-----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, Hn3ra/SPrSogsZJYgWNHyw7vvMBoCcsHJ3ohRM+Fwc+2K9zcbQIS+FFIKY1rCNw+ 2C4Dj+dxXt8GspN0mIqeFw== 0000950144-02-003991.txt : 20020416 0000950144-02-003991.hdr.sgml : 20020416 ACCESSION NUMBER: 0000950144-02-003991 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020416 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: 1934 Act SEC FILE NUMBER: 000-16461 FILM NUMBER: 02612714 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 g75225e10-k.txt COMMUNITY BANCSHARES, INC. SECURITIES AND EXCHANGE COMMISSION 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 000-16461 COMMUNITY BANCSHARES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 63-0868361 - -------------------- ----------------------------------- (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 68149 MAIN STREET 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 13, 2002, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES WAS $41,031,270 BASED UPON A SALE PRICE OF $15.00 PER SHARE ON MARCH 13, 2002. AS OF MARCH 13, 2002, THERE WERE 4,635,697 SHARES OF THE REGISTRANT'S COMMON STOCK, $.10 PAR VALUE SHARES, OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K: PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS. PART 1 ITEM 1 - BUSINESS GENERAL Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended (the "Bank Holding Company Act"). The Company was organized in 1983 and commenced business in 1985. The Company has one bank subsidiary, Community Bank, an Alabama banking corporation which conducts a general commercial banking business in north and west-central Alabama and south-central Tennessee. At December 31, 2001, the Company and its subsidiaries had total assets of approximately $729,481,000, deposits of approximately $617,706,000 and shareholders' equity of approximately $40,665,000. The Company maintains its principal executive offices at 68149 Main Street, Blountsville, Alabama 35031, and its telephone number is (205) 429-1000. SUBSIDIARY BANK At December 31, 2001, Community Bank conducted business through 30 locations in nine counties in north Alabama, two counties in west-central Alabama and one county in south-central Tennessee. It offers a wide range of commercial and retail banking services, including savings and time deposit accounts, personal and commercial loans and personal and commercial checking accounts. The majority of loans by Community Bank are to individuals and small to mid-sized businesses in Alabama and Tennessee. Community Bank seeks to provide superior service to its customers and to become a vital component of each of the communities it serves. Community Bank operates in small non-urban communities. At December 31, 2001 the Bank had locations in Blountsville, Cleveland, Oneonta, Snead and West Blount in Blount County, Alabama; Fort Payne and Rainsville in DeKalb County, Alabama; Rogersville in Lauderdale County, Alabama; Elkmont in Limestone County, Alabama; Gurley, Meridianville and New Hope in Madison County, Alabama; Demopolis in Marengo County, Alabama; Hamilton in Marion County, Alabama; Arab, Albertville, Boaz and Guntersville in Marshall County, Alabama; Falkville and Hartselle in Morgan County, Alabama; Uniontown in Perry County, Alabama; Double Springs and Haleyville in Winston County, Alabama; and Pulaski in Giles County, Tennessee. At December 31, 2001, Community Bank operated 26 full service offices as well as four paying and receiving offices located within Wal-Mart stores, which primarily open deposit accounts, cash checks and receive deposits and loan payments. In late 2001 and early 2002, Community Bank entered into agreements to sell its two Pulaski, Tennessee offices, its Rainsville and Ft. Payne, Alabama offices and its Marshall County, Alabama locations. The Marshall County locations include one banking office in Boaz, Alabama, one in Albertville, Alabama, two in Arab, Alabama, and two in Guntersville, Alabama. Two of the total ten offices under agreements to sell are paying and receiving offices located in Wal-Mart stores, one in Ft. Payne, Alabama and one in Guntersville, Alabama. On March 31, 2002, the Bank closed on the sale of its Pulaski, Tennessee offices and anticipates the sale of the others during the second quarter of 2002. SUBSIDIARIES OF COMMUNITY BANK 1st Community Credit Corporation currently operates 12 finance company offices in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman, Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta, Alabama. 1st Community Credit Corporation provides loans to a market segment traditionally not pursued by Community Bank. These loans have typically generated higher yields and involved greater risk than standard commercial bank loans. At December 31, 2001, 1st Community Credit 1 Corporation's loan portfolio totaled approximately $24,765,000. Community Insurance Corp. serves as an agent in the sale of title, property, casualty and life insurance products to individuals and businesses through an office in Huntsville, Alabama. Community Insurance Corp. owns 100% of the outstanding shares of capital stock of Southern Select Insurance, Inc., a managing general agency which brokers agricultural, commercial and personal insurance products. Both Community Insurance Corp. and Southern Select Insurance, Inc. are located in Huntsville, Alabama. Community Appraisals, Inc., a subsidiary of Community Bank, operates a real estate appraisal business through its office located at the Company's headquarters complex in Blountsville, Alabama. This subsidiary provides appraisal services in connection with the lending activities of Community Bank and 1st Community Credit Corporation. MARKET AREAS At December 31, 2001, the Company's principal market areas were located in north Alabama (Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison, Marshall and Morgan Counties), northwest Alabama (Marion and Winston Counties), west-central Alabama (Marengo and Perry Counties) and in south-central Tennessee (Giles County). All of the Company's banking and finance company offices are located in relatively rural areas and place an emphasis on personal service. With the exception of Blount, Marengo, Marion, Perry and Winston Counties in Alabama, the markets in which the Company operates share one common characteristic: each is close enough to Huntsville, Alabama, to share in the economic and employment benefits of that city. Huntsville is located in Madison County. Unemployment for Madison County was 3.7% for December 2001 as compared to 6.00% for Alabama during that period, as reported by the Alabama Department of Industrial Relations. The Huntsville Metropolitan Statistical Area ("MSA") possesses a diverse economic base with employers that include the military and aerospace industries, manufacturers of durable goods, machinery, transportation, as well as retailers and service industries. Agriculture, in the form of soybeans, hay, corn, cotton, tobacco, dairy and poultry farming, also makes up a significant portion of the Huntsville MSA's economy. Similarly, Blount County is close enough to Birmingham, Alabama, to share in the economic and employment benefits of that city. Jefferson County, in which Birmingham is located, had a 4.3% unemployment rate for December 2001, according to the Alabama Department of Industrial Relations. The Birmingham area still retains some of the steel and related manufacturers that built the city, but the economy is now more diverse with the University of Alabama in Birmingham and the healthcare industry providing many jobs. Marion and Winston Counties lie in northwest Alabama, near the Mississippi border. In both counties the manufacturing sector provides more jobs, and higher sales or receipts, than the wholesale, retail and service sectors. Manufactured housing and furniture production are two prominent industries in these counties, and both industries have experienced recent economic slowdowns. Marion County was reported to have an unemployment rate of 9.4% for December 2001, according to the Alabama Department of Industrial Relations. Winston County was reported to have an unemployment rate of 10.1% for December 2001 according to the Alabama Department of Industrial Relations. Marengo and Perry Counties are located in west-central Alabama. Manufacturing provides more jobs in these counties than the wholesale, retail, and service sectors. In addition, catfish farming and the timber industry are important components in the economy of these counties. Marengo County's unemployment rate reported by the Alabama Department of Industrial Relations for December 2001 was 6.8%. Perry County was reported to have an unemployment rate of 13.4% for December 2001 as reported by the Alabama Department of Industrial Relations. 2 As previously discussed, at December 31, 2001, Community Bank was under agreements to sell ten of its bank locations. The locations are located in DeKalb County, Alabama, Marshall County, Alabama and Giles County, Tennessee. The sale of these bank locations will not affect the presence of 1st Community Credit Corporation, a subsidiary of Community Bank, in its DeKalb and Marshall County market areas. The sale of the Tennessee operations was consummated on March 31, 2002, and the Company no longer has a presence in Tennessee. While certain markets have experienced an economic downturn, overall, the Company remains optimistic about current economic prospects in its market areas, and the Company attempts to assist those local economies by returning the deposits of its customers to the communities from which they come in the form of loans. LENDING ACTIVITIES Community Bank's lending activities include commercial, real estate and consumer loans. Community Bank's commercial loan services include term-loans, lines of credit and agricultural loans. A broad range of short to medium term commercial loans, both secured and unsecured, are made available to businesses for working capital, business expansion and the purchase of equipment and machinery. Community Bank's real estate lending activities include fixed and adjustable rate residential mortgage loans, construction loans, second mortgages, home improvement loans and home equity lines of credit. Community Bank's consumer lending services include loans for automobiles, recreation vehicles and boats, as well as personal (secured and unsecured) and deposit account secured loans. COMPETITION The banking business in Alabama is highly competitive with respect to loans, deposits and other financial services and is dominated by a number of major banks and bank holding companies which have numerous offices and affiliates operating over wide geographic areas. Community Bank competes for deposits, loans and other business with these banks as well as with savings and loan associations, credit unions, mortgage companies, insurance companies and other local financial institutions. Many of the major commercial banks operating in Community Bank's service areas offer services such as international banking and investment and trust services, which are not offered by Community Bank. Additionally, the competitive environment for both the Company and Community Bank may be materially affected by the enactment of the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLBA"). This law modified or eliminated many barriers between investment banking, commercial banking and insurance underwriting and sales. See "Supervision and Regulation". These changes in the law have created and may continue to create greater competition for the Company and Community Bank by increasing the number and types of competitors and by encouraging increased consolidation within the financial services industry. EMPLOYEES At December 31, 2001, the Company and its subsidiaries had approximately 383 full-time equivalent employees. The Company and its subsidiaries provide a variety of group life, health and accident insurance, retirement and stock ownership plans and other benefit programs for their employees. The Company maintains continuing education and training programs for its employees, designed to prepare the employees for positions of increasing responsibility in management or operations. Membership and participation by employees in professional and industry organizations is encouraged and supported by the Company. 3 SUPERVISION AND REGULATION The following is a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those federal and state statutes and regulations specifically mentioned herein. Changes in the laws and regulations applicable to the Company and its subsidiaries can affect the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. The Company cannot accurately predict whether legislation will ultimately be enacted, and, if enacted, the ultimate effect that it or implementing regulations would have on its or its subsidiaries financial condition or results of operations. The Company is a bank holding company and is registered as such with the Federal Reserve. The Company is subject to regulation and supervision by the Federal Reserve and is required to file with the Federal Reserve annual reports and such other information as the Federal Reserve may require. The Federal Reserve also conducts examinations of the Company. The Federal Reserve takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's position that, in serving as a source of strength to its subsidiary bank, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary bank during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary bank. Community Bank is incorporated under the banking laws of the State of Alabama and is subject to the applicable provisions of Alabama banking laws and to regulation and examination by the Alabama State Banking Department. Examinations include a review of Community Bank's condition and resources, its mode of conducting and managing its affairs, the actions of its directors, the investment of its funds, the safety and prudence of its management, compliance with its charter and law in the administration of its affairs and other aspects of Community Bank's operations. State statutes in Alabama relate to such matters as loans, mortgages, consolidations, required reserves, allowable investments, issuance of securities, payment of dividends, establishment of branches, filing of periodic reports and other matters affecting the business of Community Bank. Deposits in Community Bank are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the "FDIC") and, therefore, Community Bank is subject to provisions of the Federal Deposit Insurance Act ("FDIA"). Community Bank's primary federal regulator is the FDIC, and as a result, Community Bank is subject to examination and regulation by the FDIC. The FDIC is authorized to terminate the deposit insurance of any depository institution, such as Community Bank, whose deposits are insured by the FDIC if the FDIC determines, after a hearing, that the institution or its directors have engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated any applicable law, regulation, order, condition imposed in writing by the FDIC in connection with the granting of any application or other request by the depository institution or any written agreement entered into with the FDIC. Each federal banking regulatory agency is authorized to issue a cease and desist order to any financial institution or institution-affiliated party for which the agency is the primary federal banking regulator (which in the case of Community Bank, is the FDIC and, in the case of the Company, is the Federal Reserve) if the agency determines, after a hearing, that the institution or institution-affiliated party has engaged, is engaging or is reasonably believed to be about to engage, in unsafe or unsound practices, or has violated, is violating or is reasonably believed to be about to violate a law, rule or regulation, or any condition imposed in writing by the agency in connection with the granting of any application or other request by the institution or any 4 written agreement entered into with the agency. The cease and desist order may require the institution or institution-affiliated party to cease and desist from the violation or practice, including requiring the institution or institution-affiliated party to make restitution or reimbursement against loss, restrict the institution's growth, dispose of loans or assets, rescind agreements or contracts, employ qualified officers or employees and take other actions determined to be appropriate by the agency. The order may also limit the activities of the institution. The Company and Community Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA expanded the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions through the regulation of banks and their affiliates, including bank holding companies. The provisions are designed to minimize the potential loss to depositors and to FDIC insurance funds if financial institutions default on their obligations to depositors or become in danger of default. Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA also provides for a risk-based deposit insurance premium structure. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. The FDIC maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). Community Bank's deposit accounts are insured by the FDIC under the BIF to the maximum extent permitted by law. Community Bank pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all BIF-member institutions. Under FDIC regulations, institutions are assigned to one of three capital groups for insurance premium purposes (well capitalized, adequately capitalized and undercapitalized). These three groups are then divided into subgroups which are based on supervisory evaluations by the institution's primary federal regulator, resulting in nine assessment classifications. Assessment rates vary depending upon the assessment classification. In addition, regardless of the potential risk to the insurance fund, federal law requires the FDIC to establish assessment rates that will maintain each insurance fund's ratio of reserves to insured deposits at 1.25%. During 2001 and for the first semiannual assessment period of 2002, assessment rates for BIF-insured institutions ranged from 0% of insured deposits for well-capitalized institutions with minor supervisory concerns to .27% of insured deposits for undercapitalized institutions with substantial supervisory concerns. The assessment rate schedule is subject to change by the FDIC and, accordingly, the assessment rate could increase or decrease in the future. In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Finance Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is adjusted quarterly. The average annual assessment rate in 2001 was 1.90 cents per $100 of assessable deposits. For the first quarter of 2002, the FICO assessment rate for such deposits will be 1.82 cents per $100. Community Bank's assessment expense for the year ended December 31, 2001 equaled approximately $207,000. The federal banking regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an 5 executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails to implement an accepted plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions be taken, including restricting asset growth, restricting interest rates paid on deposits, and requiring an increase in the bank's ratio of tangible equity to assets. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulatory agencies are required to rate supervised institutions on the basis of five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three under-capitalized categories, the severity of which will depend upon the capital category in which the institution is placed. Under certain circumstances, an institution may be downgraded to a category lower than that warranted by its capital levels, and subjected to the supervisory restrictions applicable to institutions in the lower capital category. Generally, subject to a narrow exception, FDICIA requires a federal banking regulatory agency to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking regulatory agencies have specified by regulation the relevant capital level for each category. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's total assets at the time it becomes undercapitalized or the amount necessary to bring the institution into compliance with all applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. At December 31, 2001, Community Bank was well capitalized for prompt corrective action purposes. The Company is required to comply with the risk-based capital guidelines established by the Federal Reserve, and other tests relating to capital adequacy which the Federal Reserve adopts from time to time. Under the risk-based capital assessment system, assets are weighted by a risk factor and a ratio is calculated by dividing the qualifying capital by the risk-weighted assets. Tier I capital generally includes common stock and retained earnings. Total capital is comprised of Tier I capital and Tier II capital, which includes certain allowances for loan losses and certain subordinated debt. The Company's Tier I and total capital ratios exceeded the required minimum levels as of December 31, 2001. The Company is a legal entity which is separate and distinct from its subsidiaries. There are various legal limitations on the extent to which Community Bank may extend credit, pay dividends or otherwise supply funds to the Company or its affiliates. In particular, Community Bank is subject to certain restrictions imposed by federal law on any extensions of credit to the Company or, with certain exceptions, other affiliates. The primary source of funds for dividends paid to the Company's shareholders is dividends paid to the Company by Community Bank. Various federal and state 6 laws limit the amount of dividends that Community Bank may pay to the Company without regulatory approval. Under Alabama law, an Alabama state bank, such as Community Bank, may not pay a dividend in excess of 90% of its net earnings until the bank's surplus is equal to at least 20% of its capital. Community Bank is also required by Alabama law to obtain the prior approval of the Superintendent of the Alabama State Banking Department in order to pay a dividend if the total of all the dividends declared by Community Bank in any calendar year will exceed the total of Community Bank's net earnings (as defined by statute) for that year and its retained net earnings for the preceding two years, less any required transfers to surplus. At December 31, 2001, Community Bank could not have declared or paid any dividend without such approval. In addition, no dividends may be paid from Community Bank's surplus without the prior written approval of the Superintendent of the Alabama State Banking Department. Under FDICIA, Community Bank may not pay any dividends, if after paying the dividend it would be undercapitalized under applicable capital requirements. The FDIC also has the authority to prohibit Community Bank from engaging in business practices which the FDIC considers to be unsafe or unsound, which, depending on the financial condition of Community Bank, could include the payment of dividends. In addition, the Federal Reserve has the authority to prohibit the payment of dividends by a bank holding company, such as the Company, if its actions constitute unsafe or unsound practices. In 1985, the Federal Reserve issued a policy statement on the payment of cash dividends by bank holding companies, which outlined the Federal Reserve's view that a bank holding company that is experiencing earnings weaknesses or other financial pressures should not pay cash dividends that exceed its net income, that are inconsistent with its capital position or that could only be funded in ways that weaken its financial health, such as by borrowing or selling assets. The Federal Reserve indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends. The federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits adequately capitalized and managed bank holding companies to acquire control of banks in states other than their home states, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. IBBEA permits states to continue to require that an acquired bank have been in existence for a certain minimum time period, which may not exceed five years. A bank holding company may not, following an interstate acquisition, control more than 10% of the nation's total amount of bank deposits or 30% of bank deposits in the relevant state (unless the state enacts legislation to raise the 30% limit). States retain the ability to adopt legislation to effectively lower the 30% limit. Federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; except that, mergers may not be approved with respect to banks located in states that, prior to June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Also, states may continue to require that an acquired bank have been in existence for a certain minimum period of time, which may not exceed five years. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. Affiliated institutions are authorized to accept deposits for existing accounts, renew time deposits and close and service loans for affiliated institutions without being deemed an impermissible branch of the affiliate. The federal Community Reinvestment Act of 1977 ("CRA") and its implementing regulations are intended to encourage regulated financial institutions to meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The regulations provide that the appropriate regulatory authority will assess CRA reports in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory CRA rating may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services. At December 31, 2001, the Company had a "satisfactory" CRA rating. 7 The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions in the Glass-Steagall Act against a bank associating with a company engaged principally in securities activities. The GLBA also permits a bank holding company to elect to become a "financial holding company," which would expand the powers of the bank holding company. The repeal of the Glass-Steagall Act provisions and the availability of financial holding company powers became effective on March 11, 2000. Financial holding company powers relate to financial activities that are determined by the Federal Reserve to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk). The GLBA itself defines certain activities as financial in nature, including lending activities, underwriting and selling insurance, providing financial or investment advice, underwriting, dealing and making markets in securities and merchant banking. In order to qualify as a financial holding company, a bank holding company's depository subsidiaries must be both well capitalized and well managed, and must have at least a satisfactory rating under the CRA. The bank holding company must also declare its intention to become a financial holding company to the Federal Reserve and certify that its depository subsidiaries meet the capitalization and management requirements. The GLBA establishes the Federal Reserve as the umbrella regulator of financial holding companies, with subsidiaries of the financial holding company being more specifically regulated by other regulatory authorities, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission and state securities and insurance regulators, based upon the subsidiaries' particular activities. The GLBA also provides for minimum federal standards of privacy to protect the confidentiality of personal financial information of customers and to regulate use of such information by financial institutions. A bank holding company that does not elect to become a financial holding company remains subject to the Bank Holding Company Act. The Company has not determined whether it will elect to become a financial holding company. Community Bank is subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity and fair credit reporting. Community Insurance Corp. is a licensed insurance agent and broker for various insurance companies, and is subject to regulation by the Alabama Insurance Commission. The Federal Reserve regulates money, credit and interest rate conditions in order to influence general economic conditions, primarily through open market operations in U.S. Government securities, changes in the discount rate, reserve requirements on member bank's deposits and funds availability regulations. The earnings and growth of the Company and its subsidiaries are subject to the influence of economic conditions generally and to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The nature and timing of any changes in such conditions and policies, and their impact on the Company, cannot be predicted. On April 9, 2001, the Company's Board of Directors entered into a Memorandum of Understanding (the "Memorandum") with the Federal Reserve Bank of Atlanta (the "Reserve Bank"), which outlines actions to be taken by the Company to address concerns identified by the Reserve Bank. In the Memorandum, the Company agreed that, without the prior written approval of the Reserve Bank, it would not declare or pay any dividends, repurchase shares of its common stock, incur any additional indebtedness, alter the terms of existing indebtedness or increase the amount of management fees paid to the Company by Community Bank. In addition, the Company agreed to maintain a quarterly Tier I leverage ratio (the ratio of Tier I capital to average assets, less goodwill) of at least 6.5% during the period in which the Memorandum is in effect, and to periodically update the Company's plan for maintaining capital and earnings at adequate levels. The Company also agreed to establish a policy that provides for target levels of capital and guidelines for payment of dividends and a plan to strengthen the Company's internal audit program. The Company further agreed that a committee of non-employee directors of the Company will review and report on the appropriateness of the compensation provided under the employment agreement of Kennon R. Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President of the Company. In addition, the Company agreed to provide 8 the Reserve Bank with a contingency plan for conserving or raising cash and information about loans extended by Community Bank to facilitate purchases of the Company's common stock, and to periodically provide the Reserve Bank with certain financial and other information and a report of actions taken by the Company to ensure compliance with the Memorandum. On March 8, 2002, the Reserve Bank requested that the Company agree to an amendment of the Memorandum that would disallow the Company from making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank. The Company expects to agree to the amendment on or before May 3, 2002. In the interim, the Company elected to defer the March 2002 interest payment on its junior subordinated deferrable interest debentures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations, Borrowed Funds - Maturities of Long-term Debt". Management of the Company cannot currently estimate the period during which the Company will remain subject to the terms of the Memorandum, or the effect of the Memorandum on the Company's financial condition, liquidity and results of operations. On April 18, 2001, the Board of Directors of Community Bank, the Company's subsidiary bank, also entered into a Memorandum of Understanding (the "Bank Memorandum") with the Regional Director of the FDIC's Atlanta Regional Office and the Alabama Superintendent of Banks ("State"). Major provisions of the Bank Memorandum include requirements to reduce classified assets, restrict expansion, adopt revised policies in the areas of lending, liquidity, interest rate risk, loan documentation, asset/liability management and ethics, review duties and responsibilities of key officers, review compliance with investment, liquidity and funds management policies, reconstitute membership of its Board of Directors, develop internal loan review and internal audit functions, maintain capital ratio requirements, restrict dividend payments, provide to the regulators updates on the status of litigation, other financial and managerial information and quarterly progress reports detailing efforts to comply with the requirements of the Bank Memorandum. Based on an examination as of June 30, 2001, the FDIC and the State requested the Community Bank Board of Directors to adopt a Safety and Soundness Compliance Plan ("Plan"). The Board adopted the Plan on March 5, 2002. If accepted by the FDIC/State, the Plan (initiated by the FDIC) would replace the Bank Memorandum (initiated by the State). Pursuant to the terms of the Plan, the Board will review the bank's organizational structure and staffing requirements and hire and train any additional personnel needed to comply with the Plan. Also the Board will review and revise the bank's loan policy and underwriting standards, loan collection plan, allowance for loan losses methodology, interest rate risk policy and asset liability management policy. The Plan also provides that the Board will adopt an internal audit program, an internal controls program, a plan to reduce classified assets and internal and external loan documentation review procedures. Also, pursuant to the Plan, the Board will engage an outside firm to perform the loan review function and will adopt an internal loan review program. The Plan also places restrictions on extending credit to borrowers who have classified loans with the bank. Under the Plan, prior to submission of Reports of Condition and Income, the Board must review the adequacy of the allowance for loan losses and provide for an adequate balance. Under the Plan, the Board committed to maintaining a Tier I capital ratio of at least 7% and to obtain the prior approval of the regulators before paying dividends. In addition, the Plan requires the submission of a budget and profit plan and the engagement of an outside accounting firm to perform the bank's internal audit function and the formation of a bank administration department to strengthen internal controls. Finally, the Plan requires management to make monthly reports to the Board of Directors regarding the status in meeting the requirements of the Plan, and to submit quarterly progress reports to the regulators. 9 STATISTICAL DISCLOSURE Statistical and other information regarding the following items are set forth in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" on the pages indicated below.
Page(s) -------- Loan Portfolio and Selected Loan Maturity................................................................ 22 Investment Portfolio..................................................................................... 23 Investment Portfolio Maturity Schedule................................................................... 24 Average Deposit Balances and Rates Paid.................................................................. 25 Maturities of Large Time Deposits........................................................................ 26 Short-term Borrowings.................................................................................... 27 Maturities of Long-term Debt ............................................................................ 28 Rate Shock Analysis...................................................................................... 30 Interest Sensitivity..................................................................................... 31 Capital Adequacy Ratios and Return on Equity and Assets.................................................. 32 Yields, Rates, Interest Rate Spread and Net Interest Margin.............................................. 35 Consolidated Average Balances, Interest Income/Expense and Yields/Rates............................................................... 36 Rate/Volume Variance Analysis............................................................................ 37 Summary of Loan Loss Experience.......................................................................... 40 Allocation of the Allowance for Loan Losses.............................................................. 41 Nonperforming Assets..................................................................................... 42 Noninterest Income....................................................................................... 43 Noninterest Expense...................................................................................... 45
10 ITEM 2 - PROPERTIES The corporate headquarters of the Company is owned by Community Bank and located at 68149 Main Street (U.S. Highway 231) in Blountsville, Alabama. Community Bank's administrative, operational, accounting and legal functions are housed in three buildings constructed in 1997, all of which are located on the same property as the corporate headquarters. The main banking office of Community Bank is located at 69156 Main Street, Blountsville, Alabama. The premises are owned by Community Bank. At December 31, 2001, Community Bank owned or leased buildings that were used in the normal course of business in 11 counties in Alabama, including Blount, DeKalb, Lauderdale, Limestone, Madison, Marengo, Marion, Marshall, Morgan, Perry and Winston Counties, and in Giles County, Tennessee. 1st Community Credit Corporation owned or leased buildings that were used in the normal course of business in ten counties in Alabama, including Blount, Cullman, Marshall, Morgan, Limestone, Lawrence, Etowah, Madison, DeKalb and Walker Counties. Community Insurance Corp. and its subsidiary, Southern Select Insurance, Inc., owned a building that is used in the normal course of business in Madison County, Alabama. For information about the amounts at which bank premises, equipment and other real estate are recorded in the Company's financial statements and information relating to commitments under leases, see the Company's Consolidated Financial Statements included elsewhere in this Report. ITEM 3 - LEGAL PROCEEDINGS Background At a meeting of Community Bank's Board of Directors on June 20, 2000, a director brought to the attention of the Board the total amount of money Community Bank had paid subcontractors in connection with the construction of a new Community Bank office. Management of the Company commenced an investigation of the expenditures. At the request of management, the architects and subcontractors involved in the construction project made presentations to the Boards of Directors of the Company and Community Bank on July 15 and July 18, 2000, respectively. At the July 18, 2000 meeting of the Board of Directors of Community Bank, another director made a presentation alleging that Community Bank had been overcharged by subcontractors on that construction project and another current construction project. On July 18, 2000, the Boards of Directors of the Company and Community Bank appointed a joint committee comprised of independent directors of the Company and of Community Bank to investigate the alleged overcharges. The joint committee has informed the Boards of Directors of the Company and Community Bank of its findings and recommendations. The joint committee retained legal counsel and an independent accounting firm to assist the committee in its investigation. Management has also been informed that the directors of Community Bank who alleged the construction overcharges have contacted bank regulatory agencies and law enforcement authorities. Management believes that these agencies and authorities either have conducted or are currently conducting investigations regarding this matter. Benson Litigation On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E. Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of Marshall County, Alabama against the Company, Community Bank, certain directors and officers of the Company and Community Bank, an employee of Community Bank and two construction subcontractors. The plaintiffs purported to file the lawsuit as a shareholder derivative action, which relates to the alleged construction overcharges being investigated by the joint committee of the Boards of Directors of the Company and Community Bank. The complaint alleges that the directors, officers and employee named as defendants in the complaint breached their fiduciary duties, failed to properly supervise officers and agents of the Company and Community Bank, and permitted waste of 11 corporate assets by allegedly permitting the subcontractor defendants to overcharge Community Bank in connection with the construction of two new Community Bank offices, and to perform the construction work without written contracts, budgets, performance guarantees and assurances of indemnification. In addition, the complaint alleges that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive Officer of the Company, breached his fiduciary duties by allegedly permitting the two named subcontractors to overcharge for work performed on the two construction projects in exchange for allegedly discounted charges for work these subcontractors performed in connection with the construction of Mr. Patterson's residence. The complaint further alleges that the director defendants knew or should have known of this alleged arrangement between Mr. Patterson and the subcontractors. The complaint also alleges that Mr. Patterson, the Community Bank employee and the two subcontractor defendants made false representations and suppressed information about the alleged overcharges and arrangement between Mr. Patterson and the subcontractors. On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C. Mann, a shareholder of the Company, as a plaintiff and adding a former director of the Company and Community Bank as a defendant. The amended complaint generally reiterates the allegations of the original complaint. In addition, the amended complaint alleges that Community Bank was overcharged on all construction projects from January 1997 to the present. The amended complaint also alleges that the defendants breached their fiduciary duties and are guilty of gross financial mismanagement, including allegations concerning the making or approval of certain loans and taking allegedly improper actions to conceal the fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs filed a second amended complaint. The second amended complaint generally reiterates the allegations of the original and first amended complaints. In addition, the second amended complaint alleges that the plaintiffs were improperly denied their rights to inspect and copy certain records of the Company and Community Bank. The second amended complaint also alleges that the directors of the Company abdicated their roles as directors either by express agreement or as a result of wantonness and gross negligence. The second amended complaint asserts that the counts involving inspection of corporate records and director abdication are individual, nonderivative claims. The second amended complaint seeks, on behalf of the Company, an unspecified amount of compensatory damages in excess of $1 million, punitive damages, disgorgement of allegedly improperly paid profits and appropriate equitable relief. Upon motion of the defendants, the case was transferred to the state Circuit Court in Blount County, Alabama by order dated September 21, 2000, as amended on October 12, 2000. On August 24, 2000, the Board of Directors of the Company designated the directors of the Company who serve on the joint investigative committee as a special litigation committee to investigate and evaluate the allegations and issues raised in this lawsuit and to arrive at such decisions and take such action as the special litigation committee deems appropriate. On June 8, 2001, the special litigation committee filed its report under seal with the court. On June 18, 2001, the court entered an order affirming the confidentiality of the special committee's report. On June 28, 2001, the Company, Community Bank and various other defendants filed a motion with the court to adopt the report of the special committee, for partial summary judgment and to realign the Company and Community Bank as plaintiffs in the lawsuit. Following a hearing on August 29, 2001, the court denied these motions on November 8, 2001. The court also ruled that the plaintiffs were entitled to conduct discovery except as it related to one of the subcontractor defendants and granted the plaintiffs' motion to unseal the report of the special litigation committee. On November 14, 2001, the directors of the Company filed a motion for the court to alter, amend or vacate its November 8, 2001 rulings. On February 7, 2002, the Company and Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C., the law firm representing the plaintiffs, due to conflicts of interest. The court held a hearing on these motions on February 22, 2002 and the parties are awaiting a ruling. On February 25, 2002, the Company and Community Bank filed a motion for limited discovery relating to its motion to disqualify the plaintiffs' law firm. As a result of the inherent uncertainties of the litigation process, the Company is unable at this time to predict the outcome of this lawsuit and its effect on the Company's financial condition and results of operations. Regardless of the outcome, however, this lawsuit could be costly, time-consuming and a diversion of management's attention. 12 Towns Derivative Litigation On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a shareholder derivative action against the directors of the Company in the state Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on January 14, 1999 to add the Company and Community Bank as defendants in the action. On February 11, 1999, the complaint was again amended to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as additional plaintiffs. The complaint alleged that the directors of the Company breached their fiduciary duty to the Company and its shareholders, engaged in fraud, fraudulent concealment, suppression of material fact and suppression of the plaintiff shareholders, failed to supervise management, and conspired to conceal wrongful acts from the Company's shareholders and paid themselves excessive director fees. The complaint also alleged that the Board of Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President of the Company, including alleged self dealing, payment of excessive compensation, misappropriation of corporate opportunities and misappropriation of funds. The complaint sought an unspecified amount of compensatory and punitive damages, removal of the current directors, appointment of a new Board of Directors, and attorneys fees and costs. On December 21, 1998, the Company and its directors filed a motion with the court seeking to have the complaint dismissed. On March 1, 1999, the Company's Board of Directors appointed a special Board committee, comprised of non-employee directors of the Company, to review the plaintiffs' allegations in accordance with Delaware law. On April 6, 1999, each of the parties to the action requested that the court stay the litigation and related discovery, motions and hearings, pending completion of the special committee's review. On April 30, 1999, the court entered an order staying the litigation and related discovery, motions and hearing in accordance with the parties' request. On October 15, 1999, the special committee filed its final report with the court. On October 21, 1999, the parties forwarded to the court an agreed-upon order governing the confidentiality of the special committee's report, which the court entered on January 2, 2000. On August 3, 2000, the Company, Community Bank and the Company's directors filed a motion to stay the proceedings until the Company's and Community Bank's joint investigative committee had completed its investigation of the alleged construction overcharges discussed above. At the request of the Company and the other defendants in the action, the court continued a hearing on the motion to dismiss. On February 23, 2001, the court indicated that there was no reason to continue the stay of this action. The parties are awaiting a hearing on the defendants' motion to dismiss the case. Management of the Company believes that the plaintiffs' allegations are false and that the action lacks merit. The Company and its directors intend to defend the action vigorously, and management of the Company believes that the action will not have a material adverse effect on the Company's financial condition or results of operations. Regardless of the outcome, however, this lawsuit could be costly, time consuming and a diversion of management's attention. Corr Family Litigation On September 14, 2000, another action was filed in the state Circuit Court of Blount County, Alabama, against the Company, Community Bank and certain directors and officers of the Company and Community Bank by Bryan A. Corr and six other related shareholders of the Company alleging that the directors actively participated in or ratified the misappropriation of corporate income. The action was not styled as a shareholder derivative action. On January 3, 2001, the defendants filed a motion for summary judgment on the basis that these claims are derivative in nature and cannot be brought on behalf of individual shareholders. The court has not ruled on the motion. The Company and its directors believe that this lawsuit is without merit and intend to defend the action vigorously. Although management currently believes that this action will not have a material adverse effect on the Company's financial condition or results of operations, regardless of the outcome, the action could be costly, time consuming and a diversion of management's attention. 13 Auto Loan Litigation On June 28, 2000, Community Bank filed an action in the United States District Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc., an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug Broaddus, the owners of the dealership, several employees and former employees of the dealership and Gerald Scot Parrish, a former employee of Community Bank, with respect to certain loans originated during 1998 in Community Bank's Wal-Mart office in Ft. Payne, Alabama. In the complaint Community Bank alleged that the defendants willingly and knowingly conducted, participated in, were employed by or associated with, or aided and abetted an enterprise within the meaning of the Racketeer Influenced and Corrupt Organizations Act ("RICO") for the purpose of defrauding Community Bank. The complaint also asserted that the defendants committed fraud, misrepresentation and deceit by submitting to Community Bank and/or approving applications for automobile loans which contained false and/or fraudulent information for the purpose of deceiving, influencing and persuading Community Bank to provide loans to customers of the automobile dealership who were otherwise not qualified to receive such loans, and suppressed material facts regarding the veracity of information contained in loan applications and the ability of persons seeking the loans to repay them. Community Bank also alleged in the complaint that the automobile dealership is responsible for the acts of its officers, agents and employees, and that the dealership and its management failed to adequately train and/or supervise its employees. The complaint stated that the defendants participated in a conspiracy to violate RICO and Alabama statutes dealing with fraud, misrepresentation and suppression of material facts, and asserted civil liability under Alabama law for violation of federal statutes dealing with financial institution fraud, mail and wire fraud and making false statements for the purpose of influencing the actions of a financial institution upon an application or loan. On June 29, 2000 and August 31, 2000 the court granted Community Bank's motions to dismiss without prejudice two of the employees of the automobile dealership as defendants in the action. On September 13, 2000, the court granted Mr. Parrish's motion to dismiss the complaint, but granted Community Bank 15 days to amend the complaint. On September 27, 2000, Community Bank filed an amended complaint which generally reiterated the allegations of the original complaint and added specific information concerning the allegedly fraudulent activity and the use of the United States mail, telephone and other wire transmissions in the conduct of such activity. On December 1, 2000, the court dismissed Community Bank's claims based upon mail and wire fraud in the amended complaint but otherwise denied Mr. Parrish's motion to dismiss the complaint. On October 10, 2001, the court granted a joint motion to bifurcate the trial into separate stages of liability and damages. On October 23 and November 19, 2001, the court granted Community Bank's motion to dismiss without prejudice three of the employees of the automobile dealership as defendants in the action. The defendants have filed answers to the amended complaint which generally deny the material allegations in the complaint and allege that any injury suffered by Community Bank was the result of the contributory negligence of Community Bank, its officers, employees and agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to recover losses incurred in connection with the loans made at Community Bank's Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the lawsuit. Any amounts received by Community Bank as a result of this litigation will be treated as a recovery on loan losses. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses." Employee Litigation On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors and executive officers of Community Bank, filed suit against Community Bank in the United States District Court for the Northern District of Alabama alleging that their employment was wrongfully terminated for allegedly providing information to bank regulatory and law enforcement authorities concerning possible violations of laws and regulations, gross mismanagement, gross waste of funds and abuse of authority by Community Bank, its directors, officers and employees. According to the complaint, the information which these two individuals provided to authorities concerned certain bank construction projects, specific loans, charge-offs, expenses and past due accounts. The 14 complaint seeks reinstatement of the plaintiffs to their former positions as officers and directors of Community Bank as well as compensatory and punitive damages. Community Bank and its directors believe this lawsuit is without merit and intend to defend the action vigorously. Management of the Company believes that this action will not have a material adverse effect on the Company's financial condition or results of operations. Conspiracy Litigation On November 6, 2001 the Company and Community Bank filed a lawsuit in the United States District Court for the Northern District of Alabama against Bryan A. Corr, Doris J. Corr, individually and as executrix of the Estate of R.C. Corr, Jr., Tina M. Corr, Corr, Inc., George M. Barnett, Michael A. Bean, Michael W. Alred, R. Wayne Washam, M. Lewis Benson, Doris E. Benson, John M. Packard and Andy Mann seeking damages in excess of $50 million. The complaint also alleges that, by knowingly making false statements and unsupported allegations to regulatory and law enforcement authorities and in certain lawsuits discussed above, the defendants abused the civil legal process to further their plan to discredit and dislodge the directors and management of the Company and Community Bank and gain control of those companies. The complaint further alleges that certain of the defendants who are former directors and/or executive officers of Community Bank breached their fiduciary duties to Community Bank by participating in, and taking action in the furtherance of, the conspiracy. Finally, the complaint alleges that the defendants failed to make filings which are required by the Federal securities laws to disclose that the group is acting in concert to acquire control of the Company. The complaint seeks compensatory and punitive damages as well as an order barring the defendants from voting their shares of Company stock, purchasing additional Company stock, soliciting proxies and submitting shareholder proposals for at least three years. On December 5, 2001, the Company, Community Bank and R. Wayne Washam entered into a stipulation pursuant to which Mr. Washam would be dismissed as a defendant. The court granted the stipulation on December 6, 2001. During the time between December 3 and December 7, 2001 the other defendants filed various motions to dismiss, abate or stay the lawsuit. On January 4, 2002, the Company and Community Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C. from representing M. Lewis Benson, Doris E. Benson, John M. Packard and Andy Mann due to a conflict of interest. On January 22, 2002 Maynard, Cooper & Gale, P.C. filed a motion to withdraw from the suit, which motion was granted by the court on January 24, 2002. On January 29, 2002 the Company and Community Bank filed an amended complaint to reflect the dismissal of Wayne Washam as a defendant and to add a claim for defamation against two of the defendants. As a result of the inherent uncertainties of the litigation process, the Company is unable at this time to predict the outcome of this lawsuit and its effect on the Company's financial condition and results of operations. Regardless of the outcome, however, this lawsuit could be costly, time-consuming and a diversion of management's attention. Indemnification and Routine Proceedings The Company's Certificate of Incorporation provides that, in certain circumstances, the Company will indemnify and advance expenses to its directors and officers for judgments, settlements and legal expenses incurred as a result of their service as officers and directors of the Company. Community Bank's Bylaws contain a similar provision for indemnification of directors and officers of Community Bank. The Company and its subsidiaries are from time to time parties to other legal proceedings arising from the ordinary course of business. Management believes, after consultation with legal counsel, that no such proceedings, if resulting in an outcome unfavorable to the Company, will, individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. 15 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders by solicitation of proxies or otherwise during the fourth quarter of 2001. [The remainder of this page intentionally left blank] 16 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, the positions held by them with the Company and certain of its subsidiaries and their principal occupations for the last five years are as follows:
Name, Age and Position Currently Held with the Company and its Subsidiaries Principal Experience During Past Five Years - ----------------------------------------------- -------------------------------------------------------- Kennon R. Patterson, Sr. (59) Chairman, President and Chief Executive Officer of the Chairman, President and Chief Executive Officer of the Company (1985-present); Chairman and Chief Executive Company; Chairman and Chief Executive Officer of Officer of Community Bank (1993-present) Community Bank; Chairman of 1st Community Credit Corporation; Vice Chairman of Community Appraisals, Inc.; Director of Community Insurance Corp., and Southern Select Insurance, Inc. Bishop K. Walker, Jr. (70)* Vice Chairman, Senior Executive Vice President and Director, Vice Chairman, Secretary, Senior Executive Vice General Counsel of the Company (1987-2002); President President and General Counsel of the Company; Director, and Director of Community Insurance Corp. (1987-1997) Senior Executive Vice President and Secretary of Community Bank; Chairman of Community Insurance Corp. and Southern Select Insurance, Inc. Denny G. Kelly (62)* President of Community Bank (1993-2001) Director and Executive Vice President of the Company; Vice Chairman and President of Community Bank; Vice Chairman and President of 1st Community Credit Corporation; Director of Community Appraisals, Inc., Community Insurance Corp. and Southern Select Insurance, Inc. Loy McGruder (61) President of Community Bank (2002-Present); Director of the Company; Director and President of Community Bank Executive Vice President of Community Bank (1994-2002); City President of Community Bank-Blountsville (1994-1997); Senior Vice President of Community Bank (1993-1994) Kerri Newton (32) Chief Financial Officer of the Company and Community Chief Financial Officer of the Company and Community Bank Bank (2001-Present); Senior Risk Consultant for Compass Bank, Birmingham, Alabama (2001); Chief Accounting Officer of Frontier National Corporation, Sylacauga, Alabama (1998-2000); Chief Financial Officer of Frontier National Bank, Lanett, Alabama (1997-2000); Vice President and Controller of The County Bank, Greenwood, South Carolina (1993-1997)
*Mr. Walker and Mr. Kelly were executive officers of the Company on December 31, 2001, but retired in January, 2002. The Company's bylaws provide that the term of office of an executive officer of the Company is as provided in the officer's employment agreement with the Company or, if the officer is not a party to an employment agreement or if the officer's employment agreement does not specify a term of office, as determined by the Company's Board of Directors and until the officer's successor is elected and qualified or until the officer's earlier resignation or removal. In May 2001, Mr. Patterson, Mr. Walker and Mr. Kelly were elected by the Company's Board of Directors to serve a term of one year and until his successor has been elected and qualified. 17 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Shares of the common stock (the "Common Stock") of the Company were held by approximately 2,334 shareholders of record as of March 13, 2002. There is no established trading market for the Common Stock, which has been purchased and sold infrequently in private transactions. Therefore, no reliable information is available as to trades of the Common Stock, or as to the prices at which such Common Stock has traded. Management has reviewed the limited information available to the Company as to the ranges at which shares of the Common Stock has been sold. The following data regarding the Common Stock are provided for information purposes only, and should not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price Range Per Share -------------------------- High Low ---------- ---------- 2001: FIRST QUARTER.................................................................. $ 22.00 $ 15.00 SECOND QUARTER................................................................. 22.00 15.00 THIRD QUARTER.................................................................. 15.00 15.00 FOURTH QUARTER................................................................. 18.00 12.00 2000: First Quarter.................................................................. $ 25.00 $ 24.00 Second Quarter................................................................. 25.00 19.00 Third Quarter.................................................................. 25.00 20.00 Fourth Quarter................................................................. 26.00 20.00 1999: First Quarter.................................................................. $ 24.00 $ 20.00 Second Quarter................................................................. 24.00 24.00 Third Quarter.................................................................. 24.00 24.00 Fourth Quarter................................................................. 24.00 24.00
Annual dividends were neither declared nor paid in 2001. Annual dividends of $.75 per share were declared by the Board of Directors on the Company's Common Stock and paid on January 5, 2000. Generally, the payment of dividends on the Common Stock is subject to the prior payment of principal and interest on the Company's long-term debt, the retention of sufficient earnings and capital in the Company's operating subsidiaries and regulatory restrictions. The Board of Directors determined that it was in the Company's best interests not to declare or pay a dividend in the first quarter of 2002, due to regulatory constraints and the Company's results of operations and financial condition for 2001. Currently, the Company is under a memorandum of understanding with the Federal Reserve that, among other restrictions, disallows the declaration or payment of any dividends without the prior written approval of the Federal Reserve. The Board of Directors does not currently anticipate declaring or paying a dividend in 2002. There can be no assurance that the Company will pay any dividends in the foreseeable future. See "Item 1 - Business - Supervision and Regulation," "Item 7 - Management's Discussion of Financial Condition and Results of Operations - Liquidity Management" and Note 16 to the Company's Consolidated Financial Statements included elsewhere in this Report. 18 ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years. All averages are daily averages.
