----------- --------------- Balance, December 31, 1996.................................... 270,000 10.00 Granted, Year Ended December 31, 1997......................... 103,000 12.50 Exercised, Year Ended December 31, 1997....................... (30,000) (10.16) ----------- --------------- Balance, December 31, 1997.................................... 343,000 10.74 GRANTED, YEAR ENDED DECEMBER 31, 1998......................... 203,331 15.00 EXERCISED, YEAR ENDED DECEMBER 31, 1998....................... (32,000) (11.72) ----------- -------------- BALANCE, DECEMBER 31, 1998.................................... 514,331 $ 12.36 =========== ==============
Expiration Options Number Date Exercisable ------------- ------------ -------------- Options with Exercise Price of $10.00............................ 222,000 3-31-2001 222,000 Options with Exercise Price of $12.50............................ 99,000 3-31-2002 99,000 Options with Exercise Price of $15.00............................ 193,331 3-31-2003 193,331 ------------- -------------- Total outstanding, December 31, 1998............................. 514,331 514,331 ============= ==============
The number of shares and weighted average exercise price have been restated to give effect for the 2:1 stock split effective March 26, 1998. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for years beginning after December 15, 1995, and allows for the option of continuing to follow Accounting Principles Board Opinion No. 25, Accounting for Stocks Issued to Employees, and the related Interpretations or selecting the minimum value method of expense recognition as described in SFAS 123. The Company has elected to apply APB Opinion No. 25 in accounting for its incentive stock options, accordingly, no compensation cost has been recognized by the Company. 61 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 1996, 1997 and 1998 was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics from the Company's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect the fair value estimate. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. The Company's options outstanding have a weighted average contractual life of 3.19 years. The weighted average fair value of options granted was $ 3.68 in 1998, $3.32 in 1997 and $2.66 in 1996. The fair value of each option granted is estimated using the following weighted-average assumptions in the option pricing model: expected dividend yield of 3.33% for 1998, 3.00% for 1997 and 2.50% for 1996; an expected option life of 5 years; expected volatility of 0.289 for 1998, 1997 and 1996; and a risk free interest rate of 5.49%, 6.12% and 5.19% for 1998, 1997 and 1996, respectively. If compensation cost for the Company's stock-based compensation plan had been determined consistent with SFAS No. 123, net income and earnings per share would have been as presented below for the years ended December 31:
1998 1997 1996 ------------- ------------- -------------- Pro forma earnings ($000's) $ 3,101 $ 3,361 $ 3,120 Pro forma Earnings per Common Share - basic .78 .88 .84 Pro forma Earnings per Common Share - diluted .77 .88 .84
These options are assumed to be exercised in the calculation of diluted average common shares outstanding, causing the equivalent average number of shares outstanding on a diluted basis to be 57,461 greater than that used to calculate basic earnings per share for 1998. Average shares outstanding when assuming dilution were greater than average shares outstanding for basic earnings per share by 22,999 for 1997. Diluted shares and basic shares were the same for 1996. The dilutative effect on earnings per share for the year ended December 31, 1998 was $.02. There was no dilutative effect on the book value of the Company's common shares at December 31, 1997 or 1996. The effects of applying SFAS 123 for providing proforma disclosures are not likely to be representative of the effects on reported earnings for future years, nor are the dividend estimates representative of commitments on the part of the Company's Board of Directors. Annual dividends of $.50 per share, $.38 per share and $.25 per share were declared by the Company's Board of Directors on its common stock and paid in January of 1998, 1997 and 1996, respectively. The payment of dividends on common stock is subject to the prior payment of principal and interest on the Company's long-term debt, maintenance of sufficient earnings and capital of the subsidiaries, and to regulatory restrictions. (See Notes 8 and 17). 62 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 13 - COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company offers a variety of financial products to its customers to aid them in meeting their requirements for liquidity, credit enhancement and interest rate protection. Generally accepted accounting principles recognize these transactions as contingent liabilities and, accordingly, they are not reflected in the accompanying financial statements. Commitments to extend credit, credit card arrangements, commercial letters of credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Company's credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded on the consolidated statements of financial condition. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. The Company has not been required to perform on any financial guarantees nor has it incurred any losses on its commitments in either 1998 or 1997. Following is a discussion of these commitments: Standby Letters of Credit: These agreements are used by the Company's customers as a means of improving their credit standings in their dealings with others. Under these agreements, the Company agrees to honor certain financial commitments in the event that its customers are unable to do so. As of December 31, 1998 and 1997, the Company has issued standby letters of credit of approximately $621,000 and $577,000, respectively. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of the Company's allowance for loan losses. Management does not anticipate any material losses as a result of these letters of credit. Loan Commitments: As of December 31, 1998 and 1997, the Company had commitments outstanding to extend credit totaling approximately $15,698,000 and $18,049,000, respectively. These commitments generally require the customers to maintain certain credit standards. Management does not anticipate any material losses as a result of these commitments. Litigation: On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a shareholder derivative action against the directors of the Company in the state Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on January 14, 1999 to add the Company and Community Bank as defendants in the action. On February 11, 1999, the complaint was again amended to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as additional plaintiffs. The complaint alleged that the directors of the Company breached their fiduciary duty to the Company and its shareholders, engaged in fraud, fraudulent concealment, suppression of material fact and suppression of the plaintiff shareholders, failed to supervise management, and conspired to conceal wrongful acts from the Company's shareholders and paid themselves excessive director fees. The complaint also alleged that the Board of Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President of the Company, including alleged self dealing, payment of excessive compensation, misappropriation of corporate opportunities and misappropriation of funds. The complaint seeks an unspecified amount of compensatory and punitive damages, removal of the current 63 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED directors, appointment of a new Board of Directors, and attorneys fees and costs. Management of the company believes that the plaintiffs' allegations are false and that the action lacks merit. The Company and its directors intend to defend the action vigorously, and have filed a motion with the court seeking to have the action dismissed. Management of the Company believes that the action will not have a material adverse effect on the Company's financial condition and results of operations. The Company and its subsidiaries are parties to other litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims are not material to the consolidated financial statements. In September 1998, Community Bank discovered that a number of automobile and truck loans had been made through its Ft. Payne, Alabama Wal-Mart location which were not in compliance with the Bank's lending policy. The total amount of those loans was approximately $9,300,000. The appropriate authorities and the Bank's financial institution bond carrier were notified, and investigations are still proceeding. As of December 31, 1998, borrowers had defaulted on loans totaling approximately $3,400,000 and the Bank had taken possession of over 200 vehicles, which were the collateral for such defaulted loans. Although investigation of the matter has not yet been completed, management currently believes that the Bank will be reimbursed either by its bond carrier or by other parties involved in these transactions and the Bank will not incur any material losses from such loans. NOTE 14 - CONCENTRATIONS OF CREDIT All of the Company's loans, commitments and standby letters of credit have been granted to customers in the Company's market area. Substantially all such customers are depositors of the Company. Investments in state and municipal securities also involve governmental entities within the Company's market area. The concentrations of credit by type of loan are set forth in Note 4. The commitments to extend credit relate primarily to consumer cash lines which represented approximately $2,399,000 and $2,967,000 of the unused commitment balances at December 31, 1998 and 1997. All remaining commitments consist primarily of unused real estate commitment lines. The Company maintains its cash accounts at various commercial banks in Alabama. The total cash balances are insured by the FDIC up to $100,000. Total uninsured balances held at other commercial banks amounted to $18,440,464 and $6,791,718, at December 31, 1998 and 1997, respectively. [The remainder of this page intentionally left blank] 64 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 15 - PENSION PLAN The Company has a defined benefit plan that provides retirement and disability benefits for substantially all employees of the Company and its subsidiaries, and death benefits for their beneficiaries. An employee will become a participant in the Pension Plan on January 1 or July 1 after completing 12 months of employment during which the employee works at least 1,000 hours. All employees are eligible to become participants in the Pension Plan regardless of age on the date they begin employment and the normal retirement age is age 65. In addition, participants in the Pension Plan accrue benefits after they have attained the normal retirement age. Benefits under the Pension Plan depend upon a participant's years of credited service with the Company or any of its subsidiaries and his average monthly earnings for the highest five consecutive years out of the participants final 10 years of employment. Employees who become participants on or after January 1, 1996 will not be vested in any benefit until he completes five years of service at which time the employee will be 100% vested. Employees who became participants before January 1, 1996, are 20% vested in his accrued benefits after completion of two years of service, 40% vested after three years of service, 60% vested after four years of service and becomes fully vested upon completion of five years of service. An employee who completes ten years of service and attains age 55 is eligible for early retirement benefits. Plan assets consist primarily of corporate stocks and bonds. The Company contributes amounts to the pension funds sufficient to satisfy funding requirements of the Employee Retirement Income Security Act. Effective January 1, 1995, the Company established a nonqualified benefit plan for certain key executives called the Community Bancshares Benefit Restoration Plan, the purpose of which is to provide the amount of the benefit which would otherwise be paid under the Company's pension plan but which cannot be paid under that plan due to the limitations imposed by the Internal Revenue Code of 1986, as amended. The following tables set forth the funding status and the amount recognized for both the Pension Plan and the Benefit Restoration Plan in the Company's Consolidated Statements of Financial Condition and the Consolidated Statements of Income. [The remainder of this page intentionally left blank] 65 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 15 - PENSION PLAN - CONTINUED Pension Plan as of December 31:
1998 1997 ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year ............. $ 4,051,109 $ 3,512,362 Service cost ........................................ 410,795 310,756 Interest cost ....................................... 334,729 280,601 Amendments .......................................... -0- -0- Actuarial (gain) or loss ............................ 630,395 46,932 Benefits paid ....................................... (106,510) (99,542) ----------- ----------- Benefit obligation at end of year ................... $ 5,320,518 $ 4,051,109 =========== =========== Change in plan assets: Fair value of plan assets at beginning of year ...... $ 4,001,126 $ 3,131,790 Actual return on plan assets ........................ 534,351 522,773 Employer contribution ............................... 367,438 446,105 Benefits paid from plan assets ...................... (106,510) (99,542) ----------- ----------- Fair value of plan assets at end of year ............ $ 4,796,405 $ 4,001,126 =========== =========== Funded status of plan: Funded status of plan ............................... $ (524,113) $ (49,983) Unrecognized actuarial (gain) or loss ............... 314,786 (176,394) Unrecognized prior service cost ..................... 112,434 124,133 Unrecognized transition (asset) or obligation ....... (54,431) (71,310) ----------- ----------- Accrued benefit cost ................................ $ (151,324) $ (173,554) =========== =========== Weighted average rate assumptions used in determining pension cost and the projected benefit obligation were: Discount rate used to determine present value of projected benefit obligation at end of year .... 7.25% 8.00% Expected long-term rate of return on plan assets for the year ............................... 10.00% 8.00% Expected rate of increase in future compensation levels ............................... 6.00% 6.00%
66 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 15 - PENSION PLAN - CONTINUED Pension plan net periodic benefit cost:
1998 1997 1996 ------------- ------------ ------------- Service cost.............................................. $ 410,795 $ 310,756 $ 269,391 Interest cost............................................. 334,729 280,601 241,630 Expected return on plan assets............................ (395,136) (245,114) (223,356) Amortization of prior service cost........................ 11,699 11,699 11,699 Amortization of transitional (asset) or obligation........ (16,879) (16,879) (16,879) Recognized actuarial loss................................. -0- -0- -0- ------------- ------------ -------------- Net periodic benefit cost................................. $ 345,208 $ 341,063 $ 282,485 ============= =========== ==============
[The remainder of this page intentionally left blank] 67 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 15 - PENSION PLAN - CONTINUED Benefit Restoration Plan as of December 31:
1998 1997 --------------- ---------------- Change in benefit obligation: Benefit obligation at beginning of year................................ $ 802,984 $ 619,321 Service cost........................................................... 68,927 52,515 Interest cost.......................................................... 74,466 55,410 Amendments............................................................. -0- -0- Actuarial (gain) or loss............................................... 242,018 75,738 Benefits paid.......................................................... -0- -0- --------------- ---------------- Benefit obligation at end of year...................................... $ 1,188,395 $ 802,984 =============== ================ Change in plan assets: Fair value of plan assets at beginning of year......................... $ -0- $ -0- Actual return on plan assets........................................... -0- -0- Employer contribution.................................................. -0- -0- Benefits paid from plan assets......................................... 0- -0- --------------- ---------------- Fair value of plan assets at end of year............................... $ -0- $ -0- =============== ================ Funded status of plan: Funded status of plan.................................................. $ (1,188,395) $ (802,984) Unrecognized actuarial (gain) or loss.................................. 404,666 188,615 Unrecognized prior service cost........................................ 203,160 238,067 Unrecognized transition (asset) or obligation.......................... -0- -0- --------------- ---------------- Accrued benefit cost................................................... $ (580,569) $ (376,302) =============== ================ Weighted average rate assumptions used in determining pension cost and the projected benefit obligation were: Discount rate used to determine present value of projected benefit obligation at end of year....................... 7.25% 8.00% Expected long-term rate of return on plan assets for the year.................................................. 10.00% 8.00% Expected rate of increase in future compensation levels.................................................. 6.00% 6.00%
68 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 15 - PENSION PLAN - CONTINUED Benefit Restoration plan net periodic benefit cost:
1998 1997 1996 ------------- ------------ ------------ Service cost................................................ $ 68,927 $ 52,515 $ 44,552 Interest cost............................................... 74,466 55,410 42,521 Expected return on plan assets.............................. -0- -0- -0- Amortization of prior service cost.......................... 34,907 34,907 34,907 Amortization of transitional (asset) or obligation.......... -0- -0- -0- Recognized actuarial loss................................... 25,967 11,243 6,325 ------------- ------------ --------- Net periodic benefit cost................................... $ 204,267 $ 154,075 $ 128,305 ============= ============ ==========
[The remainder of this page intentionally left blank] 69 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as of January 1, 1985, which enables eligible employees of the Company and its subsidiaries to own Company common stock. An employee becomes a participant in the ESOP on June 30 or December 31 after completing 12 months of employment during which the employee is credited with 1,000 or more hours of service. Contributions to the ESOP are made at the discretion of the Company's Board of Directors, but may not be less than the amount required to cover the debt service on the ESOP loan. Employer contributions are allocated to eligible participants in proportion to their compensation, which equals W-2 wages plus pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code imposes a limit ($160,000 in 1998) on the amount of compensation which may be considered under the plan. On November 3, 1993, the ESOP's Trustees executed a promissory note of $1,200,000 in order to purchase common stock from the Company's public offering of new common stock. The note was originally secured by 80,000 shares of purchased stock. The promissory note has been refinanced in years subsequent to 1993 as additional shares were purchased by the ESOP. On December 31, 1998, this note was refinanced and an additional 56,682 shares of the Company's common stock were obtained by the ESOP. This debt, in the original amount of $2,963,842, was secured by 261,433 shares of the Company's common stock. The note bears interest at a floating rate, with principal and interest payments of $31,677 due monthly through November 16, 2010, with the remaining principal, if any, due upon that date. The Company has guaranteed this debt and in accordance with the applicable accounting and reporting guidelines the debt has been recognized on the Company's statement of condition, with an offsetting charge against equity. As principal payments are made by the ESOP, the debt and offsetting charge against equity are reduced. The shares securing the note are released on a prorata basis by the lender as monthly payments of principal and interest are made. As of December 31, 1998, there were 241,350 unreleased shares with a fair value of approximately $4,827,000. These shares are subtracted from outstanding shares for earnings per share calculations. Effective January 1, 1994, the Company applied the accounting and reporting requirements of Statement of Position No. 93-6, Employers' Accounting for Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6, the employer must recognize the indebtedness of its sponsored ESOP on its financial statement and reduce its stockholders' equity for shares of stock which have not been released by a lender to the ESOP for allocation to its participating employees. The portion of payments made by the Company to the ESOP on behalf of its participating employees which are used to pay interest on the ESOP debt ($165,808, $165,550 and $152,822 in 1998, 1997 and 1996, respectively) is classified as interest expense on the Company's income statement. Dividends paid on released ESOP shares are credited to the accounts of the participants to whom the shares are allocated. Dividends on unreleased shares are treated as other income of the ESOP. At December 31, 1998 and 1997, the Company's financial statements reflect long term debt and a corresponding contra-equity account, as a result of the ESOP debt, of $2,944,232 and $2,002,902, respectively. 70 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED Company contributions to the ESOP amounted to $316,008, $289,147 and $288,878, for 1998, 1997 and 1996, respectively. NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES 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 less any required transfers to surplus. At December 31, 1998, Community Bank could have declared dividends of approximately $7,640,960 without approval of regulatory authorities. NOTE 18 - REGULATORY CAPITAL The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if taken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998 and 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998 and 1997, the Company and its banking subsidiary are classified as well capitalized under the financial institution regulatory framework. To be categorized as well capitalized the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since year-end 1998 that management believes have changed the institution's category. 71 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 18 - REGULATORY CAPITAL - CONTINUED
For Capital To Be Actual Adequacy Purposes Well Capitalized ---------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars In Thousands) AS OF DECEMBER 31, 1998: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED $ 46,083 11.03% $ 33,436 8.00% $ 41,795 10.00% COMMUNITY BANK 47,333 11.40 33,218 8.00 41,523 10.00 TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED $ 41,521 9.94% $ 16,718 4.00% $ 25,777 6.00% COMMUNITY BANK 44,362 10.68 16,609 4.00 24,914 6.00 TIER 1 CAPITAL (TO AVERAGE ASSETS): CONSOLIDATED $ 41,521 7.79% $ 21,328 4.00% $ 26,660 5.00% COMMUNITY BANK 44,362 8.34 21,268 4.00 26,585 5.00
For Capital To Be Actual Adequacy Purposes Well Capitalized ---------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars In Thousands) As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $ 36,411 11.86% $ 24,556 8.00% $ 30,695 10.00% Community Bank 39,351 12.80 24,586 8.00 30,733 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 32,638 10.63% $ 12,278 4.00% $ 18,417 6.00% Community Bank 37,219 12.11 12,294 4.00 18,441 6.00 Tier 1 Capital (to Average Assets): Consolidated $ 32,638 6.94% $ 18,813 4.00% $ 23,524 5.00% Community Bank 37,219 7.95 18,718 4.00 23,398 5.00
72 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 19 - COMPREHENSIVE INCOME In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes reporting and presentation standards for comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances arising from nonowner sources. The adoption of SFAS No. 130 in 1998 did not have a material impact on the Company's financial condition or its results of operations. The following is a summary of the components of other comprehensive income:
Year Ended December 31, --------------------------------------- 1998 1997 1996 --------- -------- ----------- Unrealized holding gains (losses) arising during period .... $ 488,059 $969,502 $(1,491,574) Reclassification adjustments for net (gains) losses included in net income ................................... (465,982) 2,590 (7,509) --------- -------- ----------- Other comprehensive income, before income taxes ............ 22,077 972,092 (1,499,083) Income tax expense (benefit) related to other Comprehensive Income ..................................... 8,831 388,837 (599,634) --------- -------- ----------- Other Comprehensive Income ................................. $ 13,246 $583,255 $ (899,449) ========= ======== ===========
NOTE 20 - RELATED PARTY TRANSACTIONS Loans: Certain directors, executive officers and principal shareholders, including their immediate families and associates were loan customers of the Bank during 1998 and 1997. Except as noted below, all such loans are made in the ordinary course of business on substantially the same credit terms, including interest rates and collateral and do not represent more than a normal risk of collection or present other unfavorable features. Total loans to these persons at December 31, 1998 and 1997, amounted to $10,780,000 and $6,971,000, respectively. An analysis of activity during 1998 in loans to related parties resulted in additions of $8,108,000, representing new loans, reductions of $4,484,000, representing payments, and an increase of $185,000, representing a change in the composition of related parties. 73 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED The Company, through Community Bank, its wholly owned subsidiary, offers all regular full-time employees, including executive officers, loans at interest rates which are one percent below the prevailing market rate. As of December 31, 1998, executive officers and directors of the Company and executive officers of Community Bank and its subsidiaries, including members of their immediate families and related interests, had loans outstanding pursuant to this policy with total indebtedness of approximately $1,719,000. The Company, through its wholly owned bank subsidiary, also offers first mortgage real estate loans on the primary residence, at a rate of 5%, to employees who are required to relocate in the course of their employment. As of December 31, 1998, executive officers and directors of the Company and executive officers of Community Bank and its subsidiaries, including members of their immediate families and related interest, had relocation loans outstanding with total indebtedness of approximately $2,985,000. Maintenance Contract: The Bank has a service contract with Heritage Farms, an unincorporated business owned by Kennon R. Patterson, Sr., a director and officer of the Company, for the upkeep and maintenance of the external grounds of six of the Bank's locations and one location for 1st Community Credit Corporation for most of 1998. External grounds upkeep and maintenance was also performed for twelve other Bank locations only during the first quarter of 1998. Maintenance expense under this contract amounted to $51,465, $96,300 and $64,875 for the years ended December 31, 1998, 1997 and 1996, respectively, a monthly average of $468, $422 and $318 per location. Interior Design : The Company and the Bank, including the Bank's subsidiaries, paid Heritage Interiors, a decorating and design firm owned and operated by the wife of Kennon R. Patterson, Sr., a director and officer of the Company, for the interior design, furniture, appliances, fixtures, hardware, carpets, wall coverings, paint, drapes and accessories for new facilities and similar work associated with the renovation of existing locations. During 1998, Heritage Interiors was paid $265,066 in connection with the completion of three new buildings with a total of approximately 60,000 square feet and $31,876 for the renovation of an existing building at the Company's headquarters in Blountsville, $150,723 in connection with the opening of a permanent location in Double Springs, $38,647 in connection with the opening of bank offices in Albertville, Boaz and Guntersville, $44,610 in connection with the opening of six offices of 1st Community Credit Corporation, and additional amounts relating to 23 other offices of the Company, Community Bank or its subsidiaries. Total payments to Heritage Interiors in 1998 were $666,492. During 1997, Heritage Interiors was paid $803,510 in connection with the building of the three new buildings at the Company's headquarters in Blountsville, $136,133 for goods and services for the Oneonta office, $139,484 for goods and services for the Cleveland office and additional amounts for goods and services for 20 other offices of the Company, Community Bank and its subsidiaries. Total payments to Heritage Interiors in 1997 were $1,186,287. During 1996, Heritage Interiors was paid $122,346 in connection with the opening of an office in Rainsville, $129,033 in connection with the opening of an office in Rogersville and additional amounts for goods and services for 17 other offices of the Company, Community Bank and its subsidiaries. Total payments to Heritage Interiors in 1996 were $377,897. These purchases were at a cost more favorable to the Company and its subsidiaries than could be obtained from unrelated parties. 74 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 21 - LEASES The Company has a number of operating lease agreements, involving land and buildings. These leases are noncancellable and expire on various dates through the year 2013. The leases provide for renewal options and generally require the Company to pay maintenance, insurance and property taxes. Options to purchase are also included in some leases. For the years ended December 31, 1998, 1997 and 1996, rental expense for operating leases was approximately $539,655, $232,759, and $176,942, respectively. Future minimum lease payments for all leases at December 31, 1998 are as follows:
OPERATING ------------- Years Ending December 31, 1999.............................. $ 382,624 2000.............................. 365,461 2001.............................. 336,757 2002.............................. 272,726 2003.............................. 237,492 Thereafter........................ 1,255,710 ------------- Total minimum lease payments...... $ 2,850,770 =============
NOTE 22 - BUSINESS COMBINATIONS On March 6, 1998, 1st Community Credit Corporation, a subsidiary of Community Bank, opened offices in Boaz and Gadsden, Alabama as a result of the acquisition of certain assets and the assumption of certain liabilities from Valley Finance, a subsidiary of Home Bank, Guntersville, Alabama. In exchange for $6,544,000 in cash, 1st Community Credit Corporation acquired assets of $5,652,000, net of $1,373,000 in unearned income on loans and $900,000 in reserve for loan losses, recorded $1,000,000 in goodwill and assumed $108,000 in liabilities. The effect of this business combination was not material to the Company's financial statements for periods prior to the acquisition date. Effective August 1, 1997, Community Insurance, Inc., a subsidiary of Community Bank, 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. On April 1, 1998, Southern Select became a wholly owned subsidiary of Community Insurance as a result of Community Insurance acquiring the remaining 49% of the common stock of Southern Select in exchange for a combination of cash and shares of the Company's common stock, totaling $383,014. The entire amount was recorded as an intangible. The effect of this business combination was not material to the consolidated financial statements of the Company for periods prior to the date of acquisition. 75 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 22 - BUSINESS COMBINATIONS - CONTINUED On April 1, 1998, Community Insurance established an office in Oneonta, Alabama through the acquisition of 100% of the common stock of the Murphree Insurance Agency. Community Insurance exchanged a combination of cash and shares of the Company's common stock, totaling $375,000, acquiring $7,884 in fixed assets and paying a premium of $367,116. Also effective April 1, 1998, Community Insurance established an office in Graysville, Alabama as a result of the acquisition of the Chafin Insurance Agency. Community Insurance exchanged a combination of cash and shares of the Company's common stock, totaling $700,000, acquiring $62,488 in assets and paying a premium of $637,512. Neither of these transactions were material to the financial statements of the Company for periods prior to the acquisition date. Effective June 15, 1998, Community Bank consummated the transaction to purchase certain assets and assumed certain liabilities from the Uniontown, Alabama branch of the First National Bank of West Point, Georgia. In exchange for cash totaling $2,615,000, the Bank received approximately $2,500,000 in additional loans, net of unearned interest and loan loss reserve, $295,000 in other assets, $5,672,000 in additional deposit liabilities, and $262,000 of intangible assets. This transaction had no material effect of the financial statements of the Company for periods prior to the date of acquisition. All business combinations were accounted for using the purchase method of accounting for business combinations. NOTE 23 - OTHER SHORT-TERM BORROWINGS Other short-term borrowings at December 31, 1998 and 1997 consisted of the U.S. Treasury Tax and Loan Note Option account, federal funds purchased, overnight funds purchased from FHLB-Atlanta and securities sold under agreements to repurchase. Information concerning securities sold under agreements to repurchase is summarized as follows:
1998 1997 ------------ ------------ Average balance during the year................................................. $ 880,551 $ 1,271,798 Average interest rate during the year........................................... 6.02% 6.29% Maximum month-end balance during the year....................................... $ 1,930,582 $ 1,033,137 U.S. government and agency securities underlying the agreements at year-end: Carrying Value.................................................................. $ 1,901,763 $ 2,842,188 Estimated Fair Value............................................................ 1,852,228 2,842,188 Accrued Interest Receivable..................................................... 25,801 51,938
76 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 23 - OTHER SHORT-TERM BORROWINGS - CONTINUED Securities sold under agreements to repurchase are generally treated as collateralized financing transactions. It is the Company's policy to deliver underlying securities to custodian accounts for customers. NOTE 24 - SUBSEQUENT EVENTS On January 7, 1999, the Board of Directors of the Company adopted a Share Purchase Rights Plan and declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock of the Company to shareholders of record on January 7, 1999. Each Right entitles the stockholder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a price of $84 per one one-hundredth of a preferred share. In the event that any person or group of affiliated or associated persons acquires beneficial ownership of 15 % or more of the outstanding common stock of the Company (an "Acquiring Person"), each holder of a purchase right, other than the Acquiring Person, will thereafter have the right to receive upon exercise of the Right that number of shares of common stock of the Company having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction of 50% or more of its assets or earning power are sold after a person or group has become an Acquiring Person, each holder of a Right, other than an Acquiring Person, will thereafter have the right to receive that number of shares of common stock of the acquiring company which at that time of such transaction have a market value of two times the exercise price of the Right. At any time after a person or group becomes an Acquiring Person and prior to the acquisition of 50% or more of the outstanding common stock of the Company by such person or group the Board of Directors of the Company may exchange the Rights, other than Rights owned by an Acquiring Person, in whole or in part, at an exchange ratio of one common share or one one-hundredth of preferred share. The purchase price and the number of shares issuable upon exercise of the Rights are subject to adjustment in the event of a stock split, stock dividend, reclassification or certain distributions with respect to the preferred stock. The Rights will expire January 13, 2009 unless such date is extended or unless the Rights are redeemed or exchanged prior to such date. [The remainder of this page intentionally left blank] 77 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments: For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investment Securities: For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loan Receivables: For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposit of similar remaining maturities. Long-term Debt: Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written: The fair value of commitments and letters of credit is estimated to be approximately the same as the notional amount of the related commitment. [The remainder of this page intentionally left blank] 78 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The estimated fair values of the Company's financial instruments as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- -------------- (in Thousands) (in Thousands) FINANCIAL ASSETS: Cash and short-term investments......... $ 26,503 $ 26,503 $ 48,766 $ 48,766 Investment securities................... 97,392 97,392 85,092 85,092 Loans................................... 433,853 326,134 Less: allowance for losses.............. 2,971 2,131 ------------- ------------- Net Loans............................... 430,882 436,914 324,003 320,133 ------------- ------------- ------------- -------------- TOTAL FINANCIAL ASSETS.................. $ 554,777 $ 560,809 $ 457,861 $ 453,991 ============= ============= ============= ============== FINANCIAL LIABILITIES: Deposits................................ $ 538,586 $ 543,221 $ 440,889 $ 440,964 Short-term borrowings................... 2,192 2,192 2,630 2,630 Long-term debt.......................... 7,569 7,606 7,398 7,246 ------------- ------------- ------------- -------------- TOTAL FINANCIAL LIABILITIES............. $ 548,347 $ 553,019 $ 450,917 $ 450,840 ============= ============= ============= ============== UNRECOGNIZED FINANCIAL INSTRUMENTS: Commitments to extend credit............ $ -0- $ 15,698 $ -0- $ 18,049 Standby letters of credit............... -0- 621 -0- 577 ------------- ------------- ------------- -------------- TOTAL UNRECOGNIZED FINANCIAL INSTRUMENTS................. $ -0- $ 16,319 $ -0- $ 18,626 ============= ============= ============= ==============
79 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 26 - CONDENSED PARENT COMPANY INFORMATION STATEMENTS OF FINANCIAL CONDITION
December 31, -------------------------------- 1998 1997 -------------- -------------- ASSETS Cash and due from banks................................. $ 3,203,234 $ 491,956 Interest-bearing deposits with other banks.............. -0- 822,713 Investment in subsidiaries (equity method) - eliminated upon consolidation.......................... 50,073,892 40,559,940 Premises and equipment, net............................. 80,684 54,084 Intangibles, net........................................ 1,086,800 1,197,428 Other assets............................................ 1,299,265 920,810 -------------- -------------- TOTAL ASSETS...................................... $ 55,743,875 $ 44,046,931 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt.......................................... $ 7,568,716 $ 7,397,612 Other liabilities....................................... 941,758 670,271 -------------- -------------- TOTAL LIABILITIES................................. 8,510,474 8,067,883 TOTAL SHAREHOLDERS' EQUITY........................ 47,233,401 35,979,048 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 55,743,875 $ 44,046,931 ============== ==============
80 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- INCOME From subsidiaries - eliminated upon consolidation Dividends................................................ $ 3,017,970 $ 2,548,201 $ 1,103,482 Management fees.......................................... 600,000 600,000 575,000 Interest................................................. 22,222 30,513 143,649 Other Income............................................. 3,740 2,400 3,904 -------------- ------------- -------------- 3,643,932 3,181,114 1,826,035 -------------- ------------- -------------- EXPENSES Salaries and employee benefits............................ 1,751,593 1,385,633 1,472,670 Interest.................................................. 400,079 465,003 522,884 Other expenses............................................ 666,862 683,802 445,751 -------------- ------------- -------------- 2,818,534 2,534,438 2,441,305 -------------- ------------- -------------- Income (loss) before income taxes and equity in undistributed earnings of subsidiaries.................... 825,398 646,676 (615,270) Income tax benefit............................................ (753,387) (719,485) (597,778) -------------- ------------- -------------- Income (loss) before equity in undistributed earnings of subsidiaries........................................... 1,578,785 1,366,161 (17,492) Equity in undistributed earnings of subsidiaries.............. 2,000,708 2,146,117 3,476,478 -------------- ------------- -------------- NET INCOME....................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 ============== ============= ==============
81 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries ............. (2,000,708) (2,146,117) (3,476,478) Provision for depreciation, amortization and accretion ..... 118,571 111,642 23,426 (Increase) decrease in other assets ........................ (378,456) (1,277) 43,489 Increase (decrease) in other liabilities .................. 271,490 19,194 (8,623) ------------ ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 1,590,390 1,495,720 40,800 ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities available for sale ..................... -0- -0- (9,010,957) Proceeds from maturity of securities available for sale ....... 822,713 1,050,000 10,073,749 (Increase) decrease in interest-bearing deposits with banks ... -0- (742,932) 113,250 Proceeds from sale of assets .................................. -0- 39,584 23,315 Capitalization of bank subsidiary ............................. (7,500,000) -0- (5,600,000) Capital expenditures .......................................... (34,543) (17,041) (58,085) ------------ ----------- ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ............................ (6,711,830) 329,611 (4,458,728) ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................................... (770,226) (766,848) (763,117) Issuance of common stock ...................................... 10,634,552 707,740 3,013,493 Cash dividends ................................................ (2,031,608) (1,500,000) (908,788) ------------ ----------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................ 7,832,718 (1,559,108) 1,341,588 ------------ ----------- ------------ Net increase(decrease) in cash and cash equivalents ............. 2,711,278 266,223 (3,076,340) Cash and due from banks at beginning of year .................... 491,956 225,733 3,302,073 ------------ ----------- ------------ CASH AND DUE FROM BANKS AT END OF YEAR .......................... $ 3,203,234 $ 491,956 $ 225,733 ============ =========== ============
82 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 NOTE 26 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
Years Ended December 31, --------------- ------------------------ 1998 1997 1996 --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest ......................................... $ 402,209 $ 467,424 $ 526,437 Income taxes ..................................... (780,000) (735,803) (393,793)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Long-term debt was increased and equity was decreased $1,200,000 on January 1, 1994 to reflect the existence of leveraged, unreleased ESOP shares. Upon the pledging of purchased shares to obtain additional ESOP debt of $1,076,958 on December 1, 1998 and $1,260,007 on May 17, 1996 long-term debt was increased and equity was decreased. The debt was reduced and shares were released by $135,628, $116,989 and $135,314, respectively, during each of the years ended December 31, 1998, 1997 and 1996 as a result of payments made by the Company's ESOP on the outstanding ESOP debt. [The remainder of this page intentionally left blank] 83 85 QUARTERLY RESULTS (UNAUDITED) A summary of the unaudited results of operations for each quarter of 1998 and 1997 follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In Thousands Except Per Share Data) 1998: TOTAL INTEREST INCOME........................................... $ 9,794 $ 10,715 $ 11,677 $ 12,179 TOTAL INTEREST EXPENSE.......................................... 5,307 5,452 5,751 6,183 PROVISION FOR LOAN LOSSES....................................... 188 208 226 263 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..................................... 4,299 5,055 5,700 5,733 INVESTMENT SECURITIES GAINS (LOSSES) ........................... 9 3 7 447 TOTAL NONINTEREST INCOME........................................ 1,573 2,058 2,037 1,968 TOTAL NONINTEREST EXPENSE....................................... 5,115 5,667 6,419 6,583 INCOME TAX EXPENSE.............................................. 211 411 401 503 NET INCOME...................................................... 555 1,038 924 1,062 PER COMMON SHARE: BASIC EARNINGS................................................. .14 .27 .24 .25 DILUTED EARNINGS............................................... .14 .26 .23 .25 1997: Total interest income........................................... $ 9,120 $ 9,313 $ 9,626 $ 9,732 Total interest expense.......................................... 4,643 4,883 5,053 4,963 Provision for loan losses....................................... 198 296 302 (24) Net interest income after provision for loan losses..................................... 4,279 4,134 4,271 4,793 Investment securities gains (losses) ........................... (3) -0- -0- -0- Total noninterest income........................................ 1,178 1,145 1,204 1,385 Total noninterest expense....................................... 4,301 3,896 4,513 4,713 Income tax expense.............................................. 332 381 256 483 Net income...................................................... 821 1,002 706 982 Per Common Share: Basic earnings................................................. .22 .27 .19 .24 Diluted earnings............................................... .22 .27 .19 .24
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 84 86 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item on the directors and director nominees of the Company is incorporated by reference from the sections entitled "Election of Directors" and "Executive Compensation and Other Information" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held during 1999. Information on the executive officers of the Company is included in Part I of this Report. ITEM 11 - EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the section entitled "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held during 1999. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held during 1999. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the section entitled "Certain Relationships, and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held during 1999. [The remainder of this page intentionally left blank] 85 87 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index of documents filed as part of this report: Community Bancshares, Inc and Subsidiaries
Financial Statements Page(s) ------ Auditor's Report........................................................... 40 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................................... 41 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996......................................... 42 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996......................................... 43 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996......................................... 44-45 Notes to Consolidated Financial Statements - December 31, 1998, 1997 and 1996......................................... 46-83 Quarterly Results (Unaudited).............................................. 84
(b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter ended December 31, 1998.