Years ended December 31, 2001 2000 1999 1998 1997 ----------- ----------- --------- --------- --------- (Dollars in thousands except per share data) Interest income.......................................... $ 58,486 $ 61,075 $ 52,194 $ 44,365 $ 37,791 Interest expense......................................... 31,588 33,856 25,522 22,693 19,541 Net interest income...................................... 26,898 27,219 26,672 21,672 18,250 Provision for loan losses................................ 6,314 9,289 4,459 885 773 Non-interest income...................................... 9,538 9,906 9,155 8,102 4,891 Non-interest expense..................................... 31,972 31,755 29,208 23,784 17,423 Net income (loss)........................................ (1,100) (2,215) 1,658 3,579 3,512 Per Share Data: Earnings/(loss) per share - basic..................... $ (0.24) $ (0.50) $ 0.37 $ 0.90 $ 0.92 Earnings/(loss) per share - diluted................... (0.24) (0.47) 0.36 0.88 0.92 Cash dividends........................................ - 0.75 0.60 0.50 0.38 Balance Sheet: Loans, net of unearned income......................... $501,520 $528,316 $498,726 $ 433,853 $326,134 Deposits.............................................. 617,706 600,901 573,261 538,586 440,889 FHLB borrowings....................................... 38,000 38,000 40,000 - - Capitalized lease obligations......................... 5,766 5,850 - - - Long-term debt........................................ 4,667 5,675 6,637 7,569 7,398 Guaranteed preferred beneficial interest in the Company's junior subordinated deferrable interest debentures...................... 10,000 10,000 - - - Average equity........................................ 42,938 41,776 44,203 37,318 33,428 Average assets........................................ 725,461 710,915 632,713 538,470 473,381 Period end assets..................................... 729,482 713,518 674,898 603,244 491,839 Ratios: Return on average assets.............................. (0.15)% (0.31)% 0.26% 0.67% 0.74% Return on average equity.............................. (2.56)% (5.30)% 3.75% 9.59% 10.51% Dividend payout ratio................................. - (150.00)% 162.16% 55.56% 40.50% Average equity to average assets...................... 5.92% 5.88% 6.99% 6.93% 7.06% Total risk-based capital.............................. 11.59% 10.54% 9.37% 11.03% 11.86% Leverage ratio........................................ 6.70% 6.44% 6.39% 7.79% 6.94%
19 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The purpose of this discussion is to focus on the significant changes in the financial condition and results of operations of the Company and its subsidiaries during 1999, 2000 and 2001. This discussion and analysis is intended to supplement and highlight information contained in the Company's consolidated financial statements and related notes and the selected financial data presented elsewhere in this Report. The discussion of net interest income in this financial review is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets. Certain statements in this Report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not based on historical facts and may be identified by their reference to a future period or by the use of forward-looking terminology, such as "anticipate," "estimate," "expect," "may" and "should." These forward-looking statements include, without limitation, those relating to the Company's future growth and profitability, economic prospects of market areas, dividends, pending litigation, branch office divestitures, non-compliant or impaired loans, capital requirements, operating strategy, deposits, consumer base, allowance for loan losses, non-performing assets, interest rate sensitivity, market risk and impact of inflation. We caution you not to place undue reliance on these forward-looking statements. Actual results could differ materially from those indicated in such forward-looking statements due to a variety of factors. These factors include, but are not limited to, changes in economic conditions and government fiscal and monetary policies, changes in prevailing interest rates and effectiveness of the Company's interest rate strategies, laws, regulations and regulatory authorities affecting financial institutions, changes in and effectiveness of the Company's operating or expansion strategies, geographic concentration of the Company's assets and operations, competition from other financial services companies, unexpected financial results or outcomes of legal proceedings, the Company's ability to obtain reimbursement from its fidelity bond insurance carrier or other persons responsible for originating non-compliant and impaired loans in Community Bank's Ft. Payne, Alabama office and other risks detailed from time to time in the Company's press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Report. SUMMARY The Company's net loss of approximately $1,100,000 for 2001 represented a $1,115,000 decrease from its net loss of approximately $2,215,000 for 2000 which represented a $3,873,000 decline from 1999's net income of approximately $1,658,000. When stated as changes in basic earnings per share, the 2001 basic loss per share of $0.24 represented a $0.26 decrease from the 2000 basic loss per share of $0.50 which represented a $0.87 decrease from the 1999 basic earnings per share of $0.37. The decrease in loss per share for 2001 primarily resulted from a reduction in the provision for loan losses. The decline in 2000 primarily resulted from additional provisions to the Company's allowance for loan losses in connection with an increase in loans charged-off and certain loans originated in Community Bank's Double Springs, Alabama branch. In 2001, 2000 and 1999, the Company has experienced higher than normal legal and accounting fees associated with legal proceedings. 20 In March 2000, the Company formed a wholly-owned Delaware statutory business trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the Trust ("Capital Securities"). All of the common securities of the Trust are owned by the Company. The proceeds from the issuance of the Capital Securities ($10,000,000) and common securities ($310,000) were used by the Trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company which carry an annual interest rate of 10.875%. The debentures represent the sole asset of the Trust. The debentures and related income statement effects are eliminated in the Company's consolidated financial statements. The Company is entitled to treat the aggregate liquidation amount of the debentures as Tier I capital under Federal Reserve guidelines. See "Borrowed Funds--Maturities of Long-term Debt and Note 9 to the Company's Consolidated Financial Statements" included elsewhere in this Report. EARNING ASSETS The Company's average earning assets in 2001 increased 3.1% over that for 2000, primarily as a result of increases in the investment portfolio and federal funds sold. Earning assets accounted for approximately 89.5% of the Company's average total assets for 2001. This growth of average earning assets in 2001 compared to a 12.2% increase during 2000 over that for 1999, primarily as a result of increases in the loan portfolio. During 1999, average earning assets increased 17.2%. Earning assets represented 88.6% and 88.7% of the Company's average total assets for 2000 and 1999 respectively. Average loans, net of unearned income, represented 79.6%, 82.9% and 82.5% of average earning assets during 2001, 2000 and 1999, respectively. Average investment securities represented 17.6% of average earning assets in 2001, compared to 16.4% in 2000 and 16.9% in 1999. The change in the mix of loans and securities during 2001 compared to 2000 was primarily attributable to a decrease in loans during 2001. The other earning asset categories accounted for less than 3.0% of average earning assets for all three periods. The increased volume in earning assets during 2001 helped offset the decrease in interest income due to the fall in interest rates. Total loans, net of unearned income, decreased approximately $26,796,000, or 5.1%, to approximately $501,520,000 at December 31, 2001, from $528,316,000 at December 31, 2000, which represented an increase of $29,590,000, or 5.9%, from $498,726,000 at December 31, 1999. These decreases were spread across the loan type categories. Commercial, financial and agricultural loans decreased by approximately $5,437,000, or 3.9%, to approximately $146,210,000 at December 31, 2001, from approximately $140,773,000 at December 31, 2000, which represented an increase of approximately $16,528,000, or 13.3%, from approximately $124,245,000 at December 31, 1999. Commercial, financial and agricultural loans represented 29.1% of total loans at December 31, 2001, compared to 26.6% at December 31, 2000 and 24.9% at December 31, 1999. Real estate - mortgage loans decreased by approximately $3,376,000, or 1.4%, to approximately $233,216,000 at December 31, 2001, from $236,592,000 at December 31, 2000, which represented an increase of approximately $12,463,000, or 5.6%, from approximately $224,129,000 at December 31, 1999. As a percentage of total loans, real estate - mortgage loans increased to 46.5% at December 31, 2001, from 44.8% at December 31, 2000 and 44.9% at December 31, 1999. Consumer loans decreased by approximately $26,642,000, or 18.3%, to approximately $119,031,000 at December 31, 2001, from approximately $145,673,000 at December 31, 2000, which represented an increase of approximately $1,220,000, or 0.9%, from approximately $144,453,000 at December 31, 1999. As a percentage of total loans, consumer loans decreased to 23.8% at December 31, 2001, from 27.6% at December 31, 2000 and 28.9% at December 31, 1999. Real estate - construction loans decreased by approximately $2,303,000, or 42.4%, to approximately $3,126,000 at December 31, 2001, from approximately $5,429,000 at December 31, 2000, which represented a decrease of approximately $1,041,000, or 16.1%, from approximately $6,470,000 at December 31, 1999. As a percentage of total loans, real estate - construction loans decreased to 0.6% at December 31, 2001, from 1.0% at December 31, 2000 and 1.3% at December 31, 1999. The Company has 21 experienced these decreases in loans because of economic downturns, the tightening of the Company's credit standards, and increased charge-offs of loans made in previous years. The following table shows the classification of loans by major category at December 31, 2001, and at the end of each of the preceding four years. LOAN PORTFOLIO
December 31, --------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------ ----------------- -------------------- ------------------- ---------------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- --------- -------- -------- --------- -------- ---------- (Dollars in Thousands) Commercial, financial and agricultural..... $146,210 29.1% $140,773 26.6% $124,245 24.9% $ 94,057 21.6% $ 64,136 19.6% Real estate - construction..... 3,126 0.6 5,429 1.0 6,470 1.3 6,153 1.4 3,499 1.1 Real estate - mortgage......... 233,216 46.5 236,592 44.8 224,129 44.9 205,457 47.3 172,504 52.7 Consumer........... 119,031 23.8 145,673 27.6 144,453 28.9 129,334 29.7 86,945 26.6 -------- ----- -------- ----- -------- ----- ------- ----- -------- ----- 501,583 100.0% 528,467 100.0% 499,297 100.0% 435,001 100.0% 327,084 100.0% Less: Unearned income........... 64 151 571 1,148 950 Allowance for loan losses...... 7,292 7,107 2,603 2,971 2,131 -------- -------- -------- -------- -------- Net loans.......... $494,227 $521,209 $496,123 $430,882 $324,003 ======== ======== ======== ======== ========
The following table provides maturities of certain loan classifications and an analysis of these loans maturing in over one year as of December 31, 2001. SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure for Loans Maturity Maturing Over One Year --------------------------------------------------- -------------------------------- Over One One Year Over Predetermined Floating or Year or Through Five Interest Adjustable Less Five Years Years Total Rate Rate -------- ------------- ----------- -------- --------------- -------------- (In thousands) Commercial, financial and agricultural............... $58,454 $ 41,815 $ 45,941 $ 146,210 $ 74,088 $ 72,122 Real estate - construction....... 2,802 269 55 3,126 1,950 1,176 ------- -------- -------- --------- -------- -------- Total.......................... $61,256 $ 42,084 $ 45,996 $ 149,336 $ 76,038 $ 73,298 ======= ======== ======== ========= ======== ========
INVESTMENT PORTFOLIO The composition of the Company's investment securities portfolio reflects the Company's investment strategy of maximizing portfolio yields subject to risk and liquidity considerations. The Company's entire portfolio is classified as available for sale. The primary objectives of the Company's investment strategy are to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company's interest rate position 22 while at the same time producing adequate levels of interest income. Management of the maturity of the portfolio is necessary to provide liquidity and to control interest rate risk. During 2001, gross investment securities sales were approximately $85,134,000 and maturities were approximately $2,500,000 representing 74.6% and 2.2%, respectively, of the average portfolio for the year, compared to gross investment securities sales of $16,230,000 in 2000 and approximately $11,628,000 in 1999 and maturities of approximately $25,210,000 in 2000 and approximately $10,778,000 in 1999. Net gains realized on the sales totaled approximately $1,284,000 during 2001, compared to approximately $5,000 in 2000 and approximately $179,000 in 1999. At December 31, 2001, gross unrealized gains in the portfolio were approximately $486,000, compared to approximately $1,419,000 at December 31, 2000 and approximately $72,000 at December 31, 1999, while gross unrealized losses amounted to approximately $893,000 at December 31, 2001, compared to approximately $756,000 at December 31, 2000 and approximately $2,827,000 at December 31, 1999. These fluctuations in the gross unrealized gains and losses in the Company's investment portfolio resulted primarily from changing bond prices. Mortgage-backed securities have varying degrees of risk of impairment of principal, as opposed to U.S. Treasury and U.S. government agency obligations, which are considered to contain virtually no default or prepayment risk. Impairment risk is primarily associated with accelerated prepayments, particularly with respect to longer maturities purchased at a premium and interest-only strip securities. The Company's mortgage-backed securities portfolio as of December 31, 2001 and 2000 contained no interest-only strips and the amount of unamortized premium on mortgage-backed securities at December 31, 2001, was $928,710, compared to $190,096 at December 31, 2000. The recoverability of the Company's investment in mortgage-backed securities is reviewed periodically by management, and if necessary, appropriate adjustments for impaired value are made to income. The carrying amount of investment securities at the end of each of the last three years is set forth in the following table: INVESTMENT PORTFOLIO
December 31, ------------------------------------------- 2001 2000 1999 -------------- ------------ ----------- (In thousands) U. S. Treasury and U.S. Government agencies................. $ 16,948 $ 46,830 $ 55,870 Mortgage-backed securities.................................. 90,647 31,341 30,521 State and municipal securities.............................. 11,684 19,499 8,356 Equity securities........................................... 2,400 3,900 2,100 ---------- --------- -------- Total investment securities............................... $ 121,679 $ 101,570 $ 96,847 ========== ========= ========
Total investment securities increased approximately $20,109,000, or 19.8%, to approximately $121,679,000 at December 31, 2001, compared to approximately $101,570,000 at December 31, 2000 and approximately $96,847,000 at December 31, 1999. During 2001, non-taxable investment securities decreased $7,815,000, or 40.1%, to approximately $11,684,000 from $19,499,000 at December 31, 2000, which represented an increase of $11,143,000 or 133.4%, from $8,356,000 at December 31, 1999. Taxable investment securities increased approximately $27,924,000, or 34.0% during 2001 to $109,995,000 from approximately $82,071,000 at December 31, 2000, which represented a decline of $6,420,000, or 7.3%, from approximately $88,491,000 at December 31, 1999. The composition of the investment securities portfolio changed during 2001 primarily as excess funds were invested in mortgage-backed securities. At December 31, 2001, U.S. government and 23 agency securities represented 13.9% of the total investment securities portfolio compared to 46.1% at year-end 2000, while state and municipal securities represented 9.6% and 19.2% of the investment securities portfolio at year-end 2001 and 2000, respectively. In 2001, as investable funds increased due to diminished loan demand and bonds redeemed prior to maturity, Community Bank invested more heavily in mortgage-backed securities to enhance cash flow and reduce call risk. The maturities and weighted average yields of the investments in the year-end 2001 portfolio of investment securities are presented below. Taxable equivalent adjustments (using a 34% tax rate) have been made in calculating yields on tax-exempt obligations. The average maturity of the investment portfolio was 5.20 years at year-end 2001 compared to 6.71 years at year-end 2000 with an average yield of 6.22% and 6.71% at December 31, 2001 and 2000, respectively. Mortgage-backed securities have been included in the maturity table based upon the guaranteed payoff date of each security. INVESTMENT PORTFOLIO MATURITY SCHEDULE
December 31, 2001 ------------------------------------------------------------------------------------ Maturing ------------------------------------------------------------------------------------ Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ------------------ ------------------ ------------------- ------------------ Amount Yield Amount Yield Amount Yield Amount Yield -------- ------- --------- ------- --------- ------- -------- ------- (Dollars in thousands) SECURITIES - ALL AVAILABLE-FOR-SALE: U. S. Government agencies.......... $ 2,001 6.62% $ 57,003 5.93% $ 21,093 6.05% $ 26,406 6.37% State and municipal securities..... 180 7.17 3,557 6.06 670 7.27 8,368 7.89 Equity securities.................. - - - - - - 2,400 6.74 ------- -------- -------- -------- $ 2,181 6.67% $ 60,560 5.94% $ 21,763 6.09% $ 37,174 6.73% ======= ======== ======== ========
With the exception of some securities issued by U.S. Government agencies, the Company held one municipal bond issued by Hartselle Utilities, whose amortized cost of $4,854,027 exceeded 10% of the Company's consolidated shareholders' equity on December 31, 2001. Federal Funds Sold increased 900.0% during 2001, from $3,000,000 at December 31, 2000 to $30,000,000 at December 31, 2001. This increase resulted from a decrease in loan demand coupled with an increase in deposit balances. The average balance of interest-bearing deposits with other banks reflected a decrease of 62.4% during 2001, compared to a decrease of 31.9% during 2000 and an increase of 33.5% during 1999. There has been no significant impact on the Company's financial statements as a result of the provisions of Statement of Financial Accounting Standards No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. DEPOSITS Community Bank's primary source of funds is its deposits. Dividends from Community Bank are the Company's primary source of funds. Historically, continued enhancement of existing products, emphasis upon better customer service and expansion into new market areas have fueled the growth in Community Bank's deposit base. The Company does not presently anticipate further geographic expansion. Rather emphasis has been placed upon attracting consumer deposits and the Company's intent is to expand its consumer base in its market areas in order to continue to fund future asset growth. 24 During 2001, the Company's average total deposits increased approximately $6,247,000, or 1.0%, to approximately $608,390,000 from approximately $602,143,000 in 2000, which represented an increase of approximately $56,921,000, or 10.4%, from approximately $545,222,000 in 1999. At December 31, 2001, the Company's total deposits were approximately $617,706,000, an increase of approximately $16,805,000, or 2.8%, from approximately $600,901,000 at December 31, 2000. The following table presents the average deposit balances and the average rates paid for each of the major classifications of deposits for the 12 month periods ending December 31, 2001, 2000 and 1999:
Average Deposit Balances and Rates Paid -------------------------------------------------------------------------------- 2001 2000 1999 ----------------------- ---------------------- -------------------------- Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ------------ --------- --------- -------- ------------ ----------- (Dollars in thousands) Noninterest-bearing demand........ $ 70,002 0.00% $ 68,785 0.00% $ 69,248 0.00% Interest-bearing demand........... 92,360 3.50 102,254 4.92 94,763 4.36 Savings........................... 58,875 3.31 55,983 4.39 53,730 3.51 Time.............................. 387,153 5.70 375,121 5.92 327,481 5.37 ---------- ---------- ---------- Total (1)...................... $ 608,390 5.06% $ 602,143 5.57% $ 545,222 4.96% ========== ========== ==========
- ---------------------------- (1) The rate paid on total average deposits represents the rate paid on total average interest-bearing deposits only. The Company's average interest-bearing deposits increased by 0.9%, 12.1% and 12.3% in 2001, 2000 and 1999, respectively. Average interest-bearing demand deposits decreased 9.7% compared to an increase of 7.9% during 2000 and 11.4% during 1999. Average savings and average time deposits increased 5.2% and 3.2%, respectively, during 2001 compared to increases of 4.2% and 14.5%, respectively, during 2000 and an increase of 15.9% and 12.0%, respectively, during 1999. Average noninterest-bearing demand deposits increased 1.8% during 2001 compared to a decrease of 0.7% during 2000 and an increase of 15.1% during 1999. Customer confidence and satisfaction are evidenced by the increase in total average deposits of 1.0% in 2001, the increase in total average deposits of 10.4% in 2000 and 12.7% in 1999. The two categories of lowest cost deposits, noninterest-bearing demand deposits and interest-bearing demand deposits, comprised the following percentages of total average deposits during 2001, 2000 and 1999, respectively: (i) Average noninterest-bearing demand deposits - 11.5%, 11.4%, and 12.7%; and (ii) average interest-bearing demand deposits - 15.2%, 17.0% and 17.4%. Community Bank experienced a shift in its deposit mix during 2001 as interest-bearing demand deposits increased $14,619,000, or 17.1%, while savings and certificates of deposits increased $1,776,000, or .4%. This is as compared to increases in interest-bearing demand deposits by $7,491,000, or 7.9%, in 2000 and by $8,589,000, or 9.6%, in 1999, increases in savings accounts by $2,253,000, or 4.2%, in 2000 and by $6,123,000, or 10.4%, in 1999, and increases in certificate of deposits by $47,640,000, or 14.5%, in 2000 and by $8,503,000, or 3.9%, in 1999. Of total time deposits at December 31, 2001, approximately 31.5 % were large denomination certificates of deposit and other time deposits of $100,000 or more, up from 20.7% at December 31, 2000. 25 The maturities of the time certificates of deposit and other time deposits of $100,000 or more issued by the Company at December 31, 2001 are summarized in the table below. MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2001 --------------------------------------------- Time Other Certificates Time of Deposit Deposits Total -------------- -------------- ---------- (In thousands) Maturing in three months or less.............................. $ 5,864 $ 19,148 $ 25,012 Maturing in over three through six months..................... 45,218 - 45,218 Maturing in over six through twelve months.................... 28,671 - 28,671 Maturing in over twelve months................................ 20,635 - 20,635 --------- -------- --------- Total...................................................... $ 100,388 $ 19,148 $ 119,536 ========= ======== =========
BORROWED FUNDS Community Bank also uses borrowed funds as a source of funds for asset growth in excess of deposit growth and for short-term liquidity needs. The mixture of borrowed funds and deposits as sources of funds depends on the relative availability and costs of those funds and Community Bank's need for funding. Borrowed funds consist primarily of short-term borrowings, borrowings from the Federal Home Loan Bank of Atlanta, Georgia ("FHLB-Atlanta") and long-term debt. Short-term borrowings at year-end 2000 and 1999 consisted of the U. S. Treasury Tax and Loan Note Option account and securities sold under agreements to repurchase. Community Bank had $5,000,000 at year end 2001 in available lines to purchase Federal Funds on a secured basis from a commercial bank and $6,000,000 at year-end 2000 in available lines to purchase Federal Funds, on an unsecured basis, from a commercial bank. At December 31, 2001 and 2000, Community Bank had no funds advanced against these lines. In May 2001, Community Bank borrowed funds of $8,000,000 under the FHLB "fixed rate credit" plan. The advance was for six months bearing interest at 4.15% and matured in November 2001. [The remainder of this page intentionally left blank] 26 The following table sets forth, for the periods indicated, certain information about the Company's short-term borrowings: SHORT-TERM BORROWINGS
At December 31, -------------------------- Weighted Maximum Average Average Average Outstanding At Balance Rate Balance Rate Any Month End ---------- ------------ ----------- ---------- --------------- (Dollars in thousands) 2001: FEDERAL FUNDS PURCHASED.................. $ - 0.00% $ 74 6.11% $ 3,000 SHORT-TERM FHLB BORROWINGS............... - 0.00% 3,967 4.30% 8,000 SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE............................. 2,538 2.13% 2,274 3.59% 391 U.S. TREASURY TAX AND LOAN, NOTE OPTION................................. 1,822 1.51% 1,021 3.21% 814 -------- ------- -------- TOTAL................................ $ 4,360 1.87% $ 7,336 3.95% $ 12,205 ======== ======= ======== 2000: Federal funds purchased.................. $ - 0.00% $ 402 6.47% $ 3,000 Short-term FHLB borrowings............... - 0.00% 325 6.86% - Securities sold under agreement to repurchase............................. 862 6.17% 818 6.17% 1,072 U.S. Treasury Tax and Loan, note option................................. 1,403 5.72% 1,044 6.14% 2,456 -------- -------- -------- Total................................ $ 2,265 5.89% $ 2,589 6.30% $ 6,528 ======== ======= ========
In the fourth quarter of 1998, Community Bank became a member of the FHLB-Atlanta and was approved to borrow under various short-term and long-term programs offered by the FHLB-Atlanta. These borrowings are secured under a blanket lien agreement on certain qualifying mortgage instruments in Community Bank's loan and investment portfolios. Community Bank's maximum credit availability with FHLB-Atlanta is fixed at $72,210,000. At December 31, 2000, Community Bank's maximum credit availability with FHLB-Atlanta was 10% of Community Bank's total assets, based upon the most recent quarterly financial information submitted to the FDIC. Based on Community Bank's Consolidated Report of Condition and Income as of the close of business on September 30, 2000, Community Bank's maximum credit availability at December 31, 2000 was approximately $74,000,000. Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's "Convertible Advance Program." Community Bank had $38,000,000 outstanding at both December 31, 2001 and 2000 under the FHLB-Atlanta's "Convertible Advance Program". This obligation has a final maturity of March 1, 2010 (120 months), a call feature every quarterly payment date during the life of the obligation, and a fixed interest rate of 5.93% per annum. The first call date for this advance was March 1, 2001; the advance was not called on that date nor has been since. Advances obtained by Community Bank under the "Convertible Advance Program" are subject to the terms of an agreement for Advances and Security Agreement with Blanket Floating Lien. Among other things, this agreement provides that upon an event of default, the FHLB may declare all or any part of the indebtedness 27 and accrued interest thereon, including any prepayment fees, to be immediately due and payable. Included in the list of "events of default" is where the FHLB reasonably and in good faith determines that a material adverse change has occurred in the financial condition of Community Bank from that disclosed at the time of the making of any advance or from the condition of Community Bank as most recently disclosed to the FHLB. Long-term debt consisted of various commitments with scheduled maturities from one to 20 years. The following table sets forth expected debt service for the next five years based on interest rates and repayment provisions as of December 31, 2001. A more detailed explanation of long-term debt is included in Note 8 to the Company's Consolidated Financial Statements included elsewhere in this Report. MATURITIES OF LONG-TERM DEBT
2002 2003 2004 2005 2006 --------- --------- --------- --------- -------- (in Thousands) Interest on indebtedness............................. $ 233 $ 194 $ 173 $ 150 $ 126 Repayment of principal............................... 1,089 398 420 442 466 -------- ----- ----- ----- ----- $ 1,322 $ 592 $ 593 $ 592 $ 592 ======== ===== ===== ===== =====
In March 2000, the Company formed a wholly-owned Delaware statutory business trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the Trust ("Capital Securities"). All of the common securities of the Trust are owned by the Company. The proceeds from the issuance of the Capital Securities ($10,000,000) and common securities ($310,000) were used by the Trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company which carry an annual interest rate of 10.875%. Under the terms of the indenture, the Company may elect to defer payments of interest for up to ten semiannual payment periods. The Company elected to defer its March 2002 interest payment and may elect to do so again based on the liquidity needs of the Company when future payments become due. For the duration of such deferral period, the Company is restricted from paying dividends to shareholders or paying debt that is junior to the debenture. The debentures represent the sole asset of the Trust. The debentures and related income statement effects are eliminated in the Company's consolidated financial statements. The Company is entitled to treat the aggregate liquidation amount of the debentures as Tier I capital under Federal Reserve guidelines. The Capital Securities accrue and pay distributions semiannually at a rate of 10.875% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into an agreement which fully and unconditionally guarantees payment of: (i) accrued and unpaid distributions required to be paid on the Capital Securities; (ii) the redemption price with respect to any Capital Securities called for redemption by the Trust; and (iii) payments due upon a voluntary or involuntary liquidation, winding up or termination of the Trust. The Capital Securities are mandatorily redeemable upon the maturity of the debentures on March 8, 2030, or upon earlier redemption as provided in the indenture pursuant to which the debentures were issued. The Company has the right to redeem the debentures purchased by the Trust: (i) in whole or in part, on or after March 8, 2010; and (ii) in whole (but not in part) at any time within 90 days following the occurrence and during the continuation of a tax event, capital treatment event or investment company event (each as defined in the indenture). As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be a percentage of the principal amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued but unpaid interest. 28 LIQUIDITY MANAGEMENT Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss. Liquidity management involves maintaining the Company's ability to meet the day-to-day cash flow requirements of Community Bank's customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the production and growth needs of the communities it serves. The primary function of asset and liability management is not only to assure adequate liquidity in order for the Company to meet the needs of its customer base, but to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can also meet the investment objectives of its shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both its customers' needs and its shareholders' objectives. In a banking environment, both assets and liabilities are considered sources of liquidity funding and both are, therefore, monitored on a daily basis. The asset portion of the balance sheet provides liquidity primarily through loan principal repayments or sales, maturities, calls and pay downs of investment securities. Real estate-construction and commercial, financial and agricultural loans that mature in one year or less totaled approximately $61,256,000, or 12.2% of loans, net of unearned income, at December 31, 2001, and investment securities maturing in one year or less totaled approximately $2,181,000, or 1.8% of the investment portfolio, at December 31, 2001. Other sources of liquidity include cash on deposit with other banks and short-term investments such as Federal Funds sold and maturing interest-bearing deposits with other banks. The liability portion of the balance sheet provides liquidity through various customers' interest-bearing and noninterest-bearing deposit accounts. Funds are also available through the purchase of Federal Funds from other commercial banks and borrowings against Community Bank's credit availability through the FHLB-Atlanta. Liquidity management involves the daily monitoring of the sources and uses of funds to maintain an acceptable Company cash position. As disclosed elsewhere in this report, Community Bank has entered into agreements to sell ten of its banking offices in the first half of 2002. Under each agreement the purchaser will receive the assets of each banking office mostly consisting of loans and fixed assets and will assume the liabilities, most of which are deposits. The cash transaction will be based upon the assets, liabilities and premium due to Community Bank at the time of each closing. Since these offices, as a whole, carry more deposits than loans and other assets, Bank management expects to disburse funds as a result of the transactions. Although the disbursement amount will not be known until the closing of each sale, management expects to disburse as much as $25 to $30 million as a result of the transactions. As of December 31, 2001, the federal funds sold balance was $30,000,000. Management expects the federal funds sold balance to remain at levels high enough to provide the funding of any cash disbursements upon the closing of any branch sales; however, these transactions will decrease the availability of liquid funds. Dividends paid by Community Bank are the primary source of funds available to the Company for debt repayment, payment of dividends to its shareholders and other needs. Certain restrictions exist regarding the ability of Community Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the Alabama Banking Department is required to pay dividends in excess of Community Bank's net earnings in the current year plus retained net earnings for the preceding two years less any required transfers to surplus. At December 31, 2001, Community Bank could not have declared any dividends without approval of regulatory authorities. See Note 16 to the Company's Consolidated Financial Statements elsewhere in this Report and "Item 1 - - Business - Supervision and Regulation." 29 The Company relies on dividends from Community Bank in order to pay expenses, service debt and pay dividends to shareholders. Although dividends from Community Bank are the primary source of funding, the Company also receives cash from Community Bank in the form of management fee income and generally retains cash for its portion of tax benefit on intercompany income tax settlements. Without dividends or management fee income from Community Bank, the Company would not be able to pay expenses or service debt. Management fees for 2001 were $300,000 and no dividends were paid for 2001. Community Bank is unable to pay a dividend to the Company without prior approval of the regulatory authorities nor is the Company able to increase the management fee charged to Community Bank without the prior written approval of the Federal Reserve. See "Item 1 - Business - Supervision and Regulation." Upon the sale of the branch offices and recognition of projected income for Community Bank in 2002, Community Bank expects to request approval for dividends to be paid to the Company; however, the amount or approval of such is not yet determinable. INTEREST RATE SENSITIVITY Community Bank's net interest income, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. Community Bank manages its exposure to fluctuations in interest rates through policies established by its Asset/Liability Committee ("ALCO"). The ALCO meets periodically to monitor its interest rate risk exposure and implement strategies that might improve its balance sheet positioning and/or earnings. Management utilizes an Interest Rate Simulation model to estimate the sensitivity of the Bank's net interest income and net income to changes in interest rates. Such estimates are based upon a number of assumptions for each scenario, including balance sheet growth, deposit repricing characteristics and prepayment rates. The estimated impact on Community Banks net interest income sensitivity over a one year time horizon at December 31, 2001 is shown below. Such analysis assumes an immediate and sustained parallel shift in interest rates and the Bank's estimates of how interest bearing transaction accounts will reprice. RATE SHOCK ANALYSIS
-100 +100 Basis Basis Points Level Points ----------- ----------- ---------- (Dollars in thousands) Prime Rate...................................................... 3.75% 4.75% 5.75% Interest Income................................................. $ 47,508 $ 50,612 $ 53,156 Interest Expense................................................ 18,102 20,094 21,679 ---------- --------- --------- Net Interest Income.......................................... $ 29,406 $ 30,519 $ 31,477 ========== ========= ========= Dollar change from Level........................................ $ (1,113) $ $ 958 Percentage change from Level.................................... -3.65% 3.14%
[The remainder of this page intentionally left blank] 30 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 100 Up 100 December 31, 2001 Basis Points Basis Points ---------------------- -------------- --------------- (Dollars in Thousands) Assets which reprice in: One year or less........................... $280,681 4.35% -0.76% Over one year.............................. 373,522 -14.12% 9.44% -------- $654,203 -6.13% 5.03% ======== Liabilities which reprice in: One year or less........................... $474,514 -9.92% 7.87% Over one year.............................. 123,409 -9.90% 7.96% -------- $597,923 -9.91% 7.89% ======== Total net interest income sensitivity......... -3.65% 3.14%
As shown above, in a 100 basis point rising rate environment, the net interest margin should increase 3.14% and in a 100 basis point falling rate environment, the net interest margin should decrease 3.65%. These percent changes from a level rate scenario fall comfortably within Community Bank's ALCO policy limit of +/-7.00%. CAPITAL RESOURCES A strong capital position is vital to the continued profitability of the Company because it promotes depositor and shareholder confidence and provides a solid foundation for future growth of the organization. In 1993, 1995 and 1998, the Company raised capital through the sale of shares of its Common Stock. All three offerings were closed upon being fully subscribed. In the fourth quarter of 1998, the Company sold to the public and the Company's Employee Stock Ownership Plan (the "ESOP"), 500,000 newly issued shares of Common Stock at a price of $19.00 per share, raising approximately $9,467,000 after reduction for offering expenses. The net proceeds from all offerings have been available for debt reduction, capital enhancement, growth and expansion of the Company and general corporate purposes. In March 2000, the Company formed a wholly-owned Delaware statutory business trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the Trust ("Capital Securities"). All of the common securities of the Trust are owned by the Company. The proceeds from the issuance of the Capital Securities ($10,000,000) and common securities ($310,000) were used by the Trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company which carry an annual interest rate of 10.875%. The debentures represent the sole asset of the Trust. The debentures and related income statement effects are eliminated in the Company's consolidated financial statements. The Company is entitled to treat the aggregate liquidation amount of the debentures as Tier I capital under Federal Reserve guidelines. See "Borrowed Funds -- Maturities of Long-term Debt." 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 31 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 includes common stock, retained earnings and guaranteed preferred beneficial interest in the Company's junior subordinate deferrable interest debentures, amounted to approximately $49,118,000 at December 31, 2001, compared to approximately $45,956,000 at December 31, 2000, and $39,976,000 at December 31, 1999. 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, which was approximately $56,833,000, $53,746,000 and $44,067,000 at year-end 2001, 2000, and 1999, respectively. The percentage ratios, as calculated under the guidelines, for Tier I and Total Risk-based capital were 10.02% and 11.59%, respectively, at December 31, 2001, compared to 9.01% and 10.54%, respectively, at year-end 2000 and 8.50% and 9.37%, respectively, at December 31,1999. At December 31, 2001, as both Tier I and Total Risk-based capital of the Company exceeded the regulatory minimum ratios of 4% and 8%, respectively. Applying the current guidelines to 2000 and 1999, the Company exceeded these minimum capital ratios for these periods as well. Another important indicator of capital adequacy in the banking industry is the leverage ratio. The Tier I Leverage ratio is defined as the ratio that the Company's Tier I capital bears to total average assets minus goodwill. The Company's Tier I Leverage ratios were 6.70%, 6.44% and 6.39% at December 31, 2001, 2000 and 1999, respectively, exceeding the regulatory minimum requirement of 4%. The following table illustrates the Company's regulatory capital ratios at December 31, 2001, 2000 and 1999: CAPITAL ADEQUACY RATIOS
December 31, ------------------------------------------------ 2001 2000 1999 ------------- ------------- -------------- (Dollars in thousands) Tier I Capital................................................ $ 49,118 $ 45,956 $ 39,976 Tier II Capital............................................... 7,715 7,790 4,091 ------------- ------------- ------------- Total Qualifying Capital................................... $ 56,833 $ 53,746 $ 44,067 ============= ============= ============== Risk-weighted Total Assets (including off-balance-sheet exposures)............................... $ 490,224 $ 510,161 $ 470,305 ============= ============= ============= Tier I Risk-based Capital Ratio............................... 10.02% 9.01% 8.50% Total Risk-based Capital Ratio................................ 11.59% 10.54% 9.37% Leverage Ratio................................................ 6.70% 6.44% 6.39%
[The remainder of this page intentionally left blank] 32 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 the equity-to assets and dividend payout ratios for each of the last three years: CAPITAL GROWTH (REDUCTION) RATIOS
Year Ended December 31, ----------------------------------------------- 2001 2000 1999 ------------- ------------ ---------- Dividend payout ratio....................................... -% (150.00)% 162.16% Average equity to average assets ratio...................... 5.92% 5.88% 6.99%
The Company's return on average assets ratio, which is computed by dividing net income (loss) by average assets, increased in 2001 to (0.15)% and decreased significantly in 2000 to (0.31)% from 0.26% in 1999. The increase in 2001 was due to the net loss of approximately $1,100,000 in 2001, compared to net loss of approximately $2,215,000 in 2000 and net income of approximately $1,658,100 in 1999, coupled with only a 2.05% increase in average assets during 2001 to approximately $725,461,000, compared to average assets of approximately $710,915,000 during 2000 and $632,713,000 during 1999. The Company's return on average equity ratio, which is computed by dividing net income (loss) by average shareholders' equity, increased in 2001 to (2.56)%, from (5.30)% in 2000. The increase in 2001 was due to net loss of approximately $1,100,000 made by the Company in 2001, compared to the net loss of approximately $2,215,000 in 2000 and net income of approximately $1,658,000 in 1999, which was coupled with only a slight increase in average shareholders' equity to approximately $42,938,000 during 2001, compared to approximately $41,776,000 during 2000 and approximately $44,203,000 during 1999. The Company's dividend payout ratio is determined by dividing the dividends per share by the basic net earnings or loss per share for the relevant period. The Company did not pay dividends in 2001. During 2000, the Company's dividend payout ratio was (150.00)% due to an increase in the amount of cash dividends paid per share coupled with a basic net loss per share reported for the period. This compares to a dividend payout ratio of 162.16% for 1999. During 2000, the amount of cash dividends paid per share increased $0.15, or 25%, to $0.75 from $0.60 in 1999. In addition, during 2000, the Company reported a basic net loss per share of $0.50 compared to basic net earnings per share of $0.37 for 1999. The Company's average equity to average assets ratio, which is computed by dividing average shareholders' equity by average assets, was 5.92% in 2001, 5.88% in 2000, and 6.99% in 1999. The increase in 2001 was due to a 2.8% increase in average shareholders' equity during 2001 to approximately $42,938,000, compared to average shareholders' equity of approximately $41,776,000 during 2000 and $44,203,000 during 1999, and a 2.1% increase in average assets to approximately $725,461,000 during 2001, compared to approximately $710,915,000 during 2000 and approximately $632,713,000 during 1999. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is usually the principal source of a financial institution's earnings stream and represents the difference or spread between interest 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 33 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 2001, on a fully taxable equivalent ("FTE") basis, decreased approximately $373,000, or 1.3%, to approximately $27,478,000 from approximately $27,851,000 in 2000, compared to an increase of approximately $575,000, or 2.1%, in 2000 from approximately $27,276,000 in 1999. The Company experienced growth in both average earning assets and average interest-bearing liabilities during 2001. However, the falling interest rate environment during 2001, coupled with interest-bearing liabilities repricing slower than interest-earning assets, resulted in the decrease in net interest income for 2001. The "Rate/Volume Variance Analysis" table in the section below provides information about changes in interest income, interest expense and net interest income due to changes in average balances and rates. The Company's FTE interest income decreased approximately $2,641,000, or 4.3%, to $59,066,000 in 2001 from $61,707,000 in 2000, compared to an increase of approximately $8,909,000, or 16.9%, in 2000 from approximately $52,798,000 in 1999. The decrease in 2001 was due to a 70 basis points decrease in the FTE yield on average earning assets during 2001 despite an increase in the volume of average earning assets. The 2000 increase was due to the 12.2% increase in average earning assets in 2000 coupled with a 40 basis points increase in the FTE yield on average earning assets. The FTE interest income on loans decreased 6.1% during 2001, due to both a decrease of 1.0% in the average loan balances outstanding and a decrease in the FTE yield on loans of 53 basis points. During 2000, the FTE interest income on loans increased 17.1%, primarily due to the 12.7% increase in the average loan balances outstanding in 2000, coupled with an increase in the FTE yield on loans of 38 basis points. The FTE interest income on investment securities increased 5.0% during 2001, compared to 2000, and 13.6% during 2000, compared to 1999, due mostly to changes in the average investment security balances outstanding. During 2001, the Company's interest expense decreased approximately $2,268,000, or 6.7%, to approximately $31,588,000 from approximately $33,856,00 in 2000, as average interest-bearing liabilities outstanding during 2001 increased 2.1% but the average rate paid on interest-bearing liabilities during 2001 decreased 50 basis points. In 2000, interest expenses increased approximately $8,334,000, or 32.7%, to approximately $33,856,000 from approximately $25,522,000 in 1999, due to the effect of a 16.0% increase in average interest-bearing liabilities in 2000, coupled with the effect of a 72 basis point increase in the average rate paid in 2000. Interest-bearing deposits are the major component of interest bearing liabilities, representing 89.0% in 2001, 90.1% in 2000 and 93.2% in 1999 of average total interest-bearing liabilities outstanding. While average interest-bearing deposits outstanding increased .9% and 12.1% during 2001 and 2000, respectively, the rate paid on these average balances reflected a decrease of 51 basis points during 2001 compared to an increase of 61 basis points during 2000. The decrease in interest expense on short-term borrowings during 2001 primarily resulted from a decline of 277 basis points in the average rate paid. The decrease in interest expense on long-term debt during 2001 occurred despite an increase in average balances outstanding during 2001 because of an 81 basis point decrease in the average rate paid during 2001. The increase in interest expense on FHLB borrowings during 2001 was due to a 10.4% increase in the average balance of borrowings outstanding during 2001 even though the average interest rate paid on these borrowings decreased 4 basis points during 2001. A new component of interest expense resulted in 2000 when Community Bank entered into capitalized lease arrangements on two of its bank locations. The average capitalized lease obligations outstanding during 2001 were approximately $5,415,000, which represented 9.0% of the Company's average total interest-bearing liabilities. 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 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 Company's FTE net interest margin for 34 2001 was 4.23%, compared to 4.42% and 4.86% for 2000 and 1999, respectively. 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 FTE net interest spread for 2001 decreased 20 basic points to 3.88% from the Company's 2000 spread of 4.08% as the cost of interest-bearing sources of funds decreased 50 basis points, but the FTE yield on earning assets decreased 70 basis points. The FTE net interest spread for 1999 was 4.40%. See the tables in this section below entitled "Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" and "Rate/Volume Variance Analysis" for more information. The following tabulation presents certain net interest income data without modification for assumed tax equivalency:
Years Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------- Rate earned on earning assets............................ 9.10% 9.80% 9.40% 9.26% 8.94% Rate paid on borrowed funds.............................. 5.22 5.72 5.00 5.23 5.14 Interest rate spread..................................... 3.88 4.08 4.40 4.03 3.80 Net interest margin...................................... 4.23 4.42 4.86 4.52 4.32
During 2001, the banking industry saw the prime interest rate move from 9.50% to 5.00%. This decrease resulted as the prime interest rate fell by 100 basis points in February 2001, 50 basis points in each of April, May, June, October, November and December and 25 basis points in each of July and September. This is in contrast to the 100 basis point increase during 2000. The Company's net interest income (not on a FTE basis), before the provision for loan losses, decreased 1.2% during 2001, and increased 2.0% and 23.1% in 2000 and 1999, respectively. Net interest income, before provision for loan losses, was $26,898,000, $27,219,000, and $26,673,000 for the twelve months ended December 31, 2001, 2000 and 1999, respectively. This represented changes of ($321,000) from 2000 to 2001 and $546,000 from 1999 to 2000 as reported in the Company's Consolidated Statements of Income included elsewhere in this Report. The "Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" and the "Rate/Volume Variance Analysis" tables are presented on the following four pages. The Consolidated Average Balances/Interest Income/Expenses and Yields/Rates table presents, for the periods shown, the average balance of certain balance sheet items, the dollar amount of interest income from average earning assets and resultant yields, the interest expense and rate paid on average interest-bearing liabilities, and the net-interest margin. The Rate/Volume Variance Analysis table presents an analysis of changes in interest income, interest expense and net interest income attributable to changes in volume and interest rate. Income from tax-exempt earning assets has been adjusted to fully taxable equivalent amounts. [The remainder of this page intentionally left blank] 35 CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES Taxable Equivalent Basis (Dollars in Thousands)
Years Ended December 31, ----------------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------- ------------------------------ ------------------------------- AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/ BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate -------- --------- -------- --------- -------- ------- ---------- --------- ------- (Dollars in thousands) Assets Earning assets: Loans, net of unearned income (1)(3)............ $516,954 $ 51,158 9.90% $522,301 $54,492 10.43% $463,298 $46,549 10.05% Investment securities: Taxable................. 100,599 6,209 6.17 87,745 5,644 6.43 79,733 4,782 6.00 Tax exempt.............. 13,468 1,052 7.81 15,366 1,271 8.27 15,412 1,305 8.47 -------- -------- -------- ------- -------- ------- Total investment securities............. 114,067 7,261 6.37 103,111 6,915 6.71 95,145 6,087 6.40 Interest bearing deposits in other banks........... 344 44 12.79 915 66 7.21 1,343 74 5.51 Federal funds sold........ 17,816 603 3.38 3,635 234 6.44 1,740 88 5.06 -------- -------- -------- ------- -------- ------- Total earning assets(2).. 649,181 59,066 9.10 629,962 61,707 9.80 561,526 52,798 9.40 Noninterest-earning assets: Cash and due from banks... 23,306 26,260 22,332 Premises and equipment.... 42,971 38,232 32,527 Accrued interest and other assets............. 16,657 19,781 19,087 Allowance for loan losses. (6,654) (3,320) (2,759) --------- -------- -------- Total assets............. $725,461 $710,915 $632,713 ======== ======== ======== Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits.......... $ 92,360 3,237 3.50 $102,254 5,036 4.92 $ 94,763 4,131 4.36 Savings deposits......... 58,875 1,950 3.31 55,983 2,457 4.39 53,730 1,886 3.51 Time deposits............ 387,153 22,057 5.70 375,121 22,218 5.92 327,481 17,577 5.37 -------- -------- -------- ------- -------- ------- 538,388 27,244 5.06 533,358 29,711 5.57 475,974 23,594 4.96 Other short-term borrowings............. 3,367 119 3.53 2,589 163 6.30 6,714 333 4.96 FHLB borrowings.......... 41,967 2,468 5.88 38,000 2,248 5.92 20,932 1,037 4.95 Capitalized lease Obligations ........... 5,415 403 7.44 3,579 327 9.14 - - 0.00 Long-term debt........... 15,478 1,354 8.75 14,716 1,407 9.56 7,100 558 7.86 -------- -------- -------- ------- -------- ------- Total interest-bearing liabilities............ 604,615 31,588 5.22 592,242 33,856 5.72 510,720 25,522 5.00 -------- ------- ------- Noninterest-bearing liabilities: Demand deposits........... 70,002 68,785 69,248 Accrued interest and other liabilities........ 7,906 8,112 8,542 Shareholders' equity...... 42,938 41,776 44,203 -------- -------- -------- Total liabilities and shareholders' equity... $725,461 $710,915 $632,713 ======== ======== ======== Net interest income/net interest spread........... 27,478 3.88% 27,851 4.08% 27,276 4.40% -------- ==== ------- ==== ------- ==== Net interest margin......... 4.23% 4.42% 4.86% ==== ==== ==== Taxable equivalent adjustment: Loans..................... 222 201 159 Investment securities..... 358 431 444 -------- ------- ------- Total taxable equivalent adjustment............. 580 632 603 -------- ------- ------- Net interest income......... $ 26,898 $27,219 $26,673 ======== ======= =======