(C) Exhibits - ------------- 3.1 Certificate of Incorporation, as amended (1) 3.2 Certificate of Amendment to the Certificate of Incorporation, changing the name of the registrant to Community Bancshares, Inc. (2) 3.3 By-Laws of Registrant, as amended and restated January 1999 3.4 Certificate of Amendment to the Certificate of Incorporation, providing for directors' indemnification (3) 3.5 Certificate of Amendment to the Certificate of Incorporation, increasing the number of authorized shares (4) 3.6 Amended Certificate of Amendment of the Certificate of Incorporation, increasing the number of authorized shares (5) 4.1 Certificate of Registrant establishing the Series 1984-1 Preferred Stock, dated August 17, 1984 ("Certificate of Stock Designation") (6) 4.2 Certificate of Amendment to the Certificate of Stock Designation (7) 10.1 Subordinated Promissory Note between the Registrant as borrower and Jack Cornelius as holder (8)
86 88
Page(s) ------- 10.2 Promissory Note, Guaranty and Pledge Agreement by and between Community Bancshares, Inc. and Colonial Bank, N.A. 10.3 Plan document for the Community Bancshares, Inc. Benefit Restoration Plan adopted April 12, 1994, effective January 1, 1995 (9) 10.4 Subordinated Promissory Note between the Registrant as borrower and Jeffrey K. Cornelius as holder (10) 10.5 Employment Agreement dated March 28, 1996 by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (11) 10.6 Employment Agreement dated March 28, 1996 by and between Bishop K. Walker, Jr. and Community Bancshares, Inc. (12) 10.7 Stock Option Agreement between Community Bancshares, Inc. and Kennon R. Patterson, Sr. dated March 28, 1996 (13) 10.8 Stock Option Agreement between Community Bancshares, Inc. and Bishop K. Walker dated March 28, 1996 (14) 10.9 Stock Option Agreement between Community Bancshares, Inc. and Denny Kelly dated March 28, 1996 (15) 10.10 Stock Option Agreement between Community Bancshares, Inc. and Hodge Patterson, III dated March 28, 1996 (16) 10.11 Stock Option Agreement between Community Bancshares, Inc. and Loy McGruder dated March 28, 1996 (17) 10.12 Stock Option Agreement between Community Bancshares, Inc. and Merritt Robbins dated March 28, 1996 (18) 10.13 Stock Option Agreement between Community Bancshares, Inc. and Wayne Washam dated March 28, 1996 (19) 10:14 Stock Option Agreement between Community Bancshares, Inc. and Glynn Debter dated March 28, 1996 (20) 10.15 Stock Option Agreement between Community Bancshares, Inc. and Robert Summerford dated March 28, 1996 (21) 10.16 Change in Control Agreement dated March 28, 1996 by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (22) 10.17 Change in Control Agreement dated March 28, 1996 by and between Bishop K. Walker, Jr. and Community Bancshares, Inc. (23) 10.18 Change in Control Agreement dated March 28, 1996 by and between Hodge Patterson and Community Bancshares, Inc. (24) 10.19 Change in Control Agreement dated March 28, 1996 by and between Denny Kelly and Community Bancshares, Inc. (25) 10.20 Change in Control Agreement dated March 28, 1996 by and between Loy McGruder and Community Bancshares, Inc. (26) 10.21 Change in Control Agreement dated December 28, 1998 by and between Michael A. Bean and Community Bancshares, Inc. 10.22 Stock Option Agreement between Community Bancshares, Inc. and Jon Owings dated March 28, 1996 (27) 10.23 Stock Option Agreement between Community Bancshares, Inc. and Kennon R. Patterson, Sr. dated March 27, 1997 (28) 10.24 Stock Option Agreement between Community Bancshares, Inc. and Bishop K. Walker, Jr. dated March 27, 1997 (29) 10.25 Stock Option Agreement between Community Bancshares, Inc. and Denny Kelly dated March 27, 1997 (30)
87 89
Page(s) ------- 10.26 Stock Option Agreement between Community Bancshares, Inc. and Hodge Patterson, III. dated March 27, 1997 (31) 10.27 Stock Option Agreement between Community Bancshares, Inc. and Loy McGruder dated March 27, 1997 (32) 10.28 Stock Option Agreement between Community Bancshares, Inc. and Merritt Robbins dated March 27, 1997 (33) 10.29 Stock Option Agreement between Community Bancshares, Inc. and Wayne Washam dated March 27, 1997 (34) 10.30 Stock Option Agreement between Community Bancshares, Inc. and Glynn Debter dated March 27, 1997 (35) 10.31 Stock Option Agreement between Community Bancshares, Inc. and Robert Summerford dated March 27, 1997 (36) 10.32 Stock Option Agreement between Community Bancshares, Inc. and Kennon R. Patterson, Jr. dated March 27, 1997 (37) 10.33 Stock Option Agreement between Community Bancshares, Inc. and John J. Lewis, Jr. dated March 27, 1997 (38) 10.34 Stock Option Agreement between Community Bancshares, Inc. and Stacey W. Mann dated March 27, 1997 (39) 10.35 Stock Option Agreement between Community Bancshares, Inc. and Edward Ferguson dated March 27, 1997 (40) 10.36 Stock Option Agreement between Community Bancshares, Inc. and Kennon R. Patterson, Sr. dated March 26, 1998 10.37 Stock Option Agreement between Community Bancshares, Inc. and Bishop K. Walker, Jr. dated March 26, 1998 10.38 Stock Option Agreement between Community Bancshares, Inc. and Denny Kelly dated March 26, 1998 10.39 Stock Option Agreement between Community Bancshares, Inc. and Hodge Patterson, III dated March 26, 1998 10.40 Stock Option Agreement between Community Bancshares, Inc. and Loy McGruder dated March 26, 1998 10.41 Form of Stock Option Agreement between Community Bancshares, Inc. and Grantees dated March 26, 1998 11 Statement of computation of earnings per common share......... 92 12 Statement of Computation of Ratios............................ 93 21 Subsidiaries of the Registrant................................ 93 27 Financial Data Table (for SEC use only).......................
Notes to Exhibits: (1) Filed as appendix II to the Proxy Statement included in part I of the Registration Statement on Form S-14, Registration No 2-92974, and incorporated herein by reference. (2) Filed as Exhibit 4 to Form 10-K for the year ended December 31, 1985, and incorporated herein by reference. (3) Filed as Exhibit 3.4 to Form 10-K for the year ended December 31, 1987, and incorporated herein by reference. (4) Filed as Exhibit 3.5 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (5) Filed as Exhibit 3 to Form 10-Q/A-1 for the period ended September 30, 1998, and incorporated herein by reference. 88 90 (6) Filed as Appendix I to the Proxy Statement included in Part I of the Registration Statement on Form S-14, Registration No. 2-92974, and incorporated herein by reference. (7) Filed as Exhibit 4.1 to the Registration Statement on Form S-1, Registration No. 33-7032, and incorporated herein by reference. (8) Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 1988, and incorporated herein by reference. (9) Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (10) Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (11) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the period ended September 30, 1998, and incorporated herein by reference (12) Filed as Exhibit 10.2 to Form 10-Q/A-2 for the period ended September 30, 1998, and incorporated herein by reference (13) Filed as Exhibit 10.20 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (14) Filed as Exhibit 10.21 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (15) Filed as Exhibit 10.22 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (16) Filed as Exhibit 10.23 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (17) Filed as Exhibit 10.24 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (18) Filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (19) Filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (20) Filed as Exhibit 10.29 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (21) Filed as Exhibit 10.30 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (22) Filed as Exhibit 10.31 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (23) Filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (24) Filed as Exhibit 10.33 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (25) Filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (26) Filed as Exhibit 10.35 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (27) Filed as Exhibit 10.36 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference (28) Filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (29) Filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (30) Filed as Exhibit 10.39 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (31) Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (32) Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (33) Filed as Exhibit 10.44 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference 89 91 (34) Filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (35) Filed as Exhibit 10.46 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (36) Filed as Exhibit 10.47 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (37) Filed as Exhibit 10.49 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (38) Filed as Exhibit 10.50 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (39) Filed as Exhibit 10.51 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (40) Filed as Exhibit 10.52 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference Certain financial statements schedules and exhibits have been omitted because they are not applicable. [The remainder of this page intentionally left blank] 90 92 EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS COMMUNITY BANCSHARES, INC. COMPUTATION OF NET INCOME PER COMMON SHARE The following tabulation presents the calculation of primary and fully diluted earnings per common share for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------- ------------ ------------- Reported net income.................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 ============= ============ ============= Earnings on common shares.............................................. $ 3,579,493 $ 3,512,278 $ 3,458,986 ============= ============ ============= Weighted average common shares outstanding - basic..................... 3,994,798 3,807,232 3,727,506 ============= ============ ============= Earnings per common share- basic Income from continuing operations.................................... $ .90 $ .92 $ .93 ============= ============ ============= Net income............................................................ $ .90 $ .92 $ .93 ============= ============ ============= Weighted average common shares outstanding - diluted.................... 4,052,259 3,830,231 3,727,506 ============= ============ ============= Earnings per common share- diluted Income from continuing operations..................................... $ .88 $ .92 $ .93 ============= ============ ============= Net income............................................................ $ .88 $ .92 $ .93 ============= ============ =============
{The remainder of this page intentionally left blank] 91 93 EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS COMMUNITY BANCSHARES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------- (Dollars in thousands) Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885 Add fixed charges: Interest on deposits............................................... 21,963 18,765 16,595 Interest on borrowings............................................. 730 777 831 Portion of rental expense representing interest expense............ 180 78 59 ------------ ------------ ------------- Total fixed charges............................................ 22,873 19,620 17,485 ------------ ------------ ------------- Income before fixed charges............................................ $ 27,979 $ 24,565 $ 22,370 ============ ============ ============= Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885 Add fixed charges: Interest on borrowings............................................. 730 777 831 Portion of rental expense representing interest expense............ 180 78 59 ------------ ------------ ------------- Total fixed charges............................................ 910 855 890 ------------ ------------ ------------- Income before fixed charges (excluding interest on deposits)........... $ 6,016 $ 5,800 $ 5,775 ============ ============ ============= RATIO OF EARNINGS TO FIXED CHARGES: Including interest on deposits..................................... 1.22X 1.25x 1.28x Excluding interest on deposits..................................... 6.61X 6.78x 6.49x
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation - ---------------------------------- ---------------------- Community Bank Alabama Subsidiaries - Indirect/wholly-owned by Community Bank - ------------------------------------------------------ Community Appraisals, Inc. Alabama 1st Community Credit Corporation Alabama Community Insurance Corp Alabama Subsidiaries - Indirect/wholly-owned by Community Insurance Corp - ----------------------------------------------------------------- Southern Select Insurance, Inc. Alabama
92 94 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. COMMUNITY BANCSHARES, INC. Date: March 25, 1999 By /s/ Kennon R. Patterson, Sr. ------------------- -------------------------------------- KENNON R. PATTERSON, SR. CHAIRMAN AND CHIEF EXECUTIVE OFFICER Date: March 25, 1999 By /s/ Michael A. Bean ------------------- ---------------------------------------- MICHAEL A. BEAN EXECUTIVE VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kennon R. Patterson, Sr. and Bishop K. Walker, Jr., and each of them, his true and lawful attorney-in-fact, as agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacity, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents in full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as they might or could be in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated. Directors Date --------- ---- /s/ Glynn Debter March 25, 1999 - ---------------------- -------------- GLYNN DEBTER /s/ Roy B. Jackson March 25, 1999 - ---------------------- -------------- ROY B. JACKSON /s/ Denny Kelly March 25, 1999 - ---------------------- -------------- DENNY KELLY 93 95 SIGNATURES, Continued Directors Date --------- ---- /s/ John J. Lewis, Jr. March 25, 1999 - --------------------------------- ---------------------- JOHN J. LEWIS, JR. /s/ Loy McGruder March 25, 1999 - --------------------------------- ---------------------- LOY MCGRUDER /s/ Hodge Patterson, III March 25, 1999 - --------------------------------- ---------------------- HODGE PATTERSON, III /s/ Kennon R. Patterson, Sr. March 25, 1999 - --------------------------------- ---------------------- KENNON R. PATTERSON, SR. /s/ Merritt Robbins March 25, 1999 - --------------------------------- ---------------------- MERRITT ROBBINS /s/ Robert O. Summerford March 25, 1999 - --------------------------------- ---------------------- ROBERT O. SUMMERFORD /s/ Bishop K. Walker, Jr. March 25, 1999 - --------------------------------- ---------------------- BISHOP K. WALKER, JR. /s/ Wayne Washam March 25, 1999 - --------------------------------- ---------------------- WAYNE WASHAM 94 96 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- EXHIBITS TO ANNUAL REPORT AND FORM 10-K YEAR ENDED DECEMBER 31, 1998 ----------------- COMMUNITY BANCSHARES, INC. P.O. BOX 1000 MAIN STREET BLOUNTSVILLE, ALABAMA 35031 ================================================================================ 95 EX-3.3 2 BY-LAWS OF COMMUNITY BANCSHARES 1 --------------------------- EXHIBIT 3.3 BY-LAWS OF COMMUNITY BANCSHARES, INC. ---------------------------- 96 2 BYLAWS OF COMMUNITY BANCSHARES, INC. ARTICLE I OFFICES SECTION 1.1. PRINCIPAL OFFICE. The principal office of the Corporation shall be in the city of Blountsville, County of Blount, State of Alabama. SECTION 1.2. OTHER OFFICES. The Corporation may also have offices at such other places within or without the States of Alabama or Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF THE STOCKHOLDERS SECTION 2.1. PLACE OF MEETINGS. Meetings of the stockholders shall be held at the Corporation's principal office in Blountsville, Alabama or at such other place either within or without the States of Alabama or Delaware as shall be specified in the notice of the meeting or in a waiver thereof. SECTION 2.2. ANNUAL MEETING. Annual meetings of the stockholders shall be held on a date and time designated by the Board of Directors and, as set forth in the notice of the meeting, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. SECTION 2.3. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Chairman of the Board, President, a majority of the Board of Directors, or by such person or persons as may be authorized by the Certificate of Incorporation or by these Bylaws. A request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. SECTION 2.4. NOTICE. Not less than twenty (20) nor more than sixty (60) days before each meeting of the stockholders, the Secretary of the Corporation shall give written notice of the meeting to each stockholder of record entitled to vote at the meeting. The notice shall state the date, hour and place of the meeting and the purpose of the meeting, if the meeting is a special meeting or notice of the purpose is required by the General Corporation Law of the State of Delaware. SECTION 2.5. QUORUM. The holders of shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum exists with respect to that matter. The presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast on a matter by a voting group, shall constitute a 97 3 quorum at meetings of stockholders except as otherwise provided by statute or by the Certificate of Incorporation. Once a share is represented for any purpose at a meeting, the holder is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is or must be set for that adjourned meeting. SECTION 2.6. ADJOURNMENT. If a quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person, or represented by proxy, shall have the power to adjourn the meeting from time to time, without further notice, to a date not more than thirty (30) days after the original record date if the time and place thereof are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. SECTION 2.7. MAJORITY RULE. A majority of all the votes cast at a meeting of stockholders at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, unless the vote of a greater number is required by the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these Bylaws. SECTION 2.8. ELECTION OF DIRECTORS. Directors shall be elected by a plurality of all the votes cast at a meeting of stockholders at which a quorum is present. SECTION 2.9. VOTING. Each outstanding share of stock, regardless of class, is entitled to one (1) vote on each matter submitted to a vote at a meeting of stockholders, unless otherwise provided by the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these Bylaws. SECTION 2.10. PROXIES. Each stockholder entitled to vote at a meeting of the stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy by signing an appointment form, either personally or by his attorney-in-fact, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it conspicuously states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. SECTION 2.11. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) ANNUAL MEETING OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of other business to be considered by the 98 4 stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Bylaw in addition to any other applicable law, rule or regulation applicable to such meeting. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of Section 2.11(a)(1), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is relevant to such person's eligibility or qualifications (as established by the Nominating Committee from time to time) or is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of Section 2.11(a)(2) to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this 99 5 Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice described in Section 2.11(a)(2) shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or the Bylaws of the Corporation, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the 100 6 rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of (A) stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION 2.12. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger books of the Corporation shall prepare and make, at least ten (10) days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, to be included in the list required by this Section 2.12 or to vote in person or by proxy at any meeting of stockholders. SECTION 2.13. INSPECTORS. The Board of Directors shall, in advance of any meeting of the stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting shall appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. SECTION 2.14. ORGANIZATION. At every meeting of the stockholders, the Chairman of the Board, or in the case of a vacancy in the office or absence of the Chairman of the Board, one of the following persons present in the order stated: the President, the Vice Presidents in their order of rank, a chairman designated by the Board of Directors, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman of the meeting, and the Secretary, or, in his absence, an Assistant Secretary, if any, or any person appointed by the chairman of the meeting, shall act as secretary of the meeting. 101 7 ARTICLE III DIRECTORS SECTION 3.1. GENERAL POWERS: NUMBER AND TENURE. The Corporation's business, properties and affairs shall be managed by its Board of Directors, composed of not less than nine nor more than eighteen persons (the number of directors to be determined by resolution of the Board of Directors from time to time). The Board of Directors shall be divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as possible, and the term of office of directors of one class shall expire at each annual meeting of stockholders, and in all cases as to each director until his successor shall be elected and shall qualify or until his earlier resignation, removal from office, death or incapacity. Additional directorships resulting from an increase in number of directors shall be apportioned among the classes as equally as possible. The initial term of office of directors of Class I shall expire at the annual meeting of stockholders in 1997; that of Class II shall expire at the annual meeting in 1998; and that of Class III shall expire at the annual meeting in 1999; and in all cases as to each director until his successor shall be elected and shall qualify or until his earlier resignation, removal from office, death or incapacity. At each annual meeting of stockholders, the number of directors equal to the number of directors of the class whose term expires at the time of such meeting (or, if less, the number of directors properly nominated and qualified for election) shall elected to hold office until the third succeeding annual meeting of stockholders after their election. SECTION 3.2. ELECTION. Unless the Certificate of Incorporation or these Bylaws provide otherwise, directors are elected by a plurality of all votes cast at a meeting of stockholders at which a quorum is present. Each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. Stockholders shall not have any cumulative voting rights. SECTION 3.3. QUALIFICATIONS. Each director of the Corporation shall have the qualifications required by the Certificate of Incorporation or these Bylaws. Directors need not be residents of the States of Alabama or Delaware or stockholders in the Corporation. SECTION 3.4. REMOVAL. Any director may be removed only for cause by vote of the holders of at least eighty percent (80%) of the voting power of all the shares of the Corporation that are present and eligible to vote at a shareholder meeting for which a quorum exists, voting together as a single class. Cause shall mean the director's willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to the Corporation. SECTION 3.5. VACANCIES. Any vacancy and newly created directorship occurring in the Board of Directors which results from an increase in the authorized number of directors elected by all of the stockholders having the right to vote may be filled 102 8 by the affirmative vote of a majority of the remaining directors or director, whether or not sufficient to constitute a quorum. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. SECTION 3.6. LACK OF DIRECTORS. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, and an election of directors may be held in the manner provided by the Certificate of Incorporation, these Bylaws or applicable law. SECTION 3.7. RESIGNATION. A director may resign at any time by delivering written notice to the Corporation, the Board of Directors, the Chairman of the Board or the President. A resignation is effective when notice is delivered, unless the notice specifies a later effective date. SECTION 3.8. POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by applicable law, the Certificate of Incorporation or by these Bylaws conferred on or reserved to the stockholders. SECTION 3.9. QUORUM. A majority of the directors then in office shall constitute a quorum for the transaction of business. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 3.10. ANNUAL MEETING. The annual meeting of the Board of Directors for the purpose of electing officers and transacting such other business as may be brought before the meeting shall be held each year immediately following the annual meeting of stockholders. SECTION 3.11. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such places, within or without the States of Delaware or Alabama, on such dates and at such times as may from time to time be determined by the Board. SECTION 3.12. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Secretary on the written request of a majority of the directors then in office. Notice of special meetings of the Board of Directors shall be given to each director at least twenty-four (24) hours before the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Such meetings shall be held at such places, 103 9 within or without the State of Delaware, on such dates and at such times as may be stated in the notice. SECTION 3.13. ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors or of a committee of the Board of Directors may be taken without a meeting if a written consent which sets forth the action is: (a) signed by each member of the Board of Directors or committee; and (b) filed with the minutes of proceedings of the Board of Directors or committee. The affirmative written consent of the number of directors that would be necessary to authorize or take action at a meeting pursuant to Section 3.15 hereof is the act of the Board of Directors without a meeting. Action taken by written consent is effective when the last director signs the consent unless the consent specifies a different effective date. SECTION 3.14. MEETINGS BY TELEPHONE. Members of the Board of Directors or any committee may participate in a meeting by means of a telephone conference or similar communications equipment provided all persons participating in the meeting can hear each other at the same time. A director participating in such a meeting is deemed to be present in person at the meeting. SECTION 3.15. MAJORITY RULE. The action of a majority of the directors present at a meeting at which a quorum is present is the action of the Board of Directors unless the Certificate of Incorporation or these Bylaws shall require a greater proportion. SECTION 3.16. COMPENSATION. The Board of Directors or a committee thereof shall have the authority to fix the compensation of directors. Directors shall be entitled to reimbursement for any reasonable expenses incurred in attending meetings and otherwise carrying out their duties. SECTION 3.17. ORGANIZATION. At every meeting of the Board of Directors, the Chairman of the Board, or in the case of a vacancy in the office or absence of the Chairman of the Board, one of the following officers present in the order stated: the Vice Chairman of the Board, the President, the Vice Presidents in their order of rank, or a chairman chosen by a majority of the directors present, shall act as chairman of the meeting, and the Secretary, or, in the absence of the Secretary, an Assistant Secretary, if any, or any other person appointed by the chairman of the meeting, shall act as secretary of the meeting. ARTICLE IV COMMITTEES SECTION 4.1. APPOINTMENTS AND POWERS. The Board of Directors shall establish an Executive Committee, an Executive Compensation Committee, a Nominating Committee and an Audit Committee. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board of Directors, designate one (1) or more other committees, each consisting of two (2) or more directors. The Board of Directors may 104 10 designate one (1) or more directors as alternative members of a committee who may replace any absent or disqualified member at any meeting of the committee. Such alternate members shall not be counted for purposes of determining a quorum unless acting for an absent or disqualified member, in which case they shall be counted in the place of the absent or disqualified member. The committee, to the extent provided in said resolution or resolutions or in these Bylaws, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it, except that a committee may not: (a) amend the Certificate of Incorporation; (b) adopt an agreement of merger, share exchange or consolidation; (c) recommend to the stockholders of the Corporation the sale, lease or exchange of all or substantially all of the Corporation's property or assets; (d) recommend to the stockholders of Corporation a dissolution of the Corporation or revocation of a dissolution; (e) amend these Bylaws; (f) declare a dividend; (g) issue stock; or (h) adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolution adopted by the Board of Directors. Sections 3.11 through 3.15 applicable to the Board of Directors shall also apply to all committees. SECTION 4.2. EXECUTIVE COMMITTEE. There shall be an Executive Committee, which, during intervals between regular meetings of the Board of Directors and to the extent permitted by law, the Certificate of Incorporation and these Bylaws, shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation. SECTION 4.3. EXECUTIVE COMPENSATION COMMITTEE. The Executive Compensation Committee shall report and recommend to the Board of Directors the compensation of all executive officers. SECTION 4.4. NOMINATING COMMITTEE. The Nominating Committee shall recommend to the Board of Directors candidates to be nominated on behalf of the Corporation at any annual or special meeting of stockholders at which directors of the Corporation are to be elected. The Nominating Committee may from time to time establish the information required from prospective nominees. The Nominating Committee may from time to time, at the direction of the Board of Directors, investigate the eligibility and qualifications of prospective nominees to hold office if elected. SECTION 4.5. AUDIT COMMITTEE. The Audit Committee shall review the financial and internal operations of the Corporation and make such reports and recommendations to the Board of Directors as it may determine or as the Board of Directors may direct. SECTION 4.6. MINUTES. Committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. 105 11 ARTICLE V NOTICES SECTION 5.1. NOTICE. Notices to directors and stockholders shall be in writing, shall specify the date, time and place of the meeting and shall be delivered personally, left at his or her residence or usual place of business, or mailed to the directors or stockholders at their addresses appearing on the records of the Corporation. Notice by mail shall be deemed to be given at the time when deposited in the United States mail, postage prepaid, and directed to the directors or stockholders at their addresses appearing on the records of the Corporation. Notice to directors may also be given by telegram, facsimile or overnight courier, and shall be deemed to be given upon receipt at their addresses appearing on the records of the Corporation. SECTION 5.2. WAIVER OF NOTICE. Whenever any notice of the time, place or purpose of a meeting is required to be given to any stockholder or director under the General Corporation Law of the State of Delaware or the Certificate of Incorporation or these Bylaws, a written waiver, signed by the person entitled to notice and delivered to the Corporation and filed with the Corporation's minutes or records, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, Board of Directors or members of a committee of the Board of Directors need be specified in any written waiver of notice unless required by the Certificate of Incorporation or these Bylaws. SECTION 5.3. ATTENDANCE CONSTITUTES WAIVER. Attendance of a person at a meeting in person or by proxy shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VI OFFICERS SECTION 6.1. OFFICERS. The officers of the Corporation shall consist of a Chairman of the Board, a Vice Chairman of the Board, a President, one or more Vice Presidents (which may have seniority designations), a Treasurer, a Secretary, and such other officers as the Board of Directors may from time to time deem proper, each of whom shall be elected by the Board of Directors. Any number of offices, except President and Secretary, may be held by the same person. SECTION 6.2. REMOVAL. If the Board of Directors in its judgment finds that the best interests of the Corporation will be served, it may remove any officer or agent of the Corporation at any time with or without cause. The removal of an officer or agent does not prejudice any of his or her contract rights, if any. 106 12 SECTION 6.3. TERM OF OFFICE; RESIGNATION. An officer of the Corporation shall serve for the term provided within any applicable contract for employment, or absent such contract shall serve for such term as determined by the Board of Directors and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. A resignation is effective when the notice is delivered, unless the notice specifies a later effective date. If a resignation is made effective at a later date and the Corporation accepts such later date, the Board of Directors may fill the pending vacancy before the effective date if it provides that the successor does not take office until the effective date. An officer's resignation does not affect the Corporation's contract rights, if any, with the officer. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors or by such officer or agent of the Corporation to whom the Board of Directors may expressly delegate such authority. SECTION 6.4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the stockholders and Board of Directors, and shall be the Corporation's chief executive officer. He shall have authority to execute bonds, mortgages, and other contracts requiring a seal, under the seal of the Corporation; he shall have power to endorse, when sold, assigned, transferred or otherwise disposed of by the Corporation, all certificates or shares of stock, bonds, or other securities issued by other corporations, associations, trusts, whether public or private, or by any government or agency thereof, and owned or held by the Corporation, and to make, execute and deliver all instruments or assignment or transfer of any such stocks, bonds or other securities and such other authority as granted by the Board of Directors, by contract or otherwise. He may, with the approval of the Board, or shall, at the Board's discretion, delegate any or all of such duties to the president. SECTION 6.5. PRESIDENT. The President shall have general powers and duties of supervision and management usually vested in the office of president of a corporation, including the authority to make contracts on behalf of the Corporation in the ordinary course of the Corporation's business. The President shall, under the direction of the Board and the Chairman, have general supervision, direction and control of the business of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board, the President shall perform all of the duties and have all of the authority of the Chairman of the Board and shall preside at all meetings of the stockholders and the Board of Directors. The President shall execute bonds, mortgages and other contracts, except where required or permitted by law to be otherwise signed and executed, and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall have the power to appoint, remove and suspend subordinate officers and agents upon such terms and conditions as he deems reasonable and appropriate. The President shall have such powers and duties as usually pertain to such office, except as the same may be modified by the Board of Directors. SECTION 6.6. VICE PRESIDENTS. The Vice Presidents, in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or 107 13 disability of the President, perform the duties and exercise the powers of the President. They shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or as the President may from time to time delegate. SECTION 6.7. SECRETARY. The Secretary shall attend meetings of the Board of Directors and stockholders, and record all the proceedings of such meetings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision the Secretary shall be. SECTION 6.8. TREASURER. The Treasurer shall have custody of the corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the President may from time to time delegate. SECTION 6.9. OTHER OFFICERS. The duties of other officers elected by the Board of Directors shall be such as are customary to the respective offices as shall be given to them by the Board of Directors, or by the Chairman or the President. SECTION 6.10. COMPENSATION. The salaries of the principal officers shall be fixed by the Board of Directors on an annual basis or for such other terms as the Board of Directors may determine from time to time, after taking account of any recommendations by any committee to which the power to advise with respect to salaries is delegated by the Board of Directors. The Board of Directors may from time to time delegate to any principal officer or any committee power to fix the salaries of other officers, agents and employees. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation or a member of any committee contemplated by these Bylaws. ARTICLE VII CERTIFICATES REPRESENTING SHARES SECTION 7.1. CERTIFICATES FOR SHARES. The shares of the Corporation shall be represented by certificates which shall be in a form approved by the Board of Directors and contain such information as may be required by the General Corporation Law of the State of Delaware or any securities exchanges on which any shares of the Corporation may be listed. 108 14 SECTION 7.2. FACSIMILE SIGNATURES. Any or all the signatures on the certificate may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. SECTION 7.3. LOST CERTIFICATES. The Board of Directors may determine the conditions for issuing a new stock certificate in place of any certificate issued by it, alleged to have been lost, stolen or destroyed. The Board of Directors may require the owner of the lost, stolen or destroyed certificate to give to the Corporation a bond with sufficient surety to indemnify the Corporation against any loss or claim arising as a result of the issuance of a new certificate. The issuance of a new certificate under this Section 7.3 does not constitute an overissue of the shares it represents. SECTION 7.4. TRANSFER OF SHARES. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 7.5. RECORD DATE FOR NOTICE AND VOTING. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders. The record date shall be not more than sixty (60) days nor less than ten (10) days before the date on which the action requiring the determination will be taken. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholder shall apply to any adjournment of the meeting; providing, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7.6. RECORD DATE FOR DIVIDENDS. For the purpose of determining stockholders entitled to receive payment of any dividend or an allotment of any rights, the Board of Directors may in advance fix a record date, which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution declaring the dividend or allotment of rights. SECTION 7.7. STOCKHOLDERS OF RECORD. The Corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares 109 15 to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE VIII INDEMNIFICATION SECTION 8.1. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify, and upon request shall advance expenses (including attorneys' fees) to, in the manner and to the fullest extent permitted by law, any officer or director (or the estate of any such person) who was or is a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan (an "indemnitee"). The Corporation may, to the fullest extent permitted by law, purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan against any liability which may be asserted against such person. To the fullest extent permitted by law, the indemnification and advances provided for herein shall include expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses (including attorneys' fees), judgments, fines and amounts paid in settlement to the fullest extent permitted by law, both as to action in his official capacity and as to action in another capacity while holding such office. SECTION 8.2. LIABILITY OF INDEMNITEE. Notwithstanding the foregoing, the Corporation shall not indemnify any such indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to secure a judgment in its favor against such indemnitee with respect to any claim, issue or matter as to which the indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that, the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 8.3. SCOPE OF RIGHTS. The rights to indemnification and advancement of expenses set forth in this Article VIII are intended to be greater than those which are otherwise provided for in the General Corporation Law of the State of Delaware, are contractual between the Corporation and the person being indemnified, his heirs, executors and administrators, and, with respect to this Article VIII are mandatory, 110 16 notwithstanding a person's failure to meet the standard of conduct required for permissive indemnification under the General Corporation Law of the State of Delaware, as amended from time to time. The rights to indemnification and advancement of expenses set forth in this Article VIII are nonexclusive of other similar rights which may be granted by law, the Certificate, these Bylaws, a resolution of the Board of Directors or stockholders or an agreement with the Corporation, which means of indemnification and advancement of expenses are hereby specifically authorized. SECTION 8.4. AMENDMENT OF RIGHTS. Any repeal or modification of the provisions of this Article VIII, either directly or by the adoption of an inconsistent provision of these Bylaws, shall be prospective only and shall not adversely affect any right or protection set forth herein existing in favor of a particular individual at the time of such repeal or modification. In addition, if an amendment to the General Corporation Law of the State of Delaware limits or restricts in any way the indemnification rights permitted by law as of the date hereof, such amendment shall apply only to the extent mandated by law and only to activities of persons subject to indemnification under this Article VIII which occur subsequent to the effective date of such amendment. ARTICLE IX GENERAL PROVISIONS SECTION 9.1. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation and the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation may, at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when the Board of Directors may deem expedient. SECTION 9.2. CHECKS; DRAFTS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 9.3. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year, unless otherwise fixed by the Board of Directors. SECTION 9.4. ANNUAL STATEMENT OF AFFAIRS. The President, or any other officer of the Corporation designated by the Board of Directors, shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. SECTION 9.5. SEAL. The seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the state of its incorporation. 111 17 ARTICLE X AMENDMENTS These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than two (2) days prior to the meeting; provided, however, that, in the case of amendments by stockholders, notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote (but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law, the Certificate of Incorporation or these Bylaws) the affirmative vote of the holders of eighty percent (80%) of the voting power of all the shares of the Corporation that are present and eligible to vote at a shareholder meeting for which a quorum exists, voting together as a single class, shall be required to alter, amend or repeal any provision of these Bylaws. ARTICLE XI EMERGENCY BYLAW In the event that a quorum of directors cannot be readily assembled because of a catastrophic event, the Board of Directors may take action by the affirmative vote of a majority of those directors present at a meeting and may exercise any emergency power granted to a board of directors under the General Corporation Law of the State of Delaware not inconsistent with these Bylaws. Special meetings of the Board of Directors may be called in an emergency by the director or, if no director is present at the Corporation's principal offices, by the officer present having the greatest seniority as an officer. The director or directors in attendance at the meeting shall constitute a quorum. If less than three (3) regularly elected directors are present, the director present having the greatest seniority as a director may appoint one (1) or more persons (not to exceed the number most recently fixed by the Board pursuant to Section 3.1) from among the officers or other executive employees of the Corporation to serve as substitute directors. If no regularly elected director is present, the officer present having the greatest seniority as an officer shall serve as a substitute director and shall appoint up to four (4) additional persons from among the officers or other executive employees of the Corporation to serve as substitute directors. The Board of Directors, either before or during any such emergency, may provide, and from time to time modify, lines of succession in the event that during such emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. The Board of Directors, either before or during such emergency, may, effective during the emergency, change the principal office of the Corporation or designate several alternative principal or regional offices or authorize the officers to do so. No officer or employee acting in accordance with the Emergency Bylaw shall be liable except for willful misconduct. To the extent not inconsistent with the Emergency Bylaw, the Bylaws of the Corporation shall remain in effect during any emergency, and upon termination of the emergency, the Emergency Bylaw shall cease to be operative. Notice of any meeting of the Board of Directors during such emergency may be given only to such of the directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. 112 EX-10.2 3 AGREEMENTS DATED DECEMBER 1,1998 1 ---------------------------------------------- EXHIBIT 10.2 PROMISSORY NOTE, GUARANTY AND PLEDGE AGREEMENT BY AND BETWEEN COMMUNITY BANCSHARES, INC. AND COLONIAL BANK, N.A. DATED DECEMBER 1, 1998 ---------------------------------------------- 113 2 $2,963,841.91 December 1, 1998 Birmingham, Alabama PROMISSORY NOTE (Non Recourse) - ------------------------------------------------------------------------------- A PORTION OF THIS PROMISSORY NOTE IS A RENEWAL AND REFINANCING OF THE OBLIGATIONS OF BORROWER UNDER A $2,183,805.18 PROMISSORY NOTE DATED MAY 17, 1996. - ------------------------------------------------------------------------------- FOR VALUE RECEIVED, the undersigned (herein, along with any other maker, endorser, surety or guarantor hereof, shall be called "Borrower"), promises to pay, without recourse, to the order of COLONIAL BANK (hereinafter along with its successors and assigns called "Lender"), at Lender's office or at such other place as Lender may from time to time designate, without grace and in lawful money of the United States of America, the principal sum of Two Million Nine Hundred Sixty-Three Thousand Eight Hundred Forty-One and 91/100 Dollars ($2,963,841.91), together with interest and charges thereon (hereinafter "Obligation"), all as evidenced by the records of Lender. I. INTEREST: Borrower agrees to pay interest on the unpaid principal Obligation, in accordance with the terms hereof. Interest on the unpaid principal Obligation shall be computed from the date hereof at a rate of 0.00% above the Colonial Base Rate (as herein defined), but in no event shall the interest rate exceed the maximum amount permitted by law. As of this date, the Colonial Bank Base Rate is 7.75%, making the interest rate accruing on the unpaid principal Obligation as of this date, 7.75% The Colonial Bank Base Rate is a reference rate established by Lender for use in computing and adjusting interest. It is subject to increase, decrease or change, and is only one of the reference rates or indices that the Lender uses. The Lender may lend to others at rates of interest at, or greater or less than the Colonial Bank Base Rate or the rate provided herein. The Colonial Bank Base Rate may change as often as daily. Any change in the interest rate resulting from a change in the Colonial Bank Base Rate shall take effect upon the change in the Colonial Bank Base Rate. Interest from date on the outstanding unpaid principal balance shall be computed on the basis of a 365 day year by multiplying the product of the principal amount outstanding and the applicable rate by the actual amount of days elapsed and dividing by 365. Both principal and accrued interest shall bear interest after maturity or default at the rate of 2.00% above the Colonial Bank Base Rate. ADDITIONAL CHARGES: In addition to interest, Borrower has paid the following additional charges: $100.00 document fee and those other fees shown on the loan closing statement. 114 3 II. PRINCIPAL AND INTEREST PAYMENTS: The Borrower promises and agrees to pay principal and interest as follows: A. One Hundred Forty Three (143) consecutive monthly principal and interest installments of $31,677.31 followed by B. One (1) final installment equal to all of the principal of and interest on the Obligation then remaining unpaid. If principal and interest are payable in installments, then the first installment will be due and payable on December 16, 1998 and the remaining installments will be due and payable on the same day of every month thereafter until both the principal and interest on this Obligation has been paid in full, or this note matures. MATURITY DATE: Any provisions of this Note to the contrary notwithstanding, all outstanding and unpaid principal indebtedness evidenced hereby, plus accrued interest, shall be due and payable on November 16, 2010, which shall be the maturity date of this Note. EFFECT OF VARIABLE RATE ON MONTHLY PAYMENTS: The monthly payment on this Obligation will increase or decrease, at the Lender's discretion, pursuant to a change in the Colonial Bank Base Rate. The fixed monthly installment has been calculated based upon a twelve (12) year amortization at a 7.75 % annual rate. In the event of a change in the Colonial Bank Base Rate, the Lender will review the amount of the monthly payment, and may, at Lender's discretion recalculate the amount of the monthly payment and so notify Borrower, who shall thenceforth make monthly payments in the amount so indicated. The ability of Lender to make changes in the amount of the monthly payment can occur upon each change of the Colonial Bank Base Rate. In the event Lender does not change the amount of the monthly payment when Colonial Bank Base Rate changes or any time thereafter, then the final payment due on this Obligation will increase. APPLICATION OF PAYMENTS: Unless otherwise elected by Lender, all payments shall be applied as billed by Lender, and if not billed, then first to late and other charges, if any, payable hereunder or under any Loan Document, then to interest and then to principal. LATE CHARGES FOR OVERDUE PAVMENTS: Any scheduled payment of principal or principal plus interest in default ten (10) days or more will be subject to a late charge of five percent (5.0%) of such scheduled payment. The late charge shall not be less than $0.50, nor exceed $100 for any late payment, except that such limitation shall be inapplicable if this Note is secured by real property. The late charge shall be charged only once for any late payment. PREPAYMENT: The Borrower reserves the right, privilege, and option to prepay the principal indebtedness evidenced by this Note, or any part thereof, at any time without penalty, and interest shall cease to accrue on the amount or amounts of principal so prepaid. Any such prepayment shall be applied to unpaid principal installments hereunder in the inverse order of the maturities thereof. No partial principal prepayment shall defer the due date of any installment of principal and interest due hereunder. 115 4 III. SECURITY: This Note and the Obligation is secured (in accordance with the terms of a Pledge Agreement from Borrower to Lender dated this date) solely by the grant of a first lien security interest in 261,434 shares of the common stock of COMMUNITY BANCSHARES, INC. owned by BANK ONE TRUST, NA as Trustee (the "Trustee") of the COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan") and held by the COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST (the "Trust"). Lender agrees to release and deliver to the Trustee for the Borrower that number of common stock shares pledged hereunder as required by ERISA Regs. (26 C.F.R.) ss. 54.4975-7(b)(8)(i) taking into account both principal and interest. This Note and the Obligation is further guaranteed by COMMUNITY BANCSHARES, INC. IV. EVENTS OF DEFAULT, AND DEFAULT: The occurrence of any of the following events shall constitute an Event of Default hereunder, time being of the essence, entitling Lender, at Lender's option, and without further notice to the Borrower, to declare the entire Obligation (principal plus accrued interest and charges) immediately due and payable at once and in full with interest to date: Borrower's failure to pay when due or to perform or comply with any of the (i) obligations or provisions under this Note and any renewals, modifications, refinancing and extensions thereof, or the (ii) obligations or provisions under the Pledge Agreement. Failure of the Lender to declare such indebtedness to be due and payable in the Event of a Default shall not constitute a waiver of the right later to declare the entire indebtedness to be at once due and payable. V. PURPOSE OF LOAN: This Note evidences a loan to be used by Borrower for acquisition of COMMUNITY BANCSHARES, INC.'s stock in order to continue to be able to fund the COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, and to repay existing indebtedness incurred for such purpose, and Borrower agrees to use the proceeds of this loan for only those purposes. Notwithstanding the foregoing, the Borrower hereby represents and warrants to Lender that the money which is the subject of the credit transaction is not for personal, family, household, or agricultural purposes within the meaning of the Federal Truth-in Lending Act or Regulation Z of the Federal Reserve Board issued pursuant thereto, and that said extension of credit is for business or commercial purposes (other than agricultural purposes). VI. NON RECOURSE OBLIGATION: Notwithstanding any provision to the contrary contained herein or in the Pledge Agreement, it is hereby expressly understood and agreed that, in the event Lender shall at any time take action to enforce the collection of the Obligation, Lender shall not seek a money judgement against the Trust or the Plan or the Trustee for any sum promised to be paid herein or in the Pledge Agreement, and Lender shall never institute suit, action, claim, at law or in equity against the Plan, the Trust or the Trustee, or collect from them personally any such sums; and if, as a result of sale of collateral described in the Pledge Agreement, a lesser sum is realized therefrom than the amount then due and owing under this Note, the Lender shall 116 5 never institute any action, suit, claim or demand at law or in equity against the Trust, the Plan, or the Trustee. This Note shall be without recourse to the Plan, the Trust and the Trustee for any deficiency and the Lender's rights are limited solely to the stock pledged herein and any earning attributable to such collateral. Furthermore, notwithstanding anything herein to the contrary, all pledges, liability and collateral of the Plan for the indebtedness represented by this Note, are subject to and limited by, ERISA Regs. (26 C.F.R.) ss. 54.4975-7(b) and in the event of a default upon indebtedness represented thereby, the value of the trust assets transferred in satisfaction of the loan shall not exceed the amount of Obligation. Provided however, nothing contained herein shall be construed in any way to relieve COMMUNITY BANCSHARES, INC. of its obligations under its guaranty of Borrower's Obligation, nor to prevent Lender's enforcement of its rights under the Pledge Agreement. VII. COMPLIANCE WITH ESOP PROVISIONS: It is expressly acknowledged and agreed that this Note and the Pledge Agreement and each provision hereof is intended strictly to comply in all respects and to be construed in accordance with and be subject to the provisions of the United States Code and the regulations and regulatory interpretations thereunder relating to employee stock ownership plans and loans thereto (the "ESOP Provisions"), including without limitation 26 U.S.C. ss. 401 & 4975, and 26 C. F. R. ss. 54.4975-7 and 29 C. F. R. ss. 2550-408b-3 and that the Obligation evidenced hereby qualifies as an "exempt loan" and a "stock acquisition loan" under the ESOP Provisions, and this Note shall be construed and be deemed to have been amended to the extent necessary to comply with the ESOP Provisions. Without limiting the generality of the foregoing, it is expressly acknowledged and agreed that the Lender shall release collateral pledged hereunder at least as rapidly as required by 26 C.F.R. ss. 54.4975-7(b)(8)(i) as the Obligation is paid. VIII. WAIVERS, COST OF COLLECTION, MISCELLANEOUS: The Borrower hereby agrees to pay all costs of collecting or attempting to collect this Note and the Obligation, including court cost, expenses of collection, and including a reasonable attorney's fee, if the same be collected by an attorney consulted with reference to suit or otherwise. The Borrower and all sureties, endorser and guarantors of this Note, to the extent not prohibited by applicable law or regulation, hereby jointly and severally, (a) waive as to this debt or any renewal, modification, extension or refinancing thereof all rights of exemption under the Constitution or laws of Alabama or any other state as to real or personal property; (b) waive demand, presentment, notice of non-payment, protest, notice of protest, notice of dishonor, all other notice, suit against any party, diligence in collection of this note, the release of any party primarily or secondarily liable thereon or any collateral pledged as security, and all other requirements necessary to hold Borrower liable hereunder; and (c) agree and consent to any one of more extensions or postponements of time of payment of this Note or any other indulgences with respect hereto, without notice thereof to any of them, and without release of liability as to any Borrower or any of them. Borrower agrees to provide Lender, upon request, any financial statements or information Lender may deem necessary; and Borrower warrants that all financial statements and information so provided shall be accurate, correct, and complete. Lender's books and records showing the account between us shall be admissible in evidence in any action or proceeding, shall be binding upon us for the purposes of establishing the items therein set forth and shall constitute prima facie proof thereof. 