- ----------------- (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%, and do not give effect to the disallowance for federal income tax purpose of interest expense related to certain tax-exempt earning assets. (3) Income on Loans, net of unearned income, includes loan fees of $2,980,000. 36 RATE/VOLUME VARIANCE ANALYSIS TAXABLE EQUIVALENT BASIS
Average Volume Change in Volume Average Rate ------------------------------- --------------------- ------------------------------- 2001 2000 1999 2001-2000 2000-1999 2001 2000 1999 --------- -------- ---------- ---------- --------- -------- --------- -------- (Dollars in thousands) EARNING ASSETS: Loans, net of unearned income....... $516,954 $522,301 $463,298 $ (5,347) $ 59,003 9.90% 10.43% 10.05% Investment securities: Taxable.......................... 100,599 87,745 79,733 12,854 8,012 6.17 6.43 6.00 Tax exempt....................... 13,468 15,366 15,412 (1,898) (46) 7.81 8.27 8.47 -------- -------- -------- -------- -------- Total investment securities.... 114,067 103,111 95,145 10,956 7,966 6.37 6.71 6.40 Interest-bearing deposits with other banks............................ 344 915 1,343 (571) (428) 12.79 7.21 5.51 Federal funds sold.................. 17,816 3,635 1,740 14,181 1,895 3.38 6.44 5.06 -------- -------- -------- -------- -------- Total earning assets........... $649,181 $629,962 $561,526 $ 19,219 $ 68,436 9.10 9.80 9.40 ======== ======== ======== ======== ======== INTEREST-BEARING LIABILITIES: Deposits: Demand........................... $ 92,360 $102,254 $ 94,763 $ (9,894) $ 7,491 3.50 4.92 4.36 Savings.......................... 58,875 55,983 53,730 2,892 2,253 3.31 4.39 3.51 Time............................. 387,153 375,121 327,481 12,032 47,640 5.70 5.92 5.37 -------- ------- -------- -------- -------- Total interest-bearing deposits 538,388 533,358 475,974 5,030 57,384 5.06 5.57 4.96 Other short-term borrowings......... 3,367 2,589 6,714 778 (4,125) 3.53 6.30 4.96 FHLB borrowings..................... 41,967 38,000 20,932 3,967 17,068 5.88 5.92 4.95 Capitalized lease obligations....... 5,415 3,579 - 1,836 3,579 7.44 9.14 0.00 Long-term borrowings................ 15,478 14,716 7,100 762 7,616 8.75 9.56 7.86 -------- ------ -------- -------- -------- Total interest-bearing liabilities................... $604,615 $592,242 $510,720 $ 12,373 $ 81,522 5.22 5.72 5.00 ======== ======== ======== ======== ======== -------- ------ ------ Net interest income/net interest spread........................... 3.88% 4.08% 4.40% ======== ====== ====== Net yield on earning assets......... 4.23% 4.42% 4.86% ======== ====== ======
Variance Attributed to(1) --------------------------------------- Interest Income/Expense Variance 2001 2000 --------------------------- --------------------- ------------------ ------------------- 2001 2000 1999 2001-2000 2000-1999 Volume Rate Volume Rate ------- --------- -------- --------- ---------- --------- -------- -------- --------- (Dollars in thousands) EARNING ASSETS: Loans, net of unearned income......... $51,158 $54,492 $46,549 $ (3,334) $ 7,943 $(559) $(2,775) $6,125 $ 1,818 Investment securities: Tax able............................. 6,209 5,644 4,782 565 862 800 (235) 503 359 Tax exempt........................... 1,052 1,271 1,305 (219) (34) (151) (68) (4) (30) ------- ------- ------- -------- ------- ----- ------- ------ ------- Total investment securities........ 7,261 6,915 6,087 346 828 649 (303) 499 329 Interest-bearing deposits with other banks.............................. 44 66 74 (22) (8) (55) 33 (27) 19 Federal funds sold.................... 603 234 88 369 146 527 (158) 117 29 ------- ------ ------- -------- ------- ----- ------- ------ ------- Total earning assets............... $59,066 $61,707 $52,798 $ (2,641) $ 8,909 $ 562 $(3,203) $6,714 $ 2,195 ======= ======= ======= ======== ======= ===== ======= ====== ======= INTEREST-BEARING LIABILITIES: Deposits: Demand.............................. $ 3,237 $ 5,036 $ 4,131 $ (1,799) $ 905 $(452) $(1,347) $ 345 $ 560 Savings............................. 1,950 2,457 1,886 (507) 571 122 (629) 82 489 Time................................ 22,057 22,218 17,577 (161) 4,641 690 (851) 2,724 1,917 ------- ------- ------- -------- ------- ----- ------- ------ ------- Total interest-bearing deposits.......................... 27,244 29,711 23,594 (2,467) 6,117 360 (2,827) 3,151 2,966 Other short-term borrowings........... 119 163 333 (44) (170) 40 (84) (243) 73 FHLB borrowings....................... 2,468 2,248 1,037 220 1,211 235 (15) 976 235 Capitalized lease obligations......... 403 327 - 76 327 42 34 327 - Long-term borrowings.................. 1,354 1,407 558 (53) 849 70 (123) 707 142 ------- ------- ------- -------- ------- ----- ------- ------ ------- Total interest-bearing liabilities. 31,588 33,856 25,522 (2,268) 8,334 747 (3,015) 4,918 3,416 ------- ------- ------- -------- ------- ----- ------- ------ ------- Net interest income.................$27,478 $27,851 $27,276 $ (373) $ 575 $(185) $ (188) $1,796 $(1,221) ======= ======= ======= ======== ======= ===== ======= ====== =======
(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. 37 PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based upon management's estimated range of those losses. Actual losses for these loans may vary significantly from this estimate. At December 31, 2001, the allowance for loan losses was $7,292,000 which represented an increase of $185,000, or 2.6%, over the December 31, 2000 amount of $7,107,000. There was a $4,504,000, or 173.0%, increase in the allowance for loan losses at December 31, 2000 as compared to December 31, 1999. This increase in the overall level of the allowance for loan losses was primarily due to additional provisions for loan losses of $3,478,000 and $501,000 made by the Company in September 2000 and December 2000, respectively. As a percentage of total loans, net of unearned income, the allowance for loan losses increased to 1.45% at December 31, 2001, compared to 1.35% at December 31, 2000. Management believes that the allowance for loan losses at December 31, 2001 is adequate to absorb known risks in the Company's loan 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 or additional provisions to the allowance for loan losses. A provision for loan losses is charged against current earnings. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The amount of the provision for loan losses 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 $6,314,000, $9,289,000 and $4,459,000 in 2001, 2000 and 1999, respectively. This represented a decrease of $2,975,000, or 32.0%, in 2001 and an increase of $4,830,000 or 108.3% in 2000. The provision for loan loss in 2001 remained high compared to historical levels due to increased loan charge-offs during the year. The increase in 2000 resulted from management's decision to make provisions for current losses and actual growth in the loan portfolio and to increase the overall level of the allowance for loan losses due to aggressive lending in new expansion markets. The additional provision in December 2000 was made with respect to the estimated loss on certain loans made through Community Bank's Double Springs, Alabama location, which are discussed in the following paragraph. In March 2001, management of Community Bank became aware that an employee in Community Bank's Double Springs, Alabama location had improperly originated approximately $1,200,000 in loans primarily during 2000 and the first quarter of 2001 in violation of Community Bank's lending policies, and had manipulated loan payments to make it falsely appear that payments under the loans were current. The bank employee has admitted wrongdoing in connection with the loans and his employment with Community Bank has been terminated. Management notified federal and state banking regulatory authorities, law enforcement authorities and the Company's fidelity bond carrier, and is cooperating with law enforcement authorities in their investigation of the matter. As a result of its investigation of these loans, the Company has charged off loans deemed to be a loss and has reserved for its future estimated losses with a provision increasing its allowance for loan losses as of December 31, 2001. In September 1998, Community Bank determined that $9,360,000 in motor vehicle loans that were originated in Community Bank's Ft. Payne, Alabama Wal-Mart location primarily during a four-month period beginning in May 1998 were not in compliance with Community Bank's lending policy. By December 31, 1999, borrowers had defaulted on approximately $5,594,000 of these loans. Community Bank took into possession and resold 362 vehicles that served as collateral for these loans, which resulted in proceeds of approximately $2,963,000, which was applied to the outstanding balances of the defaulted loans. In the fourth quarter of 1999, management determined that these unpaid balances were impaired and, therefore, made a charge of approximately $2,631,000 to the Company's allowance for loan losses in December 1999. Concurrently, a provision for loan losses, in the same amount, was made in order to return the allowance for loan losses to its 38 balance prior to the charge for the impaired loans. During 2000, Community Bank, including its subsidiary 1st Community Credit Corporation, charged an additional $567,000 to its allowance for loan losses with respect to these defaulted Ft. Payne loans. On June 20, 2000, Community Bank filed an action in the United States District Court for the Northern District of Alabama against an automobile dealership, several employees and former employees of the dealership and a former employee of Community Bank. The lawsuit seeks damages of an unspecified amount to recover losses incurred by Community Bank in connection with the Ft. Payne loans, along with all costs associated with the legal action. Any amounts received by Community Bank as a result of this litigation will be treated as a recovery on loan losses. See "Item 3 - Legal Proceedings - Auto Loan Litigation." Loan charge-offs exceeded recoveries by $6,129,000 during 2001, which represented an increase of $1,344,000, or 28.1%, from $4,785,000 during 2000, which represented a decrease of $41,000, or 0.9%, from $4,826,000 during 1999. Net loan charge-offs increased in 2001 from 2000 in large part due to Double Springs charge-offs mentioned above as well as other loans classified as loss during 2001. Net loan charge-offs remained at the same level in 2000 as compared to 1999. [The remainder of this page intentionally left blank] 39 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, 2001. SUMMARY OF LOAN LOSS EXPERIENCE
2001 2000 1999 1998 1997 ----------- ----------- --------- --------- ------- (Dollars in Thousands) Allowance for loan losses at beginning of period........ $ 7,107 $ 2,603 $ 2,971 $ 2,131 $ 2,425 Loans charged off: Commercial, financial and agricultural............... 1,056 620 282 190 80 Real estate - mortgage............................... 726 319 92 50 325 Consumer............................................. 4,785 4,114 4,814 1,223 783 ----------- ----------- --------- --------- ---------- Total loans charged off............................ 6,567 5,053 5,188 1,463 1,188 ----------- ----------- --------- --------- ---------- Recoveries on loans previously charged off: Commercial, financial and agricultural.................. 7 10 220 11 5 Real estate - mortgage............................... 40 2 4 - 9 Consumer............................................. 391 256 138 126 97 ----------- ----------- --------- --------- ---------- Total recoveries................................... 438 268 362 137 111 Net loans charged off................................... 6,129 4,785 4,826 1,326 1,077 Reserves acquired through acquisitions.................. - - - 1,281 10 Provision for loan losses............................... 6,314 9,289 4,458 885 773 ----------- ----------- --------- --------- ---------- Allowance for loan losses at end of period.............. $ 7,292 $ 7,107 $ 2,603 $ 2,971 $ 2,131 =========== =========== ========= ========= ========== Loans, net of unearned income, at end of period......... $ 501,520 $ 528,316 $ 498,726 $ 433,853 $ 326,134 =========== =========== ========= ========= ========== Average loans, net of unearned income, outstanding for the period........................... $ 516,954 $ 522,301 $ 463,298 $ 378,189 $ 324,745 =========== =========== ========= ========= ==========
2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Ratios: Allowance for loan losses to loans, net of unearned income, at end of period.................. 1.45% 1.35% 0.52% 0.68% 0.65% Allowance for loan losses at end of period to average loans, net of unearned income.............. 1.41% 1.36% 0.56% 0.79% 0.66% Net charge-offs to average loans, net of unearned income.................................... 1.19% 0.92% 1.04% 0.35% 0.33% Net charge-offs to allowance for loan losses, at end of period .................................. 84.05% 67.33% 185.40% 44.63% 50.54% Recoveries to prior year charge-offs................. 8.67% 5.17% 24.74% 11.53% 9.02%
[The remainder of this page intentionally left blank] 40 In assessing the adequacy of the allowance for loan losses, 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, external loan review professionals and also those of bank regulatory agencies that review the loan portfolio as part of the regular bank examination process. Loans identified as having increased credit risk are classified in accordance with the Company's loan policy and appropriate reserves are established for each loan classification category based on pre-determined reserve percentages. Reserves are established for the remaining unclassified portion of the loan portfolio based on actual historical loss factors associated with certain loan types. 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 net losses for each loan type during the previous five years. Management allocated the allowance for loan losses to specific loan classes, as of the dates indicated, as follows: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, ------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ----------------- ----------------- ------------------ --------------- ------------------ Percent Percent Percent Percent Percent of of of of of Amount Total Amount Total Amount Total Amount Total Amount Total -------- -------- -------- -------- -------- --------- ------ ------- -------- --------- Domestic loans Commercial, financial and agricultural................. $ 802 11% $ 711 10% $ 234 9% $ 526 18% $ 149 7% Real estate - mortgage............. 583 8 497 7 182 7 357 12 618 29 Consumer.......................... 5,907 81 5,899 83 2,187 84 2,088 70 1,364 64 ------ ----- ------- ---- ------ --- ------ ---- ------ --- $7,292 100.0% $ 7,107 100% $2,603 100% $2,971 100% $2,131 100% ====== ===== ======= ==== ====== === ====== === ====== ===
[The remainder of this page intentionally left blank] 41 NONPERFORMING ASSETS Nonperforming assets as of December 31, 2001 increased approximately $6,163,000, or 97.4%, to approximately $12,492,000 from approximately $6,329,000 at year-end 2000, which represented an increase of approximately $1,522,000 or 31.7%, from approximately $4,807,000 at December 31, 1999. Nonperforming loans include loans classified as nonaccrual or renegotiated and those past due 90 days or more for which interest was still being accrued. During 2001, nonaccruing loans increased 212.2% to $5,859,000 at December 31, 2001, while loans past due 90 days or more decreased 8.8% to $2,346,000 at December 31, 2001. The Company has recognized its asset quality problems and has in turn, increased its credit standards. The Company has also implemented steps needed to recognize problem credits more timely. Loan review processes were implemented during 2001 which have led to better identification and recognition of problem credits. During 2000, nonaccruing loans decreased 30.7% to $1,877,000 at December 31, 2000, while loans past due 90 days or more increased 93.0% to $2,571,000 at December 31, 2000. Other real estate was $4,287,000 and $1,881,000 at December 31, 2001 and 2000, respectively, which represented increases of 127.9% and 145.6%, respectively, from the prior year-end. There were no commitments to lend any additional funds on nonaccrual or renegotiated loans at December 31, 2001. The following table summarizes the Company's nonperforming assets at December 31 during each of the last five years. NONPERFORMING ASSETS
December 31, ---------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- --------- --------- ------------ (Dollars in Thousands) Nonaccruing loans....................................... $ 5,859 $ 1,877 $ 2,709 $ 1,600 $ 1,093 Loans past due 90 days or more.......................... 2,346 2,571 1,332 2,384 975 Restructured loans...................................... - - - - - ----------- ----------- --------- --------- ---------- Total nonperforming loans............................... 8,205 4,448 4,041 3,984 2,068 Other real estate....................................... 4,287 1,881 766 699 656 ----------- ----------- --------- --------- ---------- Total nonperforming assets.............................. $ 12,492 $ 6,329 $ 4,807 $ 4,683 $ 2,724 =========== =========== ========= ========= ========== Ratios: Allowance for loan losses to total nonperforming assets........................... 58.37% 112.29% 54.15% 63.44% 78.23% Total nonperforming loans to total loans (net of unearned income)....................... 1.64% 0.84% 0.81% 0.92% 0.63% Total nonperforming assets to total assets...................................... 1.71% 0.89% 0.71% 0.78% 0.55%
The ratio of allowance for loan losses to total nonperforming assets declined 48.0% during 2001, to 58.37% at December 31, 2001, compared to an increase of 107.4% during 2000, to 112.29% at December 31, 2000 and a decline of 14.6% during 1999 to 54.15% at December 31, 1999. The significant decline in this ratio for 2001 resulted from the substantial increase in the Company's nonperforming assets during 2001. The ratio of total nonperforming loans to total loans, net of unearned income, increased 95.2% during 2001, to 1.64% at December 31, 2001, compared to 0.84% and 0.81% at year-end 2000 and 1999, respectively. The ratio of total nonperforming assets to total assets increased 92.1% during 2001 to 1.71% at year-end 2001, compared to 0.89% at year-end 2000 and 0.71% at year-end 1999. The ratios have worsened in 2001 as nonperforming loans have increased. 42 There were no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed as a category of loans at December 31, 2001, 2000 and 1999. It is the general policy of Community 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. Normally, accrual of interest income on consumer installment loans is suspended when any payment of principal or interest, or both, is more than 90 days delinquent. When a loan is placed on nonaccrual status, any uncollected interest accrued in a prior year is charged against the allowance for loan losses and any uncollected interest accrued in the current year 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. NONINTEREST INCOME Noninterest income for 2001 decreased approximately $368,000, or 3.7%, to approximately $9,538,000 from approximately $9,906,000 in 2000, which represented an increase of approximately $751,000, or 8.2%, from approximately $9,155,000 in 1999. Noninterest income is derived primarily from service charges on deposit accounts, insurance commissions, bank club dues (a deposit account packaged with other financial services) and debt cancellation fees. The 2001 decrease in service charges on deposit accounts for 2001 is primarily due to a reduction in insufficient funds charges and deposit account attrition. Insurance commissions decreased 20.3% to approximately $1,918,000 in 2001 after increasing during 2000. The level of insurance commissions during the past three years is primarily a result of the activities of Community Insurance Corp., a subsidiary of Community Bank, in the areas of property, casualty and life insurance. Bank club dues decreased 6.0% during 2001, to approximately $661,000, compared to a decline of 0.4% during 2000. Debt cancellation fees decreased 33.7% to approximately $503,000, during 2001 compared to a 22.0% increase in 2000. The decline in 2001 was primarily due to decreased volume in debt cancellation coverage associated with a decline in Community Bank's loan portfolio. Other operating income decreased 41.3%, to approximately $1,109,000 during 2001 compared to increases of 6.3% and 79.1% in 2000 and 1999, respectively. Components of other operating income reflecting decreases during 2001 were fee income associated with wire transfers, safe deposit box rentals, and other miscellaneous service fees. The Company also recognized gains on the sale of investment securities during 2001, 2000 and 1999 as shown below. NONINTEREST INCOME
Years Ended December 31, Percent Change ---------------------------------- -------------------------- 2001 2000 1999 2001/2000 2000/1999 --------- --------- -------- ------------ ----------- (Dollars in Thousands) Service charges on deposits................... $ 4,063 $ 4,144 $ 3,627 (2.0)% 14.3% Insurance commissions......................... 1,918 2,406 2,243 (20.3) 7.3 Investment securities gains (losses).......... 1,284 4 179 32,000.0 (97.8) Bank club dues................................ 661 703 706 (6.0) (0.4) Debt cancellation fees........................ 503 759 622 (33.7) 22.0 Other......................................... 1,109 1,890 1,778 (41.3) 6.3 ------- ------- ------- $ 9,538 $ 9,906 $ 9,155 (3.7) 8.2 ======= ======= =======
43 NONINTEREST EXPENSES Noninterest expenses totaled approximately $31,972,000 in 2001, $31,755,000 in 2000 and $29,208,000 in 1999. These levels represent changes of 0.7% and 8.7% for 2001 and 2000, respectively. The primary component of noninterest expenses is salaries and employee benefits, which decreased $3,148,000, or 16.3%, during 2001 to $16,146,000, compared to $19,294,000 and $17,010,000 for 2000 and 1999, respectively. The decrease in salaries and employee benefits during 2001 resulted primarily from officer's salary reductions and overall corporate downsizing. Director and committee fees were $479,000 in 2001, $675,000 in 2000 and $601,000 in 1999. The decrease in 2001 resulted primarily from not paying a retainer fee to non-employee directors as was done in 2000. This represents a 29.0% decrease in 2001 compared to an increase of 12.3% in 2000. Since 1999, employee directors have not received board or committee fees. Occupancy expense increased 5.3% in 2001 to $2,866,000, compared to $2,722,000 in 2000 and $2,655,000 in 1999, while furniture and equipment expenses decreased 0.8% in 2001 to approximately $1,893,000, as compared to $1,908,000 in 2000 and $1,767,000 in 1999. Other operating expenses increased 47.9% in 2001 to approximately $10,588,000, compared to $7,156,000 in 2000 which represented a 0.3% decrease from $7,175,000 in 1999. Professional and legal fees incurred as a result of continued litigation against the Company continues to keep other operating expense high. The substantial decrease in certain types of noninterest expenses were offset by a write-down of approximately $2,653,000 of unamortized goodwill related to 1st Community Credit Corporation and Community Insurance Corp., both subsidiaries of Community Bank. Management deemed the write-down necessary based on its assessment of each Company's historical operating income. Management believes that the decision to recognize this expense was prudent under current conditions. Moreover, the large size of the write-down is based on conservative estimates of each subsidiaries future cash flows and may obviate the need for further adjustments, thus leaving the subsidiaries better positioned for future performance. In the first quarter of 2000, management took steps to reduce the rate of growth of the Company's non-interest expenses. These steps included close scrutiny of monies spent for travel and entertainment, social dues, advertising and promotions, education and training and donations. As a result of these actions, the Company reduced expenses in these areas by approximately $437,000, or 50.0%, during 2000, as compared to 1999, including a $211,000, or 65.9%, decrease in advertising expense, and a $202,000, or 79.2%, decrease in training and education expense. These reductions, however, were offset by increased costs in postage, telephone, audit and exam fees, and professional fees. Additional cost reduction measures were identified in October 2000 and initiated in the fourth quarter of 2000 and the first quarter of 2001. These actions included salary reductions at the executive officer level of Community Bank and the Company, staff reduction through attrition and down-sizing and a reduction in the number of automobiles owned or leased by the Company and its subsidiaries. [The remainder of this page intentionally left blank] 44 NONINTEREST EXPENSES
Years Ended December 31, Percent Change ---------------------------------- -------------------------- 2001 2000 1999 2001/2000 2000/1999 --------- --------- -------- ------------ ----------- (Dollars in Thousands) Salaries and employee benefits................ $16,146 $19,294 $17,010 (16.3)% 13.4% Occupancy expense............................. 2,866 2,722 2,655 5.3 2.5 Furniture and equipment expense............... 1,893 1,908 1,767 (0.8) 8.0 Director and committee fees................... 479 675 601 (29.0) 12.3 Amortization of intangibles................... 562 554 493 1.4 12.4 Loss on write-down of goodwill............... 2,653 - - 100.0 - Advertising................................... 52 109 320 (52.3) (65.9) Insurance..................................... 319 298 171 7.0 74.3 Legal Fees.................................... 1,873 785 894 138.6 (12.2) Professional fees............................. 1,202 220 166 446.4 32.5 Supplies...................................... 652 515 623 26.6 (17.3) Postage....................................... 390 443 380 (12.0) 16.6 Telephone..................................... 769 920 769 (16.4) 19.6 Training and Education........................ 44 53 255 (17.0) (79.2) Other......................................... 2,072 3,259 3,104 (36.4) 5.0 ------- ------- ------- $31,972 $31,755 $29,208 (7.7)% 8.7% ======= ======= =======
INCOME TAXES The Company experienced a tax benefit of $749,000, or a 40.5% effective tax rate, on a pre-tax loss of $1,849,000 for 2001, compared to an income tax benefit of $1,704,000, or 43.5% effective tax benefit rate, on pre-tax loss of $3,919,000 for 2000 and an income tax expense of $502,000, or 23.3% effective tax rate on pre-tax income of $2,161,000 for 1999. The tax amounts and rates are different than the statutory Federal tax rate of 34% 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. The Company attempts to maximize any tax benefits and minimize any tax liabilities through active tax planning. A more detailed explanation of income tax expense is included in Note 10 to the Company's Consolidated Financial Statements included elsewhere in this Report. 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 Report should assist in an 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. 45 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 accounting principles generally accepted in the United States and include amounts based on management's best estimates and judgment 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. 46 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 Auditors' Report................................................................................ 48 Consolidated Statements of Financial Condition as of December 31, 2001 and 2000............................. 49 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999...................... 50 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999........ 51 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.................. 52-53 Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999.............................. 54-97
47 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Birmingham, Alabama April 5, 2002 /S/ DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP 48 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001 AND 2000
2001 2000 --------------- --------------- ASSETS Cash........................................................................ $ 8,312,263 $ 7,627,215 Due from banks............................................................... 14,724,745 18,379,396 Interest-bearing deposits with banks......................................... 200,000 700,000 Federal funds sold........................................................... 30,000,000 3,000,000 Securities available for sale................................................ 121,679,303 101,569,818 Loans........................................................................ 501,583,650 528,467,345 Less: Unearned income........................................................ 63,991 151,184 Allowance for loan losses............................................... 7,292,370 7,107,430 --------------- -------------- NET LOANS.............................................................. 494,227,289 521,208,731 Premises and equipment, net.................................................. 39,626,868 39,325,645 Accrued interest............................................................. 7,061,043 8,432,321 Intangibles, net............................................................. 2,629,682 5,757,055 Other real estate............................................................ 4,287,273 1,880,548 Other assets................................................................. 6,733,102 5,637,313 --------------- -------------- TOTAL ASSETS........................................................... $ 729,481,568 $ 713,518,042 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing........................................................ $ 67,695,615 $ 67,285,705 Interest-bearing........................................................... 550,010,415 533,615,062 --------------- -------------- Total Deposits......................................................... 617,706,030 600,900,767 Other short-term borrowings.................................................. 4,359,927 2,265,231 Accrued interest............................................................. 4,400,000 5,375,725 FHLB borrowing............................................................... 38,000,000 38,000,000 Capitalized lease obligations................................................ 5,766,076 5,850,225 Long-term debt............................................................... 4,666,599 5,675,204 Guaranteed preferred beneficial interest in the Company's junior subordinated deferrable interest debentures................................ 10,000,000 10,000,000 Other liabilities............................................................ 3,917,567 4,261,120 --------------- -------------- TOTAL LIABILITIES...................................................... 688,816,199 672,328,272 SHAREHOLDERS' EQUITY Preferred stock, par value $.01 per share, 200,000 shares authorized, no shares issued............................................... - - Common stock, par value $.10 per share, 20,000,000 shares authorized, 4,808,331and 4,674,995 shares issued, as of December 31, 2001 and 2000, respectively..................... 480,833 467,499 Capital surplus.............................................................. 30,753,008 29,804,921 Retained earnings............................................................ 12,390,300 13,490,799 Treasury Stock, 20,803 shares................................................ (396,768) (396,768) Unearned ESOP shares - 174,267 and 199,877 shares as of December 31, 2001 and 2000, respectively............................. (2,317,902) (2,574,002) Accumulated other comprehensive (loss) income................................ (244,102) 397,321 ---------------- -------------- TOTAL SHAREHOLDERS' EQUITY............................................... 40,665,369 41,189,770 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 729,481,568 $ 713,518,042 =============== ==============
See notes to consolidated financial statements 49 CONSOLIDATED STATEMENTS OF INCOME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 -------------- ------------- -------------- INTEREST INCOME Interest and fees on loans.................................... $ 50,937,197 $ 54,291,413 $ 46,390,060 Interest on investment securities: Taxable securities............................................ 6,209,240 5,644,293 4,781,553 Securities exempt from federal income taxes................... 693,065 839,587 860,689 Interest on federal funds sold................................ 603,072 234,432 87,702 Interest on deposits in other banks........................... 43,851 65,576 74,250 -------------- ------------- -------------- Total Interest Income....................................... 58,486,425 61,075,301 52,194,254 -------------- ------------- -------------- INTEREST EXPENSE Interest on deposits.......................................... 27,244,411 29,711,253 23,593,922 Interest on other short-term borrowings....................... 118,857 162,801 332,551 Interest on capitalized lease obligations..................... 402,452 326,812 - FHLB borrowings............................................... 2,467,829 2,248,055 1,036,704 Interest on long-term debt.................................... 233,315 567,579 558,484 Interest on guaranteed preferred beneficial interest in the Company's junior subordinated deferrable interest debentures 1,121,213 839,791 - -------------- ------------- -------------- TOTAL INTEREST EXPENSE.................................... 31,588,077 33,856,291 25,521,661 -------------- ------------- -------------- NET INTEREST INCOME.............................................. 26,898,348 27,219,010 26,672,593 Provision for loan losses..................................... 6,313,940 9,289,362 4,458,636 -------------- ------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.............. 20,584,408 17,929,648 22,213,957 NONINTEREST INCOME Service charges on deposits................................... 4,062,631 4,143,775 3,626,448 Insurance commissions......................................... 1,918,733 2,406,183 2,243,358 Bank club dues................................................ 660,734 702,534 706,080 Debt cancellation fees........................................ 503,329 758,825 622,048 Other operating income........................................ 1,108,582 1,890,220 1,777,641 Investment securities gains................................... 1,283,945 4,587 179,303 -------------- ------------- -------------- TOTAL NONINTEREST INCOME.................................. 9,537,954 9,906,124 9,154,878 -------------- ------------- -------------- NONINTEREST EXPENSES Salaries and employee benefits................................ 16,146,189 19,293,662 17,010,366 Occupancy expense............................................. 2,865,964 2,722,441 2,654,567 Furniture and equipment expense............................... 1,892,667 1,908,086 1,767,388 Director and committee fees................................... 479,366 674,739 601,312 Other operating expenses...................................... 10,587,527 7,156,251 7,174,614 -------------- ------------- -------------- TOTAL NONINTEREST EXPENSES................................ 31,971,713 31,755,179 29,208,247 -------------- ------------- -------------- Income (loss) before income taxes................................ (1,849,351) (3,919,407) 2,160,588 Income tax expense (benefit) .................................... (748,852) (1,704,476) 502,478 -------------- ------------ -------------- NET INCOME (LOSS)......................................... $ (1,100,499) $ (2,214,931) $ 1,658,110 ============== ============ ============== Earnings (Loss) Per Common Share - basic......................... $ (0.24) $ (0.50) $ 0.37 Earnings (Loss) Per Common Share - diluted....................... $ (0.24) $ (0.47) $ 0.36
See notes to consolidated financial statements 50 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated Unearned Other Common Capital Retained ESOP Comprehensive Treasury Stock Surplus Earnings Shares Income Stock Total ----------- ------------ ----------- ------------- ------------- -------------- -------------- Balance at December 31, 1998............ $ 464,792 $29,100,383 $20,169,519 $(2,944,232) $ 442,939 $ - $ 47,233,401 Net Income - 1999............. - - 1,658,110 - - - 1,658,110 Other comprehensive income,net of tax and reclassification adjustments: Net Change in Unrealized Gains (Losses) on Securities.............. - - - - (2,096,060) - (2,096,060) ------------ Comprehensive Income.......... - - - - - - (437,950) ------------ Cash dividends: Common........ - - (2,788,754) - - - (2,788,754) Stock Options Exercised....... 867 124,138 - - - - 125,005 Tax Benefit on Stock options.. - 18,348 - - - - 18,348 Stock Issued in lieu of cash paid for directors' fees at $19...................... 892 168,644 - - - - 169,536 Release of ESOP shares........ - - - 155,790 - - 155,790 -------- ----------- ----------- ----------- ------------ ----------- ------------ Balance at December 31, 1999............ 466,551 29,411,513 19,038,875 (2,788,442) (1,653,121) - 44,475,376 Net Loss - 2000............... - - (2,214,931) - - - (2,214,931) Other comprehensive income,net of tax and reclassification adjustments: Net Change in Unrealized Gains (Losses) on Securities.............. - - - - 2,050,442 - 2,050,442 ------------ Comprehensive Loss............ - - - - - - (164,489) ------------ Cash dividends: Common........ - - (3,333,145) - - - (3,333,145) Stock Issued in lieu of cash paid for directors' fees at $23.50................... 948 221,856 - - - - 222,804 Release of ESOP shares........ - 171,552 - 214,440 - - 385,992 Purchase of Treasury Stock.... - - - - - (396,768) (396,768) -------- ----------- ----------- ----------- ------------ ----------- ------------ Balance at December 31, 2000............ 467,499 29,804,921 13,490,799 (2,574,002) 397,321 (396,768) 41,189,770 NET INCOME - 2001............. - - (1,100,499) - - - (1,100,499) OTHER COMPREHENSIVE INCOME,NET OF TAX AND RECLASSIFICATION ADJUSTMENTS: NET CHANGE IN UNREALIZED GAINS (LOSSES) ON SECURITIES................. - - - - (641,423) - (641,423) ------------ COMPREHENSIVE INCOME.......... - - - - - - (1,741,922) ------------ STOCK OPTIONS EXERCISED....... 32,956 3,708,944 - - - - 3,741,900 STOCK USED BY OPTIONEES TO PURCHASE OPTIONS WHEN FAIR VALUE WAS $18 PER SHARE...... (20,788) (3,721,112) - - - - (3,741,900) TAX BENEFIT ON STOCK OPTIONS.. - 751,556 - - - - 751,556 STOCK ISSUED IN LIEU OF CASH PAID FOR DIRECTORS' FEES AT $18.....................,. 1,166 208,699 - - - - 209,865 RELEASE OF ESOP SHARES........ - - - 256,100 - - 256,100 -------- ----------- ----------- ----------- ------------ ----------- ------------ BALANCE AT DECEMBER 31, 2001............ $ 480,833 $30,753,008 $12,390,300 $(2,317,902) $ (244,102) $ (396,768) $ 40,665,369 ========= =========== =========== =========== ============ =========== ============
See notes to consolidated financial statements 51 CONSOLIDATED STATEMENTS OF CASH FLOWS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ----------------- -------------- -------------- OPERATING ACTIVITIES: Net income (loss)........................................... $ (1,100,499) $ (2,214,931) $ 1,658,110 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses................................... 6,313,940 9,289,362 4,458,636 Provision for depreciation and amortization................. 2,611,405 3,467,187 2,296,843 Amortization of investment security premiums and accretion of discounts.............................................. 159,957 149,261 162,032 Deferred tax (benefit) expense.............................. (914,941) (2,198,860) 225,413 Loss on write-down of goodwill.............................. 2,652,620 - - Realized investment security gains.......................... (1,283,945) (4,587) (179,303) Loss on sale of premises and equipment...................... 66,482 144,398 4,396 Increase in accrued interest receivable..................... 1,371,278 (1,895,207) (545,526) Increase in accrued interest payable........................ (975,725) 1,632,119 162,672 Other....................................................... 864,637 (2,157,701) 1,460,171 --------------- -------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................. 9,765,209 6,211,041 9,703,444 --------------- -------------- --------------- INVESTING ACTIVITIES: Proceeds from sales of securities available for sale........ 86,418,413 16,229,953 11,627,522 Proceeds from maturity of securities available for sale..... 2,500,000 25,210,217 10,778,482 Purchase of securities available for sale................... (108,972,949) (42,889,985) (25,337,831) Net decrease in interest-bearing deposits with other banks.. 500,000 - 250,000 Cash used in acquisition of insurance operations............ - - (750,000) Loans purchased............................................. - - (2,312,592) Net decrease (increase) in loans to customers............... 16,968,554 (34,374,869) (67,674,628) Proceeds from sale of premises and equipment................ 108,075 162,914 72,680 Capital expenditures........................................ (2,612,433) (5,986,652) (7,254,322) Net proceeds from sale of other real estate................. 1,292,223 853,961 415,941 --------------- -------------- --------------- NET CASH USED IN INVESTING ACTIVITIES..................... (3,798,117) (40,794,461) (80,184,748) --------------- -------------- --------------- FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW accounts, savings and time open deposit accounts.................... 21,905,506 (9,214,288) 16,952,243 Net (decrease) increase in certificates of deposit.......... (5,100,244) 36,854,261 17,723,030 Net increase (decrease) in short-term borrowings............ 2,094,696 (228,611) 302,001 (Decrease) increase in borrowings from FHLB................. - (2,000,000) 40,000,000 Net (decrease) increase in capitalized lease obligations.... (84,149) 5,850,225 - Repayment of long-term debt................................. (752,504) (961,958) (775,764) Issuance of guaranteed preferred beneficial interest in Company's junior subordinated deferrable interest debentures................................................ - 10,000,000 - Issuance of common stock.................................... - 222,804 312,889 Purchase of treasury stock.................................. - (396,768) - Cash dividends.............................................. - (3,333,145) (2,788,754) --------------- -------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES................. 18,063,305 36,792,520 71,725,645 --------------- -------------- --------------- Net Increase In Cash and Cash Equivalents...................... 24,030,397 2,209,100 1,244,341 Cash and Cash Equivalents At Beginning of Year................. 29,006,611 26,797,511 25,553,170 --------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 53,037,008 $ 29,006,611 $ 26,797,511 =============== ============== ===============
52
2001 2000 1999 ------------- -------------- -------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................................... $ 32,563,802 $ 35,488,410 $ 25,684,333 Income taxes................................................ (1,082,900) 859,978 1,121,889
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Other real estate of $4,411,029, $1,824,857 and $840,902 was acquired in 2001, 2000 and 1999, respectively, through foreclosure. Other assets acquired by foreclosure amounted to $3,777,599 in 2001, $2,975,936 in 2000 and $3,969,795 in 1999. [The remainder of this page intentionally left blank] See notes to consolidated financial statements 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended (the "Bank Holding Company Act"). The Company was organized in 1983 and commenced business in 1985. The Company has one bank subsidiary, Community Bank, an Alabama banking corporation which conducts a general commercial banking business in north and west-central Alabama and south-central Tennessee. 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 accounting principles generally accepted in the United States of America 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 allowance 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 allowance based on their judgments 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. At December 31, 2001 and 2000, all of the Company's investments in securities were classified 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' 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. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Loans and Interest Income: Loans are reported at principal amounts outstanding less unearned income, net deferred fees, and the allowance for loan losses. Interest income on consumer loans, made on a discount basis, is recognized in a manner which approximates the level yield method. Interest income on substantially all other loans is recognized on a level yield basis. Loan fees, net of certain direct origination costs, are deferred and amortized over the terms of the loans using a method which approximates a level yield. Annual fees charged on equity lines are recognized as income when charged to the account holder. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when reasonable doubt exist as to the full collection of interest or principal, or when they become contractually in default for 90 days or more as to either interest or principal, unless they are both well secured and in the process of collection. When a loan is placed on nonaccrual status, current year accrued and uncollected interest is charged to interest income on loans and previous year accrued interest is charged to the allowance for loan loss reserve, unless management believes accrued interest is recoverable through the liquidation of collateral. Interest payments received on nonaccrual loans are applied as a reduction of principal. Loans are returned to accruing status when they are brought fully current with respect to interest and principal and when, in the judgement of management, the loans are estimated to be fully collectible as to both principal and interest. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual classification. 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 economic conditions, collateral values of properties securing loans, volume, growth and composition of the loan portfolio, and other relevant factors. Unfavorable changes in any of these, or other factors, or the availability of new information, could require that the allowance for loan losses be increased in future periods. The method used to determine the amount of loss inherent in the loan portfolio and thereby assess the adequacy of the recorded balance of the allowance for loan losses involves identifying portfolio loans with similar characteristics for which estimates of inherent future probable losses can be made. The estimates are based on historical loss factors as adjusted for current business and economic conditions. The loss factors are applied to the representative portfolios in order to determine the overall adequacy of the allowance for loan losses. 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 Statement of Financial Accounting Standards No. 91, 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. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. 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 Statement of Financial Accounting Standards No. 128, Earnings per Share. The following reconciles the weighted average number of shares outstanding:
2001 2000 1999 -------------- ------------- ------------- Weighted average of common shares outstanding.................... 4,572,301 4,460,295 4,429,303 Effect of dilutive options....................................... - 211,135 165,769 -------------- -------------- -------------- Weighted average of common shares outstanding effected for dilution.................................................. 4,572,301 4,671,430 4,595,072 ============== ============= ==============
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 Statement of Financial Accounting Standards 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. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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 ("ESOP") 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. Intangibles: Excess of purchase price over net assets of businesses acquired is recognized as goodwill and other intangibles and amortized on a straight-line basis over periods of 15 to 25 years. The Company assesses the value of its intangible assets to determine that recorded amounts are reasonable and not impaired. An impairment loss is recognized against operating income when events or circumstances indicate carrying amounts may not be recoverable. At December 31, 2001 and 2000, intangibles, net of amortization, totaled $2,629,682 and $5,757,055, respectively. Amortization expense for the years ending December 31, 2001, 2000, and 1999, totaled $471,390, $1,429,879 and $495,513, respectively. See Recently Issued Accounting Standards included in this Note 1 regarding SFAS 142, Goodwill and Other Intangible Assets for future accounting and reporting requirements. 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 are funded. 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 $25,000 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 $142,825 and $168,001 at December 31, 2001 and 2000, respectively. 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 and no compensation cost has been recognized by the Company. Reclassification: Certain amounts in 2000 and 1999 have been reclassified to conform with the 2001 presentation. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Comprehensive Income: 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. Items that are to be recognized under accounting standards as components of comprehensive income are displayed in the Consolidated Statements of Shareholders' Equity. (See Note 18). Segment Information: 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. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative is to be determined based upon the intended use of the derivative. For certain hedge designations (cash flow and foreign currency exposure) the derivative's gain or loss is reported as a component of other comprehensive income. Other designations require the gain or loss to be recognized in earnings in the period of change. This statement, amended as to effective date by SFAS No. 137, is effective for financial statements for periods beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board also issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of the provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, it provides new standards for reporting financial assets transferred as collateral and new standards for the derecognition of financial assets, in particular transactions involving the use of special purpose entities. SFAS No. 140 also prescribes additional disclosures for collateral transactions and for securitization transactions accounted for as sales. The new collateral standards and disclosure requirements are effective for fiscal years ending after December 15, 2000, while the new standards for the derecognition of financial assets are effective for transfers made after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement address financial accounting and reporting for business combinations and supersedes ABP Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. Prior to the issuance of this statement, subject to certain criteria, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The two methods produce different financial statement results. The single-method approach used in SFAS No. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 141 reflects the conclusion that virtually all business combinations are acquisitions and therefore should be accounted for in the same manner as other asset acquisitions based on the values exchanged. This statement provides expanded and revised guidance related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new standards for accounting relating to intangible assets after initial recognition in the financial statements. This statement proscribes the accounting practice of amortizing or expensing intangibles ratably over a prescribed period of time and imposes new guidance requiring that goodwill and certain other intangibles be tested for impairment at least annually by comparing fair values of those assets with their recorded amounts. Additional disclosure requirements also are provided. The provisions of SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001. Management has not yet determined the amount of goodwill impairment to be recognized upon adoption of SFAS 142. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that opinion). This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The major changes resulting from this statement relate to the establishment of a single method for the recognition of impairment losses on long-lived assets to be held and used whether from discontinuance of a business segment or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. Management has not yet determined whether or not the application of this statement will have a material effect on the financial statements. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 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, 2001 was approximately $421,000. 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, 2001 and 2000, 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. 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, 2001 and 2000 are presented below.
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------- ------------- ------------- ----------------- AS OF DECEMBER 31, 2001: SECURITIES AVAILABLE FOR SALE: U. S. GOVERNMENT AND AGENCY SECURITIES......... $ 16,854,383 $ 99,368 $ 5,234 $ 16,948,517 STATE AND MUNICIPAL SECURITIES................. 11,512,284 220,731 49,372 11,683,643 MORTGAGE-BACKED SECURITIES..................... 91,319,473 166,360 838,690 90,647,143 EQUITY SECURITIES.............................. 2,400,000 - - 2,400,000 -------------- ------------- ------------- ---------------- $ 122,086,140 $ 486,459 $ 893,296 $ 121,679,303 ============== ============= ============= ================ As of December 31, 2000: Securities available for sale: U. S. government and agency securities......... $ 46,826,740 $ 350,714 $ 347,680 $ 46,829,774 State and municipal securities................. 18,591,183 914,593 6,445 19,499,331 Mortgage-backed securities..................... 31,580,186 153,284 392,757 31,340,713 Equity securities.............................. 3,909,507 - 9,507 3,900,000 --------------- ------------- ------------- ---------------- $ 100,907,616 $ 1,418,591 $ 756,389 $ 101,569,818 =============== ============= ============= ================
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 3 - INVESTMENT SECURITIES - CONTINUED The contractual maturities of securities available for sale at December 31, 2001 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.
Weighted Estimated Tax Amortized Fair Equivalent Cost Value Yield ------------ ------------- ---------------- As of December 31, 2001: Due in one year or less .................... $ 2,180,704 $ 2,181,498 6.67% Due after one year through five years....... 60,955,273 60,560,338 5.94% Due after five years through ten years...... 21,811,733 21,763,025 6.09% Due after ten years......................... 34,738,430 34,774,442 6.73% Equity securities........................... 2,400,000 2,400,000 6.74% ------------ ------------ $122,086,140 $121,679,303 ============ ============
Mortgage-backed securities have been included in the maturity tables based upon the guaranteed payoff date of each security. Proceeds from the sale of available-for-sale securities were $85,134,468, $16,229,953 and $11,627,522 in 2001, 2000 and 1999, respectively. Gross realized gains and losses on investments in debt securities available for sale for each of the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ------------- ------------- -------------- Gross realized gains............................................. $ 1,283,945 $ 45,362 $ 186,853 Gross realized losses............................................ - 40,775 7,550
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 $87,514,000 and $80,503,000 at December 31, 2001 and 2000, respectively. An investment security issued by Hartselle Utilities is carried at a value of $4,854,027, which exceeds 10% of total stockholder's equity. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 4 - LOANS The Bank grants loans to customers primarily in north and west-central Alabama and south-central Tennessee. The major classifications of loans as of December 31, 2001 and 2000 were as follows:
December 31, --------------------------------- 2001 2000 --------------- ---------------- Commercial, financial and agricultural.......................................... $ 146,209,839 $ 140,773,063 Real estate - construction...................................................... 3,126,592 5,429,141 Real estate - mortgage.......................................................... 233,216,469 236,591,919 Consumer........................................................................ 119,030,750 145,673,222 --------------- ---------------- 501,583,650 528,467,345 Less: Unearned income........................................................... 63,991 151,184 Less: Allowance for loan losses................................................. 7,292,370 7,107,430 --------------- ---------------- Net loans....................................................................... $ 494,227,289 $ 521,208,731 =============== ================
At December 31, 2001, the recorded investment in loans that were considered to be impaired was $6,186,216 (of which $3,828,056 were on a nonaccrual basis). Included in this amount is $5,070,769 of impaired loans for which the related loan loss allowance is $726,895. The balance of $1,115,447 of impaired loans for which the related loan loss allowance is included in the Company's overall allowance for loan losses. At December 31, 2000, the recorded investment in loans that were considered to be impaired was $924,000 for which the related loan loss allowance was $520,000, in accordance with SFAS No. 114. There were no impaired loans for which no related allowance was determined. Of the above mentioned of impaired loans, $128,000 were on a nonaccrual basis. For the year ended December 31, 2001, the amount of interest that would have been recorded under the original terms on nonaccrual loans was $301,584 and the amount that was actually recorded was $116,094. The difference between gross interest income that would have been recorded under original terms and the interest actually recorded was $113,038 and $115,098 for the years ended December 31, 2000 and 1999 respectively. A substantial portion of the loans is secured by real estate in markets in which branch offices are located in northern Alabama. Accordingly, the ultimate collectibility of a substantial portion of the loan portfolio, and the recovery of a substantial portion of the carrying amount of real estate owned, are susceptible to changes in market conditions in these areas. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 5 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for each of the years ended December 31, 2001, 2000 and 1999, were as follows:
2001 2000 1999 ------------- ------------- -------------- Balance at beginning of year..................................... $ 7,107,430 $ 2,603,128 $ 2,970,597 Charge-offs...................................................... (6,567,136) (5,053,052) (5,188,037) Recoveries....................................................... 438,136 267,992 361,932 ------------- ------------- -------------- Net charge-offs.................................................. (6,129,000) (4,785,060) (4,826,105) Provision for loan losses........................................ 6,313,940 9,289,362 4,458,636 ------------- ------------- -------------- Balance at end of year........................................... $ 7,292,370 $ 7,107,430 $ 2,603,128 ============= ============= ==============
NOTE 6 - PREMISES AND EQUIPMENT Premises and equipment at December 31, 2001 and 2000 was as follows:
December 31, --------------------------------- 2001 2000 --------------- ---------------- Land.......................................................................... $ 4,331,352 $ 3,402,209 Buildings and land improvements............................................... 23,287,467 25,161,118 Capitalized leases............................................................ 5,880,626 5,880,626 Property Held for Sale........................................................ 2,689,023 - Furniture and equipment....................................................... 11,846,267 12,719,546 Automobiles................................................................... 1,674,691 1,690,867 Leasehold improvements........................................................ 853,690 853,690 --------------- ---------------- 50,563,116 49,708,056 Less allowance for depreciation............................................... 10,936,248 10,382,411 --------------- ---------------- $ 39,626,868 $ 39,325,645 =============== ================
The provisions for depreciation charged to occupancy expense and furniture and equipment expense for the years ended December 31, 2001, 2000 and 1999 were $2,136,653, $2,037,309 and $1,798,679, respectively. The Bank capitalized $242,020 and $244,971 in interest costs related to building construction in 2001 and 2000, respectively. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 7 - INTANGIBLES Goodwill and core deposit intangibles at December 31, 2001 and 2000 are summarized as follows:
December 31, --------------------------------- 2001 2000 --------------- ---------------- Goodwill, gross............................................................... $ 7,567,312 $ 9,069,201 Goodwill write-off............................................................ (2,652,620) - Loss on disposals............................................................. - (845,873) Accumulated amortization...................................................... (2,285,010) (2,466,273) --------------- ---------------- Balance at the end of the period.............................................. $ 2,629,682 $ 5,757,005 =============== ================
In December 2001, the Company recorded a goodwill write-down of $2,652,620 ($1,908,157 after taxes) which represented the unamortized goodwill related to the Company's wholly owned subsidiaries, 1st Community Credit Corporation and Community Insurance Corp. The goodwill of each subsidiary was determined to have been impaired because of current condition of the companies and their inability to generate future operating income without substantial revenue increases that are uncertain. Moreover, recoverability of the goodwill through future cash flows was not reasonably assured. [The remainder of this page intentionally left blank] 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 8 - DEPOSITS The major classifications of deposits as of December 31, 2001 and 2000, were as follows:
December 31, --------------------------------- 2001 2000 --------------- ---------------- Noninterest-bearing demand.................................................... $ 67,695,615 $ 67,285,705 Interest-bearing demand....................................................... 100,094,906 85,475,801 Savings....................................................................... 70,479,875 63,603,383 Time.......................................................................... 259,899,596 260,170,173 Certificates of deposit of $100,000 or more................................... 100,387,582 101,011,881 Other time deposits........................................................... 19,148,456 23,353,824 --------------- ---------------- $ 617,706,030 $ 600,900,767 =============== ================
The maturities of time deposits following December 31, 2001, were as follows:
Years Ending December 31, --------------------------- 2002............................................................................. $ 313,781,527 2003............................................................................. 47,750,783 2004............................................................................. 7,587,498 2005............................................................................. 6,305,554 2006............................................................................. 3,759,960 Thereafter....................................................................... 250,312 ---------------- $ 379,435,634
NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT At December 31, 2001 and 2000, the Company had notes payable totaling $52,666,599 and $53,675,204, 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, 2001 and 2000, the amounts outstanding were $711,304 and $1,423,003, respectively, due December 17, 2002, bearing interest at a floating prime rate, collateralized by 100% of the common stock of Community Bank. The note agreement contains provisions, which limit the Company's right to transfer or issue shares of Community 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. 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 in the Company's public offering of new common stock. The note was 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED 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 due monthly through November 16, 2010, with all remaining principal, if any, due upon that date. The initial principal and interest payment on this debt was $31,677. As changes occur in the interest rate on the loan, appropriate adjustments are made to the monthly principal and interest payments. At December 31, 2001, the monthly payment was $33,852. 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 $2,382,490 at December 31, 2001, secured by 174,267 of unreleased shares of Company stock. (See Note 15) 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 annual rate of 7%. The Company maintains the right to prepay the note at its sole discretion. The balance of the note was $1,572,805 and $1,645,977 at December 31, 2001 and 2000, respectively. Since June 1999, Community Bank has borrowed funds under the Federal Home Loan Bank of Atlanta's ("FHLB-Atlanta") "Convertible Advance Program." These advances have had original maturities of 10 years, with stated call features during the life of the obligation, at fixed interest rates for the life of the obligations. Principal is due at final maturity or on stated call dates, with interest payable each quarter. On June 1, 1999, Community Bank, the Company's bank subsidiary, borrowed $30,000,000 under the FHLB-Atlanta's "Convertible Advance Program." This advance had a final maturity of June 1, 2009 (120 months), with a call feature every three months during the life of the obligation, and carried a fixed interest rate of 4.62% per annum. This obligation was called on September 1, 1999 due to an increase in market interest rates. As a result of this call, Community Bank refinanced the original advance and borrowed an additional $10,000,000 under the same "Convertible Advance Program." This advance, totaling $40,000,000 at December 31, 1999, had a final maturity of September 1, 2009 (120 months), with a call feature every six months during the life of the obligation, and carried a fixed rate of 4.99% per annum. Due to the call of this obligation on March 1, 2000, Community Bank made a $2,000,000 reduction in the amount advanced under the FHLB-Atlanta "Convertible Advance Program" and refinanced $38,000,000. This new obligation has a final maturity of March 1, 2010 (120 months), a call feature every quarterly payment date during the life of the obligation, and a fixed interest rate of 5.93% per annum. At December 31, 2001, outstanding funds advanced to Community Bank under the FHLB-Atlanta "Convertible Advance Program" totaled $38,000,000. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 9 - FHLB BORROWINGS AND LONG TERM DEBT - CONTINUED In March 2000, the Company formed a wholly-owned Delaware statutory business trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the Trust ("Capital Securities"). All of the common securities of the Trust are owned by the Company. The proceeds from the issuance of the Capital Securities ($10,000,000) and common securities ($310,000) were used by the Trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company which carry an annual interest rate of 10.875%. The debentures represent the sole asset of the Trust. The debentures and related income statement effects are eliminated in the Company's consolidated financial statements. The Company is entitled to treat the aggregate liquidation amount of the debentures as Tier I capital under Federal Reserve guidelines. The Capital Securities accrue and pay distributions semiannually at a rate of 10.875% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into an agreement which fully and unconditionally guarantees payment of: (i) accrued and unpaid distributions required to be paid on the Capital Securities; (ii) the redemption price with respect to any Capital Securities called for redemption by the Trust; and (iii) payments due upon a voluntary or involuntary liquidation, winding up or termination of the Trust. The Capital Securities are mandatorily redeemable upon the maturity of the debentures on March 8, 2030, or upon earlier redemption as provided in the indenture pursuant to which the debentures were issued. The Company has the right to redeem the debentures purchased by the Trust: (i) in whole or in part, on or after March 8, 2010; and (ii) in whole (but not in part) at any time within 90 days following the occurrence and during the continuation of a tax event, capital treatment event or investment company event (each as defined in the indenture). As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be a percentage of the principal amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued but unpaid interest. Maturities and stated calls of long-term debt and FHLB borrowings following December 31, 2001, are as follows:
Trust Note Subordinated FHLB Preferred Payable Debt Borrowings Securities -------------- ------------ ------------- -------------- 2002............................................. $ 1,010,839 $ 78,461 $ - $ - 2003............................................. 314,078 84,133 - - 2004............................................. 329,325 90,214 - - 2005............................................. 345,314 96,737 - - 2006............................................. 362,078 103,729 - - Thereafter....................................... 732,160 1,119,531 38,000,000 10,000,000 -------------- ----------- ----------- ------------ $ 3,093,794 $ 1,572,805 $38,000,000 $ 10,000,000 ============== =========== =========== ============
67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 10 - OTHER OPERATING EXPENSES Other operating expenses consist of the following:
Years Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------- -------------- Amortization of intangibles...................................... $ 561,798 $ 553,521 $ 493,602 Loss on write-down of goodwill................................... 2,652,620 -- -- Insurance........................................................ 319,305 298,052 171,165 Legal fees....................................................... 1,872,801 785,192 893,874 Professional fees................................................ 1,201,646 219,990 166,021 Supplies......................................................... 652,020 514,633 622,980 Postage.......................................................... 389,593 442,930 380,060 Telephone........................................................ 768,863 920,029 768,944 Other............................................................ 2,168,881 3,421,904 3,677,968 ------------- ------------- -------------- $ 10,587,527 $ 7,156,251 $ 7,174,614 ============= ============= ==============
NOTE 11 - INCOME TAXES The components of income tax expense benefit for each of the years ended December 31, 2001, 2000 and 1999 were:
2001 2000 1999 ---------------------------- ----------------------------- ----------------------------- CURRENT DEFERRED Current Deferred Current Deferred ------------- ------------- -------------- ------------- ------------- -------------- Federal............... $ 149,717 $ (812,875) $ 501,709 $ (1,985,384) $ 277,441 $ 213,177 State................. 16,372 (102,066) (7,325) (213,476) (376) 12,236 ------------- -------------- -------------- ------------- ------------- -------------- $ 166,089 $ (914,941) $ 494,384 $ (2,198,860) $ 277,065 $ 225,413 ============= ============== ============== ============= ============= ==============
[The remainder of this page intentionally left blank] 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 11 - INCOME TAXES - CONTINUED The tax effects of each type of income and expense item that gave rise to deferred taxes are:
December 31, --------------------------------- 2001 2000 --------------- ---------------- Net unrealized losses (gains) on securities available for sale................ $ 162,735 $ (264,881) Depreciation.................................................................. (1,260,335) (1,190,043) Pension expense and benefits.................................................. 540,660 398,798 Provision for loan losses..................................................... 1,968,906 1,900,848 Intangibles................................................................... 744,463 - Provision for debt cancellation............................................... 52,378 61,606 Alternative minimum tax credit carryforward................................... 351,505 351,505 Loss carryforward............................................................. 191,353 191,353 Other......................................................................... 42,315 2,237 --------------- ---------------- $ 2,793,980 $ 1,451,423 =============== ================
The following is a reconciliation of the difference in the effective tax rate and the federal statutory rate:
Years Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------- -------------- Statutory federal income tax rates............................... 34.0% 34.0% 34.0% Effect on rate of: Tax-exempt income............................................. (47.5) 10.7 (18.4) State income tax, net of federal tax benefit.................. (.3) 3.7 0.5 Interest expense disallowance................................. 10.9 (1.2) 1.9 Intangibles................................................... 41.0 - - Other items...................................................... 2.4 (3.7) 5.3 ------------- -------------- -------------- Effective income tax rate........................................ 40.5% 43.5% 23.3% ============= ============== ==============
At December 31, 2001, for income tax purposes, the Company had federal alternative minimum tax (AMT) credit carry forwards of $351,505. The AMT credit carryforwards have no expiration date. Tax effects of securities transactions resulted in an increase in income taxes for 2001, 2000 and 1999 of $470,823, $1,682 and $65,750, respectively. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 12 - SHAREHOLDERS' EQUITY 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 or 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 the 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. In March 1996, the Company issued options to purchase a total of 270,000 shares of the Company's common stock. The options were issued to the directors based upon their years of service and their positions with the Company. Each of the options has an exercise price of $10.00 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. The options were exercisable through March 27, 2001. In March 1997, an additional 103,000 options were issued to the Company's directors with an exercise price of $12.50 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. These options are exercisable through March 26, 2002. In March 1998, 203,331 options were issued to directors and certain senior officers with an exercise price of $15.00 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. These options are exercisable through March 25, 2003. In December 1999, an additional 204,000 options were issued to directors and certain senior officers with an exercise price of $20.00 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. These options are exercisable through December 3, 2004. In August 2000, the Company granted options to purchase an aggregate of 15,000 shares of common stock to certain senior officers of Community Bank. Each of these options has an exercise price of $18.00 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. These options are exercisable through August 24, 2005. In December 2001, the Company granted options to purchase an aggregate of 252,000 shares of common stock to certain senior officers of Community Bank. Each of these options has an exercise price of $10.00 per share, the market value (as determined by the Board of Directors) of the Company's common stock at the time of issuance. The options are exercisable through December 17, 2006. 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 of 1933. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 12 - SHAREHOLDERS' EQUITY - CONTINUED The following sets forth certain information regarding stock options for the years ended December 31, 2001, 2000 and 1999:
Number Wgt. Average Of Shares Exercise Price ---------------- ----------------- Balance, December 31, 1998.................................................... 514,331 $ 12.36 Granted, Year Ended December 31, 1999......................................... 204,000 20.00 Exercised, Year Ended December 31, 1999....................................... (8,667) (14.42) Expired, Year Ended December 31, 1999......................................... (18,333) (15.00) --------------- --------------- Balance, December 31, 1999.................................................... 691,331 14.52 Granted, Year Ended December 31, 2000......................................... 15,000 18.00 Expired, Year Ended December 31, 2000......................................... (2,500) (20.00) --------------- --------------- Balance, December 31, 2000.................................................... 703,831 14.57 GRANTED, YEAR ENDED DECEMBER 31, 2001......................................... 252,000 10.00 EXERCISED, YEAR ENDED DECEMBER 31, 2001....................................... (329,560) 11.35 EXPIRED, YEAR ENDED DECEMBER 31, 2001......................................... (49,666) 15.10 --------------- --------------- BALANCE, DECEMBER 31, 2001.................................................... 576,605 $ 14.37 =============== ===============
Expiration Options Number Date Exercisable ------------- ------------- -------------- Options with Exercise Price of $10.00............................ 252,000 12-17-2006 252,000 Options with Exercise Price of $12.50............................ 20,400 03-26-2002 20,400 Options with Exercise Price of $15.00............................ 110,705 03-25-2003 110,705 Options with Exercise Price of $20.00............................ 183,500 12-03-2004 183,500 Options with Exercise Price of $18.00............................ 10,000 08-24-2005 10,000 ------------- -------------- Total outstanding, December 31, 2001............................. 576,605 576,605 ============= ==============
The Company permits option holders to tender previously owned shares in lieu of cash to pay the exercise price for shares acquired through option exercise. This technique results in an increase in the number of shares outstanding with little or no increase in capital account balances. During 2001, option holders tendered 207,883 shares in connection with the exercise of options for 329,560 shares resulting in a net increase of 121,667 shares outstanding. The excess of the fair market value of the 329,560 shares over the aggregate option price resulted in an income tax benefit of $751,566, which was credited to capital surplus. 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 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 2001, 2000 and 1999, 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 3.43 years. The weighted average fair value of options granted was $2.30 in 2001, $4.12 in 2000, and $3.10 in 1999. The fair value of each option granted is estimated using the following weighted-average assumptions in the option pricing model: expected dividend yield of 2.50% for 2001, 2.78% for 2000, and 4.25% for 1999; an expected option life of five years; expected volatility of .257 for 2001, 0.250 for 2000 and 0.164 for 1999; and a risk free interest rate of 4.40%, 5.08% and 6.60% for 2001, 2000 and 1999, respectively. If compensation cost for the Company's stock-based compensation plan had been determined consistent with SFAS No. 123, net income (loss) and earnings (loss) per share would have been as presented below for the years ended December 31:
2001 2000 1999 ------------- ------------- -------------- Pro forma net income (loss) ($000's)............................. $ (1,483) $ (2,254) $ 1,258 Pro forma earnings (loss) per Common Share - basic............... (0.32) (0.51) 0.28 Pro forma earnings (loss) per Common Share - diluted............. (0.32) (0.48) 0.27
No options were assumed to be exercised in the calculation of diluted average shares outstanding for 2001, since all options outstanding were at an exercise price greater than the fair market value of the stock. Therefore, average shares outstanding for 2001 was 4,572,301 for both basis and diluted earnings per share. Average shares outstanding when assuming dilution were greater than average shares outstanding for basic earnings per share by 211,135 for 2000 and 165,769 for 1999. As opposed to no dilutive effect for 2001, the dilutive effect on earnings (loss) per share was $(.03) for the year ended December 31, 2000, and $.01 for the year ended December 31, 1999. The effects of applying SFAS 123 for providing pro forma 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. Common stock issued in lieu of cash for directors' fees is summarized as follows:
2001 2000 1999 ------------- ------------- -------------- Shares issued............................................... 11,661 9,481 8,923 ============= ============= ============== Fair market value on issue date............................. $ 209,865 $ 222,804 $ 169,536 ============= ============= ==============
The aggregate fair market value of the shares issued was charged to expense in each respective period. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES No dividends were declared or paid in 2001. Annual dividends of $.75 per share and $.60 per share were declared by the Company's Board of Directors on its common stock and paid in January of 2000 and 1999, 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 15). 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. Accounting principles generally accepted in the United States of America 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 extensions 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 2001 or 2000. 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, 2001 and 2000, the Company has issued standby letters of credit of approximately $1,299,000 and $978,000, 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, 2001 and 2000, the Company had commitments outstanding to extend credit totaling approximately $19,788,000 and $19,868,000, 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. 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 $2,464,000 and $2,277,256 of the unused commitment balances at December 31, 2001 and 2000. All remaining commitments consist primarily of unused real estate commitment lines. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED Litigation Background At a meeting of Community Bank's Board of Directors on June 20, 2000, a director brought to the attention of the Board the total amount of money Community Bank had paid subcontractors in connection with the construction of a new Community Bank office. Management of the Company commenced an investigation of the expenditures. At the request of management, the architects and subcontractors involved in the construction project made presentations to the Boards of Directors of the Company and Community Bank on July 15 and July 18, 2000, respectively. At the July 18, 2000 meeting of the Board of Directors of Community Bank, another director made a presentation alleging that Community Bank had been overcharged by subcontractors on that construction project and another current construction project. On July 18, 2000, the Boards of Directors of the Company and Community Bank appointed a joint committee comprised of independent directors of the Company and of Community Bank to investigate the alleged overcharges. Upon completion of its investigation, the joint committee is to inform the Boards of Directors of the Company and Community Bank of its findings and recommendations. The joint committee retained legal counsel and an independent accounting firm to assist the committee in its investigation. Management has also been informed that the directors of Community Bank who alleged the construction overcharges have contacted bank regulatory agencies and law enforcement authorities. Management believes that these agencies and authorities either have conducted or are currently conducting investigations regarding this matter. Benson Litigation On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E. Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of Marshall County, Alabama against the Company, Community Bank, certain directors and officers of the Company and Community Bank, an employee of Community Bank and two construction subcontractors. The plaintiffs purported to file the lawsuit as a shareholder derivative action, which relates to the alleged construction overcharges being investigated by the joint committee of the Boards of Directors of the Company and Community Bank. The complaint alleges that the directors, officers and employee named as defendants in the complaint breached their fiduciary duties, failed to properly supervise officers and agents of the Company and Community Bank, and permitted waste of corporate assets by allegedly permitting the subcontractor defendants to overcharge Community Bank in connection with the construction of two new Community Bank offices, and to perform the construction work without written contracts, budgets, performance guarantees and assurances of indemnification. In addition, the complaint alleges that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive Officer of the Company, breached his fiduciary duties by allegedly permitting the two named subcontractors to overcharge for work performed on the two construction projects in exchange for allegedly discounted charges for work these subcontractors performed in connection with the construction of Mr. Patterson's residence. The complaint further alleges that the director defendants knew or should have known of this alleged arrangement between Mr. Patterson and the subcontractors. The complaint also alleges that Mr. Patterson, the Community Bank employee and the two subcontractor defendants made false representations and suppressed information about the alleged overcharges and arrangement between Mr. Patterson and the subcontractors. On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C. Mann, a shareholder of the Company, as a plaintiff and adding a former director of the Company and Community Bank as a defendant. The amended complaint generally reiterates the allegations of the original complaint. In addition, the 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED amended complaint alleges that Community Bank was overcharged on all construction projects from January 1997 to the present. The amended complaint also alleges that the defendants breached their fiduciary duties and are guilty of gross financial mismanagement, including allegations concerning the making or approval of certain loans and taking allegedly improper actions to conceal the fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs filed a second amended complaint. The second amended complaint generally reiterates the allegations of the original and first amended complaints. In addition, the second amended complaint alleges that the plaintiffs were improperly denied their rights to inspect and copy certain records of the Company and Community Bank. The second amended complaint also alleges that the directors of the Company abdicated their roles as directors either by express agreement or as a result of wantonness and gross negligence. The second amended complaint asserts that the counts involving inspection of corporate records and director abdication are individual, nonderivative claims. The second amended complaint seeks, on behalf of the Company, an unspecified amount of compensatory damages in excess of $1 million, punitive damages, disgorgement of allegedly improperly paid profits and appropriate equitable relief. Upon motion of the defendants, the case was transferred to the state Circuit Court in Blount County, Alabama by order dated September 21, 2000, as amended on October 12, 2000. On August 24, 2000, the Board of Directors of the Company designated the directors of the Company who serve on the joint investigative committee as a special litigation committee to investigate and evaluate the allegations and issues raised in this lawsuit and to arrive at such decisions and take such action as the special litigation committee deems appropriate. At a hearing on February 23, 2001 the court stayed discovery with respect to the Company, Community Bank and the directors, officers and employees of each until May 24, 2001, at which time the court expects to receive a report from the special litigation committee. Because the special litigation committee has not yet completed its investigation, and as a result of the inherent uncertainties of the litigation process, the Company is unable at this time to predict the outcome of this lawsuit and its effect on the Company's financial condition and results of operations. Regardless of the outcome, however, this lawsuit could be costly, time-consuming and a diversion of management's attention. Towns Derivative Litigation On November 19, 1998, Mr. William Towns, a shareholder of the Company, filed a shareholder derivative action against the directors of the Company in the state Circuit Court of Blount County, Alabama. Mr. Towns amended his complaint on January 14, 1999 to add the Company and Community Bank as defendants in the action. On February 11, 1999, the complaint was again amended to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the Company, as additional plaintiffs. The complaint alleged that the directors of the Company breached their fiduciary duty to the Company and its shareholders, engaged in fraud, fraudulent concealment, suppression of material fact and suppression of the plaintiff shareholders, failed to supervise management, and conspired to conceal wrongful acts from the Company's shareholders and paid themselves excessive director fees. The complaint also alleged that the Board of Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson, Sr., the Chairman of the Board, Chief Executive Officer and President of the Company, including alleged self dealing, payment of excessive compensation, misappropriation of corporate opportunities and misappropriation of funds. The complaint sought an unspecified amount of compensatory and punitive damages, removal of the current directors, appointment of a new Board of Directors, and attorneys fees and cost. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED On December 21, 1998, the Company and its directors filed a motion with the court seeking to have the complaint dismissed. On March 1, 1999, the Company's Board of Directors appointed a special Board committee comprised of non-employee directors of the Company, to review the plaintiffs' allegations in accordance with Delaware law. On April 6, 1999, each of the parties to the action requested that the court stay the litigation and related discovery, motions and hearings, pending completion of the special committee's review. On April 30, 1999, the court entered an order staying the litigation and related discovery, motions and hearing in accordance with the parties' request. On October 15, 1999, the special committee filed its final report with the court. On October 21, 1999, the parties forwarded to the court an agreed-upon order governing the confidentiality of the special committee's report, which the court entered on January 2, 2000. On August 3, 2000, the Company, Community Bank and the Company's directors filed a motion to stay the proceedings until the Company's and Community Bank's joint investigative committee had completed its investigation of the alleged construction overcharges discussed above. At the request of the Company and the other defendants in the action, the court continued a hearing on the motion to dismiss. On February 23, 2001, the court indicated that there was no reason to continue the stay of this action. The parties are awaiting a hearing on the defendants' motion to dismiss the case. Management of the Company believes that the plaintiffs' allegations are false and that the action lacks merit. The Company and its directors intend to defend the action vigorously, and management of the Company believes that the action will not have a material adverse effect on the Company's financial condition or results of operations. Regardless of the outcome, however, this lawsuit could be costly, time consuming and a diversion of management's attention. Corr Family Litigation On September 14, 2000, another action was filed in the state Circuit Court of Blount County, Alabama, against the Company, Community Bank and certain directors and officers of the Company and Community Bank by Bryan A. Corr and six other related shareholders of the Company alleging that the directors actively participated in or ratified the misappropriation of corporate income. The action was not styled as a shareholder derivative action. On January 3, 2001, the defendants filed a motion for summary judgment on the basis that these claims are derivative in nature and cannot be brought on behalf of individual shareholders. The court has not ruled on the motion. The Company and its directors believe that this lawsuit is without merit and intend to defend the action vigorously. Although management currently believes that this action will not have a material adverse effect on the Company's financial condition or results of operations, regardless of the outcome, the action could be costly, time consuming and a diversion of management's attention. The Company's Certificate of Incorporation provides that, in certain circumstances, the Company will indemnify and advance expenses to its directors and officers for judgments, settlements and legal expenses incurred as a result of their service as officers and directors of the Company. Community Bank's Bylaws contain a similar provision for indemnification of directors and officers of Community Bank. Auto Loan Litigation On June 28, 2000, Community Bank filed an action in the United States District Court for the Northern District of Alabama against Carl Gregory Ford L-M, Inc., an automobile dealership located in Ft. Payne, Alabama, Carl Gregory and Doug Broaddus, the owners of the dealership, several employees and former employees of the dealership and Gerald Scot Parrish, a former employee of Community Bank, with respect to certain loans originated during 1998 in Community Bank's Wal-Mart office in Ft. Payne, Alabama. In the 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED complaint Community Bank alleged that the defendants willingly and knowingly conducted, participated in, were employed by or associated with, or aided and abetted an enterprise within the meaning of the Racketeer Influenced and Corrupt Organizations Act (RICO) for the purpose of defrauding Community Bank. The complaint also asserted that the defendants committed fraud, misrepresentation and deceit by submitting to Community Bank and/or approving applications for automobile loans which contained false and/or fraudulent information for the purpose of deceiving, influencing and persuading Community Bank to provide loans to customers of the automobile dealership who were otherwise not qualified to receive such loans, and suppressed material facts regarding the veracity of information contained in loan applications and the ability of persons seeking the loans to repay them. Community Bank also alleged in the complaint that the automobile dealership is responsible for the acts of its officers, agents and employees, and that the dealership and its management failed to adequately train and/or supervise its employees. The complaint stated that the defendants participated in a conspiracy to violate RICO and Alabama statutes dealing with fraud, misrepresentation and suppression of material facts, and asserted civil liability under Alabama law for violation of federal statutes dealing with financial institution fraud, mail and wire fraud and making false statements for the purpose of influencing the actions of a financial institution upon an application or loan. On June 29, 2000 and August 31, 2000, the court granted Community Bank's motions to dismiss without prejudice two of the employees of the automobile dealership as defendants in the action. On September 13, 2000, the court granted Mr. Parrish's action to dismiss the complaint, but granted Community Bank 15 days to amend the complaint. On September 27, 2000, Community Bank filed an amended complaint which generally reiterated the allegations of the original complaint and added specific information concerning the allegedly fraudulent activity and the use of the United States mail, telephone and other wire transmissions in the conduct of such activity. On December 1, 2000, the court dismissed Community Bank's claims based upon mail and wire fraud in the amended complaint but otherwise denied Mr. Parrish's motion to dismiss the complaint. The defendants have filed answers to the amended complaint which generally deny the material allegations in the complaint and allege that any injury suffered by Community Bank was the result of the contributory negligence of Community Bank, its officers, employees and agents. In the lawsuit, Community Bank seeks damages of an unspecified amount to recover losses incurred in connection with the loans made at Community Bank's Wal-Mart office in Ft. Payne, Alabama, along with all costs associated with the lawsuit. Any amounts received by Community Bank as a result of this litigation will be treated as a recovery on loan losses. Employee Litigation On November 15, 2000, Michael W. Alred and Michael A. Bean, two former directors and executive officers of Community Bank, filed suit against Community Bank in the United States District Court for the Northern District of Alabama alleging that their employment was wrongfully terminated for allegedly providing information to bank regulatory and law enforcement authorities concerning possible violations of laws and regulations, gross mismanagement, gross waste of funds and abuse of authority by Community Bank, its directors, officers and employees. According to the complaint, the information which these two individuals provided to authorities concerned certain bank construction projects, specific loans, charge-offs, expenses and past due accounts. The complaint seeks reinstatement of the plaintiffs to their former positions as officers and directors of Community Bank as well as compensatory and punitive damages. Community Bank and its directors believe this lawsuit is without 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED merit and intend to defend the action vigorously. Management of the Company believes that this action will not have a material adverse effect on the Company's financial condition or results of operations. The Company and its subsidiaries are from time to time parties to other legal proceedings arising in the ordinary course of business. Management believes, after consultation with legal counsel, that no such proceedings, if resulting in an outcome unfavorable to the Company, will, individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. NOTE 14 - 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. An employee who becomes a participant 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. An employee who became a participant before January 1, 1996, is 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, Inc. 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 remainder of this page intentionally left blank] 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 14 - PENSION PLAN - CONTINUED 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. Pension Plan as of December 31:
2001 2000 --------------- ---------------- Change in benefit obligation: Benefit obligation at beginning of year.................................... $ 7,030,889 $ 5,279,613 Service cost............................................................... 614,252 620,489 Interest cost.............................................................. 495,976 446,220 Amendments................................................................. - - Actuarial (gain) or loss................................................... (37,271) 885,026 Benefits paid.............................................................. (212,680) (200,459) ---------------- ---------------- Benefit obligation at end of year........................................ $ 7,891,166 $ 7,030,889 =============== ================ Change in plan assets: Fair value of plan assets at beginning of year............................. $ 5,153,926 $ 4,983,127 Actual return on plan assets............................................... (229,629) (66,986) Employer contribution...................................................... 731,235 438,244 Benefits paid from plan assets............................................. (212,680) (200,459) ---------------- ---------------- Fair value of plan assets at end of year................................. $ 5,442,852 $ 5,153,926 =============== ================ Funded status of plan: Funded status of plan...................................................... $ (2,448,314) $ (1,876,963) Unrecognized actuarial (gain) or loss...................................... 1,946,596 1,186,539 Unrecognized prior service cost............................................ 77,337 89,036 Unrecognized transition asset.............................................. (3,794) (20,673) ---------------- ---------------- Accrued benefit cost..................................................... $ (428,175) $ (622,061) ================ ================ 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% 7.50% Expected long-term rate of return on plan assets for the year............ 9.25% 10.00% Expected rate of increase in future compensation levels.................. 6.00% 6.00%
79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 14 - PENSION PLAN - CONTINUED Pension plan net periodic benefit cost:
2001 2000 1999 ------------- ------------- -------------- Service cost..................................................... $ 614,252 $ 620,489 $ 485,701 Interest cost.................................................... 495,976 446,220 366,805 Expected return on plan assets................................... (567,699) (529,400) (470,474) Amortization of prior service cost............................... 11,699 11,699 11,699 Amortization of transitional asset............................... (16,879) (16,879) (16,879) Recognized actuarial loss........................................ - - - ------------- ------------- -------------- Net periodic benefit cost........................................ $ 537,349 $ 532,129 $ 376,852 ============= ============= ==============
Benefit Restoration Plan as of December 31:
2001 2000 --------------- ---------------- Change in benefit obligation: Benefit obligation at beginning of year.................................... $ 2,678,166 $ 2,082,163 Service cost............................................................... 157,302 141,048 Interest cost.............................................................. 202,471 170,368 Amendments................................................................. - - Actuarial loss............................................................. 162,993 284,587 Benefits paid.............................................................. - - --------------- ---------------- Benefit obligation at end of year.......................................... $ 3,200,932 $ 2,678,166 =============== ================ Change in plan assets: Fair value of plan assets at beginning of year............................. $ - $ - Actual return on plan assets............................................... - - Employer contribution...................................................... - - Benefits paid from plan assets............................................. - - --------------- ---------------- Fair value of plan assets at end of year................................... $ - $ - =============== ================ Funded status of plan: Funded status of plan...................................................... $ (3,200,932) $ (2,678,166) Unrecognized actuarial loss................................................ 1,371,808 1,298,222 Unrecognized prior service cost............................................ 98,439 133,346 Unrecognized transition (asset) or obligation.............................. - - --------------- ---------------- Accrued benefit cost....................................................... $ (1,730,685) $ (1,246,598) ================ ================ 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% 7.50% Expected long-term rate of return on plan assets for the year............ 9.25% 10.00% Expected rate of increase in future compensation levels.................. 6.00% 6.00%
80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 14- PENSION PLAN - CONTINUED Benefit Restoration plan net periodic benefit cost:
2001 2000 1999 ------------- ------------- -------------- Service cost..................................................... $ 157,302 $ 141,048 $ 85,940 Interest cost.................................................... 202,471 170,368 96,712 Expected return on plan assets................................... - - - Amortization of prior service cost............................... 34,907 34,907 34,907 Amortization of transitional (asset) or obligation............... - - - Recognized actuarial loss........................................ 89,407 63,748 38,399 ------------- ------------- -------------- Net periodic benefit cost........................................ $ 484,087 $ 410,071 $ 255,958 ============= ============= ==============
NOTE 15 - 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 ($170,000 in 2001) 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 due monthly through November 16, 2010, with the remaining principal, if any, due upon that date. The initial principal and interest payment on this debt in December 1998 was $31,677. As changes occur in the interest rate on the loan, appropriate adjustments are made to the monthly principle and interest payments. At December 31, 2001, the monthly payment was $33,852. 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, 2001, there were 174,267 unreleased shares with a fair value, based on an independent valuation of $10.00 per share, of approximately $1,742,670. These shares are subtracted from outstanding shares for earnings per share calculations. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 15- EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED 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 ($176,465, $251,976 and $237,589 in 2001, 2000 and 1999, 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 may be used to repay debt associated with the ESOP or treated as other income of the ESOP and allocated to the participants. At December 31, 2001 and 2000, the Company's financial statements reflected long-term debt related to the ESOP of $2,382,490 and $2,606,224, respectively. The corresponding contra-equity account was $2,317,902 at December 31, 2001 and $2,574,002 at December 31, 2000. Company contributions to the ESOP amounted to $406,228, $568,346 and $452,739 for 2001, 2000 and 1999, respectively. NOTE 16 - 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. Under Alabama law, the approval of the Alabama Superintendent of Banks is required to pay dividends in excess of the Bank's net earnings for the current year plus retained net earnings for the preceding two years less any required transfers to surplus. Effective April 18, 2001, the Board of Directors of Community Bank, the Company's subsidiary bank, entered into a Memorandum of Understanding ("Memorandum") with the Regional Director of the Federal Deposit Insurance Corporation's Atlanta Regional Office ("FDIC") and the Alabama Superintendent of Banks ("State"). One major provision of the Memorandum restricts the Bank from paying any cash dividends without the prior written consent of the Supervisory Authorities. The Bank has made no requests to make a dividend payment since the Memorandum has been in effect. NOTE 17 - 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 Community 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 judgments by the regulators about components, risk weightings and other factors. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 17- REGULATORY CAPITAL - CONTINUED Quantitative measures established by regulation to ensure capital adequacy require the Company and Community Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001 and 2000, that the Bank meets all capital adequacy requirements to which it is subject. At December 31, 2001 and 2000, under applicable banking regulations, the Company and Community Bank, were considered well capitalized compared to both being classified as adequately capitalized at year-end 1999. The Company is entitled to treat the aggregate liquidation amount of the junior subordinated deferrable interest debentures, purchased by Community (AL) Capital Trust I, as Tier I capital under Federal Reserve guidelines. At December 31, 2001, the aggregate liquidation amount of the debentures included in Tier I capital was $10,000,000. (See Note 8) Community Bank's allowance for loan losses, limited to 1.25% of risk-weighted assets, is a component of Tier II capital under capital adequacy guidelines. Due to the significant increase in the allowance for loan losses during 2000, this Tier II component contributed to the increases in the Company's and Community Bank's capital ratios. The amount of the allowance for loan losses included in Tier II capital at December 31, 2001 was approximately $6,142,000 for the Company and approximately $6,110,000 for Community Bank, compared to $6,386,034 for both the Company and $6,356,770 for Community Bank at December 31, 2000. [The remainder of this page intentionally left blank] 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 17 - REGULATORY CAPITAL - CONTINUED The following table sets forth the actual capital ratios at December 31, 2001 and 2000, for the Company and the Bank, as well as the minimum total risk-based, Tier 1 risked-based and Tier 1 leverage ratios required to be classified as adequately capitalized and well capitalized.
For Capital To Be Actual Adequacy Purposes Well Capitalized ------------------------ ------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----------- --------- ------- -------- --------- (Dollars In Thousands) AS OF DECEMBER 31, 2001: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED............................ $ 56,833 11.59% $ 39,218 8.00% $ 49,023 10.00% COMMUNITY BANK.......................... 58,101 11.91 39,011 8.00 48,764 10.00 TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED............................ 49,118 10.02 19,609 4.00 29,414 6.00 COMMUNITY BANK.......................... 51,991 10.66 19,505 4.00 29,258 6.00 TIER 1 CAPITAL (TO AVERAGE ASSETS): CONSOLIDATED............................ 49,118 6.70 29,315 4.00 36,644 5.00 COMMUNITY BANK.......................... 51,991 7.11 29,244 4.00 36,555 5.00 As of December 31, 2000: Total Capital (to Risk Weighted Assets): Consolidated............................ $ 53,746 10.54% $ 40,813 8.00% $ 51,016 10.00% Community Bank.......................... 52,763 10.39 40,623 8.00 50,779 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated............................ 45,956 9.01 20,406 4.00 30,610 6.00 Community Bank.......................... 46,406 9.14 20,312 4.00 30,467 6.00 Tier 1 Capital (to Average Assets): Consolidated............................ 45,956 6.44 28,539 4.00 35,674 5.00 Community Bank.......................... 46,406 6.54 28,375 4.00 35,469 5.00
84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 18 - COMPREHENSIVE INCOME In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as a part of other comprehensive income in that period or earlier periods. The following is a summary of the components of other comprehensive income:
Year Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------- -------------- Unrealized holding gains (losses) arising during period before income tax and reclassification adjustments............ $ 214,906 $ 3,421,991 $ (3,314,131) Reclassification adjustments for net (gains) losses included in net income........................................ (1,283,945) (4,587) (179,303) ------------- ------------- -------------- Other comprehensive income (loss), before income tax............. (1,069,039) 3,417,404 (3,493,434) Income tax expense (benefit) related to other comprehensive income.......................................... (427,616) 1,366,962 (1,397,374) ------------- ------------- -------------- Other comprehensive income (loss), net of income tax............. $ (641,423) $ 2,050,442 $ (2,096,060) ============= ============= ==============
NOTE 19 - RELATED PARTY TRANSACTIONS Loans: Certain directors, executive officers and principal shareholders, including their immediate families and associates were loan customers of the Bank during 2001 and 2000. 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, 2001 and 2000 amounted to approximately $16,179,000 and $14,034,000, respectively. An analysis of activity during 2001 in loans to related parties resulted in additions of approximately $377,000, representing new loans, reductions of approximately $999,000, representing payments, and an increase of approximately $2,767,000, representing a change in the composition of related parties. The Company, through Community Bank, its wholly owned subsidiary, offers all regular full-time employees, including executive officers, loans at interest rates which are 1% below the prevailing market rate. As of December 31, 2001, 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 $396,000. The Company, through Community Bank, 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, 2001, executive officers and directors of the Company and executive officers of Community 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED Bank and its subsidiaries, including members of their immediate families and related interests, had relocation loans outstanding with total indebtedness of approximately $2,155,000. Community Bank currently has outstanding two loans to Kennon R. Patterson, Sr., the Chairman and CEO of the Company: (i) a farm operating line of credit of $100,000. During 2001, the highest balance outstanding for this loan was $100,000, and its balance at year end was $49,780. The loan bears interest at 3.75%; (ii) a real-estate loan in the amount of $5,150,000. During 2001, the highest balance outstanding for this loan was $5,150,000, and its balance at year end was $5,150,000. The loan bears interest at 4.75% and is secured by real estate having an appraised value in excess of the loan amount. Community Bank currently has outstanding loans to Hodge Patterson, Executive Vice President of the Bank: (i) a real-estate loan of $549,480. During 2001, the highest balance outstanding for this loan was $561,253, and its balance at year end was $552,732. the loan bears interest at 5.00%. (ii) unsecured loans of $124,572. During 2001, the highest balance outstanding for these loans were $124,572, and its balance at year end was $124,572. The loans bear interest at 4.75%. In June 2000, Community Bank loaned $1,696,576 to Debter Properties, LLC, an Alabama limited liability company of which a director of the Company is a member, to fund the purchase from Community Bank of the real property in which Community Bank's Boaz, Alabama office is located. The loan amortizes over a 20-year period and is collateralized by a first mortgage on the real property. The loan carries a prime rate of interest that adjusts each time there is a change in the prime rate. As adjustments occur in the interest rate on the loan, appropriate increases or decreases are made to the monthly loan payment. Concurrently with this loan and the purchase of the real property, Community Bank entered into a lease agreement with Debter Properties, LLC to lease back this real property from Debter Properties, LLC for a term of 20 years, with monthly rental payments equal to the monthly amount of principal and interest due under the loan to Debter Properties, LLC plus applicable real estate taxes, assessments, levies and insurance. Maintenance Contract: The Bank had no service contracts during 2001 or 2000 with Heritage Valley Farms, an unincorporated business owned by Kennon R. Patterson, Sr., a director and officer of the Company. Heritage Valley Farms did perform upkeep and maintenance of the external grounds for five of the Bank's locations for the entire year of 1999. External grounds upkeep and maintenance was also performed for most of 1999 for five additional Bank locations and two 1st Community Credit Corporation locations. Maintenance expense under this contract amounted to $62,323 for the year ended December 31, 1999, a monthly average of $588 per location. Interior Design: The Company and the Bank had no service contracts during 2001 with 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. The Company and the Bank, including the Bank's subsidiaries used the services of Heritage Interiors during 1999 and 2000 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. At the request of Mrs. Patterson in January 2000, the Company's contract with Heritage Interiors was canceled, but at the Board of Directors' request, Mrs. Patterson agreed to complete projects then pending. During 2000, Heritage Interiors was paid $145,038 in connection with the completion of the Boaz and Hamilton, Alabama banks. In addition, Community Bank paid Heritage Interiors $41,827 in connection with the completion of the renovation of the first floor of the headquarters building and the furnishings and decorating of three departments at the headquarters complex in Blountsville, Alabama. Additional payments totaling $25,064 were made to Heritage Interiors during 2000 in connection with 21 other banking locations and the parent company. 1st Community Credit Corporation paid Heritage Interiors $22,003 for the furnishings and decorating in connection with the relocation of its Hartselle, Alabama office and $4,845 in connection with the remodeling of its Albertville, Alabama office. Additional payments totaling $7,317 were made to Heritage Interiors during 2000 in connection with nine other finance company locations. Community Insurance Corp. paid Heritage Interiors $156,158 during 2000 for furnishings and decorating in connection with the renovation of its Huntsville, Alabama office. In addition, payments totaling $4,848 were made to Heritage Interiors during 2000 for furnishings at the Oneonta, Alabama insurance office. Total payments to Heritage Interiors in 2000 were $407,100. All pending projects were completed prior to year-end 2000. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED During 1999, Heritage Interiors was paid $262,912 in connection with the opening of the Boaz, Alabama bank and the opening and completion of the Demopolis, Alabama bank. The Bank also paid Heritage Interiors $279,026 in connection with the renovation and expansion of its new permanent location in Fite House located in Hamilton, Alabama. As a result of being listed on the state and national register of historical places, a portion of the cost associated with furnishing and decorating the Fite House was to preserve the architectural style and historical significance of the building. The Bank also paid Heritage Interiors $120,080 during 1999 in connection with the renovation of three offices furnished to the Bank's Area Executive Vice Presidents and the first floor of the Company's headquarters building. Additional payments totaling $16,121 were made to Heritage Interiors during 1999 in connection with 24 other banking offices. 1st Community Credit Corporation paid Heritage Interiors $23,835 for furnishings and decorating associated with the opening of its new office in Oneonta, Alabama and $7,469 in connection with the relocation of its office in Hartselle, Alabama. 1st Community Credit Corporation also paid Heritage Interiors $78,632 during 1999 in connection with the renovation of five of its offices located in Boaz, Gadsden, Huntsville, Ft. Payne and Jasper, Alabama. Additional payments totaling $12,931 were made to Heritage Interiors by 1st Community Credit Corporation during 1999, relating to the other five locations and its administrative offices. The Company, Community Insurance Corp. and Southern Select Insurance, Inc. made payments totaling $35,848 to Heritage Interiors for various services rendered during 1999. Total payments to Heritage Interiors in 1999 were $836,854. Accounting Services: The Company has engaged the accounting firm of Schauer, Taylor, Cox, Vise and Morgan, P.C. to perform certain accounting services. Doug Schauer, a member of the firm, is Kennon R. Patterson, Sr.'s son-in-law. Other than preparing work papers during the first quarter of 2000 for the Company's independent auditors in connection with the Company's 1999 external audit, services performed by Schauer, Taylor, Cox, Vise and Morgan, P.C. for the Company in 2001 and 2000 have been limited to preparation of the Company's quarterly tax accruals, preparation and filing the Company's federal and state tax returns and consultation regarding interpretation and application of accounting standards. During 1999, services performed by Schauer, Taylor, Cox, Vice and Morgan, P.C., included the review of work papers and reports prepared by Community Bank's internal audit department, preparation of work papers for the Company's independent auditors in connection with the Company's external audits, preparation and filing the Company's federal and state tax returns and consultation regarding interpretation and application of accounting standards. The Company and its subsidiaries paid Schauer, Taylor, Cox, Vise and Morgan, P.C. $121,707, $117,898 and $143,000 for services rendered during 2001, 2000 and 1999, respectively. Leases: In June 2000, Community Bank entered into a capital lease agreement, as the tenant, with Debter Properties, LLC, an Alabama limited liability company, pursuant to which Community Bank leased the real property in which Community Bank's Boaz, Alabama office is located. Mr. Glynn Debter, a director of the Company, is a member of Debter Properties, LLC. In connection with the lease agreement, Community Bank loaned funds to Debter Properties, LLC to finance its purchase of the real property from Community Bank. The term of the lease is 20 years; provided, however, that in no event shall the term of the lease expire prior to the time when the loan obtained by the lessor to purchase the leased property is paid in full. The monthly rent on this lease is an amount equal to the monthly debt amortization of funds which the lessor borrowed to purchase the leased property. Because the interest rate on the loan used to purchase the property adjusts with fluctuation in the prime rate, the monthly lease payments are subject to change. At December 31, 2001, the amount of the monthly rental payment was $11,136. Lease payments to Debter Properties, LLC during 2001 totaled approximately $156,651. In addition, Community Bank agreed to pay the lessor an additional sum 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 19 - RELATED PARTY TRANSACTIONS - CONTINUED to be adjusted periodically to coincide with the cost to the lessor of the real estate taxes and other items and insurance. Community Bank is responsible for maintenance, repairs and utilities for the real property. Community Bank is also responsible for maintaining fire and extended coverage and general liability insurance coverage for the real property. The Company has the option to purchase the leased premises from the lessor at any time during the term of the lease for an amount equal to the lessor's cost in acquiring and/or constructing such leased premises. In an Addendum to the Lease Agreement and Loan Agreement, dated June 1, 2000, Community Bank agreed to maintain and continue in force fire and extended coverage insurance and general liability insurance upon the leased premises. In return, the lessor agreed to reimburse Community Bank on a quarterly basis the amount of the insurance premium that is included in payments made by Community Bank under the lease. On March 13, 2001, Community Bank entered into a ground lease with Merritt Robbins, a director of the Company and Community Bank, pursuant to which Community Bank leases property in New Hope, Alabama, from Mr. Robbins for a period of 5 years at a monthly rent of $800. Community Bank has the option to renew the lease for up to seven successive 5-year terms in which event the rent increases $200 per month with each renewal term. At any time during the term of the lease Community Bank has the option to purchase the property at a price agreed upon by the parties, or, if the parties cannot agree, at a price determined by averaging appraisals of the property performed by two licensed appraisers. On June 14, 2001, Community Bank entered into a lease with Michael Robbins, the son of a director of the Company and Community Bank pursuant to which Mr. Robbins leases property in Madison County, Alabama from Community Bank for a period of 5 years at a monthly rent of $700. Mr. Robbins has the option to renew the lease for up to seven successive 5-year terms. At any time during the term of the lease Mr. Robbins has the option to purchase the property at a price agreed upon by the parties, or, if the parties cannot agree, at a price determined by averaging appraisals of the property performed by two licensed appraisers. NOTE 20 - LEASES The Company has a number of operating lease agreements, involving land and buildings. The operating leases are noncancellable and expire on various dates through the year 2018. 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, 2001, 2000, and 1999, rental expense for operating leases was approximately $559,725, 523,524 and $687,994, respectively. During 2000, Community Bank entered into sale/leaseback arrangements on its Hamilton, Alabama and Boaz, Alabama bank locations. Due to the structure of these transactions, the leases qualified and are accounted for under capitalized lease rules. 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 20 - LEASES - CONTINUED The following is an analysis of the leased property under capital leases by major classes:
Asset Balances at December 31, ------------------------------ 2001 2000 ------------- ------------- Buildings.................................................... $ 5,880,626 $ 5,880,626 Less allowance for depreciation.............................. 355,137 130,840 ------------- ------------ $ 5,525,489 $ 5,749,786 ============= ============
The following is a schedule by year of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments as of December 31, 2001. All capitalized leases are with related parties.