117 6 The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid against the Lender; unless in writing and signed by the Lender. All rights and remedies hereunder and under any statute or rule of law shall be cumulative and may be exercised successively or concurrently. This note shall be governed by and construed in accordance with the laws of the State of Alabama. BORROWER CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN BIRMINGHAM, ALABAMA AND WAIVES ANY OBJECTION WE MAY HAVE BASED UPON IMPROPER VENUE OR FORUM NON CONVENIENS OR TO THE CONDUCT OF ANY PROCEEDINGS IN ANY SUCH COURT. IN ANY JUDICIAL PROCEEDING BROUGHT WITH RESPECT TO, RELATING TO, OR PERTAINING TO THIS NOTE, THE LOAN DOCUMENTS, THE OBLIGATION, THE ADMINISTRATION, HANDLING OR COLLECTION OF THE OBLIGATION, OR THE ACTIONS OF LENDER, THE BORROWER ANY RIGHT TO TRLAL BY JURY. Borrower covenant and agree that Borrower will furnish Lender a prompt written notice of any action or inaction by Lender or any of Lender's agents or attorneys in connection with this Note, the Loan Documents, or the advances or obligations thereunder, that may be actionable against Lender, Lender's agents, Lender's attorneys, or a defense to payment of the Borrower's obligations to Lender for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law. Borrower further agrees that, unless this notice is duly given as promptly as possible (and in any event within ten (10) days) after Borrower has knowledge or with the exercise of reasonable diligence should have had knowledge of any such action or inaction, Borrower will not assert and shall be deemed to have waived, any claim or defense arising therefrom. The Borrower understands that the Lender may from time to time enter into a participation agreement or agreements with one or more participants pursuant to which such participant or participants shall be given participation in advances made under this note and that such participants may from time to time similarly grant to other participants subparticipations in such advances. Singular or plural words used herein shall be taken to refer to the undersigned, whether one or more than one, and this Note shall bind each of the undersigned, jointly and severally. If any provision of this Note is or becomes invalid or unenforceable, the remaining provisions shall not be affected thereby. Any change or modification to this Note must be in writing and signed by both Lender and Borrower. IX. EXECUTION: This note has been executed by the Borrower without condition that anyone else should sign or become bound hereunder and without any other conditions whatever being made. The provisions hereof are binding on the successors and assigns of the Borrower and shall inure to the benefit of the Lender and its successors and assigns, and every subsequent holder of this Note. Borrower acknowledges receipt of a completed copy hereof, and of any other instrument executed by Borrower before this transaction is consummated. [SIGNATURES CONTINUED ON NEXT PAGE] 118 7 IN WITNESS WHEREOF, we have caused this note to be executed, sealed and delivered in Birmingham, Alabama on the day and year first above written. CAUTION -- IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU SIGN IT. COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: BANK ONE TRUST, NA As Trustee By: /s/ Stella LeBlanc -------------------------------------------------- Stella LeBlanc (Its Relationship Manager) By: Its Administrative Committee By: /s/ Bishop K. Walker, Jr. -------------------------------------------------- Bishop K. Walker, Jr. (Member) By: /s/ Denny Kelly -------------------------------------------------- Denny Kelly (Member) By: /s/ Kennon R. Patterson, Sr. -------------------------------------------------- Kennon R. Patterson, Sr. (Member) 119 8 GUARANTY COLONIAL BANK P.O. Box 1887 Birmingham, Alabama, 35201 Ladies and Gentlemen: In consideration of and in order to induce you to enter into a Promissory Note, financing arrangement and/or any modifications, amendments, supplements, and renewals thereto or thereof (all hereinafter referred to collectively as "the Loan Agreement") with COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (hereinafter jointly, severally and collectively referred to as the "Borrower") and/or to make loans and advances to the Borrower, and for other good and valuable consideration, the undersigned agrees to be, without deduction by reason of setoff, defense, or counterclaim of the Borrower, primarily liable for the due performance and prompt payment of all of the obligations of the Borrower to you, to all present and future subsidiaries, assigns, and affiliates of COLONIAL BANK (hereinafter collectively referred to as "Bank") no matter when or how arising, whether under a note, the Loan Agreement, or any other present or future agreement with Bank, and specifically including any and all interest, attorney fees, and cost pertaining thereto, or which accrue after an order for relief is entered against Borrower in any Bankruptcy proceedings (all of which are hereafter collectively referred to as "Obligations"). The undersigned consents to and hereby waives any and all notice of the making of any modification, amendment, renewal or extension of any note or Loan Agreement or any supplement thereto; the making of any other agreement; the incurring of any other debts or obligations by the Borrower to Bank; the granting to the Borrower or to any obligor, of any extensions of time to make any payments to perform or discharge any Obligations (or waive such performances and/or discharge); the compounding, compromising, and/or adjusting of any claim against the Borrower or any such obligor or debtor; the accepting or releasing of any security either of Borrower or of any third party; and all other notices which the undersigned is entitled. No act on Bank's part and nothing other than the full payment, performances, and discharge of all Obligations shall operate to discharge or satisfy the liability of the undersigned hereunder. The liability of the undersigned hereunder is primary, direct and unconditional and may be enforced without first resorting to any rights or remedies Bank may have against the Borrower, any other person, any other entity, or against any security. The undersigned agrees that this Guaranty, and all Obligations secured hereby, shall remain in full force and effect and in its original tenor at all times hereinafter during the term hereof, notwithstanding i) the unenforceability, non-existence, invalidity, or non-perfection of any of the Obligations, or any instrument or agreement guaranteeing or securing the Obligations, or of any lien, pledge, assignment, security interest or conveyance given as security for the Obligations; ii) the failure of Bank to pursue any collateral securing the Obligations or the failure to file a claim against the Borrower or any other guarantor of the Obligation in any proceeding pertaining to the death, insolvency, or bankruptcy of such person or entity; or iii) any action or undertakings by, or against, Bank or Borrower or concerning any collateral which is secured, pledged or assigned to the Bank in connection with the obligation in any proceeding in the United States Bankruptcy Court; including without limitation, matters relating to valuation of collateral, election or imposition of secured or unsecured claim status upon claims by the Bank pursuant to any Chapter of the Bankruptcy Code, as may be applicable from time to time. 120 9 This instrument is a continuing guaranty and agreement, extending to and covering all Obligations of the Borrower arising both before and after the termination of the undersigned's relationship with Borrower. This guaranty is terminable by the undersigned only after the expiration of the Loan Agreement, by notice sent to Bank by registered mail, return receipt requested, and such termination shall become effective on the thirtieth day after actual receipt by Bank of such notice and shall apply only to transactions having their inception thereafter. Any termination by or release of any guarantor in whole or in part (including without limitation any release by you of the undersigned or of any other guarantor) shall not affect the continuing liability of any other guarantors whether under this or any other instrument. All claims of any kind whatsoever which the undersigned may now or may hereafter acquire against the Borrower, including rights of indemnity, are hereby assigned to Bank, and such claims, as well as all money, security, and property of the undersigned which may at any time be in Bank's possession, shall be deemed held as security and subject to the Bank's right of set-off, for all of the Obligations of Borrower and of the undersigned to Bank whether now or hereafter acquired and no matter how arising and whether under this instrument or otherwise. Prior to the execution of this Guaranty, and immediately after the execution of this Guaranty, the undersigned was and is solvent, and paying its debts as they come due. So long as there shall be an Obligation due Bank, the undersigned covenants and agrees that the undersigned will furnish Bank: (a) as soon as available and in any event within ninety (90) days after the end of each year the undersigned's financial statement, and if requested by Bank, balance sheet and copies of the related statements of income, changes in capital accounts and changes in financial position for such year; (b) a prompt written report of any material adverse change in the undersigned's financial condition; and (c) a prompt written notice of any action or inaction by Bank or any of Bank's agents or attorneys in connection with this Guaranty, the Loan Agreement or the Obligations, that may be actionable against Bank, Bank's agents, Bank's attorneys, or a defense to payment of the Obligations for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law. The undersigned agrees that unless the notice provided for in subclause "(c)" hereof is duly given as promptly as possible (and in any event within ten (10) days) after the undersigned has knowledge or with the exercise of reasonable diligence should have had knowledge of any such action or inaction, we will not assert and shall be deemed to have waived, any claim or defense arising therefrom. In the event any payment of principal or interest received upon this Obligation and paid by the undersigned or any other guarantor, surety, co-maker or endorser, shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference under the bankruptcy or insolvency laws of the United States or otherwise due to any party other than the Bank; then in any such event, the obligation of said undersigned and any security pledged by the undersigned to secure such obligation, shall remain as an Obligation due hereunder and as security for such Obligation, and shall not be considered as having been extinguished by said payment or payments, notwithstanding return by the Bank to the undersigned of the original hereof, and shall survive the same in their original terms, without exception. Upon full or partial payment of the Obligations, Bank, at its discretion, may retain its security interest in any property pledged by the undersigned as security for the Obligations or this guaranty, until the expiration of any preference periods set out in the bankruptcy laws of the United States. Your books and records show in the accounts and transactions between you and the Borrower shall be admissible in any action or proceeding, and shall be binding upon us for the purpose of establishing the items therein set forth, and shall constitute prima facie proof thereof. THE UNDERSIGNED 121 10 CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN BIRMINGHAM, ALABAMA AND WAIVES ANY OBJECTION WE MAY HAVE BASED UPON IMPROPER VENUE OR FORUM NON CONVENIENS OR TO THE CONDUCT OF ANY PROCEEDINGS IN ANY SUCH COURT. IN ANY JUDICIAL PROCEEDING BROUGHT WITH RESPECT TO THE LOAN AGREEMENT OR THIS GUARANTY, THE UNDERSIGNED WAIVES ANY RIGHT TO TRIAL BY JURY. In the event any claim under this instrument is referred to an attorney for collection, the undersigned, in addition to the liability as hereinabove set forth, shall be liable for attorneys' fees and cost of collection incurred by the Bank in collecting the unpaid indebtedness and Obligations of Borrower to Bank, or an amount equal to 15% of the unpaid indebtedness and Obligations of the Borrower to Bank, whichever is greater. The undersigned waives any right to exemption under the Constitution of the State of Alabama or any other state as to any indebtedness or obligation created hereunder. This instrument and the agreements executed contemporaneously herewith, represent the entire and complete agreement between the undersigned and Bank. This instrument cannot be changed or terminated orally, shall be interpreted in accordance with the laws of the State of Alabama, shall be binding upon the undersigned and the respective heirs, executors, administrators, successors, and assigns of the undersigned, and shall inure to the benefit of Bank and its successors and assigns. The term "undersigned" as used in the agreement shall mean COMMUNITY BANCSHARES, INC., and its successors. Executed under my hands and seals this lst day of December, 1998 COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ---------------------------------------- Kennon R. Patterson, Sr. (Chairman of the Board and President) ATTEST: /s/ Bishop K. Walker, Jr. -------------------------------------------- Bishop K. Walker, Jr. (Secretary) 122 11 PLEDGE AGREEMENT To induce COLONIAL BANK (hereinafter referred to as Lender) to make a loan to COMMUNITY BANCSHARES, INC.' EMPLOYEE STOCK OWNERSHIP TRUST and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (hereinafter jointly, severally and collectively referred to as Borrower) the undersigned does herewith deposit, transfer, assign, convey and pledge to Lender as collateral security to the Obligation cited herein the following Stock certificates and Securities belonging to the undersigned, free of any claim, encumbrances, lien, or prior assignments, to secure the obligations evidenced by that certain Promissory Note dated this day, in the amount of $2,963,841.91, executed by Borrower (hereinafter "Loan" or "Obligation"), and all renewals and modifications thereof, to wit: 261,434 shares of the common stock of COMMUNITY BANCSHARES, INC., along with all stock dividends, stock splits, and proceeds (whether in cash or in kind) of any of the foregoing or pertaining to the foregoing. (all of the above, along with all stock dividends, stock splits and proceeds, hereinafter referred to as "Securities") It is understood that these Securities hereby pledged to Lender as Collateral for the Loan shall not be sold or liquidated, without the consent of Lender, until said Loan, principal and interest, and all other obligations of the Borrower to Lender have been paid in full, provided however, it is expressly acknowledged and agreed that this agreement and each provision hereof is intended strictly to comply in all respects and to be construed in accordance with and be subject to the provisions of the United States Code and the regulations and regulatory interpretations thereunder relating to employee stock ownership plans and loans thereto (the "ESOP Provisions"), including without limitation 26 U.S.C. ss.ss. 401 & 4975, and 26 C.F.R. ss. 54.4975-7 and 29 C.F.R. ss. 2550-408b-3 and that the Loan secured hereby qualifies as an "exempt loan" and a "stock acquisition loan" under the ESOP Provisions. This agreement shall be construed and be deemed to have been amended to the extent necessary to comply with the ESOP Provisions. Without limiting the generality of the foregoing, it is expressly acknowledged and agreed that the Lender shall release collateral pledged hereunder as required by 26 C.F.R. ss. 54.4975-7(b)(8)(i) as the Loan is paid. Upon the failure of the Borrower to pay the Loan according to the terms of the Note, Loan, or other document evidencing the Loan, or upon a default in said obligation as defined in the Note, Loan documents, or other documents evidencing the Loan, then the aforementioned liability of the Borrower to Lender shall become immediately due and payable, notwithstanding any credit or time allowed to the Borrower by any instrument evidencing such liability. In any of the aforementioned events, the Lender may immediately without advertisement, and without notice to the undersigned, sell any of the Securities, as against said indebtedness or liability of the Borrower, at private sale or broker's board, or otherwise, or may, without notice, discount, collect compound, compromise, settle, manage, and turn the same into cash according to opportunity, at the discretion of Lender and apply the proceeds thereof as far as needed toward the payment of said indebtedness or liability, together with interest and all expenses (legal or otherwise) for sale or collection. If any such sale be at broker's board or at public auction, Lender may itself be a purchaser at such sale free from any right of equity of redemption of the undersigned, such right and equity being hereby waived and released. The undersigned consents to and hereby waives any and all notice of the making of any modification, amendment, -renewal or extension of any note or agreement evidencing the Obligation, or any supplement thereto; the making of any other agreement; the incurring of any other debts or obligations by the Borrower to Lender or others and/or of the pledge, sale, transfer, and/or assignment thereof; the granting of security interests therein to Lender; the granting to the Borrower or to any obligor or debtor of any obligation or debts assigned 123 12 to Lender, of any extensions of time to make any payments to perform or discharge any Obligation (or waive such performances and/or discharge); the compounding, compromising, and/or adjusting of any claim against the Borrower or any such obligor or debtor; the accepting or releasing of any security either of Borrower or of any third party; and all other notices which the undersigned is entitled. No act on Lender's part and nothing other than the full payment, performances, and discharge of all Obligation shall operate to discharge or satisfy the liability of the undersigned hereunder. The liability of the undersigned hereunder is primary, direct and unconditional and may be enforced without first resorting to any rights or remedies Bank may have against the Borrower, any other person, any other entity, or against any security. The undersigned agrees that this Pledge Agreement, and all Obligation secured hereby, shall remain in full force and effect and in its original tenor at all times hereinafter during the term hereof, notwithstanding i) the unenforceability, non-existence invalidity, or non-perfection of the Obligation, or any instrument or agreement guaranteeing or securing the Obligation, or of any lien, pledge, assignment, security interest or conveyance given as security for the Obligation; ii) the failure of Lender to pursue any collateral securing the Obligation or the failure to file a claim against the Borrower or any other guarantor of the Obligation in any proceeding pertaining to the death, insolvency, or bankruptcy of such person or entity; or iii) any action or undertakings by, or against, Lender or Borrower or concerning any collateral which is secured, pledged or assigned to the Lender in connection with the obligation in any proceeding in the United States Bankruptcy Court; including without limitation, matters relating to valuation of collateral, election or imposition of secured or unsecured claim status upon claims by the Lender pursuant to any Chapter of the Bankruptcy Code, as may be applicable from time to time. This pledge shall be binding upon the undersigned and the heirs, executors, and administrators of the undersigned and shall enure to the benefit of Lender, its successors, and assigns This instrument shall be construed and given effect according to the laws of the State of Alabama, the applicable provisions of ERISA, the