Related Party Total Operating Operating Capitalized ------------- ------------- --------------- Years Ending December 31, 2002............................................... $ 9,600 $ 381,265 $ 398,748 2003............................................... 9,600 280,707 398,748 2004............................................... 9,600 217,846 398,748 2005............................................... 9,600 139,305 398,748 2006............................................... 2,400 94,767 398,748 Thereafter......................................... - 264,400 7,967,800 ------------- ------------ --------------- Total minimum lease payments....................... $ 40,800 $ 1,378,290 9,961,540 ============= ============= Less amount representing interest.................. 4,195,464 --------------- Present value of net minimum lease payments........ $ 5,766,076 ===============
NOTE 21 - OTHER SHORT-TERM BORROWINGS Other short-term borrowings at December 31, 2001 and 2000 consisted of the U.S. Treasury Tax and Loan Note Option account of $1,822,420 and securities sold under agreements to repurchase of $2,537,507. The Company had no federal funds purchased or overnight funds purchased from FHLB-Atlanta at December 31, 2001 and 2000. US Treasury Tax and Loan Note Option and 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. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 21 - OTHER SHORT-TERM BORROWINGS - CONTINUED The following table sets forth, for the periods indicated, certain information about the Company's short-term borrowings: SHORT-TERM BORROWINGS
At December 31, ------------------------ Weighted Maximum Average Average Average Outstanding At Balance Rate Balance Rate Any Month End ------------ ---------- ---------- ----------- ---------------- (Dollars in thousands) 2001: FEDERAL FUNDS PURCHASED.................. $ - 0.00% $ 74 6.11% $ 3,000 SHORT-TERM FHLB BORROWINGS............... - 0.00% 3,967 4.30% 8,000 SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE............................. 2,538 2.13% 2,274 3.59% 391 U.S. TREASURY TAX AND LOAN, NOTE OPTION................................. 1,822 1.51% 1,021 3.21% 814 --------- ------- -------- TOTAL................................ $ 4,360 1.87% $ 7,336 3.95% $ 12,205 ========= ======= ======== 2000: Federal funds purchased.................. $ - 0.00% $ 402 6.47% $ 3,000 Short-term FHLB borrowings............... - 0.00% 325 6.86% - Securities sold under agreement to repurchase............................. 862 6.17% 818 6.17% 1,072 U.S. Treasury Tax and Loan, note option................................. 1,403 5.72% 1,044 6.14% 2,456 -------- ------- -------- Total................................ $ 2,265 5.89% $ 2,589 6.30% $ 6,528 ======== ======= ========
NOTE 22 - 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. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED 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. FHLB Borrowings, Long-term Debt and Capital Securities: The fair value of the Company's fixed rate borrowings are estimated using discounted cash flows, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of the Company's variable rate borrowing approximates their fair values. 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] 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The estimated fair values of the Company's financial instruments as of December 31, 2001 and 2000 are as follows:
2001 2000 ------------------------------ ------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value -------------- ------------- ------------- ---------------- (IN THOUSANDS) (IN THOUSANDS) FINANCIAL ASSETS Cash and short-term investments................ $ 23,237 23,237 $ 26,707 $ 26,707 Federal funds sold............................. 30,000 30,000 3,000 3,000 Investment securities.......................... 121,679 121,679 101,570 101,570 Loans.......................................... 501,520 517,454 528,316 - Less: allowance for loan losses................ 7,292 7,292 7,107 - -------------- ------------- ------------- ---------------- Net Loans...................................... 494,228 510,162 521,209 519,754 -------------- ------------- ------------- ---------------- TOTAL FINANCIAL ASSETS......................... $ 669,144 $ 685,078 $ 652,486 $ 651,031 ============== ============= ============= ================ FINANCIAL LIABILITIES Deposits....................................... $ 617,706 $ 623,334 $ 600,901 $ 604,172 Short-term borrowings.......................... 4,360 4,360 2,265 2,265 FHLB borrowings................................ 38,000 52,631 38,000 37,067 Capitalized lease obligations.................. 5,766 5,766 5,850 5,850 Long-term debt................................. 4,667 4,767 5,675 5,586 Guaranteed preferred beneficial interest in the Company's junior subordinated deferrable interest debentures............... 10,000 14,902 10,000 10,756 -------------- ------------- ------------- ---------------- TOTAL FINANCIAL LIABILITIES.................... $ 680,499 $ 705,760 $ 662,691 $ 665,696 ============== ============= ============= ================ UNRECOGNIZED FINANCIAL INSTRUMENTS Commitments to extend credit................... $ - $ 18,489 $ - $ 19,868 Standby letters of credit...................... - 1,299 - 978 -------------- ------------- ------------- ---------------- TOTAL UNRECOGNIZED FINANCIAL INSTRUMENTS........................ $ - $ 19,788 $ - $ 20,846 ============== ============= ============= ================
92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 23 - CONDENSED PARENT COMPANY INFORMATION STATEMENTS OF FINANCIAL CONDITION
December 31, --------------------------------- 2001 2000 --------------- ---------------- ASSETS Cash and due from banks.................................................... $ 982,434 $ 3,573,341 Investment in subsidiaries (equity method) - eliminated upon consolidation............................................ 53,452,423 51,553,558 Premises and equipment, net................................................ 19,384 22,779 Intangibles, net........................................................... 836,867 920,178 Deferred tax assets........................................................ 1,016,469 825,817 Refundable Income taxes-current............................................ 692,163 1,189,661 Other assets............................................................... 777,694 1,409,907 --------------- ---------------- TOTAL ASSETS........................................................... $ 57,777,434 $ 59,495,241 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt............................................................. $ 4,666,599 $ 5,675,204 Guaranteed preferred beneficial interest in the Company's junior subordinated deferrable interest debentures....................... 10,310,000 10,310,000 Other liabilities.......................................................... 2,135,466 2,320,266 --------------- ---------------- TOTAL LIABILITIES...................................................... 17,112,065 18,305,470 TOTAL SHAREHOLDERS' EQUITY............................................. 40,665,369 41,189,771 --------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 57,777,434 $ 59,495,241 =============== ================
[The remainder of this page intentionally left blank] 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 23 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF INCOME
Year Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------- -------------- INCOME From subsidiaries - eliminated upon consolidation: Dividends................................................... $ - $ 4,878,562 $ 3,702,566 Management fees............................................. 300,000 300,000 600,000 Interest.................................................... 111,322 169,455 51,578 Other Income................................................ 15,007 27,759 3,620 ------------- ------------- -------------- 426,329 5,375,776 4,357,764 EXPENSES Salaries and employee benefits................................ 1,568,160 2,193,107 1,857,053 Interest...................................................... 1,388,241 1,433,404 320,895 Other expenses................................................ 683,737 1,340,281 1,692,028 ------------- ------------- -------------- 3,640,138 4,966,792 3,869,976 ------------- ------------- -------------- Income (loss) before income taxes and equity in undistributed earnings of subsidiaries........................ (3,213,809) 408,984 487,788 Income tax benefit............................................... (1,107,020) (1,506,160) (1,059,075) -------------- ------------- -------------- Income before equity in undistributed earnings (loss) of subsidiaries............................................... (2,106,789) 1,915,144 1,546,863 Equity in undistributed earnings (loss) of subsidiaries.......... 1,006,290 (4,130,075) 111,247 ------------- ------------- -------------- NET INCOME (LOSS)................................................ $ (1,100,499) $ (2,214,931) $ 1,658,110 ============== ============= ==============
[The remainder of this page intentionally left blank] 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 23 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............................................. $ (1,100,499) $ (2,214,931) $ 1,658,110 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in undistributed income of subsidiaries.............. (1,006,290) 4,130,075 (111,247) Provision for depreciation, amortization and accretion...... 86,707 108,362 94,629 Increase in other assets.................................... 1,690,614 (1,547,353) (191,731) Increase in other liabilities............................... (184,800) 1,291,716 86,792 ------------- ------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................. (514,268) 1,767,869 1,536,553 ------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available for sale ...... - - - Increase in interest-bearing deposits with banks.............. - - - Proceeds from sale of assets.................................. - 33,431 15,599 Capitalization of subsidiaries................................ (1,534,000) (5,940,879) - Capital expenditures.......................................... - - (28,538) ------------- ------------- -------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.................................... (1,534,000) (5,907,448) (12,939) ------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt................................... (752,504) (961,958) (775,764) Issuance of guaranteed preferred beneficial interest in Company's junior subordinated deferrable interest Debentures......................................... - 10,310,000 - Issuance of common stock...................................... 209,865 222,804 312,889 Cash dividends................................................ - (3,333,145) (2,788,754) ------------- ------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................... (542,639) 6,237,701 (3,251,629) ------------- ------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (2,590,907) 2,098,122 (1,728,015) Cash and Due From Banks at Beginning of Year..................... 3,573,341 1,475,219 3,203,234 ------------- ------------- -------------- CASH AND DUE FROM BANKS AT END OF YEAR........................... $ 982,434 $ 3,573,341 $ 1,475,219 ============= ============= ==============
95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 24 - SUBSEQUENT EVENTS In late 2001 and early 2002, Community Bank entered into agreements to sell its two Pulaski, Tennessee offices, its Rainsville and Ft. Payne, Alabama offices and its Marshall County, Alabama locations. The Marshall County locations include one banking office in Boaz, Alabama, one in Albertville, Alabama, two in Arab, Alabama, and two in Guntersville, Alabama. Two of the total ten offices under agreements to sell are paying and receiving offices located in Wal-Mart stores, one in Ft. Payne, Alabama and one in Guntersville, Alabama. Each agreement calls for the purchaser to purchase the fixed assets of each location and the book value of each loan portfolio less any agreed upon discounts. The agreements also call for the purchaser to assume the deposit liabilities of each location and pay an agreed upon premium for the deposits assumed. On March 31, 2002, Community Bank closed on the sale of its Pulaski bank offices and recorded a gain of $1,551,443, representing a 7% premium on the 30-day average of core deposits totaling $1,884,194 less the discount on loans and fixed assets of $332,751. The Rainsville and Ft. Payne sale is expected to occur on May 3, 2002 and the Marshall County sale is expected to occur on May 31, 2002, both assuming satisfaction of customary conditions prior to closing. Both transactions are expected to result in gains representing an 8% premium on core deposits less the agreed upon discount on loans. [The remainder of this page intentionally left blank] 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, 2001, 2000 AND 1999 NOTE 25 - QUARTERLY RESULTS (UNAUDITED) A summary of the unaudited results of operations for each quarter of 2001 and 2000 follows:
Third First Second Quarter Fourth Quarter Quarter (As Restated) Quarter ------------- ------------- -------------- ---------------- (In Thousands Except Per Share Data) 2001: TOTAL INTEREST INCOME......................... $ 15,105 $ 14,942 $ 14,488 $ 13,951 TOTAL INTEREST EXPENSE........................ 8,815 8,265 7,887 6,622 PROVISION FOR LOAN LOSSES..................... 951 1,381 2,449 1,533 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................... 5,340 5,296 4,152 5,796 INVESTMENT SECURITIES GAINS (LOSSES).......... 353 25 155 751 TOTAL NONINTEREST INCOME...................... 2,309 2,128 2,005 1,812 TOTAL NONINTEREST EXPENSE..................... 6,865 7,808 7,321 9,978 INCOME TAX EXPENSE............................ 332 (202) 24 (903) NET INCOME (LOSS)............................. 805 (156) (1,033) (716) PER COMMON SHARE: BASIC EARNINGS (LOSS)....................... $ .18 $ (.03) $ (.22) $ (.16) DILUTED EARNINGS (LOSS)..................... .18 (.03) (.22) (.16) 2000: Total interest income......................... $ 14,315 $ 15,223 $ 15,825 $ 15,712 Total interest expense........................ 7,465 8,440 8,900 9,051 Provision for loan losses..................... 1,008 1,329 4,619 2,333 Net interest income after provision for loan losses................... 5,842 5,454 2,306 4,829 Investment securities gains (losses).......... (27) - 45 (13) Total noninterest income...................... 2,522 2,638 2,512 2,229 Total noninterest expense..................... 7,669 7,694 7,749 8,644 Income tax expense............................ 214 95 (1,128) (886) Net income (loss)............................. 454 303 (1,758) (1,214) Per Common Share: Basic earnings (loss)....................... $ .10 $ .06 $ (.39) $ (.27) Diluted earnings (loss)..................... .10 .06 (.38) (.25)
In April 2002, the Company amended the Form 10Q filed for the period ended September 30, 2001. Net loans and total assets decreased $1,258,010 resulting from a restatement of charge-offs for the period. Net income and total shareholders' equity decreased $1,258,010 resulting from a restatement of the provision for loan losses of $962,549 and other operating expenses of $295,461. 97 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company's discussion of changes in its accountants are disclosed in: (i.) The Company's Current Report on Form 8-K filed on May 16, 2000 (ii.) an amendment thereto on Form 8-K/A filed on May 30, 2000 (iii.) a Current Report on Form 8-K filed on September 28, 2000 (iv.) an amendment thereto on Form 8-K/A filed on October 10, 2000 (v.) a Current Report on Form 8-K filed on February 15, 2001. [The remainder of this page intentionally left blank] 98 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item with respect to the directors and nominees for director 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 2002. Information regarding the executive officers of the Company is included in Part I of this Report. Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the section entitled "Election of Directors - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the annual meeting of shareholders to be held during 2002. 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 2002. 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 2002. 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 2002. [The remainder of this page intentionally left blank] 99 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) ------- Auditors' Report.......................................................................................... 59 Consolidated Statements of Financial Condition as of December 31, 2001 and 2000.............................................................................. 60 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999........................................................................ 61 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999........................................................................ 62 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999........................................................................ 63-64 Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999........................................................................ 65-113 Quarterly Results (Unaudited)............................................................................. 114
(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the fourth quarter ended December 31, 2001: (c) Exhibits 3.1 Certificate of Incorporation, as amended and restated May 2000 (1) 3.2 By-Laws of Registrant, as amended and restated May 2000 (2) 4.1 Rights Agent Agreement, dated January 13, 1999, between Community Bancshares, Inc. and the Bank of New York (3) 4.2 Indenture, dated March 23, 2000, by and between Community Bancshares, Inc. and The Bank of New York (4) 10.1 Promissory Note, Guaranty and Pledge Agreement, dated December 1, 1998, by and between Community Bancshares, Inc. and Colonial Bank, N.A. (5) 10.2 Plan document for the Community Bancshares, Inc. Benefit Restoration Plan adopted April 12, 1994, effective January 1, 1995 (6) (*) 10.3 Subordinated Promissory Note, dated October 4, 1994, between Community Bancshares, Inc. as borrower and Jeffrey K. Cornelius as holder (7) 10.4 Employment Agreement, dated March 28, 1996 by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (8) (*) 10.5 Amendment to Employment Agreement, dated October 14, 1999, by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (9) (*)
100 10.6 Stock Option Agreement between Community Bancshares, Inc. and Robert O. Summerford, dated March 27, 1997 (10) (*) 10.7 Stock Option Agreement between Community Bancshares, Inc. and Denny Kelly, dated March 26, 1998 (11) (*) 10.8 Stock Option Agreement between Community Bancshares, Inc. and Loy McGruder, dated March 26, 1998 (12) (*) 10.9 Form of Stock Option Agreement between Community Bancshares, Inc. and grantees, dated March 26, 1998 (13) (*) 10.10 Form of Change in Control Agreement between Community Bancshares, Inc. and each of Kennon R. Patterson, Sr. and Loy McGruder dated December 4, 1999 (14) (*) 10.11 Form of Stock Option Agreement for Non-Employee Directors between Community Bancshares, Inc., and each of Glynn Debter, Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins and Robert O. Summerford, dated December 4, 1999 (15) (*) 10.12 Form of Stock Option Agreement for Employees between Community Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop K. Walker, Jr., Denny Kelly, and Loy McGruder, dated December 4, 1999 (16) (*) 10.13 Amended and Restated Declaration of Trust, dated March 23, 2000, by and between The Bank of New York (Delaware), The Bank of New York, Community Bancshares, Inc. and Community (AL) Capital Trust I (17) 10.14 Guarantee Agreement, dated March 23, 2000, by and between Community Bancshares, Inc. and The Bank of New York (18) 10.15 Placement Agreement, dated March 23, 2000, between Community (AL) Capital Trust I, Community Bancshares, Inc. and Salomon Smith Barney, Inc. (19) 10.16 Lease Agreement, dated May 31, 2000, between REM, LLC, as lessor, and Community Bank, as lessee (20) 10.17 Addendum to Lease Agreement and Loan Agreement, dated May 31,2000, between REM, LLC and Community Bank (21) 10.18 Lease Agreement, dated June 1, 2000, between Debter Properties, LLC, as lessor, and Community Bank, as lessee (22) 10.19 Addendum to Lease Agreement and Loan Agreement, dated June 1, 2000, between Debter Properties, LLC and Community Bank (23) 10.20 Form of Amendment to Nonqualified Stock Option Agreement, between Community Bancshares, Inc. and grantee, dated December 12, 2000 (24) (*) 10.21 Change in Control Agreement, dated September 18, 2001, between Community Bancshares, Inc. and Kerri C. Newton (25)(*) 10.22 Form of Stock Option Agreement between Community Bancshares, Inc. and each Kennon R. Patterson, Sr., Glynn Debter, Roy B. Jackson, Denny Kelly, John J. Lewis, Jr., Loy McGruder, Kennon R. Patterson, Jr., Merritt Robbins, Robert O. Summerford, Jimmie Trotter and Kerri Newton dated December 18, 2001(*) 10.23 Stock Purchase Agreement dated January, 2002 between Community Bancshares, Inc. and Denny G. Kelly and Arlene S. Kelly (*) 10.24 Stock Purchase Agreement dated January, 2002 between Community Bancshares, Inc. and Bishop K. Walker and Wanda W. Walker (*) 10.25 Severance Agreement dated the 9th day of January, 2002 by and between Denny G. Kelly and Community Bancshares, Inc. and Community Bank (*) 10.26 Severance Agreement dated the 9th day of January, 2002 by and between Bishop K. Walker and Community Bancshares, Inc. and Community Bank (*) 10.27 Acquisition Agreement dated December 21, 2001 by and among First Farmers and Merchants Corporation, First Farmers and Merchants National Bank of Columbia, Community Bank and Community Bancshares, Inc. 10.28 Supplemental Agreement dated January 23, 2002 between First Farmers and Merchants Corporation, First Farmers and Merchants National Bank of Columbia, Community Bank and Community Bancshares, Inc.
101 10.29 Acquisition Agreement dated the 25th day of February, 2002 by and between First Southern National Bank and Community Bank 10.30 Acquisition Agreement dated the 25th day of February, 2002 by and between Peoples Bank of North Alabama and Community Bank 10.31 Amendment to Subordinated Promissory Note, dated March 26, 2002, between Community Bancshares, Inc. and Jeffrey K. Cornelius 11 Statement of computation of per share earnings 12 Statement of computation of ratios 21 Subsidiaries of the Registrant
Notes to Exhibits: (1) Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (2) Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (3) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated herein by reference (4) Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (5) Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (6) Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (7) Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (8) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended September 30, 1998, and incorporated herein by reference (9) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference (10) Filed as Exhibit 10.47 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (11) Filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (12) Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (13) Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (14) Filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference (15) Filed as Exhibit 10.33 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference (16) Filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference (17) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (18) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (19) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (20) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference
102 (21) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (22) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (23) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (24) Filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference (25) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference (*) Management contract or compensation plan or arrangement
Certain financial statements, schedules and exhibits have been omitted because they are not applicable. 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, in the city of Blountsville, State of Alabama, on April 15, 2002. COMMUNITY BANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ------------------------------- KENNON R. PATTERSON, SR. CHAIRMAN AND CHIEF EXECUTIVE OFFICER By: /s/ Kerri C. Newton ------------------------------- KERRI C. NEWTON CHIEF FINANCIAL OFFICER 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. Signature - ----------------------------- /s/ Kennon R. Patterson, Sr. - ---------------------------- KENNON R. PATTERSON, SR. Chairman of the Board, President, Chief Executive Officer, Director (principal executive officer) /s/ Kerri C. Newton - ---------------------------- KERRI C. NEWTON Chief Financial Officer (principal accounting officer) /s/ Glynn Debter - ---------------------------- GLYNN DEBTER Director 103 /s/ Roy B. Jackson - ---------------------------- ROY B. JACKSON Director - ---------------------------- DENNY KELLY Director /s/ John J. Lewis, Jr. - ---------------------------- JOHN J. LEWIS, JR. Director /s/ Loy McGruder - ----------------------------- LOY MCGRUDER Director /s/ Kennon R. Patterson, Jr. - ---------------------------- KENNON R. PATTERSON, JR. Director /s/ Merritt Robbins - ---------------------------- MERRITT ROBBINS Director /s/ Robert O. Summerford - ---------------------------- ROBERT O. SUMMERFORD Director /s/ Jimmie Trotter - ---------------------------- JIMMIE TROTTER Director 104 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ EXHIBITS TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------ COMMUNITY BANCSHARES, INC. 68149 MAIN STREET BLOUNTSVILLE, ALABAMA 35031 - -------------------------------------------------------------------------------- (c) Exhibits 3.1 Certificate of Incorporation, as amended and restated May 2000 (1) 3.2 By-Laws of Registrant, as amended and restated May 2000 (2) 4.1 Rights Agent Agreement, dated January 13, 1999, between Community Bancshares, Inc. and the Bank of New York (3) 4.2 Indenture, dated March 23, 2000, by and between Community Bancshares, Inc. and The Bank of New York (4) 10.1 Promissory Note, Guaranty and Pledge Agreement, dated December 1, 1998, by and between Community Bancshares, Inc. and Colonial Bank, N.A. (5) 10.2 Plan document for the Community Bancshares, Inc. Benefit Restoration Plan adopted April 12, 1994, effective January 1, 1995 (6) (*) 10.3 Subordinated Promissory Note, dated October 4, 1994, between Community Bancshares, Inc. as borrower and Jeffrey K. Cornelius as holder (7) 10.4 Employment Agreement, dated March 28, 1996 by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (8) (*) 10.5 Amendment to Employment Agreement, dated October 14, 1999, by and between Kennon R. Patterson, Sr. and Community Bancshares, Inc. (9) (*) 10.6 Stock Option Agreement between Community Bancshares, Inc. and Robert O. Summerford, dated March 27, 1997 (10) (*) 10.7 Stock Option Agreement between Community Bancshares, Inc. and Denny Kelly, dated March 26, 1998 (11) (*) 10.8 Stock Option Agreement between Community Bancshares, Inc. and Loy McGruder, dated March 26, 1998 (12) (*) 10.9 Form of Stock Option Agreement between Community Bancshares, Inc. and grantees, dated March 26, 1998 (13) (*) 10.10 Form of Change in Control Agreement between Community Bancshares, Inc. and each of Kennon R. Patterson, Sr. and Loy McGruder dated December 4, 1999 (14) (*) 10.11 Form of Stock Option Agreement for Non-Employee Directors between Community Bancshares, Inc., and each of Glynn Debter, Roy B. Jackson, John J. Lewis, Jr., Merritt Robbins and Robert O. Summerford, dated December 4, 1999 (15) (*) 10.12 Form of Stock Option Agreement for Employees between Community Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop K. Walker, Jr., Denny Kelly and Loy McGruder dated December 4, 1999 (16) (*) 10.13 Amended and Restated Declaration of Trust, dated March 23, 2000, by and between The Bank of New York (Delaware), The Bank of New York, Community Bancshares, Inc. and Community (AL) Capital Trust I (17) 10.14 Guarantee Agreement, dated March 23, 2000, by and between Community Bancshares, Inc. and The Bank of New York (18) 10.15 Placement Agreement, dated March 23, 2000, between Community (AL) Capital Trust I, Community Bancshares, Inc. and Salomon Smith Barney, Inc. (19) 10.16 Lease Agreement, dated May 31, 2000, between REM, LLC, as lessor, and Community Bank, as lessee (20) 10.17 Addendum to Lease Agreement and Loan Agreement, dated May 31,2000, between REM, LLC and Community Bank (21) 10.18 Lease Agreement, dated June 1, 2000, between Debter Properties, LLC, as lessor, and Community Bank, as lessee (22)
10.19 Addendum to Lease Agreement and Loan Agreement, dated June 1, 2000, between Debter Properties, LLC and Community Bank (23) 10.20 Form of Amendment to Nonqualified Stock Option Agreement, between Community Bancshares, Inc. and grantee, dated December 12, 2000 (24) (*) 10.21 Change in Control Agreement, dated September 18, 2001, between Community Bancshares, Inc. and Kerri C. Newton (25)(*) 10.22 Form of Stock Option Agreement between Community Bancshares, Inc. and each Kennon R. Patterson, Sr., Glynn Debter, Roy B. Jackson, Denny Kelly, John J. Lewis, Jr., Loy McGruder, Kennon R. Patterson, Jr., Merritt Robbins, Robert O. Summerford, Jimmie Trotter and Kerri Newton dated December 18, 2001 (*) 10.23 Stock Purchase Agreement dated January, 2002 between Community Bancshares, Inc. and Denny G. Kelly and Arlene S. Kelly (*) 10.24 Stock Purchase Agreement dated January, 2002 between Community Bancshares, Inc. and Bishop K. Walker and Wanda W. Walker (*) 10.25 Severance Agreement dated the 9th day of January, 2002 by and between Denny G. Kelly and Community Bancshares, Inc. and Community Bank (*) 10.26 Severance Agreement dated the 9th day of January, 2002 by and between Bishop K. Walker and Community Bancshares, Inc. and Community Bank (*) 10.27 Acquisition Agreement dated December 21, 2001 by and among First Farmers and Merchants Corporation, First Farmers and Merchants National Bank of Columbia, Community Bank and Community Bancshares, Inc. 10.28 Supplemental Agreement dated January 23, 2002 between First Farmers and Merchants Corporation, First Farmers and Merchants National Bank of Columbia, Community Bank and Community Bancshares, Inc. 10.29 Acquisition Agreement dated the 25th day of February, 2002 by and between First Southern National Bank and Community Bank 10.30 Acquisition Agreement dated the 25th day of February, 2002 by and between Peoples Bank of North Alabama and Community Bank 10.31 Amendment to Subordinated Promissory Note, dated March 26, 2002, between Community Bancshares, Inc. and Jeffrey K. Cornelius 11 Statement of computation of per share earnings 12 Statement of computation of ratios 21 Subsidiaries of the Registrant
Notes to Exhibits: (1) Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (2) Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (3) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated herein by reference (4) Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (5) Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (6) Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (7) Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference (8) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended September 30, 1998, and incorporated herein by reference (9) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference (10) Filed as Exhibit 10.47 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference (11) Filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (12) Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (13) Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference (14) Filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference (15) Filed as Exhibit 10.33 to From 10-K for the year ended December 31, 1999, and incorporated herein by reference (16) Filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference (17) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (18) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (19) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference (20) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (21) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (22) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (23) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference (24) Filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference (25) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference. (*) Management contract or compensation plan or arrangement Certain financial statements schedules and exhibits have been omitted because they are not applicable. EX-10.22 3 g75225ex10-22.txt FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.22 FORM OF STOCK OPTION AGREEMENT COMMUNITY BANCSHARES, INC. 2001 NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made and entered into as of December 18, 2001, between grantor Community Bancshares, Inc., a Delaware corporation (the "Corporation") and grantee, __________________- (the "Grantee"). WITNESSETH: The Board of Directors of the Corporation (the "Board") on December 18, 2001 approved the grant to Grantee of awards under the Corporation's long-term incentive program and established the terms and conditions of such awards, as contained in this Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. GRANT OF OPTION. Grantee shall have the right and option to purchase on the terms and conditions set forth herein, all or any part of an aggregate of _______ shares ("Option Shares") of the $.10 par value common stock of the Corporation (the "Common Stock") at the purchase price of $10.00 per share (the "Option Price"). The Option Price is 100% of the fair market value of the Common Stock on December 18, 2001, the date of the grant of the option covered by this Agreement. 2. TERMS AND CONDITIONS. It is understood and agreed that the option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The option shall expire five (5) years after the date of grant (the "Expiration Date"). After the Expiration Date, the parties shall have no further rights or obligations hereunder. (b) Exercise of Option. The option covered by this Agreement may be exercised by Grantee from time to time, in whole or in part, at any time prior to the Expiration Date subject to the restrictions in Section 2(d), (e) and (f) and Section 7. (c) Method of Exercise and Payment of Purchase Price Upon Exercise. The Grantee may elect to exercise the option by giving written notice of such election to the Corporation, in such form as the Board may require, accompanied by payment in cash or in such other manner as may be approved by the Board, of the full purchase price of the Option Shares for which the election is made. As determined by the Board, in its sole discretion, payment of the Option Price shall be made in cash or Common Stock that was acquired at least six (6) months prior to the exercise of the option, or a combination thereof. To the extent permitted by applicable law, the option may be exercised and the exercise price paid pursuant to arrangements with brokerage firms permitted under Regulation T of the Federal Reserve Board or successor regulations or statutes. Any federal or state tax withholding requirements can be satisfied by shares of Common Stock acquired pursuant to the option exercise. (d) Exercise Upon Death. In the event that Grantee ceases to be affiliated with the Corporation or its subsidiaries (either as an employee or director) by reason of death, the option may thereafter be exercised as to all shares subject to the option by the legal representative of the estate or by the person or persons entitled to the option under the Grantee's will or the laws of descent and distribution, as appropriate, until the earlier of (i) the expiration of the stated term of the option or (ii) the first anniversary of the date of the Grantee's death. (e) Exercise Upon Termination of Affiliation by Reason of Disability. In the event that Grantee ceases to be affiliated with the Corporation or its subsidiaries (either as an employee or director) by reason of Disability (as defined below), the option may thereafter be exercised as to all shares subject to the option until the earlier of (i) the expiration of the stated term of the option or (ii) the first anniversary of the date that Grantee is determined by the Corporation to be disabled. (f) Exercise Upon Termination of Affiliation by Reason Other than Death or Disability. The option or any unexercised portions thereof shall expire upon the earlier of (i) the expiration of the stated term of the option or (ii) the 90th day after the termination of Grantee's affiliation with the Corporation and its subsidiaries (both as an employee and as a director) for any reason other than death or Disability. Provided, however, if the Grantee's affiliation is terminated for Cause (as defined below), the option shall expire on the date of the termination of the Grantee's affiliation. 3. NO RIGHTS AS SHAREHOLDER OR TO EMPLOYMENT OR TO DIRECTORSHIP. No option granted hereunder shall entitle the holder thereof to any rights as a shareholder in the Corporation with respect to any shares to which the option relates until such shares have been paid for in full and issued. Furthermore, the option shall not confer upon the Grantee any rights of employment with the Corporation or any of its subsidiaries or any rights to be a director of the Corporation or any of its subsidiaries or affect the right of the Corporation or its subsidiaries to terminate the affiliation of the Grantee at any time, with or without cause. 4. RESTRICTIONS ON TRANSFER OF SHARES. Grantee hereby agrees for himself or herself and his or her legal representative, heirs and distributees, that if a registration statement covering the shares issuable upon exercise of any option hereunder is not effective under the Securities Act of 1933, as amended (the "Act"), at the time of such exercise, or if some other exemption from the provisions of the Act is not available, then all shares of Common Stock then received or purchased upon such exercise shall be acquired for investment, and that the notice of exercise delivered to the Corporation shall be accompanied by a representation in writing acceptable in scope and form to counsel to the Corporation and signed by Grantee or Grantee's legal representative, heirs or distributees, as the case may be, to the effect that the shares are being acquired in good faith for investment and not with a view to distribution thereof. Any shares so acquired may be deemed restricted securities under Rule 144 as promulgated by the Securities and Exchange Commission under the Act, and as the same may be amended or replaced and subject to restrictions upon sale or other disposition. 5. REGISTRATION OF SHARES. If at any time the Board shall determine that the listing, registration or qualification of any shares subject to the option upon any securities exchange, or under any state or federal law, or the consent or approval of any governmental or regulatory body is necessary or desirable as a condition of or in connection with the issuance or purchase of shares hereunder, the option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval has been effected or obtained free of any conditions not acceptable to the Board. 6. TRANSFER OF RIGHTS. This option is not transferable except by will or by the laws of descent and distribution and shall be exercisable during Grantee's lifetime only by Grantee. After the death of Grantee, this option may be exercised only by Grantee's estate or by the person or persons entitled to the option under Grantee's will or the laws of descent and distribution, as appropriate. In the event the option is transferred to the Grantee's estate, the option may be exercised by the estate only to the extent that the Grantee would have been entitled had the option not been transferred. 7. COMPETITION WITH EMPLOYER - COVENANT NOT TO COMPETE. In consideration of the grant by the Corporation of the option, Grantee agrees with the Corporation as follows: (a) While Grantee is affiliated with the Corporation or one or more of its subsidiaries (hereinafter collectively referred to as the "Company") either as an employee or a director, Grantee will devote his or her entire time, energy and skills to the service of the Company. Any employment shall be at the pleasure of the board of directors of each employing corporation. Except as provided in Section 2 hereof, no option granted under this Agreement shall be exercised after the termination of Grantee's affiliation (both as an employee and a director) with the Company. (b) Grantee will not, during the term of his or her affiliation (either as an employee or director) with the Company, or for a period of two years after termination for any reason of his or her affiliation with the Company, directly or indirectly, either individually or as a stockholder (except for passive investments of less than one percent of the outstanding shares), director, officer, consultant, independent contractor, employee, agent, member or otherwise of or through any corporation, partnership, association, joint venture, firm, individual or otherwise (hereinafter "Firm"), or in any other capacity: Page 113 (i) Carry on or engage in a business like or similar to any business engaged in by the Company either (A) in the county in which the Grantee has primarily been employed by the Company at the time of termination of employment or (B) within a 25-mile radius of the location where the Grantee has primarily been employed by the Company at the time of termination of employment; or (ii) Solicit or do business (like or similar to any business engaged in by the Company) with any customer of the Company either (A)in the county in which the Grantee has primarily been employed by the Company at the time of termination of employment or (B) within a 25-mile radius of the location where the Grantee has primarily been employed by the Company at the time of termination of employment; or (iii) Solicit, directly or indirectly, any employee of the Company to leave their employment with the Company for any reason. For purposes of this Agreement, the Company and Grantee agree that Grantee shall be deemed to have solicited any employee in violation of this Agreement if such employee is hired by Grantee or his or her Firm within six (6) months of Grantee's last date of affiliation (either as an employee or a director) with the Company. If Grantee is a nonemployee director, the restrictions in (i) and (ii) above shall apply with respect to either (A) the county in which the director resides at the time he ceases to be a director, or (B) within a 25-mile radius of the location where the director resides at the time he ceases to be a director. The above two-year period shall be extended by any period of time during which Grantee is in default of the covenants contained in this Agreement. (c) During the term of his or her affiliation (either as an employee or a director) with the Company and thereafter, Grantee shall not divulge, or furnish or make accessible to any third party, company, corporation or other organization (including, but not limited to, customers, competitors or governmental agencies), without the Corporation's prior written consent, any trade secrets, customer lists, information regarding customers, or other confidential information concerning the Company or its business, including without limitation, confidential methods of operation and organization, trade secrets, confidential matters related to pricing, markups, commissions and customer lists. (d) In the event of a breach or threatened breach by Grantee of all or any part of the provisions of subdivisions (b) or (c) of this Section 7, the Company shall be entitled to an injunction restraining Grantee from such breach without limiting any other rights or remedies available to the Company for such breach or threatened breach. (e) Grantee specifically recognizes and affirms that each of the covenants contained in subdivisions (b) and (c) of this Section 7 is a material and important term of this Agreement which has induced the Company to provide for the award of the option granted hereunder, and Grantee further agrees that should all or any part or application of subdivisions (b) or (c) of Section 7 of this Agreement be held or found invalid or unenforceable for any reason whatsoever by a court of competent jurisdiction in an action between Grantee and the Company, the Corporation shall be entitled to receive (but not obligated to acquire) from Grantee all Common Stock held by Grantee which was obtained by Grantee under this Agreement (including all shares obtained by virtue of any stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares, or other transaction, hereinafter "stock dividends") by returning to Grantee for each share received the Option Price paid by Grantee (as adjusted for stock dividends). If Grantee has sold, transferred, or otherwise disposed of Common Stock obtained under this Agreement (including all shares obtained by virtue of any stock dividend), the Corporation shall be entitled to receive from Grantee the difference between the Option Price paid by Grantee and the fair market value of the Common Stock (including all shares obtained by virtue of any stock dividends) on the date of sale transfer or other disposition. Page 114 (f) Notwithstanding any provision to the contrary herein contained, Section 7(b) shall not apply: (i) Upon the termination of the Grantee's affiliation with the Corporation (either as an employee or a director) other than for Cause within one (1) year following a Change in Control of the Corporation; or (ii) Upon the voluntary termination of Grantee's affiliation with the Corporation (either as an employee or a director) for any reason within the thirty (30) day period immediately after the one (1) year period following a Change in Control of the Corporation. 8. DEFINITIONS. For the purposes of this Agreement, the following terms shall have the definitions set forth below: (a) "Cause" means (i) any act (A) that constitutes, on the part of the Grantee, fraud, dishonesty, a felony or gross malfeasance of duty and (B) that directly results in a material injury to the Corporation; or (ii) conduct by the Grantee in his office with the Corporation that is grossly inappropriate and demonstrably likely to lead to material injury to the Corporation, 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 Grantee 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 30 days) within which the Grantee may take such remedial action, and the Grantee shall not have taken such specified remedial action within such specified reasonable time. (b) "Change in Control of the Corporation" means (i) the acquisition, directly or indirectly, by any "person" (within the meaning of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") within any twelve-month period of securities of the Corporation representing an aggregate of twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation, 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 merger or consolidation or other business combination of the Corporation with any other person, other than a merger, consolidation or business combination which would result in the outstanding Common Stock 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 percent (60%) of the outstanding common stock of the Corporation or such surviving entity or parent of affiliate thereof outstanding immediately after such merger, consolidation or business combination; or (iv) a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets; or (v) the occurrence of any other event or circumstance which is not covered by (i) through (iv) above which the Board determines affects control of the Corporation and, in order to implement the purposes of this agreement, adopts a resolution that such event or circumstance constitutes a Change in Control for purposes of this agreement. (c) "Disability" means total and permanent disability as determined under the Corporation's long-term disability plan. (d) "Retirement" means termination of employment under circumstances in which the Grantee is entitled to a benefit from the Corporation's defined benefit pension plan. 9. DISPOSITION OF SHARES. Grantee agrees to notify the Corporation promptly of the disposition of any shares of Common Stock purchased pursuant to this option which are disposed of within one year after transfer of such shares to Grantee, or within two years of the date of the grant of such option. For purposes of such notification, "disposition" shall have the meaning assigned to it in Section 425(c) of the Code. 10. ADJUSTMENT OF AWARDS. In the event of any change in corporate capitalization, such as stock split, or a corporate transaction, such as a merger, consolidation, separation or other distribution of stock or property of the Corporation, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any Page 115 partial or complete liquidation of the Corporation, such adjustment shall be made in the number and class of and/or price of the Option Shares as may be determined to be appropriate and equitable by the Corporation's Board of Directors, in its sole discretion, to prevent dilution or enlargement of the benefits or potential benefits intended to be available under this agreement; provided that the number of Option Shares shall always be a whole number. 11. INTERPRETATION. Any question of interpretation or application of this Agreement shall be resolved by the Corporation's Board of Directors and its determination shall be final and binding on the Corporation and Grantee. 12. NOTICES. All notices hereunder shall be in writing and, if to the Corporation, shall be delivered personally to the Chairman or mailed to the Corporation's principal office at P.O. Box 1000, Blountsville, Alabama 35031, addressed to the attention of the Chairman; and if to Grantee, shall be delivered personally or mailed to him at the address for Grantee found in the Corporation's records. Such addresses may be changed at any time by notice from one party to the other. 13. BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties hereto, the successors and assigns of the Corporation and the person to whom the rights of Grantee are transferred by will or the laws of descent and distribution. 14. AMENDMENT. This Agreement may be amended from time to time by the Board, but no such amendment shall impair the rights of the Grantee without the Grantee's consent. Page 116 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMMUNITY BANCSHARES, INC. By: ----------------------------------------------- Kennon R. Patterson, Sr. Chairman, President and Chief Executive Officer WITNESS: GRANTEE: - --------------------------- ---------------------------------- Signature Page 117 EX-10.23 4 g75225ex10-23.txt STOCK OPTION AGREEMENT DATED JANUARY, 2002 EXHIBIT 10.23 STOCK PURCHASE AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC AND DENNY G. KELLY AND ARLENE S. KELLY Page 118 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of the 9th day of January, 2002 by and among Denny G. Kelly, Arlene S. Kelly (each, a "Seller," and collectively, the "Sellers"), and Community Bancshares, Inc., a Delaware corporation (the "Purchaser"). RECITALS: WHEREAS, Denny G. Kelly and Purchaser have entered into a retirement agreement dated of equal date herewith in connection with Mr. Kelly's retirement as an executive officer and director of Purchaser and its subsidiary; and WHEREAS, each of the Sellers own issued and outstanding shares of common stock, $.10 par value per share (the "Common Stock"), of the Purchaser; and WHEREAS, each of the Sellers desires to sell, and the Purchaser desires to acquire, all of the shares of Common Stock held by the Sellers, for the consideration and on the terms set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT: 1. Sale and Purchase of the Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below), each of the Sellers shall sell, transfer, convey and assign to the Purchaser, and the Purchaser shall acquire, the number of shares of Common Stock set forth opposite the name of such Seller on Exhibit A hereto (collectively, the "Shares") and all of the Sellers' rights, title and interests therein. In exchange therefor, at the Closing the Purchaser shall remit to the Sellers as the purchase price hereunder (the "Purchase Price") cash in the amount of $12.00 per Share by wire transfer of immediately available funds to a bank account specified by the applicable Seller, or by such other method as to which the Purchaser and each Seller may agree. 2. Closing. (a) The Closing of the transactions contemplated by this Agreement shall take place at the offices of Purchaser, or at such other place as may be mutually agreed upon by the parties hereto, following satisfaction (or waiver thereof) of all of the conditions set forth in Sections 6 and 7 hereof at a date established by the Purchaser which shall be no later than the second anniversary of the date of this Agreement (the "Closing Date"). Notwithstanding the preceding, the Purchaser may, in its sole discretion, elect to purchase portions of the Shares at various dates within the two-year period commencing on the date hereof. In that event there will be more than one closing date and each event that is to occur on the Closing Date shall occur on each date set by the Purchaser as the closing date with respect to the pro rata number of Shares being purchased on such date. (b) At the Closing: Page 119 (i) Each of the Sellers (except as otherwise indicated below) will deliver to the Purchaser: (A) certificates representing the number of Shares set forth opposite the name of such Seller on Exhibit A hereto, duly endorsed (or accompanied by duly executed stock powers), with signatures guaranteed by a commercial bank or by a member firm of the New York Stock Exchange, for transfer to the Purchaser; and (B) a certificate executed by such Seller to the effect that each of such Seller's representations and warranties in this Agreement was true and correct in all material respects as of the date of this Agreement and is true and correct in all material respects as of the Closing Date as if made on the Closing Date, and that such Seller has performed all acts, obligations and conditions required to be performed by such Seller at or prior to the Closing (collectively, the "Sellers' Certificates"). (ii) The Purchaser will deliver to the Sellers: (A) the Purchase Price in the respective amounts set forth opposite the name of each Seller on Exhibit A hereto by wire transfer to an account specified by such Seller or by such other method as the Purchaser and each Seller may agree; and (B) a certificate executed by the Purchaser to the effect that each of the Purchaser's representations and warranties in this Agreement was true and correct in all material respects as of the date of this Agreement and is true and correct in all material respects as of the Closing Date as if made on the Closing Date, and that the Purchaser has performed all acts, obligations and conditions required to be performed by it at or prior to the Closing (the "Purchaser's Certificate"). 3. Representations and Warranties of the Sellers. Each of the Sellers represents and warrants, severally and not jointly, to the Purchaser as follows: (a) Organization and Authority. Each of the Sellers is an individual residing in the State of Alabama. Each of the Sellers has full power, right, legal capacity and authority to enter into this Agreement and to carry out the transactions contemplated hereby. (b) Authorization and Binding Effect. The execution, delivery and performance of this Agreement by each of the Sellers has been approved by all requisite action and no other approval or authorization is required on the part of the Sellers or any other person by law or otherwise in order to make this Agreement a valid, binding and enforceable obligation of the Sellers. This Agreement is and will constitute a valid and legally binding obligation of each of the Sellers and will be enforceable against each of the Sellers in accordance with the terms hereof, except as that enforceability may be (i) limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (ii) subject to general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law). (c) Title to Shares. Each of the Sellers is and will be on the Closing Date the record and beneficial owner and holder of the number of Shares set forth opposite the name of such Seller on Exhibit A hereto, free and clear of all liens, pledges, options, rights of first refusal, charges and encumbrances except Page 120 those liens and encumbrances listed on Exhibit B. None of the Shares is the subject of any shareholder agreement, voting trust or other agreement or understanding relating to the voting thereof or restricting in any way the sale or transfer thereof. (d) Conflicts. The execution of this Agreement by each of the Sellers, the compliance by each of the Sellers with the provisions of this Agreement and the consummation by each of the Sellers of the transactions contemplated hereby (i) will not violate any provision of applicable law to which any of the Sellers is subject, (ii) will not constitute a default under, or are not events which, with notice, lapse of time, or both, would constitute a default under, or result in the termination of, or accelerate the performance required by any of the terms, conditions or provisions of, any contract, agreement or other instrument binding on any of the Sellers, (iii) will not (due to the action or inaction of any Seller) result in the creation of any encumbrance upon any of the Shares, (iv) will not require the consent or approval of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, and (v) do not violate any order, writ, injunction, decree or arbitral award, statute, rule or regulation applicable to any of the Sellers. (e) Litigation. There is no litigation, arbitration, claim, investigation or proceeding pending or, to the best knowledge of each of the Sellers, threatened against any of the Sellers at law or in equity, before any court, arbitration tribunal or governmental agency that questions (i) the validity of this Agreement, the Sellers' Releases, the Standstill Agreement or the Stipulation, or (ii) the right of the Sellers to enter into such agreements and releases or to consummate the purchase and sale of the Shares and other transactions contemplated herein or therein. To the best of each of the Seller's knowledge, there is no reasonable basis for any such litigation, arbitration, claim, investigation or proceeding against any of the Sellers. (f) Securities Laws. Each of the Sellers has held the Shares owned by such Seller of record and beneficially for more than one year except those Shares issued by the Purchaser upon the exercise of stock options by Denny G. Kelly in accordance with those certain Nonqualified Stock Option Agreements dated March 28, 1996 and March 27, 1997. None of the Sellers purchased any of the Shares from the Purchaser with a view to the distribution of such Shares or engages, either full-time or part-time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling or otherwise dealing or trading in the Shares. (g) Information. Each Seller has had the opportunity to ask for, and has received all information requested from the Purchaser, that such Seller deems, based on the representations and warranties made by the Purchaser herein, necessary or desirable in order to make such Seller's decision to sell the Shares to the Purchaser in accordance with the terms of this Agreement. (h) Absence of Brokers. The Sellers have incurred no obligation or liability, contingent or otherwise, for brokerage or finder's fees or commissions or other similar payments in connection with this Agreement or the transactions provided for herein. 4. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Sellers as follows: (a) Organization and Authority. The Purchaser is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. The Purchaser has full power, right, legal capacity and authority to enter into this Agreement and to carry out the transactions contemplated hereby. Page 121 (b) Authorization and Binding Effect. The execution, delivery and performance of this Agreement by the Purchaser has been approved by all requisite corporate action on the part of the Purchaser and no other corporate approval or authorization is required on the part of the Purchaser or any other person by law or otherwise in order to make this Agreement a valid, binding and enforceable obligation of the Purchaser. This Agreement is and will constitute a valid and legally binding obligation of the Purchaser and will be enforceable against it in accordance with the terms hereof, except as that enforceability may be (i) limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (ii) subject to general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law). (c) Conflicts. The execution by the Purchaser of this Agreement, the compliance by it with the provisions of this Agreement and the consummation by it of the transactions contemplated hereby (assuming any required regulatory approvals are obtained) (i) will not violate any provision of applicable law to which the Purchaser is subject, (ii) will not conflict with any of the terms of the Purchaser's Certificate of Incorporation, Bylaws or any amendments thereto, (iii) will not constitute a default under, or are not events which, with notice, lapse of time, or both, would constitute a default under, or result in the termination of, or accelerate the performance required by any of the terms, conditions or provisions of any contract, agreement or other instrument binding on the Purchaser, and (iv) do not violate any order, writ, injunction, decree or arbitral award, statute, rule or regulation applicable to the Purchaser. (d) Litigation. There is no litigation, arbitration, claim, investigation or proceeding pending or, to the best knowledge of the Purchaser, threatened against the Purchaser at law or in equity, before any court, arbitration tribunal or governmental agency that questions (i) the validity of this Agreement, or (ii) the right of the Purchaser to enter into such agreements and release or to consummate the purchase and sale of the Shares and other transactions contemplated herein or therein. To the best of the Purchaser's knowledge, there is no reasonable basis for any such litigation, arbitration, claim, investigation or proceeding against the Purchaser. (e) Rights Plan. The execution by the Sellers and the Purchaser of this Agreement does not, and the consummation of the transactions contemplated herein in accordance with the terms hereof will not, contravene or trigger the exercise of preferred share purchase rights granted under the Purchaser's Share Purchase Rights Plan or that certain Rights Agent Agreement, dated as of January 13, 1999, between the Purchaser and the Bank of New York. (f) Absence of Brokers. The Purchaser has incurred no obligation or liability, contingent or otherwise, for brokerage or finder's fees or commissions or other similar payments in connection with this Agreement or the transactions provided for herein. 5. Covenants. (a) Best Efforts; Cooperation. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use such party's reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from governmental entities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental entity, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the execution and delivery of any additional instruments necessary to consummate the transactions Page 122 contemplated by, and to fully carry out the purposes of, this Agreement, and (iv) causing the conditions in Sections 6 and 7 of this Agreement to be satisfied. (b) No Negotiation. Until such time, if any, as this Agreement is terminated pursuant to Section 9 hereof, the Sellers will not, and will cause each of their agents or representatives not to, directly or indirectly, solicit, initiate, participate in or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any person, individual or entity (other than the Purchaser) relating to any transaction involving the sale, transfer, encumbrance or pledge of the Shares. (c) Notification. (i) Between the date of this Agreement and the Closing Date, each Seller will promptly notify the Purchaser in writing if such Seller becomes aware of any fact or condition that causes or constitutes a breach of any of the Sellers' representations and warranties herein as of the date of this Agreement, or if such Seller becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, each Seller will promptly notify the Purchaser of the occurrence of any breach of any covenant of the Sellers in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 6 impossible or unlikely. Each of the Sellers acknowledges that the Purchaser is under no obligation to provide information of a non-public nature to the Sellers based on events that occur after the execution of this Agreement, except to the extent that such information is otherwise made available through the Purchaser's public filings with the Securities and Exchange Commission. (ii) Between the date of this Agreement and the Closing Date, the Purchaser will promptly notify the Sellers in writing if the Purchaser becomes aware of any fact or condition that causes or constitutes a breach of any of the Purchaser's representations and warranties herein as of the date of this Agreement, or if the Purchaser becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, the Purchaser will promptly notify the Sellers of the occurrence of any breach of any covenant of the Purchaser in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 7 impossible or unlikely. (d) Confidentiality. Each of the Sellers shall keep, and shall cause their agents and representatives to keep, the existence and terms of this Agreement and the transactions contemplated herein and therein, and the discussions and negotiations related thereto, and all information regarding the Purchaser or provided by the Purchaser in connection herewith strictly confidential, shall only disclose the same to such Seller's attorneys, accountants and financial advisors on a need-to-know basis, unless (i) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, or (ii) the furnishing or use of such information is required in connection with, legal proceedings, and shall not at any time use such information for any business purpose other than with respect to the transactions contemplated by this Agreement. (e) Voting. Between the date of this Agreement and the Closing Date, each Seller agrees to vote (or, in the case of Shares as to which the Seller is the beneficial, but not record owner, direct the record holder to vote) the Shares listed on Exhibit A and any other shares of Company Common Stock as to which such Seller acquired any legal or beneficial interest in accordance with the recommendations of the Page 123 Purchaser's Board of Directors on any matter submitted to the Purchaser's shareholders at any annual or special meeting of shareholders. 6. Conditions to the Obligations of the Purchaser. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement is subject to the following conditions: (a) Representations and Warranties. The representations and warranties of each of the Sellers, as set forth in Section 3 above, shall be true and correct in all material respects as of the Closing, and each of the Sellers shall have performed all acts, obligations and conditions required to be performed by the Sellers at or prior to the Closing. (b) Closing Certificates. The Sellers shall have delivered to the Purchaser the Sellers' Certificates. (c) Proceedings and Documents Satisfactory. All proceedings in connection with the transactions contemplated hereby and all certificates and documents delivered to the Purchaser pursuant to this Agreement shall be satisfactory in form and substance to the Purchaser and its counsel acting reasonably and in good faith. (d) No Obstructive Proceeding. No action or proceedings shall have been instituted, and no order, decree or judgment of any court, agency, commission or governmental authority shall be subsisting, against any of the Sellers or the Purchaser which seeks to, or would, render it unlawful as of the Closing to effect the transactions contemplated hereby in accordance with the terms hereof, and no such action shall seek damages in a material amount by reason of the transactions contemplated hereby. Also, no substantive legal objection to the transactions contemplated by this Agreement shall have been received from or threatened by any governmental department or agency. (e) Release of Liens; No Claim Regarding Stock Ownership or Sale Proceeds. The lienholders listed on Exhibit B must have agreed in writing to release any lien or encumbrance upon the Shares being transferred to Purchaser upon receipt of the Purchase Price or a portion thereof. There must not have been made or threatened by any person unrelated to the Purchaser or its subsidiaries any claim asserting that such person (i) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any voting, equity or ownership interest in, any of the Shares, or (ii) is entitled to all or any portion of the Purchase Price payable for the Shares. (f) Consents and Approvals. All of the consents, permits and licenses required from any federal, state or local governmental agency or organization, and all releases, waivers of default and consents to assignment required from any third party, with respect to consummation of the transactions contemplated hereby shall have been obtained. (g) Performance of Obligations. The Sellers shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date, and the Purchaser shall have received a certificate to such effect signed by each of the Sellers. 7. Conditions to the Obligations of the Sellers. The Sellers' obligations to consummate the transactions contemplated by this Agreement are subject to the following conditions: Page 124 (a) Representations and Warranties. The representations of the Purchaser, as set forth in Section 4 above, shall be true and correct in all material respects as of the Closing, and the Purchaser shall have performed all acts, obligations and conditions required to be performed by it at or prior to the Closing. (b) Closing Certificate. The Purchaser shall have delivered to the Seller the Purchaser's Certificate. (c) Proceedings and Documents Satisfactory. All proceedings in connection with the transactions contemplated hereby and all certificates and documents delivered to the Purchaser pursuant to this Agreement shall be satisfactory in form and substance to the Sellers and the Sellers' counsel acting reasonably and in good faith. (d) No Obstructive Proceeding. No action or proceedings shall have been instituted, and no order, decree or judgment of any court, agency, commission or governmental authority shall be subsisting, against any of the Sellers or the Purchaser which seeks to, or would, render it unlawful as of the Closing to effect the transactions contemplated hereby in accordance with the terms hereof, and no such action shall seek damages in a material amount by reason of the transactions contemplated hereby. Also, no substantive legal objection to the transactions contemplated by this Agreement shall have been received from or threatened by any governmental department or agency. (e) Consents and Approvals. All of the consents, permits and licenses required from any federal, state or local governmental agency or organization, and all releases, waivers of default and consents to assignment required from any third party, with respect to consummation of the transactions contemplated hereby shall have been obtained. (f) Performance of Obligations. The Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Closing Date, and the Sellers shall have received a certificate to such effect signed on behalf of the Purchaser by an officer of the Purchaser. 8. Indemnification. (a) Survival; Knowledge. All representations and warranties, covenants and agreements of the parties made in this Agreement shall survive the Closing for a period of 36 months after the Closing Date, unless otherwise specifically provided herein. The right to indemnification, payment of damages or other remedy based on representations, warranties, covenants and obligations herein will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants and obligations. (b) Indemnification of the Purchaser. Each of the Sellers, jointly and severally, agrees to indemnify, defend and hold harmless the Purchaser and its directors, officers, stockholders, employees, agents, affiliates and representatives from and against any and all damages, losses, settlement payments, obligations, liabilities, penalties, claims, actions or causes of action, encumbrances and reasonable costs and expenses (including, without limitation, attorneys' fees and costs of investigation) suffered, sustained, incurred or paid by any such indemnified party because of the untruth, inaccuracy or breach of any Page 125 representation, warranty, agreement or covenant of any of the Sellers contained in or made pursuant to this Agreement or the Sellers' Certificates. (c) Indemnification of the Sellers. The Purchaser agrees to indemnify, defend and hold harmless each of the Sellers from and against any and all damages, losses, settlement payments, obligations, liabilities, penalties, claims, actions or causes of action, encumbrances and reasonable costs and expenses (including, without limitation, attorneys' fees and costs of investigation) suffered, sustained, incurred or paid by any such indemnified party because of the untruth, inaccuracy or breach of any representation, warranty, agreement or covenant of the Purchaser contained in or made pursuant to this Agreement or the Purchaser's Certificate. (d) Notice and Opportunity to Defend. (i) In the case of a claim based on a demand by a third party, a party making a claim for indemnification hereunder (the "Indemnified Party") shall notify in writing the indemnifying party (the "Indemnitor") of the claim, describing the claim, the amount thereof, and the basis therefor, within 15 days after a third-party claim is presented to the Indemnified Party. The Indemnitor shall have the right to assume the entire control of the defense, compromise or settlement thereof, and, in connection therewith, the Indemnified Party shall cooperate fully to make available to the Indemnitor all pertinent information under its control. If the Indemnitor fails to assume the defense of such claim within a reasonable length of time, the Indemnified Party may do so without the Indemnitor's participation, in which case the Indemnitor shall pay the expenses of such defense, and the Indemnified Party may settle or compromise such claim without the Indemnitor's consent. If the Indemnified Party fails to so notify the Indemnitor, and if the Indemnitor is thereby materially prejudiced by such failure of notice in its defense of the claim, the Indemnitor's obligation of indemnity hereunder shall be extinguished with respect to such claim to the extent that the Indemnitor has been prejudiced by the failure to give such notice. (ii) In any case in which an Indemnified Party seeks indemnification hereunder which is not subject to paragraph (I) of this Section 8(d) because no third-party action is involved, the Indemnified Party shall promptly provide written notice to the Indemnitor of the claim, describing the claim, the amount thereof, and the basis therefor. The Indemnitor shall respond to each such claim within 30 days of receipt of such notice. No action shall be taken pursuant to the provisions of this Agreement or otherwise by the Indemnified Party until the later of (A) the expiration of the 30-day response period (unless reasonably necessary to protect the rights of the Indemnified Party), or (B) 30 days following the receipt of a response within such 30-day period by the Indemnified Party requesting an opportunity to cure the matter giving rise to the indemnification (and, in such event, the amount of such claim for indemnification shall be reduced to the extent so cured within such 30-day cure period). (e) Non-Exclusive Remedies. The remedies provided in this Section shall be non-exclusive and cumulative and shall not preclude assertion by any party of any other rights or the seeking of any other rights or remedies against any other party hereto. (f) Limitation of Liability. Notwithstanding anything to the contrary contained in this Agreement or otherwise, if, notwithstanding the limitations contained in this Section 8 or elsewhere in this Agreement, the Sellers nevertheless become liable to the Purchaser, in no event shall the aggregate amount of such liability of the Sellers (including, but not limited to, any and all liabilities of the Sellers for costs, expenses and attorneys' fees paid or incurred in connection therewith or in connection with the curing of any and all misrepresentations of representations or warranties or breaches of covenants or agreements under this Agreement) exceed the Purchase Price. Page 126 9. Termination. (a) Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing as follows: (i) by the mutual consent of the Purchaser and the Sellers; (ii) by Sellers representing a majority of the Shares, if any of the conditions set forth in Section 7 hereof shall have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Sellers to comply with the obligations of this Agreement) and the Sellers have not waived such condition on or before such date; (iii) by the Purchaser, if any of the conditions provided in Section 6 hereof have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Purchaser to comply with the obligations of this Agreement) and the Purchaser has not waived such condition on or before such date; or (iv) by either the Sellers representing a majority of the Shares or the Purchaser if a material breach of any provision of this Agreement has been committed by the other of them and such breach has not been waived. In the event of such termination by either the Purchaser or the Sellers pursuant to this Section 9(a), written notice shall forthwith be given to the other parties hereto. (b) Events Upon Termination. In the event that this Agreement is terminated as provided above: (i) the Purchaser shall deliver to the Sellers all documents (and copies thereof in its possession) previously delivered by the Sellers to the Purchaser in connection herewith; (ii) the Sellers shall deliver to the Purchaser all documents (and copies thereof in their possession) previously delivered by the Purchaser to the Sellers in connection herewith; and (iii) none of the parties hereto, nor any of their respective shareholders, directors or officers, shall have any liability to the other party for costs, expenses, loss of anticipated profits, consequential damages or otherwise, except that if this Agreement is terminated by the Purchaser or the Sellers because of a breach of this Agreement by the Purchaser (with respect to the Sellers) or the Sellers (with respect to the Purchaser), then the terminating party's right to pursue any and all legal and equitable remedies with respect thereto shall survive such termination unimpaired. 10. Change in Control. The Change in Control Agreement dated December 4, 1999 between Denny G. Kelly and Purchaser is canceled and terminated as of the date hereof. If prior to the consummation of the transactions contemplated hereby Purchaser enters into an agreement to consolidate with, merge into or sell, transfer or lease all or substantially all of its assets to any other entity pursuant to which shareholders of Purchaser will receive an amount in excess of $12.00 per share for their Common Stock, Sellers shall have the option to terminate this Agreement and elect to receive the consideration for the Shares offered to other shareholders of Purchaser. Page 127 11. Miscellaneous (a) Notices. All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given if delivered by hand, by overnight delivery, or United States mail, postage prepaid, registered or certified mail, return receipt requested, upon delivery or refusal of delivery, in each case to the appropriate addresses set forth below (or to such other addresses as a party may designate by notice to the other party hereto): (i) if to the Sellers: Denny G. Kelly and Arlene S. Kelly, 53 Creekwood Drive, Union Grove, Alabama 35175, and (ii) if to the Purchaser: Community Bancshares, Inc., 68149 Main Street, Blountsville, Alabama 35031, Attention: Kennon R. Patterson, Sr. (b) Entire Agreement. This Agreement and the Exhibits, schedules and documents delivered pursuant hereto constitute the entire agreement, and supersedes any prior agreement, understanding or letter of intent (oral or written), between the parties hereto relating to the subject matter of this Agreement. To be effective, any modification of this Agreement must be in writing and signed by the party to be charged thereby. (c) Choice of Law. The validity and construction of this Agreement shall be governed by the laws of the State of Alabama, without regard to the principles of conflict of laws thereof. (d) Headings. The Section headings herein are for reference only and shall not limit or control the meaning of any provision of this Agreement. (e) No Waiver. No delay or omission on the part of any party hereto in exercising any right hereunder shall operate as a waiver of such right or any other right under this Agreement. (f) Assignment. No party hereto shall assign this Agreement, or any rights, benefits, duties or obligations hereunder, or any interest therein, without first obtaining the express prior written consent of the other parties hereto; provided, however, that this Agreement may be assigned by any of the Sellers to a revocable management trust formed by such Seller. Without waiver of the foregoing provisions, all of the rights, benefits, duties, liabilities, and obligations of the parties hereto shall inure to the benefit of and be binding upon the parties and their respective heirs, successors and permitted assigns. (g) Interpretation. The parties hereto have each negotiated the terms hereof and reviewed this Agreement carefully. It is the intent of the parties that each word, phrase, and sentence and other part hereof shall be given its plain meaning, and that rules of interpretation or construction of contracts that would construe any ambiguity of any part hereof against the draftsman, by virtue of being the draftsman, shall not apply. When a reference is made in this Agreement to an Article, Section or Exhibit, such reference shall be to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of Page 128 comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a person are also to its heirs, successors and permitted assigns. (h) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall comprise one and the same document. In making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart executed by the party against whom enforcement of this Agreement is sought. (i) Attorneys' Fees. If legal action is commenced to enforce this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and reasonable attorneys' fees in addition to any other relief granted. The term "prevailing party" shall mean the party in whose favor final judgment after appeal (if any) is rendered with respect to the claims asserted in a complaint. (j) Severability. If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. (k) Expenses. All expenses incurred in connection with the transactions contemplated hereby, including, without limitation, attorneys' fees, accounting fees, sales taxes, recording fees, investment advisers' fees and disbursements, shall be borne by the respective parties incurring such expense, whether or not such transactions are consummated; it being understood and agreed that all federal, state and local income, transfer and sales taxes arising from the disposition of the Shares pursuant to this Agreement shall be borne by the Sellers. (l) Cooperation and Further Assurances. The parties hereto will cooperate with each other and will use all reasonable efforts to cause the fulfillment of the conditions to the parties obligations hereunder and to obtain as promptly as possible all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement. From time to time, at the Purchaser's request, and without further consideration, the Sellers will execute, acknowledge and deliver all instruments of further assurance and do all such acts and things as may reasonably be requested by the Purchaser for the purpose of carrying out the intent of this Agreement and to more effectively to convey, transfer to and vest in the Purchaser and its assignees, the Shares to be conveyed hereunder. (m) Schedules and Exhibits. The Schedules and Exhibits attached hereto, and all Schedules and Exhibits attached hereto after the date of this Agreement and prior to the Closing, are hereby incorporated into this Agreement wherever reference is made to them to the same extent as if they were set out in full at the point at which such reference is made. (n) No Third Party Beneficiaries. Except as expressly provided herein, this Agreement and its provisions, terms and conditions are for the sole and exclusive benefit of the parties hereto and their heirs, successors and permitted assigns. Page 129 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. THE "SELLERS" THE "PURCHASER" COMMUNITY BANCSHARES, INC. /S/ DENNY G. KELLY BY: /S/ KENNON R . PATTERSON --------------------------------- -------------------------- DENNY G. KELLY KENNON R. PATTERSON, SR. CHAIRMAN, PRESIDENT & CEO /S/ ARLENE S. KELLY --------------------------------- ARLENE S. KELLY EXHIBIT A
PURCHASE PRICE SELLER NUMBER OF SHARES DUE TO SELLER - ------ ---------------- -------------- Denny G. Kelly and Arlene S. Kelly as joint tenants With right of survivorship 60,208 $722,496 Denny G. Kelly 150 $ 1,800
In addition, Denny Kelly. is the beneficial owner of shares allocated to his account in the Community Bancshares, Inc. Employee Stock Ownership Plan. Sellers and Purchaser agree that the terms of this Stock Purchase Agreement shall apply to those shares; provided, however, that no actions shall be taken by any party with respect to such shares which, in the opinion of counsel, jeopardizes the tax-qualified status of the ESOP under Section 401 of the Internal Revenue Code of 1986, as amended. EXHIBIT B Colonial Bank has a lien on approximately 49,000 shares and The Exchange Bank of Altoona has a lien on 10,000 shares. Page 130 EX-10.24 5 g75225ex10-24.txt STOCK OPTION AGREEMENT DATED JANUARY, 2002 EXHIBIT 10.24 STOCK PURCHASE AGREEMENT BETWEEN COMMUNITY BANCSHARES, INC AND BISHOP K. WALKER AND WANDA W. WALKER Page 131 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of the ___ day of January, 2002 by and among Bishop K. Walker, Jr., Wanda W. Walker (each, a "Seller," and collectively, the "Sellers"), and Community Bancshares, Inc., a Delaware corporation (the "Purchaser"). RECITALS: WHEREAS, Bishop K. Walker, Jr. and Purchaser have entered into a retirement agreement dated of equal date herewith in connection with Mr. Walker's retirement as an executive officer and director of Purchaser and its subsidiary; and WHEREAS, each of the Sellers own issued and outstanding shares of common stock, $.10 par value per share (the "Common Stock"), of the Purchaser; and WHEREAS, each of the Sellers desires to sell, and the Purchaser desires to acquire, all of the shares of Common Stock held by the Sellers, for the consideration and on the terms set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT: 1. Sale and Purchase of the Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below), each of the Sellers shall sell, transfer, convey and assign to the Purchaser, and the Purchaser shall acquire, the number of shares of Common Stock set forth opposite the name of such Seller on Exhibit A hereto (collectively, the "Shares") and all of the Sellers' rights, title and interests therein. In exchange therefor, at the Closing the Purchaser shall remit to the Sellers as the purchase price hereunder (the "Purchase Price") cash in the amount of $12.00 per Share by wire transfer of immediately available funds to a bank account specified by the applicable Seller, or by such other method as to which the Purchaser and each Seller may agree. 2. Closing. (a) The Closing of the transactions contemplated by this Agreement shall take place at the offices of Purchaser, or at such other place as may be mutually agreed upon by the parties hereto, following satisfaction (or waiver thereof) of all of the conditions set forth in Sections 6 and 7 hereof at a date established by the Purchaser which shall be no later than the second anniversary of the date of this Agreement (the "Closing Date"). Notwithstanding the preceding, the Purchaser may, in its sole discretion, elect to purchase portions of the Shares at various dates within the two-year period commencing on the date hereof. In that event there will be more than one closing date and each event that is to occur on the Closing Date shall occur on each date set by the Purchaser as the closing date with respect to the pro rata number of Shares being purchased on such date. (b) At the Closing: Page 132 (i) Each of the Sellers (except as otherwise indicated below) will deliver to the Purchaser: (A) certificates representing the number of Shares set forth opposite the name of such Seller on Exhibit A hereto, duly endorsed (or accompanied by duly executed stock powers), with signatures guaranteed by a commercial bank or by a member firm of the New York Stock Exchange, for transfer to the Purchaser; and (B) a certificate executed by such Seller to the effect that each of such Seller's representations and warranties in this Agreement was true and correct in all material respects as of the date of this Agreement and is true and correct in all material respects as of the Closing Date as if made on the Closing Date, and that such Seller has performed all acts, obligations and conditions required to be performed by such Seller at or prior to the Closing (collectively, the "Sellers' Certificates"). (ii) The Purchaser will deliver to the Sellers: (A) the Purchase Price in the respective amounts set forth opposite the name of each Seller on Exhibit A hereto by wire transfer to an account specified by such Seller or by such other method as the Purchaser and each Seller may agree; and (B) a certificate executed by the Purchaser to the effect that each of the Purchaser's representations and warranties in this Agreement was true and correct in all material respects as of the date of this Agreement and is true and correct in all material respects as of the Closing Date as if made on the Closing Date, and that the Purchaser has performed all acts, obligations and conditions required to be performed by it at or prior to the Closing (the "Purchaser's Certificate"). 3. Representations and Warranties of the Sellers. Each of the Sellers represents and warrants, severally and not jointly, to the Purchaser as follows: (a) Organization and Authority. Each of the Sellers is an individual residing in the State of Alabama. Each of the Sellers has full power, right, legal capacity and authority to enter into this Agreement and to carry out the transactions contemplated hereby. (b) Authorization and Binding Effect. The execution, delivery and performance of this Agreement by each of the Sellers has been approved by all requisite action and no other approval or authorization is required on the part of the Sellers or any other person by law or otherwise in order to make this Agreement a valid, binding and enforceable obligation of the Sellers. This Agreement is and will constitute a valid and legally binding obligation of each of the Sellers and will be enforceable against each of the Sellers in accordance with the terms hereof, except as that enforceability may be (i) limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (ii) subject to general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law). (c) Title to Shares. Each of the Sellers is and will be on the Closing Date the record and beneficial owner and holder of the number of Shares set forth opposite the name of such Seller on Exhibit A hereto, free and clear of all liens, pledges, options, rights of first refusal, charges and encumbrances except Page 133 those liens and encumbrances listed on Exhibit B. None of the Shares is the subject of any shareholder agreement, voting trust or other agreement or understanding relating to the voting thereof or restricting in any way the sale or transfer thereof. (d) Conflicts. The execution of this Agreement by each of the Sellers, the compliance by each of the Sellers with the provisions of this Agreement and the consummation by each of the Sellers of the transactions contemplated hereby (i) will not violate any provision of applicable law to which any of the Sellers is subject, (ii) will not constitute a default under, or are not events which, with notice, lapse of time, or both, would constitute a default under, or result in the termination of, or accelerate the performance required by any of the terms, conditions or provisions of, any contract, agreement or other instrument binding on any of the Sellers, (iii) will not (due to the action or inaction of any Seller) result in the creation of any encumbrance upon any of the Shares, (iv) will not require the consent or approval of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, and (v) do not violate any order, writ, injunction, decree or arbitral award, statute, rule or regulation applicable to any of the Sellers. (e) Litigation. There is no litigation, arbitration, claim, investigation or proceeding pending or, to the best knowledge of each of the Sellers, threatened against any of the Sellers at law or in equity, before any court, arbitration tribunal or governmental agency that questions (i) the validity of this Agreement, the Sellers' Releases, the Standstill Agreement or the Stipulation, or (ii) the right of the Sellers to enter into such agreements and releases or to consummate the purchase and sale of the Shares and other transactions contemplated herein or therein. To the best of each of the Seller's knowledge, there is no reasonable basis for any such litigation, arbitration, claim, investigation or proceeding against any of the Sellers. (f) Securities Laws. Each of the Sellers has held the Shares owned by such Seller of record and beneficially for more than one year except those Shares issued by the Purchaser upon the exercise of stock options by Bishop K. Walker, Jr. in accordance with those certain Nonqualified Stock Option Agreements dated March 28, 1996, March 27, 1997 and March 26, 1998. None of the Sellers purchased any of the Shares from the Purchaser with a view to the distribution of such Shares or engages, either full-time or part-time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling or otherwise dealing or trading in the Shares. (g) Information. Each Seller has had the opportunity to ask for, and has received all information requested from the Purchaser, that such Seller deems, based on the representations and warranties made by the Purchaser herein, necessary or desirable in order to make such Seller's decision to sell the Shares to the Purchaser in accordance with the terms of this Agreement. (h) Absence of Brokers. The Sellers have incurred no obligation or liability, contingent or otherwise, for brokerage or finder's fees or commissions or other similar payments in connection with this Agreement or the transactions provided for herein. 4. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Sellers as follows: (a) Organization and Authority. The Purchaser is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. The Purchaser has full power, right, legal capacity and authority to enter into this Agreement and to carry out the transactions contemplated hereby. Page 134 (b) Authorization and Binding Effect. The execution, delivery and performance of this Agreement by the Purchaser has been approved by all requisite corporate action on the part of the Purchaser and no other corporate approval or authorization is required on the part of the Purchaser or any other person by law or otherwise in order to make this Agreement a valid, binding and enforceable obligation of the Purchaser. This Agreement is and will constitute a valid and legally binding obligation of the Purchaser and will be enforceable against it in accordance with the terms hereof, except as that enforceability may be (i) limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (ii) subject to general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law). (c) Conflicts. The execution by the Purchaser of this Agreement, the compliance by it with the provisions of this Agreement and the consummation by it of the transactions contemplated hereby (assuming any required regulatory approvals are obtained) (i) will not violate any provision of applicable law to which the Purchaser is subject, (ii) will not conflict with any of the terms of the Purchaser's Certificate of Incorporation, Bylaws or any amendments thereto, (iii) will not constitute a default under, or are not events which, with notice, lapse of time, or both, would constitute a default under, or result in the termination of, or accelerate the performance required by any of the terms, conditions or provisions of any contract, agreement or other instrument binding on the Purchaser, and (iv) do not violate any order, writ, injunction, decree or arbitral award, statute, rule or regulation applicable to the Purchaser. (d) Litigation. There is no litigation, arbitration, claim, investigation or proceeding pending or, to the best knowledge of the Purchaser, threatened against the Purchaser at law or in equity, before any court, arbitration tribunal or governmental agency that questions (i) the validity of this Agreement, or (ii) the right of the Purchaser to enter into such agreements and release or to consummate the purchase and sale of the Shares and other transactions contemplated herein or therein. To the best of the Purchaser's knowledge, there is no reasonable basis for any such litigation, arbitration, claim, investigation or proceeding against the Purchaser. (e) Rights Plan. The execution by the Sellers and the Purchaser of this Agreement does not, and the consummation of the transactions contemplated herein in accordance with the terms hereof will not, contravene or trigger the exercise of preferred share purchase rights granted under the Purchaser's Share Purchase Rights Plan or that certain Rights Agent Agreement, dated as of January 13, 1999, between the Purchaser and the Bank of New York. (f) Absence of Brokers. The Purchaser has incurred no obligation or liability, contingent or otherwise, for brokerage or finder's fees or commissions or other similar payments in connection with this Agreement or the transactions provided for herein. 5. Covenants. (a) Best Efforts; Cooperation. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use such party's reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from governmental entities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental entity, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the execution and delivery of any additional instruments necessary to consummate the transactions Page 135 contemplated by, and to fully carry out the purposes of, this Agreement, and (iv) causing the conditions in Sections 6 and 7 of this Agreement to be satisfied. (b) No Negotiation. Until such time, if any, as this Agreement is terminated pursuant to Section 9 hereof, the Sellers will not, and will cause each of their agents or representatives not to, directly or indirectly, solicit, initiate, participate in or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any person, individual or entity (other than the Purchaser) relating to any transaction involving the sale, transfer, encumbrance or pledge of the Shares. (c) Notification. (i) Between the date of this Agreement and the Closing Date, each Seller will promptly notify the Purchaser in writing if such Seller becomes aware of any fact or condition that causes or constitutes a breach of any of the Sellers' representations and warranties herein as of the date of this Agreement, or if such Seller becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, each Seller will promptly notify the Purchaser of the occurrence of any breach of any covenant of the Sellers in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 6 impossible or unlikely. Each of the Sellers acknowledges that the Purchaser is under no obligation to provide information of a non-public nature to the Sellers based on events that occur after the execution of this Agreement, except to the extent that such information is otherwise made available through the Purchaser's public filings with the Securities and Exchange Commission. (ii) Between the date of this Agreement and the Closing Date, the Purchaser will promptly notify the Sellers in writing if the Purchaser becomes aware of any fact or condition that causes or constitutes a breach of any of the Purchaser's representations and warranties herein as of the date of this Agreement, or if the Purchaser becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, the Purchaser will promptly notify the Sellers of the occurrence of any breach of any covenant of the Purchaser in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 7 impossible or unlikely. (d) Confidentiality. Each of the Sellers shall keep, and shall cause their agents and representatives to keep, the existence and terms of this Agreement and the transactions contemplated herein and therein, and the discussions and negotiations related thereto, and all information regarding the Purchaser or provided by the Purchaser in connection herewith strictly confidential, shall only disclose the same to such Seller's attorneys, accountants and financial advisors on a need-to-know basis, unless (i) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, or (ii) the furnishing or use of such information is required in connection with, legal proceedings, and shall not at any time use such information for any business purpose other than with respect to the transactions contemplated by this Agreement. (e) Voting. Between the date of this Agreement and the Closing Date, each Seller agrees to vote (or, in the case of Shares as to which the Seller is the beneficial, but not record owner, direct the record holder to vote) the Shares listed on Exhibit A and any other shares of Company Common Stock as to which such Seller acquired any legal or beneficial interest in accordance with the recommendations of the Page 136 Purchaser's Board of Directors on any matter submitted to the Purchaser's shareholders at any annual or special meeting of shareholders. 6. Conditions to the Obligations of the Purchaser. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement is subject to the following conditions: (a) Representations and Warranties. The representations and warranties of each of the Sellers, as set forth in Section 3 above, shall be true and correct in all material respects as of the Closing, and each of the Sellers shall have performed all acts, obligations and conditions required to be performed by the Sellers at or prior to the Closing. (b) Closing Certificates. The Sellers shall have delivered to the Purchaser the Sellers' Certificates. (c) Proceedings and Documents Satisfactory. All proceedings in connection with the transactions contemplated hereby and all certificates and documents delivered to the Purchaser pursuant to this Agreement shall be satisfactory in form and substance to the Purchaser and its counsel acting reasonably and in good faith. (d) No Obstructive Proceeding. No action or proceedings shall have been instituted, and no order, decree or judgment of any court, agency, commission or governmental authority shall be subsisting, against any of the Sellers or the Purchaser which seeks to, or would, render it unlawful as of the Closing to effect the transactions contemplated hereby in accordance with the terms hereof, and no such action shall seek damages in a material amount by reason of the transactions contemplated hereby. Also, no substantive legal objection to the transactions contemplated by this Agreement shall have been received from or threatened by any governmental department or agency. (e) Release of Liens; No Claim Regarding Stock Ownership or Sale Proceeds. The lienholders listed on Exhibit B must have agreed in writing to release any lien or encumbrance upon the Shares being transferred to Purchaser upon receipt of the Purchase Price or a portion thereof. There must not have been made or threatened by any person unrelated to the Purchaser or its subsidiaries any claim asserting that such person (i) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any voting, equity or ownership interest in, any of the Shares, or (ii) is entitled to all or any portion of the Purchase Price payable for the Shares. (f) Consents and Approvals. All of the consents, permits and licenses required from any federal, state or local governmental agency or organization, and all releases, waivers of default and consents to assignment required from any third party, with respect to consummation of the transactions contemplated hereby shall have been obtained. (g) Performance of Obligations. The Sellers shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date, and the Purchaser shall have received a certificate to such effect signed by each of the Sellers. 7. Conditions to the Obligations of the Sellers. The Sellers' obligations to consummate the transactions contemplated by this Agreement are subject to the following conditions: Page 137 (a) Representations and Warranties. The representations of the Purchaser, as set forth in Section 4 above, shall be true and correct in all material respects as of the Closing, and the Purchaser shall have performed all acts, obligations and conditions required to be performed by it at or prior to the Closing. (b) Closing Certificate. The Purchaser shall have delivered to the Seller the Purchaser's Certificate. (c) Proceedings and Documents Satisfactory. All proceedings in connection with the transactions contemplated hereby and all certificates and documents delivered to the Purchaser pursuant to this Agreement shall be satisfactory in form and substance to the Sellers and the Sellers' counsel acting reasonably and in good faith. (d) No Obstructive Proceeding. No action or proceedings shall have been instituted, and no order, decree or judgment of any court, agency, commission or governmental authority shall be subsisting, against any of the Sellers or the Purchaser which seeks to, or would, render it unlawful as of the Closing to effect the transactions contemplated hereby in accordance with the terms hereof, and no such action shall seek damages in a material amount by reason of the transactions contemplated hereby. Also, no substantive legal objection to the transactions contemplated by this Agreement shall have been received from or threatened by any governmental department or agency. (e) Consents and Approvals. All of the consents, permits and licenses required from any federal, state or local governmental agency or organization, and all releases, waivers of default and consents to assignment required from any third party, with respect to consummation of the transactions contemplated hereby shall have been obtained. (f) Performance of Obligations. The Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Closing Date, and the Sellers shall have received a certificate to such effect signed on behalf of the Purchaser by an officer of the Purchaser. 8. Indemnification. (a) Survival; Knowledge. All representations and warranties, covenants and agreements of the parties made in this Agreement shall survive the Closing for a period of 36 months after the Closing Date, unless otherwise specifically provided herein. The right to indemnification, payment of damages or other remedy based on representations, warranties, covenants and obligations herein will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants and obligations. (b) Indemnification of the Purchaser. Each of the Sellers, jointly and severally, agrees to indemnify, defend and hold harmless the Purchaser and its directors, officers, stockholders, employees, agents, affiliates and representatives from and against any and all damages, losses, settlement payments, obligations, liabilities, penalties, claims, actions or causes of action, encumbrances and reasonable costs and expenses (including, without limitation, attorneys' fees and costs of investigation) suffered, sustained, incurred or paid by any such indemnified party because of the untruth, inaccuracy or breach of any Page 138 representation, warranty, agreement or covenant of any of the Sellers contained in or made pursuant to this Agreement or the Sellers' Certificates. (c) Indemnification of the Sellers. The Purchaser agrees to indemnify, defend and hold harmless each of the Sellers from and against any and all damages, losses, settlement payments, obligations, liabilities, penalties, claims, actions or causes of action, encumbrances and reasonable costs and expenses (including, without limitation, attorneys' fees and costs of investigation) suffered, sustained, incurred or paid by any such indemnified party because of the untruth, inaccuracy or breach of any representation, warranty, agreement or covenant of the Purchaser contained in or made pursuant to this Agreement or the Purchaser's Certificate. (d) Notice and Opportunity to Defend. (i) In the case of a claim based on a demand by a third party, a party making a claim for indemnification hereunder (the "Indemnified Party") shall notify in writing the indemnifying party (the "Indemnitor") of the claim, describing the claim, the amount thereof, and the basis therefor, within 15 days after a third-party claim is presented to the Indemnified Party. The Indemnitor shall have the right to assume the entire control of the defense, compromise or settlement thereof, and, in connection therewith, the Indemnified Party shall cooperate fully to make available to the Indemnitor all pertinent information under its control. If the Indemnitor fails to assume the defense of such claim within a reasonable length of time, the Indemnified Party may do so without the Indemnitor's participation, in which case the Indemnitor shall pay the expenses of such defense, and the Indemnified Party may settle or compromise such claim without the Indemnitor's consent. If the Indemnified Party fails to so notify the Indemnitor, and if the Indemnitor is thereby materially prejudiced by such failure of notice in its defense of the claim, the Indemnitor's obligation of indemnity hereunder shall be extinguished with respect to such claim to the extent that the Indemnitor has been prejudiced by the failure to give such notice. (ii) In any case in which an Indemnified Party seeks indemnification hereunder which is not subject to paragraph (I) of this Section 8(d) because no third-party action is involved, the Indemnified Party shall promptly provide written notice to the Indemnitor of the claim, describing the claim, the amount thereof, and the basis therefor. The Indemnitor shall respond to each such claim within 30 days of receipt of such notice. No action shall be taken pursuant to the provisions of this Agreement or otherwise by the Indemnified Party until the later of (A) the expiration of the 30-day response period (unless reasonably necessary to protect the rights of the Indemnified Party), or (B) 30 days following the receipt of a response within such 30-day period by the Indemnified Party requesting an opportunity to cure the matter giving rise to the indemnification (and, in such event, the amount of such claim for indemnification shall be reduced to the extent so cured within such 30-day cure period). (e) Non-Exclusive Remedies. The remedies provided in this Section shall be non-exclusive and cumulative and shall not preclude assertion by any party of any other rights or the seeking of any other rights or remedies against any other party hereto. (f) Limitation of Liability. Notwithstanding anything to the contrary contained in this Agreement or otherwise, if, notwithstanding the limitations contained in this Section 8 or elsewhere in this Agreement, the Sellers nevertheless become liable to the Purchaser, in no event shall the aggregate amount of such liability of the Sellers (including, but not limited to, any and all liabilities of the Sellers for costs, expenses and attorneys' fees paid or incurred in connection therewith or in connection with the curing of any and all misrepresentations of representations or warranties or breaches of covenants or agreements under this Agreement) exceed the Purchase Price. Page 139 9. Termination. (a) Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing as follows: (i) by the mutual consent of the Purchaser and the Sellers; (ii) by Sellers representing a majority of the Shares, if any of the conditions set forth in Section 7 hereof shall have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Sellers to comply with the obligations of this Agreement) and the Sellers have not waived such condition on or before such date; (iii) by the Purchaser, if any of the conditions provided in Section 6 hereof have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Purchaser to comply with the obligations of this Agreement) and the Purchaser has not waived such condition on or before such date; or (iv) by either the Sellers representing a majority of the Shares or the Purchaser if a material breach of any provision of this Agreement has been committed by the other of them and such breach has not been waived. In the event of such termination by either the Purchaser or the Sellers pursuant to this Section 9(a), written notice shall forthwith be given to the other parties hereto. (b) Events Upon Termination. In the event that this Agreement is terminated as provided above: (i) the Purchaser shall deliver to the Sellers all documents (and copies thereof in its possession) previously delivered by the Sellers to the Purchaser in connection herewith; (ii) the Sellers shall deliver to the Purchaser all documents (and copies thereof in their possession) previously delivered by the Purchaser to the Sellers in connection herewith; and (iii) none of the parties hereto, nor any of their respective shareholders, directors or officers, shall have any liability to the other party for costs, expenses, loss of anticipated profits, consequential damages or otherwise, except that if this Agreement is terminated by the Purchaser or the Sellers because of a breach of this Agreement by the Purchaser (with respect to the Sellers) or the Sellers (with respect to the Purchaser), then the terminating party's right to pursue any and all legal and equitable remedies with respect thereto shall survive such termination unimpaired. 10. Change in Control. The Change in Control Agreement dated December 4, 1999 between Bishop K. Walker, Jr. and Purchaser is canceled and terminated as of the date hereof. If prior to the consummation of the transactions contemplated hereby Purchaser enters into an agreement to consolidate with, merge into or sell, transfer or lease all or substantially all of its assets to any other entity pursuant to which shareholders of Purchaser will receive an amount in excess of $12.00 per share for their Common Stock, Sellers shall have the option to terminate this Agreement and elect to receive the consideration for the Shares offered to other shareholders of Purchaser. Page 140 11. Miscellaneous (a) Notices. All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given if delivered by hand, by overnight delivery, or United States mail, postage prepaid, registered or certified mail, return receipt requested, upon delivery or refusal of delivery, in each case to the appropriate addresses set forth below (or to such other addresses as a party may designate by notice to the other party hereto): (i) if to the Sellers: Bishop K. Walker, Jr. and Wanda W. Walker, 362 Highlands, Union Grove, Alabama 35175, and (ii) if to the Purchaser: Community Bancshares, Inc., 68149 Main Street, Blountsville, Alabama 35031, Attention: Kennon R. Patterson, Sr. (b) Entire Agreement. This Agreement and the Exhibits, schedules and documents delivered pursuant hereto constitute the entire agreement, and supersedes any prior agreement, understanding or letter of intent (oral or written), between the parties hereto relating to the subject matter of this Agreement. To be effective, any modification of this Agreement must be in writing and signed by the party to be charged thereby. (c) Choice of Law. The validity and construction of this Agreement shall be governed by the laws of the State of Alabama, without regard to the principles of conflict of laws thereof. (d) Headings. The Section headings herein are for reference only and shall not limit or control the meaning of any provision of this Agreement. (e) No Waiver. No delay or omission on the part of any party hereto in exercising any right hereunder shall operate as a waiver of such right or any other right under this Agreement. (f) Assignment. No party hereto shall assign this Agreement, or any rights, benefits, duties or obligations hereunder, or any interest therein, without first obtaining the express prior written consent of the other parties hereto; provided, however, that this Agreement may be assigned by any of the Sellers to a revocable management trust formed by such Seller. Without waiver of the foregoing provisions, all of the rights, benefits, duties, liabilities, and obligations of the parties hereto shall inure to the benefit of and be binding upon the parties and their respective heirs, successors and permitted assigns. (g) Interpretation. The parties hereto have each negotiated the terms hereof and reviewed this Agreement carefully. It is the intent of the parties that each word, phrase, and sentence and other part hereof shall be given its plain meaning, and that rules of interpretation or construction of contracts that would construe any ambiguity of any part hereof against the draftsman, by virtue of being the draftsman, shall not apply. When a reference is made in this Agreement to an Article, Section or Exhibit, such reference shall be to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of Page 141 comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a person are also to its heirs, successors and permitted assigns. (h) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall comprise one and the same document. In making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart executed by the party against whom enforcement of this Agreement is sought. (i) Attorneys' Fees. If legal action is commenced to enforce this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and reasonable attorneys' fees in addition to any other relief granted. The term "prevailing party" shall mean the party in whose favor final judgment after appeal (if any) is rendered with respect to the claims asserted in a complaint. (j) Severability. If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. (k) Expenses. All expenses incurred in connection with the transactions contemplated hereby, including, without limitation, attorneys' fees, accounting fees, sales taxes, recording fees, investment advisers' fees and disbursements, shall be borne by the respective parties incurring such expense, whether or not such transactions are consummated; it being understood and agreed that all federal, state and local income, transfer and sales taxes arising from the disposition of the Shares pursuant to this Agreement shall be borne by the Sellers. (l) Cooperation and Further Assurances. The parties hereto will cooperate with each other and will use all reasonable efforts to cause the fulfillment of the conditions to the parties obligations hereunder and to obtain as promptly as possible all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement. From time to time, at the Purchaser's request, and without further consideration, the Sellers will execute, acknowledge and deliver all instruments of further assurance and do all such acts and things as may reasonably be requested by the Purchaser for the purpose of carrying out the intent of this Agreement and to more effectively to convey, transfer to and vest in the Purchaser and its assignees, the Shares to be conveyed hereunder. (m) Schedules and Exhibits. The Schedules and Exhibits attached hereto, and all Schedules and Exhibits attached hereto after the date of this Agreement and prior to the Closing, are hereby incorporated into this Agreement wherever reference is made to them to the same extent as if they were set out in full at the point at which such reference is made. (n) No Third Party Beneficiaries. Except as expressly provided herein, this Agreement and its provisions, terms and conditions are for the sole and exclusive benefit of the parties hereto and their heirs, successors and permitted assigns. Page 142 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. THE "SELLERS" THE "PURCHASER" COMMUNITY BANCSHARES, INC. /S/ BISHOP K. WALKER, JR. BY: /S/ KENNON R. PATTERSON, SR. ------------------------------ -------------------------------- BISHOP K. WALKER, JR. KENNON R. PATTERSON, SR. CHAIRMAN, PRESIDENT & CEO /S/ WANDA W. WALKER ----------------------------- WANDA W. WALKER EXHIBIT A
PURCHASE PRICE SELLER NUMBER OF SHARES DUE TO SELLER - ------ ---------------- --------------- Bishop K. Walker, Jr. 152,952 $1,835,424 Bishop K. Walker, Jr. and Wanda W. Walkeras joint tenants with right of survivorship 14,794 $ 177,528 Wanda W. Walker 32,528 $ 390,336 Bishop K. Walker, Jr. as Trustee for Matthew W. Scheile 890 $ 10,660 Matthew W. Scheile, Bishop K. Walker, Jr. and Wanda W. Walker as joint tenants with right of survivorship 1,185 $ 14,220
In addition, Bishop K. Walker, Jr. is the beneficial owner of 46,002 shares held by Community Bank as custodian of a self-directed IRA and shares allocated to his account in the Community Bancshares, Inc. Employee Stock Ownership Plan, and Wanda W. Walker is the beneficial owner of 3,030 shares held by Community Bank as custodian of a self-directed IRA Sellers and Purchaser agree that the terms of this Stock Purchase Agreement shall apply to those shares; provided, however, that no actions shall be taken by any party with respect to such shares which, in the opinion of counsel, jeopardizes the tax-qualified status of the ESOP under Section 401 or the IRAs under Section 408 of the Internal Revenue Code of 1986, as amended. Page 143 EXHIBIT B The Exchange Bank of Alabama has a lien on approximately 75,000 shares. Page 144 EX-10.25 6 g75225ex10-25.txt SEVERANCE AGREEMENT DATED JANUARY 9, 2002 EXHIBIT 10.25 SEVERANCE AGREEMENT BETWEEN DENNY G. KELLY AND COMMUNITY BANCSHARES, INC AND COMMUNITY BANK Page 145 STATE OF ALABAMA COUNTY OF BLOUNT THIS AGREEMENT made and entered into on this the 9th day of January, 2002, by and between DENNY G. KELLY, 53 CREEKWOOD DRIVE, UNION GROVE, AL 35175, hereinafter known as and referred to as "party of the first part" and COMMUNITY BANCSHARES, INC., A DELAWARE CORPORATION, AND COMMUNITY BANK, AN ALABAMA BANKING CORPORATION, P.O. Box 1000, Blountsville, AL 35031, hereinafter known and referred to as "parties of the second part": WITNESSETH WHEREAS, the party of the first part is presently serving as Executive Vice President and a member of the Board of Directors of Community Bancshares, Inc., and as President and a member of the Board of Directors of Community Bank; and WHEREAS, the party of the first part and the parties of the second part desire to enter into an agreement providing for payment of severance compensation and other severance benefits to the party of the first part by the parties of the second part following the retirement of the party of the first part as an officer of the parties of the second part. NOW, THEREFORE, in consideration of the retirement of the party of the first part as an officer of the parties of the second part, the party of the first part and the parties of the second part mutually agree to a severance package in favor of the party of the first part as follows: 1. Community Bank, an Alabama banking corporation, will pay to the party of the first part the sum of FOUR HUNDRED AND NINETY-FIVE THOUSAND AND NO/100 DOLLARS ($495,000.00) in two equal annual installments of TWO HUNDRED AND FORTY-SEVEN THOUSAND AND FIVE HUNDRED DOLLARS ($247,500.00) with the first instalment being due and payable on the eighth day after execution of this Agreement and the second and final instalment each being due and payable on January 8, 2003. 2. The party of the first part, having filed his election for retirement benefits with the parties of the second part, the party of the first part shall commence drawing his retirement benefits on the 1st day of February, 2002 from both the Defined Benefit Plan and the Benefit Restoration Plan of the parties of the second part. 3. The party of the first part shall be allowed to remain as a participant on the Blue Cross-Blue Shield of Alabama health insurance program of the parties of the second part under the same terms and conditions available to other early retirees. 4. The party of the first part and the parties of the second part will simultaneously with the execution of this Agreement enter into a separate Stock Purchase Agreement. Page 146 5. The parties of the second part shall purchase a vehicle mutually agreeable to both parties and shall deliver said vehicle and a certificate of title thereto to the party of the first part free and clear of all liens, encumbrances and outstanding ownership of rights. 6. The party of the first agrees that he shall be available for consultations with respect to the business affairs of the parties of the second part during the calendar years 2002 and 2003, and be available to render advice and provide assistance on matters requested of him by senior management and the Board of Directors of the parties of the second part in matters affecting the parties of the second part. Without limiting the generality of the foregoing, the party of the first part agrees that he shall be available to make calls on new and prospective customers, attend civic and social functions and assist with shareholder relations on behalf of the parties of the second part. 7. The parties recognize that the indemnification provisions of the Certificate of Incorporation and/or By-laws of Community Bancshares, Inc. and the Articles of Incorporation and/or By-laws of Community Bank (the "corporate documents") will govern the right of the party of the first party to be indemnified after the date of his retirement for acts and omissions occurring prior to his retirement. In addition, the parties of the second part acknowledge that the party of the first part will be entitled to indemnification pursuant to their respective corporate documents for actions taken or omitted by the party of the first party in his capacity as a consultant during the term of this Agreement. 8. The benefits, rights and privileges in favor of the party of the first part under this Agreement shall survive the death of the party of the first part in favor of the personnel representative of the Estate of the party of the first part. 9. The benefits, rights and privileges in favor of the party of the first part under this Agreement shall not be affected by the sale of the parties of the second part or any agreement to sell by the parties of the second part of any or all of its business assets, including the sale or agreement to sell stock ownerships possessed by the parties of the second part, or either of them. 10. This Agreement and the contents thereof shall be presented to and approved by the respective Boards of Directors of the respective parties of the second part by appropriate corporate resolutions. 11. In exchange for and in consideration of the promises, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the party of the first part, on behalf of himself and his heirs and personal representatives, agrees to release and forever discharge the parties of the second part and their respective officers, directors, agents and employees from any and all suits, claims, charges, causes of action, rights, demands, damages, costs, expenses or attorneys' fees, which he now has or may hereafter have against one or more of them on account of, connected with or growing out of any aspect of his employment with the parties of the second part or termination thereof, including, but not limited to, any claims, rights or demands arising out of any oral or written contractual relationship; any local, state or federal regulation or law, including, but not limited to, (1) the Civil Rights Act of 1991, (2) the Civil Rights Act of 1964, (3) the Civil Rights Act of 1866, (4) the Age Discrimination in Page 147 Employment Act (ADEA), (5) the Equal Pay Act, (6) the National Labor Relations Act, (7) the Fair Labor Standards Act, (8) the Employee Retirement Income Security Act (ERISA), (9) the Americans with Disabilities Act (ADA), (10) the Workers Adjustment and Retraining Notification Act (WARN), (11) the Consolidated Omnibus Budget Reconciliation Act (COBRA), (12) the Veterans' Reemployment Rights Act, (13) the Alabama Age Discrimination Act, (14) any Workers Compensation claims, (15) the Family Medical Leave Act (FMLA), and (16) and other federal or state statutory or common law theory of liability or damages. 12. It is understood that this Agreement does not constitute an admission by the parties of the second part of any violation of any federal, state or local law, ordinance, administrative regulation or case or common law theory of liability or damage. 13. The party of the first part agrees that he will refrain from publicly or privately engaging in any negative, harassing or disparaging remarks or conduct toward the parties of the second part or their directors, management or employees. Upon proof of violation or breach of this Agreement, the parties of the second part shall immediately seek repayment of any compensation or monies paid to the party of the first part set forth in this Agreement. Exercise of this right by the parties of the second part shall in no way limit the right of the parties of the second part to seek all legal and equitable damages and/or remedies arising out of the party of the first part's breach of any provision of this Agreement. 14. The party of the first part waives all claims or rights to employment or re-employment with the parties of the second part. 15. The terms and provisions of this Agreement and the enforcement thereof shall be governed by the laws of the State of Alabama. 16. By his signature below, the party of the first part acknowledges that he has carefully read and understands this Agreement and has entered into it knowingly and voluntarily intending to be bound by its terms. The party of the first part further acknowledges that he has been given at least forty-five (45) days to review and consider this Agreement and has been advised to consult with his attorney before signing it. The party of the first part understands that he may revoke the acceptance of this Agreement within seven (7) days of such acceptance (which acceptance is indicated by the his signature below). If the party of the first part chooses to revoke such acceptance, he understands he must do so in writing to Ounita Wilks, Vice President of Human Resources. The party of the first part understands that this Agreement will not be effective until the seven day revocation period has passed. The party of the first part understands that his acceptance of the consideration stated above and his execution of this Agreement are intended to bar any and all disputes arising out of his employment with the parties of the second part or the termination of such employment. Page 148 IN WITNESS WHEREOF, Denny G. Kelly as party of the first part, has hereunto set his hand and signature on the day, month and year first above written, and Community Bancshares, Inc., a Delaware corporation, and Community Bank, an Alabama banking corporation, as parties of the second part, acting by and through their respective Chairmans of Board of Directors, has caused this Agreement to be executed for and as the act of Community Bancshares, Inc. and Community Bank on the day, month and year first above written. /s/ William H. Caughran, Jr. /s/ Denny G. Kelly - --------------------------------- ----------------------------------------- WITNESS DENNY G. KELLY - PARTY OF THE FIRST PART COMMUNITY BANCSHARES, INC., A DELAWARE CORPORATION - PARTY OF THE SECOND PART ATTEST: BY: /s/ Kennon R. Patterson, Sr. ------------------------------------- CHAIRMAN OF ITS BOARD OF DIRECTORS /s/ William H. Caughran, Jr. - --------------------------------- BOARD SECRETARY COMMUNITY BANK, AN ALABAMA BANKING CORPORATION - PARTY OF THE SECOND PART ATTEST: BY: /s/ Kennon R. Patterson, Sr. ------------------------------------- CHAIRMAN OF ITS BOARD OF DIRECTORS /s/ William H. Caughran, Jr. - --------------------------------- BOARD SECRETARY Page 149 EX-10.26 7 g75225ex10-26.txt SEVERANCE AGREEMENT DATED DECEMBER 21, 2001 EXHIBIT 10.26 SEVERANCE AGREEMENT BETWEEN BISHOP K. WALKER AND COMMUNITY BANCSHARES, INC AND COMMUNITY BANK 151 STATE OF ALABAMA COUNTY OF BLOUNT THIS AGREEMENT made and entered into on this the 9th day of January, 2002, by and between BISHOP K. WALKER, JR., 362 HIGHLANDS. UNION GROVE, AL 35175, hereinafter known as and referred to as "party of the first part" and COMMUNITY BANCSHARES, INC., A DELAWARE CORPORATION, AND COMMUNITY BANK, AN ALABAMA BANKING CORPORATION, P.O. Box 1000, Blountsville, AL 35031, hereinafter known and referred to as "parties of the second part": WITNESSETH WHEREAS, the party of the first part is presently serving as Vice Chairman and Senior Executive Vice President and General Counsel and a member of the Board of Directors of Community Bancshares, Inc., and as Senior Executive Vice President and a member of the Board of Directors of Community Bank; and WHEREAS, the party of the first part and the parties of the second part desire to enter into an agreement providing for payment of severance compensation and other severance benefits to the party of the first part by the parties of the second part following the retirement of the party of the first part as an officer, director and general counsel. NOW, THEREFORE, in consideration of the retirement of the party of the first part as an officer, director and general counsel of the parties of the second part, the party of the first part and the parties of the second part mutually agree to a severance package in favor of the party of the first part as follows: 1. Community Bank, an Alabama banking corporation, will pay to the party of the first part the sum of SIX HUNDRED THOUSAND AND NO/100 DOLLARS ($600,000.00) in two equal annual installments, the first annual installment of THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00) being due and payable on the eighth day after the execution of this Agreement and a second and final annual installment of THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00) on the 8th day of January, 2003. 2. The party of the first part, having filed his election for retirement benefits with the parties of the second part on the 26th day of December, 2001, the party of the first part shall commence drawing his retirement benefits on the 1st day of February, 2002 from both the Defined Benefit Plan and the Benefit Restoration Plan of the parties of the second part. 3. The party of the first part shall be allowed to remain as a participant on the Blue Cross-Blue Shield of Alabama health insurance program of the parties of the second part until such time as he can be covered under Medicare Plans A & B and C-Plus by Blue Cross-Blue Shield of Alabama which is expected to be on or about the 1st day of February, 2002. Page 151 4. The party of the first part and the parties of the second part will simultaneously with the execution of this Agreement enter into a separate Stock Purchase Agreement. 5. The parties of the second part shall purchase the 2001 Cadillac Seville presently leased by the parties of the second part for the use and benefit of the party of the first part, and the parties of the second part shall deliver said automobile and a certificate of title thereto to the party of the first part free and clear of all liens, encumbrances and outstanding ownership of rights. 6. The party of the first agrees that he shall be available for consultations with respect to the business affairs of the parties of the second part during the calendar years 2002 and 2003, and be available to render advice and provide assistance on matters requested of him by senior management and the Board of Directors of the parties of the second part in matters affecting the parties of the second part. Without limiting the generality of the foregoing, the party of the first part agrees that he shall be available for consultation with respect to the issuance of title insurance binders and policies as well as the stock transfer function of the parties of the second part. 7. The parties recognize that the indemnification provisions of the Certificate of Incorporation and/or By-laws of Community Bancshares, Inc. and the Articles of Incorporation and/or By-laws of Community Bank (the "corporate documents") will govern the right of the party of the first party to be indemnified after the date of his retirement for acts and omissions occurring prior to his retirement. In addition, the parties of the second part acknowledge that the party of the first part will be entitled to indemnification pursuant to their respective corporate documents for actions taken or omitted by the party of the first party in his capacity as a consultant during the term of this Agreement. 8. The benefits, rights and privileges in favor of the party of the first part under this Agreement shall survive the death of the party of the first part in favor of the personnel representative of the Estate of the party of the first part. 9. The benefits, rights and privileges in favor of the party of the first part under this Agreement shall not be affected by the sale of the parties of the second part or any agreement to sell by the parties of the second part of any or all of its business assets, including the sale or agreement to sell stock ownerships possessed by the parties of the second part, or either of them. 10. This Agreement and the contents thereof shall be presented to and approved by the respective Boards of Directors of the respective parties of the second part by appropriate corporate resolutions. 11. In exchange for and in consideration of the promises, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the party of the first part, on behalf of himself and his heirs and personal representatives, agrees to release and forever discharge the parties of the second part and their respective officers, directors, agents and employees from any and all suits, claims, charges, causes of action, rights, demands, damages, costs, expenses or attorneys' fees, which he now has or may hereafter have against one or more of them on account of, connected with or growing out of any aspect of his employment with the parties of the second part or termination thereof, including, but not limited to, any claims, rights or demands arising out of any oral or written contractual relationship; any local, state or federal regulation or law, including, but not limited to, (1) the Civil Rights Act of 1991, (2) the Civil Rights Act of 1964, (3) the Civil Rights Act of 1866, (4) the Age Discrimination in Employment Act (ADEA), (5) the Equal Pay Act, (6) the National Labor Relations Act, (7) the Fair Labor Standards Act, (8) the Employee Retirement Income Security Act (ERISA), (9) the Americans with Disabilities Act (ADA), (10) the Workers Adjustment and Retraining Notification Act (WARN), (11) the Consolidated Omnibus Budget Reconciliation Act (COBRA), (12) the Veterans' Reemployment Rights Act, (13) the Alabama Age Discrimination Act, (14) any Workers Compensation claims, (15) the Family Medical Leave Act (FMLA), and (16) and other federal or state statutory or common law theory of liability or damages. 12. It is understood that this Agreement does not constitute an admission by the parties of the second part of any violation of any federal, state or local law, ordinance, administrative regulation or case or common law theory of liability or damage. 13. The party of the first part agrees that he will refrain from publicly or privately engaging in any negative, harassing or disparaging remarks or conduct toward the parties of the second part or their directors, management or employees. Upon proof of violation or breach of this Agreement, the parties of the second part shall immediately seek repayment of any compensation or monies paid to the party of the first part set forth in this Agreement. Exercise of this right by the parties of the second part shall in no way limit the right of the parties of the second part to seek all legal and equitable damages and/or remedies arising out of the party of the first part's breach of any provision of this Agreement. 14. The party of the first part waives all claims or rights to employment or re-employment with the parties of the second part. 15. The terms and provisions of this Agreement and the enforcement thereof shall be governed by the laws of the State of Alabama. 16. By his signature below, the party of the first part acknowledges that he has carefully read and understands this Agreement and has entered into it knowingly and voluntarily intending to be bound by its terms. The party of the first part further acknowledges that he has been given at least forty-five (45) days to review and consider this Agreement and has been advised to consult with his attorney before signing it. The party of the first part understands that he may revoke the acceptance of this Agreement within seven (7) days of such acceptance (which acceptance is indicated by the his signature below). If the party of the first part chooses to revoke such acceptance, he understands he must do so in writing to Ounita Wilks, Vice President of Human Resources. The party of the first part understands that this Agreement will not be effective until the seven day revocation period has passed. The party of the first part understands that his acceptance of the consideration stated above and his execution of this Agreement are intended to bar any and all disputes arising out of his employment with the parties of the second part or the termination of such employment. IN WITNESS WHEREOF, Bishop K. Walker, Jr. as party of the first part, has hereunto set his hand and signature on the day, month and year first above written, and Community Bancshares, Inc., a Delaware corporation, and Community Bank, an Alabama banking corporation, as parties of the second part, acting by and through their respective Chairmans of Board of Directors, has caused this Agreement to be executed for and as the act of Community Bancshares, Inc. and Community Bank on the day, month and year first above written. /s/ William H. Caughran /s/ Bishop K. Walker, Jr. - ------------------------------ -------------------------------------- WITNESS BISHOP K. WALKER, JR. - PARTY OF THE FIRST PART COMMUNITY BANCSHARES, INC., A DELAWARE CORPORATION - PARTY OF THE SECOND PART ATTEST: BY: /s/ Kennon R. Patterson, Sr. -------------------------------------- CHAIRMAN OF ITS BOARD OF DIRECTORS /s/ William H. Caughran - ------------------------------ BOARD SECRETARY COMMUNITY BANK, AN ALABAMA BANKING CORPORATION - PARTY OF THE SECOND PART ATTEST: BY: /s/ Kennon R. Patterson, Sr. -------------------------------------- CHAIRMAN OF ITS BOARD OF DIRECTORS /s/ William H. Caughran - ------------------------------ BOARD SECRETARY EX-10.27 8 g75225ex10-27.txt ACQUISITION AGREEMENT DATED DECEMBER 21, 2001 EXHIBIT 10.27 ---------------------------------- ACQUISITION AGREEMENT BETWEEN FIRST FARMERS AND MERCHANTS CORPORATION AND COMMUNITY BANK ---------------------------------- EXECUTION COPY ACQUISITION AGREEMENT This Acquisition Agreement (the "Agreement") is made and entered into as of the 21st day of December, 2001, by and among First Farmers and Merchants Corporation., a Tennessee corporation (the "Company") and its wholly-owned subsidiary, First Farmers and Merchants National Bank of Columbia, a national banking association (the "Purchaser"), Community Bank, an Alabama banking corporation (the "Seller") and Community Bancshares, Inc., a Delaware corporation ("CBI"). W 1 T N E S S E T H: The Seller has offered for sale its branch offices located at (i) 302 South 2nd Street, Pulaski, Tennessee and (ii) 1700 West College Street, Pulaski, Tennessee (the "Branches") together with substantially all of the deposit and Loan business of such Branches. The Purchaser has received information regarding the Branches and has offered to purchase substantially all of the assets and liabilities of the Branches on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINED TERMS 1.01 Definitions. The following terms used in this Agreement shall have the meanings specified below: (a) "Core Deposits" means all deposits maintained at the Branches, exclusive of deposits represented by certificates of deposit in denominations of $100,000 or more. (b) "Available Core Deposit Base" means the daily average total Core Deposit balances, as indicated by the general ledger books of account of the Branches for the approximately 30-day period immediately preceding the date of Closing. (c) "Closing" means the closing of the purchase of the assets and the assumption of the liabilities of the Branches as provided herein. (d) "Information Statement" means the Information pertaining to the Branches prepared and delivered to the Purchaser by the Seller in November 2001, the receipt of which is acknowledged. (e) "Loan" means each loan agreement, note or borrowing arrangement (including, without limitation, leases, credit enhancements, commitments, guarantees and other interest-bearing assets) to which Seller is a party and which are on the Branches' books at Closing. ARTICLE II SALE OF ASSETS 2.01 Assets Sold. On the terms and subject to the conditions of this Agreement, at the Closing, the Seller shall transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase and receive from the Seller, the following assets, properties and rights (the "Purchased Assets"): (a) all Loans on the Branches' books at Closing at their respective then outstanding principal amounts, together with accrued interest thereon; provided, however, that in the event Purchaser's due diligence review of such Loans reveals that certain of the Loans are undesirable to Purchaser, Purchaser and Seller agree to negotiate a mutually agreeable adjustment to the purchase price for such undesirable Loans; (b) all of the Seller's rights and title to the real property and improvements located thereon owned or leased by the Seller with respect to the Branches, with any owned real property and improvements to be purchased at the fully depreciated net book value thereof (set forth on Exhibit 8.03) and any leased real property and improvements being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder; (c) all cash on hand at the Branches at Closing; (d) the furniture, fixtures and equipment and any replacements thereof or repairs thereto (together with any manufacturer's warranties or maintenance or service agreements thereon which are in effect and are assignable) located in the Branches (exclusive of those items referred to in Section 2.03 of this Agreement), whether leased or owned as identified on Exhibit 8.04, with owned property being purchased at the fully depreciated net book value thereof (set forth in Exhibit 8.04) and any leased property being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder; (e) all rights to the extent assignable in, to and under any vendor single interest insurance or other insurance on collateral transferred to the Purchaser with the Loans; (f) any unearned credit life insurance or debt cancellation premiums under the control of the Seller with respect to Loans sold to the Purchaser hereunder; (g) all agreements, contracts, files (written or electronic), ledgers, or other documents relating to any of the foregoing; and (h) all real property categorized on the books of the Branches as "other real estate" at a mutually agreeable price to be negotiated by Seller and Purchaser following the completion of Seller's due diligence review of the Branches. 2.02 Value of Equipment and Additions. The Seller represents and warrants that the net book value of the furniture, fixtures and equipment of the Branches on Seller's books (excluding the items 157 listed in Section 2.03 of this Agreement) is as set forth in Exhibits 8.03 and 8.04 as of the date of the Information Statement. 2.03 Assets Not Sold. The following are expressly excluded from the Purchased Assets: (a) the Seller's signs and logos; and (b) the Seller's proprietarily marked stationery, forms, labels, shipping material, brochures, advertising material and similar property; provided, however, it is the intention of the parties, that items not bearing proprietary marks and which are necessary or useful in operating the Branches during the first days after Closing not be removed. 2.04 Documents of Transfer. The sale, transfer, assignment and delivery of the Purchased Assets pursuant to this Article II shall be effected by general warranty deeds, bills of sale, endorsements, assignments and other instruments of transfer and conveyance sufficient to convey title as agreed hereunder and satisfactory in form and substance to counsel for the Seller and the Purchaser. At the Closing, the Seller will give the Purchaser possession and control of the Purchased Assets and assumed liabilities and will deliver to the Purchaser all keys, combinations, codes and other necessary access devices relating to the Branches, the Purchased Assets and the assumed liabilities. At Closing, the Seller will deliver to the Purchaser originals of the promissory notes, security agreements, and related agreements or information relating to or evidencing all Loans purchased, to the extent these exist, and otherwise will deliver the best copies available. 2.05 Removal of Assets Not Sold. As soon as reasonably possible following the Closing, but no later than one week following Closing (unless otherwise agreed by Purchaser), the Seller will remove all of its personal property referred to in Section 2.03 of this Agreement; provided, however, the Seller shall coordinate with the Purchaser to have the Seller's signs and logos removed from the Branches at Closing. The Seller shall remove all such signs, logos and equipment at its own cost and in a manner that will not damage the premises or improvements or unduly disturb operations. 2.06 Title to Real Property and Leases. The Seller shall provide the Purchaser with originals or copies of all deeds and leases with respect to the Branches' real property and improvements, and all real estate records to the extent held by the Seller relating to the Branches. 2.07 Breaches with Third Parties. Nothing in this Agreement shall constitute an agreement to assign any claim, contract, license, lease, commitment, sales order or purchase order or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach thereof or would in any way affect the rights of the Seller thereunder so that Purchaser would not in fact receive all such rights. The Seller will cooperate with the Purchaser in any arrangement desired to provide Purchaser with the benefits under any such claims, contracts, licenses, leases, commitments, sales or purchase orders, including enforcement at the cost of Seller for the benefit of the Purchaser of any and all rights of the Seller against a third party thereto arising out of the breach or cancellation by such third party or otherwise. Seller shall obtain at its sole cost and expense evidence satisfactory to the Purchaser of transfer or assignment to the Purchaser of any such property or property rights or any contract or agreement which shall require the consent or approval of any third party, or shall provide the 158 Purchaser with alternative arrangements with respect to such matters that are satisfactory to Purchaser. The provisions of this Section 2.07 shall not apply to title to any real property, lease of, or to any other interest in, real property, to deposit obligations or to Loans conveyed under this Agreement. 2.08 Payments and Information Received After Closing. The Seller agrees to forward promptly to the Purchaser: (a) any payments (properly endorsed without recourse as necessary) which are received by the Seller on or after the date of Closing that relate in any way to the Loans being purchased by the Purchaser hereunder, together with sufficient information so that any such payments may be properly applied to the extent such information is available to the Seller; and (b) any notices or other correspondence received on or after the date of Closing that relate in any way to the Loans purchased or to other Purchased Assets. ARTICLE III ASSUMPTION OF LIABILITIES 3.01 Liabilities Assumed. At the Closing the Purchaser shall assume and agree to pay and discharge only those specific existing liabilities of the Branches described in Exhibit 3.01 hereto (the "Assumed Liabilities"). No assurance is given by the Seller that the Branches' present deposit customers will become or continue to be customers of the Purchaser, the same being at the sole discretion of such customers. 3.02 Liabilities Not Assumed. Except for those liabilities specifically assumed by the Purchaser under Section 3.01 above, the Purchaser is not assuming any other liabilities or obligations of the Seller, including, but not limited to the following: (a) cashier's checks, money orders, interest checks, official checks, drafts and expense checks issued by the Seller prior to Closing; (b) all liabilities and obligations arising from or connected with the Branches relating to circumstances arising or existing prior to the Closing; and (c) all liabilities and obligations of the Seller for fees, commissions, costs and expenses incurred by the Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, legal, consulting, accounting and appraisal fees and expenses. 3.03 Documentation of Assumption. At Closing the Purchaser shall deliver to the Seller an undertaking, satisfactory in form and substance to counsel for the Seller, under which the Purchaser will assume and agree to perform, discharge and pay the obligations and liabilities assumed by the Purchaser pursuant to this Agreement. An acceptable form of such undertaking is attached as Exhibit 3.03 hereto and made a part hereof. 159 3.04 Assumption Subject to Certain Terms. The liabilities being assumed by the Purchaser pursuant to this Article shall be assumed subject to the terms and conditions of the contracts of deposit and other written agreements relating thereto and the laws, rules and regulations applicable thereto. 3.05 Payment of Items by Seller After Closing. If, subsequent to the assumption of liabilities pursuant to this Article, the Seller shall properly honor any valid check or withdrawal on a deposit assumed by Purchaser ("Transferred Account"), then in that event the Purchaser shall pay the Seller any monies so paid by the Seller to or for the benefit of such Transferred Account, if there are sufficient available collected funds in such Transferred Account to fully pay such check or item. 3.06 Payment of Items by Purchaser After Closing. The Purchaser agrees that after Closing it will pay all properly payable checks, drafts and withdrawal orders drawn by the parties to the Transferred Accounts if the available collected balance of each Transferred Account is sufficient to permit the payment thereof. 3.07 Transfer of Credits by Seller; Information Received After Closing. (a) The Seller agrees to transfer to the Purchaser any deposits accepted by it after the date of Closing for credit to Transferred Accounts, however the Seller shall be under no obligation to accept such deposits or for any claims resulting from such procedure. (b) Any notices or correspondence received by the Seller on or after the Closing with respect to any liabilities assumed by the Purchaser hereunder will be sent promptly to the Purchaser. 3.08 Safe Deposit Boxes. The keys, contracts, signature cards and other material or equipment related to safe deposit boxes located in the Branches, together with such boxes which shall contain all contents thereof, shall be delivered by the Seller to the Purchaser at Closing. Safe deposit box rentals collected by the Seller prior to the Closing shall be prorated between the Seller and the Purchaser at Closing. 3.09 Seller Not Liable to Pay. In the event any deposit customer holding a Transferred Account shall demand payment from the Seller for all or any part of any deposit liabilities assumed by the Purchaser with respect to the Transferred Account, the Seller shall not be liable or responsible for making such payment, and the Purchaser shall defend, indemnify and hold the Seller harmless from and against any and all claims, demands and actions by all such deposit customers for such payments or liabilities. 3.10 Purchaser Responsible for Returned Items. The Purchaser agrees to pay promptly to the Seller an amount equal to the amount of any checks, drafts or withdrawal orders credited to a Transferred Account as of the Closing date which are returned to the Seller after the Closing date. 3.11 Credit Life Insurance Refunds. Seller and Purchaser shall negotiate a mutually acceptable agreement with respect to the liabilities for refunding unearned credit life insurance premiums. 160 ARTICLE IV ASSUMPTION OF RISKS 4.01 Insurance Policies. Effective immediately upon the time of Closing, the Seller will discontinue any casualty and public liability insurance coverage maintained with respect to the premises of the Branches. The Purchaser shall be solely responsible for all casualty losses and liability claims arising from the premises of the Branches after the time of Closing. Nothing in this Section 4.01 shall be construed or deemed to require the Purchaser to insure the furniture, fixtures or equipment of the Seller which may not be removed from the Branches at Closing, and the Seller shall solely bear all risk of loss to such property following Closing. 4.02 Safe Deposit Boxes. Immediately upon the time of Closing, the Purchaser shall assume all risks arising after the Closing with respect to granting access to and protecting the contents of the safe deposit boxes located at the Branches. 4.03 Security of Persons and Property Immediately upon the time of the Closing, the Seller will discontinue providing any security for persons and property provided by the Seller prior to Closing. Nothing contained herein shall be construed to require the Seller to remove any of its security equipment not being sold to Purchaser until such time as the Seller can reasonably remove or arrange for the removal of such security equipment without interrupting the Purchaser's business or the security of the premises of the Branches. The risk of loss of such equipment shall be borne by the Seller. ARTICLE V SETTLEMENT 5.01 Settlement. The amount of cash to be received or paid by Purchaser at Closing shall be calculated under the formula set forth the Settlement Statement attached hereto as Exhibit 5.01 and incorporated herein by reference. The Purchased Assets to be transferred at Closing shall be valued as provided in Article II of this Agreement. The premium to be paid by Purchaser to Seller shall be based upon the Available Core Deposit Base as determined in Section 1.01(b) hereof. The premium due from the Purchaser to the Seller shall equal seven percent (7%) of the Available Core Deposit Base. At Closing, the Seller shall deliver to the Purchaser a copy, certified by a duly authorized officer of the Seller, of such Settlement Statement, which sets forth the computation of the cash payable to or due from the Purchaser at Closing, and upon acceptance by the Purchaser, the Seller or the Purchaser, as the case may be, shall pay said amount to the other at Closing. 5.02 Post-Closing Adjustments to Purchase Price. Within five (5) business days following the date of Closing, the Seller shall, based upon its general ledger and other books and records, recalculate the amount of cash to be received or paid by the Purchaser as of the Closing date using the Final Settlement Statement attached hereto as Exhibit 5.02 and incorporated herein by reference, and the amount of cash to be received or paid by the Purchaser shall be adjusted and paid, by the Seller or the Purchaser, as the case may be as provided in such Exhibit 5.02. 161 5.03 Casualty and Other Losses Prior to Closing. If the buildings in which the Branches are located or any other improvements with respect to the Branches shall be damaged by fire or other casualty, whether insured or uninsured, and shall not be repaired or restored to its original condition prior to the Closing, the Purchaser may terminate this agreement without further liability or require Seller to promptly assign or pay over to Purchaser any insurance proceeds covering such facility and its contents. 5.04 Pro Rata Adjustments of Expenses. All property taxes, rents and utility payments, and all similar expenses itemized in a writing delivered by the Seller to Purchaser a reasonable time before Closing relating to the ownership and operation of the Branches, and the Federal Deposit Insurance Corporation ("FDIC") insurance premiums relating to Transferred Accounts, shall be prorated between the parties as of the date of Closing. ARTICLE VI EMPLOYEES 6.01 Transfer of Certain. Employees. Effective at Closing, the Seller will terminate the employment of all employees assigned to the Branches, and such employees will become "at will" employees of the Purchaser under such terms as may be established by Purchaser in its sole discretion, except as otherwise expressly provided in Section 6.03 below. The Seller and the Purchaser shall mutually agree upon any additions to or replacements of staff after the date of this Agreement through Closing, and Seller shall not employ any employees at the Branches during such time other than on an "at will" basis. 6.02 Re-Employment Restriction. The Seller agrees that for a period of one year following the Closing it shall not solicit the employment of any of its former employees who transfer to the Purchaser at Closing. 6.03 Benefits. Each employee of Seller who transfers to the Purchaser will receive the same pension, profit sharing, insurance, vacation, sick leave and other benefits as comparable employees of Purchaser. Purchaser shall give each of Seller's employees who transfer to Purchaser credit for service with Seller for purposes of any vacation or sick leave policy, and for purposes of determining vesting (but not eligibility or benefit accrual) under Purchaser's profit sharing plan. 6.04 Responsibility for Employees Transferring. With respect to all employees of the Branches transferring to the Purchaser, the Seller will be responsible for all salaries, wages and benefits payable to such employees during employment by the Seller up to Closing. 6.05 Employee Information. The Seller shall provide the Purchaser at times the Purchaser may deem necessary such records and information regarding such transferred employees' service with the Seller as the Purchaser may reasonably need for purposes of the Purchaser's employment and benefits program records including the complete personnel file on each transferring employee. The Purchaser and the Seller agree to assist each other by providing the employee information needed to open and close employee files on those employees transferred. The Seller reserves the right to obtain the employee's prior consent to release information which in the Seller's sole discretion, the Seller 162 believes should not be released to the Purchaser without the employee's prior consent. Should information be withheld, the Seller must advise the Purchaser of such prior to Closing. ARTICLE VII ACCESS TO PROPERTIES AND RECORDS 7.01 Access and Confidential Treatment. From and after the date of this Agreement, the Seller shall permit the Purchaser's agents and representatives full access, during normal business hours and upon reasonable notice, to all assets, properties, books, records (except employee records and information excluded by Section 6.05 hereof), agreements and commitments of the Seller relating to the Branches, and the Seller shall furnish representatives of the Purchaser during such period with all such information concerning the affairs of the Branches as the Purchaser may reasonably request. The Purchaser will hold in strict confidence all documents and information concerning the Seller so furnished that is not in the public domain and will not publicly disclose such documents or information except to its attorneys, accountants, or other advisers, to regulatory and self-regulatory authorities, or as required by law or pursuant to legal process (in which case it will seek to obtain confidentiality orders protecting such documents and information). If the transactions contemplated by this Agreement are not consummated, all such documents and information shall promptly be returned to the Seller. Nothing in this Section 7.01 shall be deemed to require Seller to breach any obligation of confidentiality if the same is itself disclosed to Purchaser, or to reveal any proprietary information, trade secrets or marketing or strategic plans. 7.02 Recordkeeping and Access Following Closing. The Purchaser will preserve and safely keep, for as long as may be required by applicable law, all of the files, books of account and records delivered to the Purchaser through Closing related to the Branches for the joint benefit of itself and the Seller, and shall permit the Seller or its representatives, for proper purposes, at any reasonable time and at Seller's expense, to inspect, make extracts from or copies of, any such files, books of account or records as the Seller shall deem reasonably necessary for the Seller's legitimate business purposes. The Seller will not use such documents or information for the purpose of competing with the Purchaser. ARTICLE VIII SELLER'S REPRESENTATIONS AND WARRANTIES The Seller represents and warrants to the Purchaser as follows: 8.01 Corporate Organization. The Seller is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Alabama. 8.02 Corporate Authority. The Seller has full corporate right, power, capacity and authority validly to enter into and to perform this Agreement and the transactions contemplated by this Agreement, and to sell, transfer, assign and deliver the Purchased Assets referred to in Article II. The execution, delivery and performance of this Agreement, and the transactions contemplated by this Agreement have been duly and validly authorized by all requisite corporate action, and this Agreement is binding and enforceable against the Seller in accordance with its terms. 163 8.03 Title to or Right to Occupy Real Estate. Exhibit 8.03 describes all real estate, improvements, and any related rights owned, leased, or otherwise held by Seller with respect to the Branches, and with respect to owned property, the fully depreciated net book value thereof. Seller (a) has and at Closing will have indefeasible fee simple title to, and owns and at Closing will be the sole owner of all the real property to be purchased by Purchaser pursuant to Article II, subject to no mortgage, pledge, lien, security interest, tenant leases, participation, charge, encumbrance or conditional sale of other title retention agreement except for real estate taxes not yet due and payable, restrictions, easements and rights of way of record, and (b) is and at Closing will be the sole lessee with respect to the leases to be assigned to Purchaser pursuant to said Article II, with the right to convey to Purchaser the leasehold interest therein so as to assure that Purchaser shall have the full, exclusive and peaceful possession of such leasehold interest. All real estate and fixtures will at the time of Closing be in good operating condition and repair, subject only to ordinary wear and tear, and will otherwise be received in "AS IS" condition with no other warranties by Seller as to their condition or future performance, except those warranties related to title. 8.04 Condition of Personal Property. Exhibit 8.04 sets forth by category or item all of the tangible personal property owned or leased (identified as such) which is used or useful in connection with the operation of the Branches, with the fully depreciated net book value of owned property being also set fort on Exhibit 8.04. The tangible personal property included in the Purchased Assets is, and at the Closing will be, in good operating condition and repair, subject only to ordinary wear and tear and will otherwise be received in "AS IS" condition with no other warranties by Seller as to its condition or future performance, except those warranties relating to title. 8.05 Status of Loans. (a) Exhibit 8.05 sets forth (i) all of the Loans of Seller that as of November 30, 2001, were classified by any bank examiner (whether regulatory or internal) as "Other Loans Specially Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned Loans", "Watch List" or words of similar import, together with the principal amount of and accrued and unpaid interest on each such Loan and the identity of the borrower thereunder, and (ii) by category of Loan (i.e., commercial, consumer, etc.), all of the other Loans of Seller that as of November 30, 2001, were classified as such, together with the aggregate principal amount of and accrued and unpaid interest on such Loans by category. (b) With respect to each Loan within the Purchased Assets: the Loan complies in all material RESPECTS with all applicable laws and is a valid loan enforceable in accordance with its terms; the Seller is the sole owner thereof, no participation therein having been sold; the Loan is not pledged or encumbered; the principal balance of the Loan as shown on the Seller's books and records is true and correct as of the last date shown thereon; all purported signatures on and executions of any document in connection with such Loan are genuine and authorized; all loan documentation has been actually signed or executed by all necessary parties; the Seller has and will transfer to Purchaser, custody of all documents, or microfilm or photocopy records thereof related to such Loan and there are no other written or unwritten agreements, understandings, or other arrangements with respect to such Loan; provided, however, that all Loans (and any notes, other evidences of indebtedness or security agreements associated therewith) transferred at Closing by the Seller to the Purchaser are transferred without recourse and without any other warranties or representations as to the collectibility of any such Loans, the value of the collateral securing same or the creditworthiness of any of the makers, guarantors or other obligors thereof. 164 8.06 No Violations. Subject to receipt of all necessary corporate and regulatory approvals, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate any provisions of law to which the Seller is subject and do not and will not conflict with or result in the violation or breach of any condition or provision of, or constitute a default under, any contract, right, lease, pledge, lien, security interest, instrument, indenture, mortgage, charge, encumbrance, agreement, order, writ, injunction, decree or judgment to which the Seller is a party or which is binding on Seller or to which any of the property or assets of Seller is subject. Except as disclosed on Exhibit 8.06, no consent, license, approval or authorization of or designation, declaration or filing with any governmental authority or other person or entity is required on the part of Seller. The Seller is not in default under any lease, agreement, contract, commitment or other obligation or asset which the Purchaser is assuming or which affects the property rights being transferred hereunder to the Purchaser. 8.07 Limitations of Warranties. Except as may be expressly represented or warranted in this Agreement or in any document of transfer, the Seller makes no representations or warranties whatsoever with regard to any Purchased Asset being transferred to Purchaser, any liability or obligation being assumed by the Purchaser or as to any other matter or transaction contemplated by this Agreement. 8.08. Legal Proceedings. (a) Except as set forth in Exhibit 8.08, Seller is not a party to any, and there are no pending or, to Seller's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Seller relating in any way to the Branches, the Loans, the other Purchased Assets and Assumed Liabilities, or challenging the validity or propriety of the transactions contemplated by this Agreement. (b) Except as set forth in Exhibit 8.08, there is no injunction, order, judgment, decree, or regulatory restriction imposed upon Seller or the assets of Seller. 8.09. No Fiduciary Accounts. Other than individual retirement accounts ("IRA's") for which Seller may act as custodian, Seller has no persons or accounts for which it acts as a fiduciary, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor. 8.10. Environmental Matters. Except as set forth in Exhibit 8.10: (a) Seller, and to the knowledge of Seller, each of the Participation Facilities and the Loan Properties (each as hereinafter defined), are in compliance with all applicable federal, state and local laws, including common law, regulations and ordinances, and with all applicable decrees, orders and contractual obligations relating to pollution or the discharge of, or exposure to, Hazardous Materials (as hereinafter defined) in the environment or workplace ("Environmental Laws"); (b) There is no suit, claim, action or proceeding, pending or, to the knowledge of Seller, threatened, before any governmental entity or other forum in which Seller, any Participation Facility or any Loan Property, has been or, with respect to threatened proceedings, may be, named as a 165 defendant (x) for alleged noncompliance (including by any predecessor) with any Environmental Laws, or (y) relating to the release, threatened release or exposure to any Hazardous Material whether or not occurring at or on a site owned, leased or operated by Seller, any Participation Facility or any Loan Property; (c) To the knowledge of Seller, during the period of (x) Seller's ownership or operation of any of their respective current or former properties, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there has been no release of Hazardous Materials in, on, under or affecting any such property. To the knowledge of Seller, prior to the period of (x) Seller's ownership or operation of current or former properties, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there was no release of Hazardous Materials in, on, under or affecting any such property, Participation Facility or Loan Property; and (d) The following definitions apply for purposes of this Section: (x) "Hazardous Materials" means any chemicals, pollutants, contaminants, wastes, toxic substances, petroleum or other regulated substances or materials, (y) "Loan Property" means any property in which Seller holds a security interest which security interest will be transferred to Purchaser pursuant to this Agreement, and, where required by the context, said term means the owner or operator of such property; and (z) "Participation Facility" means any facility in which Seller participates in the management and, where required by the context, said term means the owner or operator of such property. ARTICLE IX PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Seller as follows: 9.01 Corporate Organization. The Purchaser is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America and qualified to do business in the State of Tennessee. 9.02 Corporate Authority. Subject to approval by the Comptroller of the Currency, the Purchaser has full corporate right, power, capacity and authority validly to enter into and to perform this Agreement and the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Purchaser have been, or will be prior to Closing, duly and validly authorized by all requisite corporate action and this Agreement is binding and enforceable against the Purchaser in accordance with its terms. 9.03 No Violations. Subject to the conditions set forth in Article XII below, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate any provision of law to which the Purchaser or the Company is subject and do not and will not conflict with or result in the violation or breach of any condition or provision of, or constitute a default under, any contract, right, lease, pledge, lien, security interest, instrument, indenture, mortgage, charge, encumbrance, agreement, order, writ, injunction, decree or judgment to which the Purchaser or the Company is a party or which is binding on the Purchaser or the Company or to which any of the property or assets of Purchaser or the Company is subject. Except as set forth in 166 Article XII, no consent, license, approval or authorization of or designation, declaration or filing with any governmental authority or other person or entity is required on the part of the Purchaser in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated herein. 9.04 Regulatory Approvals. The Purchaser will promptly apply for and in good faith diligently and expeditiously pursue all required regulatory approvals that it needs to consummate the transactions contemplated hereby. 9.05 Consents of Third Parties. In addition to obtaining the requisite regulatory approvals, the Purchaser shall use its best efforts to obtain and preserve any consents or approvals of third parties necessary, appropriate or expedient to the consummation of the purchase of the Branches, including, but not limited to, those consents of its lenders. 9.06. Legal Proceedings. Except as set forth in Exhibit 9.06, Purchaser is not a party to any, and there are no pending or, to Purchaser's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature challenging the validity or propriety of the transactions contemplated by this Agreement. ARTICLE X ADDITIONAL UNDERTAKINGS OF SELLER 10.01 Conduct of Business Pending Closing. The Seller agrees that from the date of this Agreement to the date of Closing, it will: (a) use its reasonable best efforts to maintain the operations of the Branches as presently conducted, and avoid any act that would materially and adversely affect the amount or value of the Purchased Assets or the liabilities being assumed; (b) operate the business of the Branches only in the ordinary and usual manner, provide the same services and hours of operation as is now being provided by such Branches, and use all reasonable efforts to preserve intact its present business organization, to keep available the services of its present employees and to preserve its relations with customers having business dealings with the Branches, except as expressly provided in Section 3.01 hereof; (c) maintain fire, casualty, and extended coverage insurance for the benefit of the Seller and Purchaser, as their interests may appear, on the Branches and the Purchased Assets in reasonable amounts not less than that presently held; (d) maintain its books of account and records concerning the Branches in the ordinary and usual manner, in accordance with generally accepted accounting principles applied on a basis consistent with prior years; and (e) not take any action which would cause any representation or warranty made herein to be untrue at the date of Closing. 167 10.02 Documentation Delivered at Closing and Further Assurances. At the Closing, the Seller shall transfer, assign and deliver to the Purchaser all original (to the extent these exist and are held by the Seller) and other records, books, papers, documents, instruments, collateral in its possession and agreements of Seller relating to the Purchased Assets and the liabilities being assumed by the Purchaser hereunder, including but not limited to, signature cards, stop payment orders, contracts, deposit slips, canceled checks, withdrawal orders and records of accounts which may be requested by the Purchaser prior to Closing.. The Seller agrees that it will, at the Closing and at any time and from time to time after the Closing, upon the Purchaser's request do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances and assurances as may be required to complete the process of assigning, transferring, granting, conveying, assuring and confirming to Purchaser, any and all of the Purchased Assets and liabilities purchased and assumed by the Purchaser hereunder and the performance of any or all obligations of the Seller hereunder. 10.03 Non-Solicitation of Business. The Seller and its subsidiaries and affiliates will not, for a period of two years after the Closing, (i) directly indirectly develop, own, or operate any physical location offering financial services or products within a 25 mile radius of the Branches (except for any currently operating locations of Seller, its subsidiaries or affiliates), or (ii) directly compete for or solicit any Transferred Accounts or any Loans sold hereunder, but the Seller shall be entitled to conduct mass mailings, statement stuffers and mailings to persons holding accounts with the Seller outside the Branches or having other relations with the Seller's other offices, and newspaper, radio, television, billboards and other advertisements of a general nature. This subsection shall not apply to those deposits and Loans not transferred to the Purchaser at Closing and the restrictions on the Seller contained in this section are intended to apply only to the deposits and loan business that the Seller's customers would normally be expected to conduct at the Branches and within the Pulaski community. 10.04 Notice to Customers of Sale of Branches. To the extent required by law or otherwise agreed upon by the parties, the Seller and the Purchaser shall jointly notify the customers of the Branches affected by the transaction of the pending transfer of their deposit account, Loan or safe deposit box to the Purchaser. 