Internal Revenue Code, and other applicable federal laws. [SIGNATURES CONTINUED ON NEXT PAGE] 124 13 EXECUTED at Birmingham, Alabama, this lst day of December, 1998. COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN By: BANK ONE TRUST, NA As Trustee By: /s/ Stella LeBlanc -------------------------------------------------- Stella LeBlanc (Its Relationship Manager) By: Its Administrative Committee By: /s/ Bishop K. Walker, Jr. -------------------------------------------------- Bishop K. Walker, Jr. (Member) By: /s/ Denny Kelly -------------------------------------------------- Denny Kelly (Member) By: /s/ Kennon R. Patterson, Sr. -------------------------------------------------- Kennon R. Patterson, Sr. (Member) STATE OF LOUISIANA COUNTY OF BLOUNT I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that Stella LeBlanc, whose name as Relationship Manager of BANK ONE TRUST, NA as trustee of COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST, a trust, and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, a plan, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as trustee as aforesaid. Given under my hand and official seal, this the 1st day of December, 1998. /s/ Elaine E. Corvin ------------------------------------------------------- NOTARY PUBLIC My Commission Expires: 7/22/2001 -------------------------------- 125 14 STATE OF ALABAMA ) JEFFERSON COUNTY ) I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that Bishop K. Walker, Jr., Denny Kelly, and Kennon R. Patterson, Sr, whose name as members of the administrative committee of COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP TRUST, a trust, and COMMUNITY BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, a plan, are signed to the foregoing instrument and who are known to me, acknowledged before me on this day that, being informed of the contents of said instrument, they, as such members, and with fall authority, executed the same voluntarily, as an act of said committee, acting in its capacity as administrative committee as aforesaid. Given under my hand and official seal, this the 1st day of December, 1998. /s/ Elaine E. Corvin ------------------------------------------------------- NOTARY PUBLIC My Commission Expires: 7/22/2001 -------------------------------- 126 EX-10.21 4 CHANGE IN CONTROL AGREEMENT DATED 12/28/1998 1 ---------------------------- EXHIBIT 10.21 CHANGE IN CONTROL AGREEMENT BY AND BETWEEN MICHAEL A. BEAN AND COMMUNITY BANCSHARES, INC. DATED DECEMBER 28, 1998 ---------------------------- 127 2 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT (this "Agreement"), dated this 28th day of December, 1998, by and between Community Bancshares, Inc. a Delaware corporation (the "Company"), and Michael A. Bean (the "Executive"). WITNESSETH: WHEREAS, the Company wishes to assure itself and its key employees of continuity of management and objective judgment in the event of any actual or contemplated Change in Control of the Company, and the Executive is a key employee of the Company and is an integral part of management of the Company (for purposes hereof employment with any present or future parent or subsidiary corporation of the Company shall be considered employment by the Company); and WHEREAS, this Agreement is not intended to materially alter the compensation and benefits that the Executive could reasonably expect to receive in the absence of a Change in Control of the Company, and this Agreement accordingly will be operative only upon circumstances relating to an actual or anticipated change in control of the Company. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein contained, the parties hereby agree as follows: I. OPERATION OF AGREEMENT This Agreement shall be effective immediately upon its execution by the parties hereto, but anything in this Agreement to the contrary notwithstanding, neither the Agreement nor any provision hereof shall be operative unless, during the term of this Agreement, there has been a Change in Control of the Company during the term of this Agreement, all of the provisions hereof shall become operative immediately. II. TERM OF AGREEMENT The term of this Agreement shall be for an initial three (3) year period commencing on the date hereof, and shall be renewable at the end of the first year of such initial three (3) year period and annually thereafter, for an additional one (1) year period following the initial three (3) year period and prior extensions thereof in the sole discretion of the Compensation Committee and upon such terms and conditions as the Compensation Committee may authorize at such time. 128 3 III. DEFINITIONS 1. "BOARD" or "BOARD OF DIRECTORS" - the Board of Directors of the Company. 2. "CAUSE" - either (i) any act that constitutes, on the part of the Executive, (A) fraud, dishonesty, a felony or gross malfeasance of duty, and (B) that directly results in material injury to the Company; or (ii) conduct by the Executive in his office with the Company that is grossly inappropriate and demonstrably likely to lead to material injury to the Company, as determined by the Board acting reasonably and in good faith; provided, however, that in the case of (ii) above, such conduct shall not constitute Cause unless the Board shall have delivered to the Executive notice setting forth with specificity (A) the conduct deemed to qualify as Cause, (B) reasonable action that would remedy such objection, and (c) a reasonable time (not less than thirty (30) days) within which the Executive may take such remedial action, and the Executive shall not have taken such specified remedial action within such specified reasonable time. 3. "CHANGE IN CONTROL" - Either (i) the acquisition, directly or indirectly, by any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1937, as amended) within any twelve (12) month period of securities of the Company representing an aggregate of twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election of each new director was approved in advance by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; or (iii) consummation of (a) a merger, consolidation or other business combination of the Company with any other "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) or affiliate thereof, other than a merger, consolidation or business combination which would result in the outstanding common stock of the Company immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into common stock of the surviving entity or a parent or affiliate thereof) at least sixty (60)% of the outstanding common stock of the Company or such surviving entity or parent or affiliate thereof outstanding immediately after such merger, consolidation or business combination, or (b) a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all or substantially all of the Company's assets; or (iv) the occurrence of any other event or circumstance which is not covered by (i) through (iii) above which the Board determines affects control of the Company and, in order to implement the purposes of this Agreement as set forth above, adopts a resolution that such event or circumstance constitutes a Change in Control of the purposes of this Agreement. 129 4 4. "CODE" - the Internal Revenue Code of 1986, as amended. 5. "COMPENSATION COMMITTEE" - the Executive Compensation Committee of the Board of Directors of the Company, or any successor committee. 6. "DISABILITY" - the Executive's probable and expected inability as a result of physical or mental incapacity to substantially perform his duties for the Company on a full time basis for a period of six (6) months. The determination of whether the Executive suffers a Disability shall be made by a physician acceptable to both the Executive (or his personal representative) and the Company. 7. "EXCESS SEVERANCE PAYMENT" - the term "Excess Severance Payment" shall have the same meaning as the term "excess parachute payment" defined in Section 280G(b)(1) of the Code. 8. "INVOLUNTARY TERMINATION" - termination of the Executive's employment by the Executive following a Change in Control which, in the reasonable judgment of the Executive, is due to (i) a change of the Executive's responsibilities, position (including status, office, title, reporting relationships or working conditions), authority or duties (including changes resulting from the assignment to the Executive of any duties inconsistent with his positions, duties or responsibilities as in effect immediately prior to the Change in Control); or (ii) a reduction in the Executive's compensation or benefits as in effect immediately prior to the Change in Control, or (iii) a forced relocation of the Executive's primary place of employment to a place more than fifty (50) miles from the Executive's primary place of employment immediately prior to the Change in Control. Involuntary Termination does not include retirement (including early retirement) within the meaning of the Company's retirement plan, or death or Disability of the executive. 9. "PRESENT VALUE" - The term "Present Value" shall have the same meaning as provided in Section 280G(d)(4) of the Code. 10. "SEVERANCE PAYMENT" - The term "Severance Payment" shall have the same meaning as the term "parachute payment" defined in Section 280G(b)(2) of the Code. 11. "REASONABLE COMPENSATION" - The term "Reasonable Compensation" shall have the same meaning as provided in Section 280G(b)(4) of the Code. 130 5 IV. BENEFITS UPON TERMINATION FOLLOWING A CHANGE IN CONTROL 1. TERMINATION - The Executive shall be entitled to, and the Company shall pay or provide to the Executive, the benefits described in Section 2 below if (a) a Change in Control occurs during the term of this Agreement, and (b) the Executive's employment is terminated within thirty (30) months following the Change in Control either (i) by the Company (other than for Cause or by reason of the Executive's death or Disability) or (ii) by the Executive pursuant to Involuntary Termination; provided, however, that if: (a) during the term of this Agreement there is a public announcement of a proposal for a transaction that, if consummated, would constitute a Change in Control or the Board receives and decides to explore an expression of interest with respect to a transaction which, if consummated, would lead to a Change in Control (either transaction being referred to herein as the "Proposed Transaction"); and (b) the Executive's employment is thereafter terminated by the Company other than for Cause or by reason of the Executive's death or Disability; and (c) the Proposed Transaction is consummated within one (1) year after the date of termination of the Executive's employment. then, for the purposes of this Agreement, a Change in Control shall be deemed to have occurred during the term of this Agreement and the termination of the Executive's employment shall be deemed to have occurred within two (2) years following a Change in Control. 2. BENEFITS TO BE PROVIDED - If the Executive becomes eligible for benefits under Section 1 above, the Company shall pay or provide to the Executive the benefits set forth in this Section 2. (a) SALARY - The Executive will continue to receive his current salary (subject to withholding of all applicable taxes and any amounts referred to in Section 2(c) below) for a period of thirty (30) months from his date of termination in the same manner as it was being paid as of the date of termination; provided, however, that the salary payments provided for hereunder shall be paid in a single lump sum payment, to be paid not later than thirty (30) days after his termination of employment; provided further, that the amount of such lump sum payment shall be determined by taking the salary payments to be made and discounting them to their Present Value. For purposes hereof, the Executive's "current salary" shall be the highest rate in effect during the six-month period prior to the Executive's termination. (b) BONUSES - The Executive shall receive payments from the Company for the thirty (30) months following the month in which this employment is terminated in an amount for each such month equal to one-twelfth of the average of the bonuses earned by him for the two calendar years immediately preceding the year in which such termination occurs. Any bonus amounts that the Executive had previously earned from the Company but which may not yet have been paid as of the date of termination shall not be affected by this provision, other than to serve as a measurement for this portion of the severance benefit. The bonus amounts determined herein shall be paid in a single lump sum payment, to be paid not later than 30 days after termination of employment; provided, further, that the amount of such lump sum payment shall be determined by taking the bonus payments (as of the payment date) to be made and discounting them to their Present Value. 131 6 (c) HEALTH AND LIFE INSURANCE COVERAGE - The health and life insurance benefits coverage provided to the Executive at his date of termination shall be continued at the same level and in the same manner as if his employment had not terminated (subject to the customary changes in such coverages if the Executive retires or reaches age 65 or similar events), beginning on the date of such termination and ending on the date thirty (30) months from the date of such termination. Any additional coverages the Executive had at termination, including dependent coverage, will also be continued for such period at the same level and on the same terms as provided to the Executive immediately prior to his termination, to the extent permitted by the applicable policies or contract. Any costs Executive was paying for such coverages at the time of termination shall be paid by the Executive by separate check payable to the Company each month in advance. If the terms of any benefit plan referred to in this Section do not permit continued participation by the Executive, then the Company will arrange for other coverage at its expense providing substantially similar benefits as it can find for other officers in similar positions. (d) EMPLOYEE RETIREMENT PLANS - To the extent permitted by the applicable plan, the Executive will be fully vested in and will be entitled to continue to participate, consistent with past practices, in all employee retirement plans maintained by the Company in effect as of his date of termination. The Executive's participation in such retirement plans shall continue for a period of thirty (30) months from the date of termination of his employment (at which point he will be considered to have terminated employment within the meaning of the plans) and the compensation payable to the executive under (a) and (b) above shall be treated (unless otherwise excluded) as compensation under the plan. If full vesting and continued participation in any plan is not permitted, the Company shall pay to the executive and, if applicable, his beneficiary, a supplemental benefit equal to the Present Value on the date of termination of employment of the excess of (i) the benefit the Executive would have been paid under such plan if he had been fully vested and had continued to be covered for the 30-month period as if the Executive had earned compensation described under (a) and (b) above and had made contributions sufficient to earn the maximum matching contribution, if any, under such plan (less any amounts he would have been required to contribute), over (ii) the benefit actually payable to or on behalf of the Executive under such plan. For purposes of determining the benefit under (i) in the preceding sentence, contributions deemed to be made under a defined contribution plan will be deemed to be invested in the same manner as the Executive's account under such plan at the time of termination of employment. The Company shall pay such supplemental benefits (if any) in a lump sum. 132 7 (e) CAREER COUNSELING - The Company will provide career counseling and out placement services on an individual basis to the Executive as the Company deems appropriate and for a reasonable period following the Executive's termination of employment; provided, however, that the Company's obligation to provide such services shall terminate at such time, if any, as the cost of such services exceeds $5,000. (f) EFFECT OF LUMP SUM PAYMENT - The lump sum payment under (a) or (b) above shall not alter the amounts the Executive is entitled to receive under the benefit plans described in (c) and (d) above. Benefits under such plans shall be determined as if the Executive had remained employed and received such payments over a period of thirty (30) months. (g) EFFECT OF DEATH OR RETIREMENT - The benefits payable or to be provided under this Agreement shall continue in the event of the Executive's death and shall be payable to his estate or named beneficiary. The benefits payable or to be provided under this Agreement shall cease in the event of the Executive's election to commence retirement benefits under the Company's retirement plan. (h) LIMITATION ON AMOUNT - Notwithstanding anything in this Agreement to the contrary, any benefits payable or to be provided to the Executive by the Company or its affiliates, whether pursuant to this Agreement or otherwise, which are treated as Severance Payments shall be modified or reduced in the manner provided in (h) below to the extent necessary so that the benefits payable or to be provided to the Executive under this Agreement that are treated as Severance Payments, as well as any payments or benefits provided outside of this Agreement that are so treated, shall not cause the Company to have paid an Excess Severance Payment. In computing such amount, the parties shall take into account all provisions of Internal Revenue Code Section 280G, including making appropriate adjustments to such calculation for amounts established to be Reasonable Compensation. (i) MODIFICATION OF AMOUNT - In the event that the amount of any Severance Payments that would be payable to or for the benefit of the Executive under this Agreement must be modified or reduced to comply with this Section 2, the Executive shall direct which Severance Payments are to be modified or reduced; provided, however, that no increase in the amount of any payment or change in the timing of the payment shall be made without the consent of the Company. (j) AVOIDANCE OF PENALTY TAXES - This Section 2 shall be interpreted so as to avoid the imposition of excise taxes on the Executive under Section 4999 of the Code or the disallowance of a deduction to the Company pursuant to Section 280G(a) of the Code with respect to amounts payable under this Agreement or otherwise. (k) ADDITIONAL LIMITATION - In addition to the limits otherwise provided in this Section 2, to the extent permitted by law, the Executive may in his sole discretion elect to reduce any payments he may be eligible to receive under this Agreement to prevent the imposition of excise taxes on the Executive under Section 4999 of the Code. 133 8 (l) NO OBLIGATION TO FUND - The agreement of the Company (or its successor) to make payments to the Executive hereunder shall represent solely the unsecured obligation of the Company (and its successor), except to the extent the Company (or its successors) in its sole discretion elects in whole or in part to fund its obligations under this Agreement pursuant to a trust arrangement or otherwise. VI. MISCELLANEOUS 1. CONTRACT NON-ASSIGNABLE - The parties acknowledge that this Agreement has been entered into due to, among other things, the special skills of the Executive, and agree that this Agreement may not be assigned or transferred by the Executive, in whole or in part, without the prior written consent of the Company. Any business entity succeeding to all or substantially all of the business of the Company by purchase, merger, consolidation, sale of assets or otherwise, shall be bound by this Agreement. 2. OTHER AGENTS - Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to the Company. 3. NOTICES - All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or seven days after mailing if mailed, first class, certified mail, postage prepaid: To the Company: Community Bancshares, Inc. P.O. Box 1000 Blountsville, Alabama 35031 To the Executive: Michael A. Bean P.O. Box 1000 Blountsville, Alabama 35031 Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. 4. PROVISIONS SEVERABLE - If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. 5. WAIVER - Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. 6. AMENDMENTS AND MODIFICATIONS - This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement. 7. GOVERNING LAW - The validity and effect of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Alabama. 134 9 8. ARBITRATION OF DISPUTES; EXPENSES - The parties agree that all disputes that may arise between them relating to the interpretation or performance of this Agreement, including matters relating to any funding arrangements for the benefits provided under this Agreement, shall be determined by binding arbitration through an arbitrator approved by the American Arbitration Association or other arbitrator mutually acceptable to the parties. The award of the arbitrator shall be final and binding upon the parties and judgment upon the award rendered may be entered in any court having jurisdiction. In the event the Executive incurs legal fees and other expenses in seeking to obtain or to enforce any such rights or benefits through settlement, arbitration or otherwise, the Company shall promptly pay the Executive's reasonable legal fees and expenses incurred in enforcing this Agreement. Except to the extent provided in the preceding sentence, each party shall pay its own legal fees and other expenses associated with the arbitration, provided that the fee for the arbitrator shall be shared equally. 9. INDEMNITY - The Executive shall be entitled to the benefits of the indemnity currently applicable to the Executive, if any, as provided by the Company's articles of incorporation or bylaws. Any changes to the articles of incorporation or bylaws reducing the indemnity granted to officers shall not affect the rights granted hereunder. The Company may not reduce these indemnity benefits confirmed to the Executive hereunder without the written consent of the Executive. 10. TERMINATION OF PRIOR AGREEMENTS - The Executive hereby agrees to a mutual termination, effective as of the effective date of this Agreement, of any prior existing change in control agreements (by whatever name), providing benefits to the Executive upon a termination of employment following a Change in Control of the Company, to which he and the Company are parties, and as to such prior agreements, if any, the Executive releases all claims, rights and entitlements. 11. REGULATORY APPROVALS - The Agreement, and the rights and obligations of the parties hereto, shall be subject to approval of the same by any and all regulatory authorities having jurisdiction over the Company, to the extent such approval is required by law, regulation, or order. 135 10 12. REGULATOR INTERVENTION - Notwithstanding any term of this Agreement to the contrary, this Agreement is subject to the following terms and conditions: (a) The Company's obligations to provide compensation or other benefits to Executive under this Agreement may be suspended if the Company has been served with a notice of charges by the appropriate federal banking agency under provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818) directing the Company to cease making payments required hereunder; provided, however, that (i) The Company shall seek in good faith with its best efforts to oppose such notice of charges as to which there are reasonable defenses; (ii) In the event the notice of charges is dismissed or otherwise resolved in a manner that will permit the Company to resume its obligations to provide compensation or other benefits hereunder, the Company shall immediately resume such payments and shall also pay Executive the compensation withheld while the contract obligations were suspended, except to the extent precluded by such notice; and (iii) During the period of suspension, the vested rights of the contracting parties shall not be affected, except to the extent precluded by such notice. (b) The Company's obligations to provide compensation or other benefits to Executive under this Agreement shall be terminated to the extent a final order has been entered by the appropriate federal banking agency under provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818) directing the Company not to make the payments required hereunder; provided, however, that the vested rights of the contracting parties shall not be affected by such order, except to the extent precluded by such order. (c) The Company's obligations to provide compensation or other benefits to Executive under this Agreement shall be terminated or limited to the extent required by the provisions of any final regulation or order of the Federal Deposit Insurance Company promulgated under Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)) limiting or prohibiting any "golden parachute payment" as defined therein, but only to the extent that the compensation or payments to be provided under this Agreement are so prohibited or limited. (d) Notwithstanding the foregoing, the Company shall not be required to make any payments under this Agreement prohibited by law. 136 11 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officers and the Executive has hereunto set his hand, as of the date and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. --------------------------------------------- Title: Chairman, President and Chief Executive Officer Attest: /s/ Bishop K. Walker, Jr. ----------------------------------- Title: Secretary (CORPORATE SEAL) EXECUTIVE /s/ Michael A. Bean -------------------------------------------- Executive Vice President (SEAL) -------------------------------------------- 137 EX-10.36 5 STOCK OPTION AGREEMENT / KENNON R. PATTERSON,SR. 1 ------------------------------ EXHIBIT 10.36 STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND KENNON R. PATTERSON, SR. DATED MARCH 26, 1998 ------------------------------ 138 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: Kennon R. Patterson, Sr. Number Shares Subject to Option: 8,334 Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be exercised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 139 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 140 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Bishop K. Walker, Jr. -------------------------------------- Title: Vice Chairman, Senior Executive Vice President and General Counsel /s/ Kennon R. Patterson, -------------------------------------- GRANTEE 141 EX-10.37 6 STOCK OPTION AGREEMENT / BISHOP K. WALKER,JR. 1 ------------------------------ EXHIBIT 10.37 STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND BISHOP K. WALKER, JR. DATED MARCH 26, 1998 ------------------------------ 142 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: Bishop K. Walker, Jr. Number Shares Subject to Option: 6,667 Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be exercised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 143 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 144 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ---------------------------------------------- Title: Chairman, President and Chief Executive Officer /s/ Bishop K. Walker, Jr. --------------------------------------------- GRANTEE 145 EX-10.38 7 STOCK OPTION AGREEMENT / DENNY KELLY 1 ------------------------------ EXHIBIT 10.38 STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND DENNY KELLY DATED MARCH 26, 1998 ------------------------------ 146 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: Denny Kelly Number Shares Subject to Option: 5,000 Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be exercised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 147 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 148 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ----------------------------------------- Title: Chairman, President and Chief Executive Officer /s/ Denny Kelly -------------------------------------------- GRANTEE 149 EX-10.39 8 STOCK OPTION AGREEMENT / HODGE PATTERSON,III 1 ------------------------------ EXHIBIT 10.39 STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND HODGE PATTERSON, III DATED MARCH 26, 1998 ------------------------------ 150 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: Hodge Patterson, III Number Shares Subject to Option: 3,334 Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be excerised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 151 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 152 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. --------------------------------------------- Title: Chairman, President and Chief Executive Officer /s/ Hodge Patterson, III --------------------------------------------- GRANTEE 153 EX-10.40 9 STOCK OPTION AGREEMENT / LOY MCGRUDER 1 ------------------------------ EXHIBIT 10.40 STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND LOY MCGRUDER DATED MARCH 26, 1998 ------------------------------ 154 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: Loy McGruder Number Shares Subject to Option: 3,334 Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be exercised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 155 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 156 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ------------------------------------------ Title: Chairman, President and Chief Executive Officer /s/ Loy McGruder ------------------------------------------- GRANTEE 157 EX-10.41 10 FORM OF STOCK OPTION AGREEMENT DATED MARCH 26,1998 1 ------------------------------ EXHIBIT 10.41 FORM OF STOCK OPTION AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC. AND ----------------------------- GRANTEE DATED MARCH 26, 1998 ----------------------------- 158 2 NONQUALIFIED STOCK OPTION AGREEMENT UNDER THE COMMUNITY BANCSHARES, INC. 1998 STOCK OPTION PLAN FOR DIRECTORS Grantee: _________________________ Number Shares Subject to Option: ________ Option Price per Share: $30.00 Date of Grant: March 26, 1998 1.Grant of Option: Community Bancshares, Inc. (the "Company") hereby grants to the Grantee named above (the "Grantee"), under the Community Bancshares, Inc. 1998 Stock Option Plan for Directors (the "Plan"), a Nonqualified Stock Option to purchase, on the terms and conditions set forth in this agreement (this "Option Agreement"), the dollar amount for the market value of shares indicated above the Company's Common Stock of the par value of $.10 each (the "Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Stock on the date of grant. Options must be exercised in whole shares. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2.Period of Option and Limitations on Right to Exercise. The Nonqualified Stock Option granted hereby will, to the extent not previously exercised, lapse at 5:00 p.m., Central Time, on the day immediately prior to the fifth anniversary of the date of grant (the "Expiration Date") unless sooner terminated in whole or in part as follows: (a)Termination of Directorship. Upon termination of the Grantee's employment by the Company or its subsidiaries or membership on the Board of Directors of the Company for any reason other than for cause or death, the Option granted hereby shall terminate ninety (90) days following the date of termination of the Grantee's employment or membership on the board or, if earlier, on the Expiration Date. If the Grantee exercises the Option after termination of the Grantee's employment or service on the Board of Directors, the Grantee may exercise the Option only with respect to the shares that were otherwise exercisable on the date of termination on the Grantee's employment or service on the Board. If the Grantee's employment or membership on the Board of Directors is terminated for cause, the Option granted hereby shall expire upon such termination. (b)Death. In the event of the death of the Grantees, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Option granted hereby on the date of death, upon proof satisfactory to the company of their authority. The Grantee's Successors must exercise such Option within one (1) year after the Grantee's death and in any event prior to the Expiration Date. 159 3 3.Exercise of Option. The terms, times and conditions of exercise of the Nonqualified Stock Option granted hereby are as follows: The Option shall be exercisable at any time after the date of grant prior to its lapse as stated in paragraph "2.". The Option granted hereby shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by full payment in cash or by check for the number of Shares specified in such written notice. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws, the Option may be exercised through a broker in a so-called "cashless exercise" whereby the broker sells the option shares and delivers cash sales proceeds to the Company in payment of the exercise price. Subject to the terms of this Option Agreement, the Nonqualified Stock Option granted hereby may be exercised at any time and without regard to any other option held by the Grantee to purchase stock of the Company. In addition, the terms contained in the Plan are incorporated into and made a part of this Option Agreement and this Option Agreement shall be governed by and construed in accordance with the Plan. 4.Nontransferability. The Option granted hereby is not assignable or transferable by the Grantee other than by will or the laws of descent and distribution and is subject to the provisions of Section 8 hereof. The Option may be exercised during the lifetime of the Grantee only by the Grantee. 5.Limitation of Rights. The Option granted hereby does not confer to the Grantee or the Grantee's personal representative any rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with the exercise of the Option. Nothing in this Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Grantee's directorship at any time, nor confer upon the Grantee any right to continue in as a director of the Company or any Subsidiary. 6.Stock Reserve. The Company shall at all times during the term of this Option Agreement reserve and keep available such number of shares of Stock as will be sufficient to satisfy the requirements of this Option Agreement. 7.Grantee's Covenant. The Grantee hereby agrees to use his or her best efforts to serve as a director of the Company in a diligent and loyal manner and to promote the Company's interests. 8.Restrictions on Transfer and Pledge. No right or interest of the Grantee in the Option granted hereby may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a subsidiary, or shall be subject to any lien, obligation, or liability of the Grantee to any other party other than the Company or a Subsidiary. 160 4 9.Restrictions on Issuance of Shares. If at any time the Board shall determine in its discretion, that listing, registration or qualification of the shares of Stock covered by the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been affected or obtained free of any conditions not acceptable to the Board. 10.Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Option Agreement, the provisions of the Plan shall be controlling and determinative. 11.Successors. This Option Agreement shall be binding upon any successor of the Company, in accordance with the terms of this Option Agreement and the Plan. IN WITNESS WHEREOF, Community Bancshares, Inc., acting by and through its duly authorized officers, has caused this Option Agreement to be executed, and the Grantee has executed this Option Agreement, all as of the day and year first above written. COMMUNITY BANCSHARES, INC. By: ------------------------------------------ Title: -------------------------------------- --------------------------------------------- GRANTEE 161 EX-11 11 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS COMMUNITY BANCSHARES, INC. COMPUTATION OF NET INCOME PER COMMON SHARE The following tabulation presents the calculation of primary and fully diluted earnings per common share for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------- ------------ ------------- Reported net income.................................................... $ 3,579,493 $ 3,512,278 $ 3,458,986 ============= ============ ============= Earnings on common shares.............................................. $ 3,579,493 $ 3,512,278 $ 3,458,986 ============= ============ ============= Weighted average common shares outstanding - basic..................... 3,994,798 3,807,232 3,727,506 ============= ============ ============= Earnings per common share- basic Income from continuing operations.................................... $ .90 $ .92 $ .93 ============= ============ ============= Net income............................................................ $ .90 $ .92 $ .93 ============= ============ ============= Weighted average common shares outstanding - diluted.................... 4,052,259 3,830,231 3,727,506 ============= ============ ============= Earnings per common share- diluted Income from continuing operations..................................... $ .88 $ .92 $ .93 ============= ============ ============= Net income............................................................ $ .88 $ .92 $ .93 ============= ============ =============
{The remainder of this page intentionally left blank] 162 EX-12 12 STATEMENT OF COMPUTATION OF RATIOS 1 EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS COMMUNITY BANCSHARES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------- (Dollars in thousands) Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885 Add fixed charges: Interest on deposits............................................... 21,963 18,765 16,595 Interest on borrowings............................................. 730 777 831 Portion of rental expense representing interest expense............ 180 78 59 ------------ ------------ ------------- Total fixed charges............................................ 22,873 19,620 17,485 ------------ ------------ ------------- Income before fixed charges............................................ $ 27,979 $ 24,565 $ 22,370 ============ ============ ============= Pretax income.......................................................... $ 5,106 $ 4,945 $ 4,885 Add fixed charges: Interest on borrowings............................................. 730 777 831 Portion of rental expense representing interest expense............ 180 78 59 ------------ ------------ ------------- Total fixed charges............................................ 910 855 890 ------------ ------------ ------------- Income before fixed charges (excluding interest on deposits)........... $ 6,016 $ 5,800 $ 5,775 ============ ============ ============= RATIO OF EARNINGS TO FIXED CHARGES: Including interest on deposits..................................... 1.22X 1.25x 1.28x Excluding interest on deposits..................................... 6.61X 6.78x 6.49x
163 EX-21 13 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation - ---------------------------------- ---------------------- Community Bank Alabama Subsidiaries - Indirect/wholly-owned by Community Bank - ------------------------------------------------------ Community Appraisals, Inc. Alabama 1st Community Credit Corporation Alabama Community Insurance Corp Alabama Subsidiaries - Indirect/wholly-owned by Community Insurance Corp - ----------------------------------------------------------------- Southern Select Insurance, Inc. Alabama
164 EX-27 14 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE COMMUNITY BANCSHARES, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 25,553,170 950,000 0 0 97,391,609 97,391,609 97,391,609 433,852,636 2,970,597 603,243,597 538,585,521 2,191,841 7,664,118 7,568,716 0 0 464,792 46,768,609 603,243,597 38,422,899 5,240,349 701,671 44,364,919 21,963,493 22,693,053 21,671,866 884,682 465,982 5,226,325 5,105,697 5,105,697 0 0 3,579,493 0.90 0.88 4.64 1,600,000 2,384,000 0 0 2,131,000 1,463,000 137,000 2,971,000 2,971,000 0 0
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