10.05 Conversion of Transferred Accounts. The Seller agrees to cooperate with the conversion of the customer asset and liability accounts in an orderly and expeditious fashion, and to provide reasonable appropriate support to the Purchaser for the timely conversion of such accounts, and related data processing, computer, customer research and information conversions. 10.06 Post-Conversion Processing . After conversion of all accounts to Purchaser's processing systems, as between Seller and Purchaser, the Seller shall be and have the rights and obligations of a "Collecting Bank" or "Intermediary Bank" under Article 4 of the Uniform Commercial Code as adopted in Alabama (Code of Alabama, 1975, Sections 7-4-101 et. seq.) , with respect to items drawn on Transferred Accounts received by it for processing. Items received for processing against the Transferred Accounts shall be grouped and delivered to Purchaser within the time limits provided by the Alabama Uniform Commercial Code in a special cash letter separately identified as "Transferred Accounts Cash Letter". The Purchaser shall indemnify the Seller against all claims, suits, damages or losses and expenses (including reasonable attorneys' fees) arising out of any claim by an owner of a Transferred Account that the Seller is the "Payor Bank" with respect to such items. 168 10.07 Diligence and Good Faith. The Seller will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Article XII below (except the conditions set forth in Section 12.06); and (b) cooperate in good faith with the Purchaser in its seeking the satisfaction of all conditions set forth in Article XIII below. 10.08 Indemnity. Seller and CBI hereby jointly and severally agree to indemnify and hold harmless Purchaser and its officers, directors, employees, affiliates, and assigns (each a "Purchaser Indemnitee") against, from and in respect of: (i) Any damage, expense or deficiency resulting from any default, misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Seller under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Purchaser pursuant to this Agreement. (ii) Any liability of Seller except the Assumed Liabilities (iii) Any and all expenses (including reasonable attorney fees), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Purchaser Indemnitee arising out of Seller's operations or arising out of Seller's ownership of the Branches. Seller agrees promptly to advance to any Purchaser Indemnitee, on demand, any expenses, attorney's fees and disbursements incurred by any Purchaser Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Seller relates. (iv) Any environmental, health, and safety liabilities arising out of or relating to: (a) the ownership, operation, or condition at any time on or prior to the Closing Date of the Branches or any other properties and assets (whether real, personal, or mixed and whether tangible or intangible) in which Seller has or had an interest, or (b) any Hazardous Materials or other contaminants affecting the Purchased Assets. (v) Any bodily injury (including illness, disability, and death, and regardless of when any such bodily injury occurred, was incurred, or manifested itself), personal injury, property damage (including trespass, nuisance, wrongful eviction, and deprivation of the use of real property), or other damage of or to any person, including any employee or former employee of Seller or any other person for whose conduct any Purchaser Indemnitee is or may be held responsible, in any way arising from or allegedly arising from any hazardous activity conducted or allegedly conducted with respect to the Branches or the operation of the Branches prior to the Closing Date. (vi) Notwithstanding any other provision of this Agreement to the contrary, Purchaser and Seller will cooperate with respect to any environmental cleanup and any related proceeding with respect to which indemnity may be sought under this Section. 169 ARTICLE XI ADDITIONAL UNDERTAKINGS OF PURCHASER 11.01 Purchaser's Contact with Customers. The Purchaser and the Seller, as and to the extent provided in Section 10.04, may jointly notify the customers of the Branches of the pending transfer of their deposit account, Loan or safe deposit box to the Purchaser. The Purchaser agrees that any notices, letters or other material which the Purchaser wishes to send or give to customers of the Branches prior to Closing shall be approved by the Seller in advance, which approval shall not be unreasonably withheld. The Purchaser shall also provide all customers whose accounts are transferring all necessary checkbooks, check order forms, passbooks, loan coupon books and other materials bearing the name of the Purchaser which shall be available for use by customers of the Branches immediately after the Closing. The Purchaser shall also direct each transferring customer that, effective as of Closing, such customers should no longer use and should destroy all checkbooks and check order forms of the Seller pertaining to accounts at the Branches transferred to the Seller. Except, and only to the extent and manner specifically permitted hereby, the Purchaser shall not contact, or solicit the Loan and deposit business of any customers of the Branches prior to the Closing. 11.02 Safe Deposit Box and Night Depository Business. The Purchaser shall assume and discharge from and after the time of Closing, the duties and obligations of the Seller with respect to the Branches' safe deposit box and night depository business. The Purchaser shall maintain all necessary facilities for the use of such boxes by the renters thereof and night deposit facilities by the users thereof, during the period for which such persons have paid rent therefor in advance to the Seller, subject to the provisions of the written rental and night depository agreements between the Seller and the respective renters of such boxes or users of such night depository facilities delivered to the Purchaser. 11.03 Use of Names, Trademarks, Etc. The Purchaser will not, upon and after the Closing, use the name "Community Bank" or any of the Seller's trade names, trademarks or service marks for products or services, or any variation of any such names or marks, nor shall the Purchaser use any name or marks similar to such names or marks so as to infringe on any protection afforded thereto under Federal, state or local statutes, laws, rules or regulations or common law, or which would be misleading or confusingly similar to such names. 11.04 Diligence and Good Faith. The Purchaser will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Section 12.06 and in Article XIII below; and (b) cooperate in good faith with the Seller in its seeking the satisfaction of all conditions set forth in Article XII below (except those conditions set forth in Section 12.06). 11.05 Indemnity. Purchaser and the Company hereby jointly and severally agree to indemnify and hold harmless Seller and its officers, directors, employees, affiliates, and assigns (each a " Seller Indemnitee") against, from and in respect of: (i) Any damage, expense or deficiency resulting from any default, misrepresentation, breach 170 of warranty, or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Seller pursuant to this Agreement. (ii) Any and all expenses (including reasonable attorney fees), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Seller Indemnitee arising out of Purchaser's operations or arising out of Purchaser's ownership of the Branches after the Closing Date. Purchaser agrees promptly to advance to any Seller Indemnitee, on demand, any expenses, attorney's fees and disbursements incurred by any Seller Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Purchaser relates. (iii) Any environmental, health, and safety liabilities arising out of or relating to: (a) the ownership, operation, or condition at any time after the Closing Date of the Branches or any other properties and assets (whether real, personal, or mixed and whether tangible or intangible) which are transferred to Purchaser pursuant to this Agreement or (b) any Hazardous Materials or other contaminants affecting the Purchased Assets after the Closing Date. (iv) Any bodily injury (including illness, disability, and death, and regardless of when any such bodily injury occurred, was incurred, or manifested itself), personal injury, property damage (including trespass, nuisance, wrongful eviction, and deprivation of the use of real property), or other damage of or to any person, including any employee or former employee of Seller or any other person for whose conduct any Seller Indemnitee is or may be held responsible, in any way arising from or allegedly arising from any hazardous activity conducted or allegedly conducted with respect to the Branches or the operation of the Branches after the Closing Date. ARTICLE XII CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS The obligations of the Purchaser to close under this Agreement shall be subject to the following conditions (all or any of which, except the conditions of Section 12.06, may be waived in whole or in part by the Purchaser to the extent permitted by law): 12.01 Representations and Warranties True. The representations and warranties made by Seller in this Agreement shall have been true and correct when made and shall be true and correct on and as of the date of Closing with the same force and effect as though such representations and warranties had been made on and as of such date. 12.02 Obligations Performed. The Seller shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by it on or before the date of Closing. 12.03 Certificate of Compliance. The Seller shall have executed and delivered to the Purchaser a certificate substantially in the form and substance as attached hereto as Exhibit 12.03, dated as of the date of Closing. 171 12.04 No Adverse Litigation. No action, suit or proceeding shall have been instituted or threatened against the Seller or the Purchaser by or before any court or governmental agency to restrain or prohibit, or to obtain damages in respect of this Agreement or the consummation of the transactions contemplated hereby which in the opinion of the Purchaser makes it inadvisable to proceed to Closing under this Agreement. 12.05 Opinion of Counsel. The Purchaser shall have received an opinion of counsel for the Seller, dated the date of Closing, in substantially the same form and substance as the opinion attached hereto as Exhibit 12.05 to the effect that this Agreement and the other documents contemplated by this Agreement have been duly authorized, executed and delivered by the Seller and that without making an investigation for such purpose, nothing has come to such counsel's attention which causes such counsel to believe that any representation or warranty of Seller contained in this Agreement is inaccurate or untrue as of the date of Closing. 12.06 Regulatory Approvals. The Purchaser and the Company shall have obtained, at their own expense, from all necessary governmental and regulatory authorities, all necessary consents to and authorizations and approvals of this Agreement and the transactions contemplated by this Agreement and the related transfers of ownership and control of all licenses, permits or other governmental authorizations necessary to carry on all aspects of the business of the Branches. 12.07 Due Diligence Review. Purchaser shall have completed and be satisfied with the scope and results of a review of the business operations, assets, properties, liabilities, and other matters regarding Seller and the Branches, and shall have reached agreements with Seller satisfactory to Purchaser in all respects regarding any matter or matters relating to such investigation, including without limitation, agreements with respect to the Loans being purchased and the purchase price for Loans pursuant to Section 2.01. 12.08 Title Insurance. Purchaser shall have obtained at its own cost and expense such owner's and leasehold policies of title insurance as it shall desire, free of any exception or other qualification other than standard exceptions and exclusions. ARTICLE XIII CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS The obligations of the Seller to close under this Agreement shall be subject to the following conditions (all or any of which may be waived, in whole or in part, by the Seller to the extent permitted by law): 13.01 Representations and Warranties True. The representations and warranties made by the Purchaser and the Company in this Agreement shall have been true and correct when made and shall be true and correct on and as of the date of Closing with the same force and effect as though such representations and warranties had been made on and as of such date. 172 13.02 Obligations Performed. The Purchaser and the Company shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by the Company on or before the date of Closing. 13.03 Certificate of Compliance. The Purchaser shall have executed and delivered to the Seller a certificate in substantially the same form and substance as the one attached hereto as Exhibit 13.03, dated as of the date of Closing. 13.04 No Adverse Litigation. No action, suit or proceeding shall have been instituted or threatened against the Seller, or the Purchaser or the Company by or before any court or governmental agency to restrain or prohibit, or to obtain damages in respect of, this Agreement or the consummation of the transactions contemplated hereby which in the opinion of Seller makes it inadvisable to proceed to Closing under this Agreement. 13.05 Opinion of Counsel. The Seller shall have received an opinion of counsel for the Purchaser and the Company, dated the date of Closing, in substantially the form attached hereto as Exhibit 13.05 to the effect that this Agreement and the other documents contemplated by this Agreement have been duly authorized, executed and delivered by Purchaser and that without making an investigation for such purpose, nothing has come to such counsel's attention which causes him to believe that any representation or warranty of Purchaser made in this Agreement is untrue as of the date of Closing. ARTICLE XIV CLOSING 14.01 Time and Place. The hour, date and location of Closing under this Agreement shall be at a location mutually acceptable to Purchaser and Seller as soon as practicable after the Purchaser's receipt of all regulatory and governmental approvals and the expiration of any required waiting period. ARTICLE XV TERMINATION 15.01 Methods of Termination. This Agreement may be terminated as follows: (a) at any time by the mutual written consent of the Purchaser and the Seller; (b) by the Purchaser in writing at any time that it determines in good faith that the conditions set forth in Article XII of this Agreement will not be met by February 28, 2001; (c) by the Seller in writing at any time that it determines in good faith that the conditions set forth in Article XIII of this Agreement will not be met by February 28, 2001; (d) by the Seller in writing at any time after any of the regulatory authorities has denied any application of the Purchaser for approval of the transactions contemplated herein; 173 (e) by the Purchaser in writing on or before January 21, 2002 if as a result of its due diligence review it discovers a fact or circumstance that makes it inadvisable in Purchaser's sole discretion for Purchaser to proceed with the transaction contemplated hereby; (f) by the Purchaser or the Seller if the Closing shall not have occurred on or prior to February 28, 2002, unless the failure of such occurrence is due to the failure of the party seeking termination failing to perform or observe any of its agreements and conditions set forth herein. 15.02 Procedure Upon Termination. In the event of termination pursuant to Section 15.01 hereof, written notice thereof shall forthwith be given to the other party in accordance with Section 17.08 of this Agreement, and this Agreement shall terminate immediately unless an extension is consented to by the party having the right to terminate. If this Agreement is terminated as provided herein: (a) each party will return all documents, work papers and other materials and information of the other party relating to this transaction, whether obtained before or after the execution hereof, to the party furnishing the same; (b) all information received by either party hereto with respect to the business of the other party (other than information which is a matter of public knowledge or which has heretofore been or hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for any business purpose by such party or disclosed or delivered by such party to third persons; and (c) the Purchaser shall immediately pay the Seller 50% of the total out of pocket costs expended for notices to customers and joint mailings as provided in section 10.04, as approved at such time. ARTICLE XVI MUTUAL COVENANTS AND AGREEMENTS 16.01 Best Efforts; Cooperation. Subject to the terms and conditions hereof, each party hereto agrees promptly to take, or cause to be taken, all actions and to do or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, or otherwise, including, without limitation, attempting to obtain all necessary consents, waivers and regulatory approvals, to consummate and make effective at the earliest practicable time, the transactions contemplated by this Agreement. The officers and employees of each party shall fully cooperate with officers and employees, accountants, counsel and other representatives of the other in all matters contemplated by this Agreement. ARTICLE XVII MISCELLANEOUS 174 17.01 Modifications and Waivers. This Agreement may not be modified except by an instrument in writing duly executed by the parties. Any waiver of any term of this Agreement must be in writing. 17.02 No Brokers or Finders. The Purchaser and the Seller each represent and warrant to each other that no broker or finder has been employed by or has acted for it in connection with this Agreement or the transactions contemplated hereby, and each party agrees to indemnify the other against all losses, costs, damages or expenses arising out of claims for fees or commissions of brokers or finders alleged to have been employed or engaged by such party. 17.03 Survival of Representations and Warranties. All representations and warranties contained herein and in any written agreement or instrument delivered or executed in connection herewith are true at and as of the times provided herein, and all of which will survive the execution and delivery of this Agreement, any examination on behalf of any party hereto, and the consummation of all transactions contemplated herein. Notwithstanding the foregoing sentence, representations and warranties made with respect to title to any real estate to be conveyed hereunder, shall survive the Closing only to the extent provided in the documents of conveyance relating thereto. 17.04 Binding Effect. All terms of this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns; provided, however, that the rights of the Purchaser in and to this Agreement and the transactions contemplated hereby may not be assigned by the Purchaser except with the Seller's prior written consent. 17.05 Counterparts. This Agreement is being executed simultaneously in two or more identical counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 17.06 Expenses. Each party shall bear its own expenses incurred in connection with this Agreement and all transactions contemplated herein. 17.07 Notices and Primary Contact Personnel. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, overnight courier or if mailed, postage prepaid, by United States first class mail, to the other party at its address shown on Exhibit 17.07 hereto. The parties hereto, as a matter of convenience, are designating primary contact personnel on Exhibit 17.07, and each party may contact such persons in day-to-day, routine dealings with the other party leading up to and following the Closing. 17.08 Publicity. The Purchaser and the Seller shall cooperate with each other as to the content and timing of public and customer filings, publicity, press releases and announcements concerning this Agreement, and all transactions contemplated hereby, and prior to releasing any such information each party will send such material to the other party for its review and consent, which consent may not be withheld unreasonably. 175 17.09 Time of the Essence. The parties hereto acknowledge that time is of the essence with respect to the performance of this Agreement and the consummation of the transactions contemplated herein in accordance with the terms hereof. 17.10 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Tennessee applicable to contracts made and to be performed wholly within such state. 17.11 Cover, Index and Headings, Etc. The cover, index and headings contained in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation hereof. The use of the singular in this Agreement shall be deemed to be or include the plural (and vice versa), whenever appropriate. 17.12 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, the balance of this Agreement shall remain in full force and effect except to the extent otherwise agreed by the parties in writing. 17.13 Entire Agreement. This Agreement and the Information Statement including any exhibits hereto or thereto, represent the entire agreement of the parties relating to the subject matter hereof. All prior negotiations and understandings between the parties are merged into this Agreement and there are no understandings or agreements other than those incorporated herein. 17.14 Preparation of Exhibits. In order to permit Seller additional time to complete the exhibits and schedules called for by this Agreement, Purchaser has agreed to permit the delivery of the exhibits and schedules following the date hereof, but in no event later than January 4, 2002. The representations and warranties made by Seller in this Agreement shall not be deemed to be modified by any exhibit or schedule until such exhibit or schedule is accepted in writing by Purchaser in its sole discretion. In the event that the exhibits or schedules submitted by Seller shall contain any matter or reflect any circumstance that is unsatisfactory in any respect to Purchaser in its sole discretion, then Purchaser may terminate this Agreement without further obligation or liability, or may request Seller to negotiate in good faith regarding an adjustment in Purchaser's favor to the terms and conditions of this Agreement. 176 IN WITNESS WHEREOF, the Company, the Purchaser, CBI and the Seller have caused this Agreement to be executed by their respective duly authorized officers and their respective corporate seals to be affixed hereto as of the day and year first above written. FIRST FARMERS AND MERCHANTS CORPORATION By /s/ John P. Tomlinson -------------------------------------- ATTEST: Its Senior Executive Vice President ------------------------------------- /s/ Patricia N. McClanahan - ------------------------------------ Its Treasurer --------------------------------- [CORPORATE SEAL] FIRST FARMERS AND MERCHANTS NATIONAL BANK OF COLUMBIA By /s/ John P. Tomlinson -------------------------------------- ATTEST: Its Senior Executive Vice President ------------------------------------- /s/ Patricia N. McClanahan - ------------------------------------ Its Senior Vice President and Chief Financial Officer --------------------------------- [CORPORATE SEAL] COMMUNITY BANK By /s/ Kennon R. Patterson, Jr. -------------------------------------- ATTEST: Its Chairman and Chief Executive Officer ------------------------------------- /s/ William H. Caughran, Jr. - ------------------------------------ Its General Counsel --------------------------------- [CORPORATE SEAL] COMMUNITY BANCSHARES, INC. By /s/Kennon R. Patterson, Sr. -------------------------------------- ATTEST: Its Chairman, President and Chief Executive Officer ------------------------------------- /s/ William H. Caughran - ------------------------------------ Its Secretary --------------------------------- [CORPORATE SEAL] 177 STATE OF TENNESSEE ) ) MAURY COUNTY ) I, Judy Hickman, a Notary Public in and for said county in said state hereby certify that John P. Tomlinson as Senior Executive Vice President and Patricia N. McClanahan as Treasurer of First Farmers and Merchants Corporation, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 21st day of December, 2001. /s/ Judy Hickman ---------------------------------------- Notary Public My Commission expires: 05/24/05 [NOTARIAL SEAL] STATE OF TENNESSEE ) ) MAURY COUNTY ) I, Judy Hickman, a Notary Public in and for said county in said state hereby certify that John P. Tomlinson as Senior Executive Vice President and Patricia N. McClanahan as Senior Vice President and Chief Financial Officer of First Farmers and Merchants National Bank of Columbia, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 21st day of December, 2001. /s/ Judy Hickman ---------------------------------------- Notary Public My Commission expires: 05/24/05 [NOTARIAL SEAL] 178 STATE OF ALABAMA ) ) BLOUNT COUNTY ) I, Carol S. Murcks, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson, Sr. as Chairman and Chief Executive Officer and William H. Caughran as General Counsel of Community Bank, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 21st day of December, 2001. /s/ Carol S. Murcks ---------------------------------------- Notary Public My Commission expires: November 7, 2002 [NOTARIAL SEAL] STATE OF ALABAMA ) ) BLOUNT COUNTY ) I, Carol S. Murcks, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson, Sr. as Chairman, President and Chief Executive Officer and William H. Caughran as Secretary of Community Banncshares, Inc., whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 21st day of December, 2001. /s/ Carol S. Murcks ---------------------------------------- Notary Public My Commission expires: November 7, 2002 [NOTARIAL SEAL] 179 EX-10.28 9 g75225ex10-28.txt SUPPLEMENTAL AGREEMENT DATED JANUARY 23, 2002 EXHIBIT 10.28 - ------------------------------------------------------------------------------- SUPPLEMENTAL AGREEMENT BETWEEN FIRST FARMERS AND MERCHANTS CORPORATION AND COMMUNITY BANK - ------------------------------------------------------------------------------- 180 SUPPLEMENTAL AGREEMENT This Supplemental Agreement (the "Agreement") is made and entered into as of the 23rd day of January, 2002, by and among First Farmers and Merchants Corporation, a Tennessee corporation (the "Company") and its wholly-owned subsidiary, First Farmers and Merchants National Bank of Columbia, a national banking association (the "Purchaser"), Community Bank, an Alabama banking corporation (the "Seller") and Community Bancshares, Inc., a Delaware corporation ("CBI"). W 1 T N E S S E T H: The parties entered into that certain Acquisition Agreement (the "Acquisition Agreement") dated December 21, 2001 which provides for the acquisition of Seller's branch offices located in Pulaski, Tennessee, by Purchaser. The Acquisition Agreement contemplated that certain issues between the parties would be addressed following the completion of Purchaser's due diligence review of the Branches. The Purchaser has completed its due diligence review and the parties desire to finalize these open issues. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows: Section 1. Adjustments to the Purchase Price. (a) At the Closing the Seller shall transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase and receive from the Seller all Loans on the Branches' books at Closing at their respective then outstanding principal amounts, together with accrued interest thereon, less a discount of Five Hundred and Fifty-Eight Thousand Six Hundred and Fifty-One Dollars ($558,651.00). The amount of this discount shall not change between the date hereof and the Closing. No other adjustment to the purchase price for the Loans shall be made pursuant to Section 2.01(a) of the Acquisition Agreement. (b) The purchase price for the real property and improvements to be transferred to Purchaser as set forth in Section 2.01(b) of the Acquisition Agreement shall be reduced by Seventy-Five Thousand Dollars ($75,000.00). (c) At the Closing the Seller shall transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase and receive from the Seller all real property categorized on the books of the Branches as "other real estate" at its fully depreciated net book value as shown on the books of Seller. No 181 additional negotiations or adjustments are contemplated pursuant to Section 2.01(h) of the Acquisition Agreement. Section 2. Appraisal of Real Property. Seller will cause its subsidiary, Community Appraisals, Inc. to perform an appraisal of the real property and improvements being transferred to Purchaser pursuant to Section 2.01(b) of the Acquisition Agreement. At the Closing Purchaser shall reimburse Community Appraisals, Inc. its cost in providing the appraisal. Section 3. Credit Life Insurance and Debt Cancellation Agreements. The agreement between the parties contemplated by Section 3.11 of the Acquisition Agreement is as follows: (a) Seller will reimburse Purchaser the amount of any unearned credit life insurance premiums or debt cancellation fees which must be refunded to a customer of the Branches after the Closing based upon a Loan made prior to the Closing. (b) Seller will reimburse Purchaser the amount of any debt cancelled by Purchaser after the Closing pursuant to the terms of a debt cancellation agreement between Seller and a customer of the Branches dated prior to the Closing. Section 4. Due Diligence Review. With respect to Section 12.07 of the Acquisition Agreement, Purchaser has completed and is satisfied with the scope and results of its due diligence review and has reached additional agreements with Seller satisfactory to Purchaser in all respects resulting therefrom. The provisions of Section 12.07 of the Acquisition Agreement shall not be a condition precedent to Purchaser's obligations under the Acquisition Agreement. The provisions of Section 15.01(e) shall not be grounds for termination of the Acquisition Agreement by Purchaser. Section 5. Review of New Loans. Between the date of this Agreement and the Closing Seller shall not make any Loan in a principal amount exceeding Fifty thousand dollars unsecured and One hundred and twenty-five thousand dollars secured ($50,000 unsecured and $125,000 secured) unless Purchaser shall have had an opportunity to review and consent to such Loan. Section 6. Exhibits. Purchaser acknowledges that it has received the exhibits and schedules contemplated by the Acquisition Agreement and hereby accepts such schedules and exhibits. The provisions of Section 17.14 of the Acquisition Agreement shall not be grounds for termination or amendment of the Acquisition Agreement. Section 7. Defined Terms. Terms which are not defined herein shall have those definitions set forth in the Acquisition Agreement. 182 Section 8. Full Force and Effect. The Acquisition Agreement remains in full force and effect unchanged except as modified by this Agreement. IN WITNESS WHEREOF, the Company, the Purchaser, CBI and the Seller have caused this Agreement to be executed by their respective duly authorized officers and their respective corporate seals to be affixed hereto as of the day and year first above written. FIRST FARMERS AND MERCHANTS CORPORATION By /s/ Waymon L. Hickman -------------------------------------- ATTEST: Its Chairman and CEO ------------------------------------- /s/ John P. Tomlinson - ------------------------------------ Its Senior Executive Vice President --------------------------------- [CORPORATE SEAL] FIRST FARMERS AND MERCHANTS NATIONAL BANK OF COLUMBIA By /s/ Waymon L. Hickman -------------------------------------- ATTEST: Its Chairman and CEO ------------------------------------- /s/ John P. Tomlinson - ------------------------------------ Its Senior Executive Vice President --------------------------------- [CORPORATE SEAL] COMMUNITY BANK By /s/ KennonR. Patterson, Sr. -------------------------------------- ATTEST: Its Chairman ------------------------------------- /s/ William H. Caughran - ------------------------------------ Its Secretary --------------------------------- [CORPORATE SEAL] COMMUNITY BANCSHARES, INC. 183 By /s/ KennonR. Patterson, Sr. -------------------------------------- ATTEST: Its Chairman ------------------------------------- /s/ William H. Caughran - ------------------------------------ Its Secretary --------------------------------- [CORPORATE SEAL] STATE OF TENNESSEE ) ) GILES COUNTY ) I, Marsha F. Dutton, a Notary Public in and for said county in said state hereby certify that Waymon L. Hickman as Chairman and CEO and John P. Tomlinson as Senior Executive Vice President of First Farmers and Merchants Corporation, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 23rd day of January, 2002. /s/ Marsha F. Dutton ---------------------------------------- Notary Public My Commission expires: 4-18-2005 ------------------ [NOTARIAL SEAL] STATE OF TENNESSEE ) ) GILES COUNTY ) I, Marsha F. Dutton, a Notary Public in and for said county in said state hereby certify that Waymon L. Hickman as Chairman and CEO and John P. Tomlinson as Senior Executive Vice President of First Farmers and Merchants National Bank of Columbia, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 23rd day of January, 2002. /s/ Marsha F. Dutton ---------------------------------------- Notary Public 184 My Commission expires: 4-18-2005 ------------------ [NOTARIAL SEAL] STATE OF TENNESSEE ) ) GILES COUNTY ) I, Marsha F. Dutton, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson as Chairman and William H. Caughran as Secretary of Community Bank, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 23rd day of January, 2002. /s/ Marsha F. Dutton ---------------------------------------- Notary Public My Commission expires: 4-18-2005 ------------------ [NOTARIAL SEAL] STATE OF TENNESSEE ) ) GILES COUNTY ) I, Marsha F. Dutton, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson as Chairman and William H. Caughran as Secretary of Community Bancshares, Inc., whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 23rd day of January, 2002. /s/ Marsha F. Dutton ---------------------------------------- Notary Public My Commission expires: 4-18-2005 ------------------ [NOTARIAL SEAL] 185 EX-10.29 10 g75225ex10-29.txt ACQUISITION AGREEMENT DATED FEBRUARY 25, 2002 EXHIBIT 10.29 - ------------------------------------------------------------------------------- ACQUISITION AGREEMENT BETWEEN FIRST SOUTHERN NATIONAL BANK AND COMMUNITY BANK - ------------------------------------------------------------------------------- 186 ACQUISITION AGREEMENT This Acquisition Agreement (the "Agreement") is made and entered into as of the 25th day of February, 2002, by and between First Southern National Bank, a national banking association (the "Purchaser") and Community Bank, an Alabama banking corporation (the "Seller"). W 1 T N E S S E T H: The Seller has offered for sale its branch offices located at (i) 403 Main Street West, Rainsville, Alabama, and (ii) 2001 Glen Boulevard, Southwest, Ft. Payne, Alabama (the "Branches") together with substantially all of the deposit and Loan business of such Branches. Purchaser has received summary information regarding the Branches and has offered to purchase substantially all of the assets and liabilities of the Branches on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINED TERMS 1.01 Definitions. The following terms used in this Agreement shall have the meanings specified below: (a) "Available Core Deposit Base" means the daily average total Core Deposit balances, as indicated by the general ledger books of account of the Branches for the approximately 30-day period immediately preceding the Closing Date, except that for the calculation of the Available Core Deposit Base for the Initial Settlement Statement such time period shall be the 25-day period prior to the date upon which the Initial Settlement Statement is provided to Purchaser as required by Section 5.01. (b) "Banking Day" means any day on which the main offices of Purchaser and Seller are open for business but shall not include any Saturday, Sunday, or any day established as a legal banking holiday by the Board of Governors of the Federal Reserve or the Alabama Superintendent of Banks (the "Superintendent"). (c) "Closing" means the closing of the purchase of the assets and the assumption of the liabilities of the Branches as provided herein. (d) "Closing Date" shall have the meaning set forth in Section 14.01. 187 (e) "Core Deposits" means all deposits maintained at the Branches, exclusive of (i) public funds time deposits including deposits of the State of Alabama and its political subdivisions, authorities and agencies, including time deposit accounts or TDOAs , and (ii) deposits represented by certificates of deposit representing at Closing a liability of $100,000 or more and (iii) any accounts designated by Seller or Purchaser on Exhibit 1.01(e) attached hereto as not expected to transfer to Purchaser ("NETT Deposits"). (f) "Litigation" shall mean any action, arbitration, cause of action, claim, complaint, criminal prosecution, governmental or other examination or investigation, hearing, administrative or other proceeding relating to or affecting a party, its business, its assets (including contracts related to it), or the transactions contemplated by this Agreement, but shall not include regular, periodic examinations of depository institutions and their affiliates by regulatory authorities. (g) "Loan" means each loan agreement, note or borrowing arrangement (including all collateral relating thereto) to which Seller is a party and which are properly booked on the Branches' books and records at the Closing Date, including, without limitation, all overdraft lines of credit. ARTICLE II SALE OF ASSETS 2.01 Assets Sold. On the terms and subject to the conditions of this Agreement, at the effective date and time of the acquisition contemplated hereby (the "Effective Time"), the Seller shall transfer, convey, assign and deliver to Purchaser and Purchaser shall purchase and receive from the Seller, the following assets, properties and rights (the "Purchased Assets") free and clear of all liens: (a) all Loans properly booked on the Branches' books at the Closing Date at their respective then outstanding principal amounts, together with accrued interest thereon, including the FOLLOWING; (1) Loans in which the collateral securing same has been repossessed ("Other Real Estate") or in which collection efforts have been instituted or, claim and delivery or foreclosure proceedings have been filed); (2) Loans 60 days or more past due, including non accrual status; (3) Loans upon which insurance has been force-placed; (4) Loans in connection with which the borrower has filed a petition for relief or is the subject of a proceeding under the United State Bankruptcy Code ("Bankruptcy Code") prior to the Closing Date; (5) Loans that do not meet the credit standards of Purchaser; 188 (6) Loans otherwise identified by Purchaser as uncollectible; and (7) Loans classified or classifiable as special mention, substandard, doubtful or loss. All Loans that fit the criteria of (1) - (7) above shall hereinafter be referred to as "Discounted Loans" and shall be purchased by Purchaser at mutually agreed amounts to be shown on Exhibit 2.01(a)(1), which amounts shall appropriately reflect the risks, collectibility or realization and costs of collection and realization. All other Loans to be purchased shall be purchased at the value thereof shown on Seller's books (the "Regular Loans"). Purchaser shall not be required to take any Loans which are to any employee of the Seller (other than to employees of the Branches) nor any Loans to any affiliates of Seller or its related entities. All Discounted Loans and the purchase price to be paid therefor are set forth on Exhibit 2.01(a)(1) and the Regular Loans and the purchase price to be paid therefor are set forth on Exhibit 2.01(a)(2). (b) all of the Seller's rights and title to the real property and improvements located at the Branches, whether owned or leased by the Seller, with any owned real property and improvements to be purchased at the fully depreciated net book value thereof (set forth on Exhibit 8.03) and any leased real property and improvements being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder ("Real Property"); (c) all cash on hand at the Branches at the Closing Date; (d) all furniture, fixtures and equipment and any replacements thereof or repairs thereto (together with any manufacturer's warranties or maintenance or service agreements thereon which are in effect and are assignable) located in the Branches (exclusive of those items referred to in Section 2.03 of this Agreement), whether leased or owned as identified on Exhibit 8.04, with owned property being purchased at the fully depreciated net book value thereof (set forth in Exhibit 8.04) and any leased property being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder, to the extent assignable ("Personal Property"); (e) all rights to the extent assignable in, to and under any vendor single interest insurance or other insurance on collateral transferred to Purchaser with the Loans, and any payments received by Seller before Closing, with such payments to be prorated based on the term of the Loan, and after Closing with respect to such insurance; (f) all unearned credit insurance under the control of the Seller with respect to Loans sold to Purchaser hereunder to the extent the credit insurance coverage is assignable; (g) all agreements, contracts, instruments, files (written or electronic), credit analyses and reports, ledgers, or other documents relating to any of the foregoing; and (h) Other Real Estate as set forth on Exhibit 2.01(h) hereto at a mutually agreeable price to be negotiated by Seller and Purchaser following the completion of Seller's due diligence review of the Branches based upon the risks, fair market value and costs of realization on such Other Real Estate; provided Seller shall have no obligation to purchase any Other Real Estate or Discount 189 Loans as to which any violation of, or liabilities under, any Environmental Laws exist or are pending or threatened, or as to which there is any existing, pending, or threatened Litigation. 2.02 Value of Equipment and Additions. The Seller represents and warrants that the fully depreciated, net book value of the Real Property and the Personal Property of the Branches on Seller's books (excluding the items listed in Section 2.03 of this Agreement) is as set forth in Exhibits 8.03 and 8.04 as of the date of this Agreement, and which exhibits shall be updated to the Closing Date. 2.03 Assets Not Sold. The following are expressly excluded from the Purchased Assets: (a) the Seller's signs and logos provided all sign poles and time and temperature signs will remain and become Purchaser's property; (b) the Seller's proprietarily marked stationery, forms, labels, shipping material, brochures, advertising material and similar property; provided, however, it is the intention of the parties, that Personal Property not bearing proprietary marks and which is necessary or useful in operating the Branches after the Closing Date not be removed; (c) any Loans to any Seller Affiliate (as defined in Section 7.01), except for Loans made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or unfavorable features to persons employed and performing services at the Branches; and (d) any Loans or participation or other interests in any Loan originated and transferred from another financial institution to Sellers as part of a loan sale, sale of participations, or interests, including syndicated or agented credits or otherwise. 2.04 Purchase Price. As full consideration for the purchase of the Branches and the Purchased Assets, Purchaser shall pay Seller a purchase price (the "Purchase Price") equal to the sum of the following: (a) fully depreciated net book value for the owned Real Property and owned Personal Property. (b) a premium for the Core Deposits equal to 8.00% of the Available Core Deposit Base; (c) the book value for the Regular Loans; (d) the mutually agreed upon purchase price for the Discounted Loans; (e) the face amount of the cash on hand at the Branches at Closing; 190 (f) with respect to the Other Real Estate, a mutually agreeable price to be negotiated by the Seller and Purchaser prior to the Closing Date; and (g) with respect to all other Purchased Assets listed in Section 2.01, the aggregate sum of one dollar ($1.00). 2.05 Documents of Transfer. The sale, transfer, assignment and delivery of the Purchased Assets pursuant to this Article II shall be effected by general warranty deeds, bills of sale, endorsements, assignments and other instruments of transfer and conveyance sufficient to convey all of Seller's right, title, and interest as agreed hereunder and satisfactory in form and substance to counsel for the Seller and Purchaser, including without limitation, the making of all filings and the recordation of the assignment of all mortgages and other Loans in the respective county courthouses where such mortgages and other Loans relate. At the Closing Date, the Seller will give Purchaser possession and control of the Purchased Assets and assumed liabilities and will deliver to Purchaser all keys, combinations, codes and other necessary access devices relating to the Branches, the Purchased Assets and the assumed liabilities. At the Closing Date, the Seller will deliver to Purchaser originals of the promissory notes, security agreements, and related agreements, documents, and interests or information relating to or evidencing all Loans purchased, to the extent these exist, and otherwise will deliver the best copies available. 2.06 Removal of Assets Not Sold. As soon as reasonably possible following the Closing Date, the Seller will remove all of its Personal Property referred to in Section 2.03 of this Agreement; provided, however, the Seller shall coordinate with Purchaser to have the Seller's removable signs and logos (excluding all sign poles and time and temperature signs which shall be transferred to and held by Purchaser) removed from the Branches on the Closing Date; provided further, that Seller shall not remove any personal property not bearing Seller's proprietary marks and which are necessary or useful in operating the Branches. The Seller shall remove all such Personal Property, signs, logos and equipment at its own cost and in a manner that will not damage the premises or improvements or unduly disturb operations. 2.07 Title to Real Property and Leases. The Seller shall provide Purchaser with originals (or copies if originals are not available) of all deeds and leases with respect to the Branches' real property and improvements, and all real estate records to the extent held by the Seller relating to the Branches. 2.08 Breaches with Third Parties. Nothing in this Agreement shall constitute an agreement to assign any claim, contract, license, lease, commitment, sales order or purchase order or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach thereof or would in any way affect the rights of the Seller thereunder so that Purchaser would not in fact receive all such rights, and all such items are listed in Exhibit 2.08 hereto. The Seller will cooperate with Purchaser in any arrangement desired to provide Purchaser with the benefits under any such claims, contracts, licenses, leases, commitments, sales or purchase orders. Seller shall obtain at its sole cost and expense evidence satisfactory to Purchaser of transfer or assignment to Purchaser of any such property or property rights or any contract or agreement which shall require the consent or approval of any third party. 191 2.09 Payments and Information Received After the Closing Date. The Seller agrees to forward promptly to Purchaser: (a) any payments (properly endorsed as necessary) which are received by the Seller on or after the Closing Date that relate in any way to the Loans being purchased by Purchaser hereunder, together with sufficient information so that any such payments may be properly applied to the extent such information is available to the Seller; and (b) any notices or other correspondence received on or after the Closing Date that relate in any way to the Loans purchased or to other Purchased Assets. ARTICLE III ASSUMPTION OF LIABILITIES 3.01 Liabilities Assumed. At the Effective Time, Purchaser shall assume and agree to pay and discharge only those specific existing liabilities of the Branches described in Exhibit 3.01 hereto (the "Assumed Liabilities") and accrued interest and at Closing, Seller agrees to transfer to Purchaser all of the Assumed Liabilities and accrued interest. No assurance is given by the Seller that the Branches' present deposit customers will become or continue to be customers of Purchaser, the same being at the sole discretion of such customers. 3.02 Liabilities Not Assumed. Except for those Assumed Liabilities specifically assumed by Purchaser under Section 3.01 above, Purchaser is not assuming any other liabilities or obligations of the Seller, including, but not limited to the following: (a) cashier's checks, traveler's checks, money orders, interest checks, official checks, letters of credit, consignments of U.S. Savings bonds, drafts and expense checks issued by the Seller prior to the Effective Time; (b) all liabilities and obligations of any nature arising from or connected with the Branches and their operation, including circumstances or events arising or existing prior to the Effective Time, including, but not limited to, liabilities or obligations with respect to any Litigation, or governmental proceedings arising, commenced or made known to Seller prior to the Effective Time and related to the Branches, or which thereafter arise with respect to matters occurring prior to the Effective Time; (c) all liabilities and obligations of the Seller for fees, commissions, costs and expenses incurred by the Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, legal, consulting, accounting and appraisal fees and expenses; and (d) all liabilities and obligations of Seller under any debt cancellation or credit insurance contracts or similar arrangements. 3.03 Documentation of Assumption. At the Closing Date Purchaser shall deliver to the Seller an undertaking, reasonably satisfactory in form and substance to counsel for the Seller, under 192 which Purchaser will assume and agree to perform, discharge and pay the obligations and liabilities assumed by Purchaser pursuant to this Agreement. An acceptable form of such undertaking is attached as Exhibit 3.03 hereto and made a part hereof. 3.04 Assumption Subject to Certain Terms. The liabilities being assumed by Purchaser pursuant to this Article shall be assumed subject to the terms and conditions of the contracts of deposit and other written agreements relating thereto provided by Seller to Purchaser and the laws, rules and regulations applicable thereto. 3.05 Payment of Items by Seller After the Closing Date. If, subsequent to the assumption of liabilities pursuant to this Article III, the Seller shall properly honor any valid check or withdrawal on a deposit assumed by Purchaser ("Transferred Account"), Purchaser shall pay the Seller any monies so paid by the Seller to or for the benefit of such Transferred Account; provided, there are sufficient available collected funds in such Transferred Account to fully pay such check or item. 3.06 Payment of Items by Purchaser After the Closing Date. Purchaser agrees that after the Closing Date it will pay, in accordance with applicable law and customary banking practices, all properly payable checks, drafts and withdrawal orders drawn by the parties to the Transferred Accounts if the available collected balance of each Transferred Account is sufficient to permit the payment thereof. 3.07 Transfer of Credits by Seller; Information Received After the Closing Date. (a) The Seller agrees to transfer to Purchaser any deposits received by it after the Closing Date for credit to Transferred Accounts, however the Seller, after the passage of 60 days from the Effective Time, shall be under no obligation to accept such deposits or for any claims resulting from such procedure. (b) Any notices or correspondence received by the Seller on or after the Closing Date with respect to any liabilities assumed or assets and Loans purchased by Purchaser hereunder will be sent promptly to Purchaser. 3.08 Final Statements. Seller will render a final statement to each depositor of a Transferred Account as to transactions occurring through the Effective Time. Seller will be entitled to impose normal fees and service charges on a per item basis through Closing, but Seller will not impose periodic fees or blanket charges in connection with such final statements. 3.09 ACH. The Purchaser, at its expense, will timely notify all Automated Clearing House ("ACH") originators of the transfers and assumptions to be made pursuant to the Agreement as of the Closing Date, and the Seller will cooperate with Purchaser, and provides at its expense, all tapes and data reasonably requested by Purchaser for such purpose. For a period of 60 days beginning on the Closing Date, Seller will honor all ACH items related to accounts assumed under this Agreement which are mistakenly routed or presented to Seller. Seller will make no charge to Purchaser for honoring such items, and will electronically transmit such ACH data to Purchaser. If Purchaser cannot receive an electronic transmission, Seller will make available to Purchaser at Seller's 193 operations center receiving items from the ACH tapes containing such ACH data. Items mistakenly routed or presented after the 60-day period will be returned to the presenting party. 3.10 Debit Card Transactions. After the Closing Date, Purchaser agrees to use its reasonable efforts to collect from Purchaser's customers amounts equal to any debit card connected with a deposit account transferred to Purchaser and any Visa or MasterCard chargebacks under the MasterCard and Visa Merchant Agreements between Seller and its customers or amounts equal to any deposit items on accounts transferred hereunder and that are returned to Seller after the Closing Date which were honored by Seller prior to the Closing Date and remit such amounts so collected to Seller. Purchaser agrees to immediately remit to Seller any funds held in the customer's transferred deposit account related to such debit card when the Purchaser receives such notice from the Seller, up to the amount of the charged back or returned item that had been previously credited by Seller, if such funds are available in such customer account at the time of notification by Seller to Purchaser of the charged back or returned item. Notwithstanding the foregoing, Purchaser shall have no duty to remit funds for any item or charge that has been improperly returned or charged to Seller. 3.11 Safe Deposit Boxes. The keys, contracts, signature cards and other material or equipment related to safe deposit boxes located in the Branches, together with such boxes which shall contain all contents thereof, shall be delivered by the Seller to Purchaser at the Closing Date. Safe deposit box rentals collected by the Seller prior to the Closing Date shall be prorated between the Seller and Purchaser at the Closing Date. 3.12 Seller Not Liable to Pay. In the event any deposit customer holding a Transferred Account shall demand payment from the Seller for all or any part of any deposit liabilities assumed by Purchaser with respect to the Transferred Account, the Seller shall not be liable or responsible for making such payment. If Seller does make any such payment to a deposit customer relating to a Transferred Account, Purchaser shall promptly reimburse Seller for the amount thereof, provided there are sufficient available collected funds in such Transferred Account to fully pay such reimbursement. 3.13 Purchaser Responsible for Returned Items. Purchaser agrees to pay promptly to the Seller an amount equal to the amount of any checks, drafts or withdrawal orders credited to a Transferred Account as of the Closing Date and reflected in the Settlement Statements, but which items are returned to the Seller after the Closing Date. 194 ARTICLE IV ASSUMPTION OF RISKS 4.01 Insurance Policies. Effective immediately upon the Effective Time, the Seller will discontinue any casualty and public liability insurance coverage maintained with respect to the premises of the Branches. Purchaser shall be solely responsible for all casualty losses and liability claims arising from the premises of the Branches after the Effective Time. Nothing in this Section 4.01 shall be construed or deemed to require Purchaser to insure the furniture, fixtures or equipment of the Seller which may not be removed from the Branches at the Closing Date, and the Seller shall solely bear all risk of loss to such property following the Closing Date. 4.02 Safe Deposit Boxes. Immediately upon the Effective Time, Purchaser shall assume all risks arising after the Effective Time with respect to granting access to and protecting the contents of the safe deposit boxes located at the Branches. 4.03 Security of Persons and Property. Immediately upon the Effective Time, the Seller will discontinue providing any security for persons and property provided by the Seller prior to the Effective Time. Nothing contained herein shall be construed to require the Seller to remove any of its security equipment not being sold to Purchaser until such time as the Seller can reasonably remove or arrange for the removal of such security equipment without interrupting Purchaser's business or the security of the premises of the Branches . The risk of loss of such equipment shall be borne solely by the Seller. ARTICLE V SETTLEMENT 5.01 Settlement. (a) The amount of cash to be received or paid by Purchaser at Closing shall be calculated in accordance with the formula set forth in the settlement statement attached hereto as Exhibit 5.01 and incorporated herein by reference ("Initial Settlement Statement"). The Purchased Assets to be transferred at Closing shall be valued as provided in Article II of this Agreement. (b) Five (5) days prior to the Closing Date, the Seller shall deliver to Purchaser a copy, certified by a duly authorized officer of the Seller, of the Initial Settlement Statement, which sets forth the computation of the cash payable to or due from Purchaser at Closing, and upon acceptance by Purchaser, the Seller or Purchaser, as the case may be, shall pay said amount to the other at Closing. 5.02 Post-Closing Adjustments to Purchase Price. As soon as possible, but within five (5) Banking Days following the Closing Date, the Seller shall, based upon its general ledger and other books and records relating to the Branches, recalculate the amount of cash to be received or paid by Purchaser as of the Closing Date using the Final Settlement Statement attached hereto as Exhibit 5.02 and incorporated herein by reference, and the amount of cash to be received or paid by Purchaser shall be agreed upon by the Purchaser and Seller and shall be adjusted and paid, by the Seller or Purchaser, as the case may be as provided in such Exhibit 5.02. 195 5.03 Casualty and Other Losses Prior to the Effective Time. If the buildings in which the Branches are located or any other Real Property, improvements, or Personal Property with respect to the Branches or which are included in or are securing any Purchased Assets, shall be damaged by fire or other casualty, whether insured or uninsured, and shall not be repaired or restored to its original condition prior to the Closing Date, Seller shall promptly assign and pay over to Purchaser any insurance proceeds with respect to such assets. 5.04 Pro Rata Adjustments of Expenses. All property taxes, rents and utility payments, salaries, similar expenses, and other expenses and taxes related to the liabilities assumed or assets purchased hereunder itemized in a writing and delivered by the Seller to Purchaser at least five (5) days prior to the Closing Date relating to the ownership and operation of the Branches, and the Federal Deposit Insurance Corporation ("FDIC") insurance premiums relating to Transferred Accounts, shall be prorated between the parties as of the Closing Date. ARTICLE VI EMPLOYEES 6.01 Transfer of Certain Employees. Seller, except as mutually agreed by Purchaser and Seller, will use its reasonable efforts to maintain the employees as employees of Seller at the Branches until the Closing Date. Any employee whose employment shall be terminated for any reason prior to the Closing Date or who shall elect not to be an employee of Purchaser shall be dealt with by Seller in its sole and absolute discretion, and Purchaser shall have no liability therefor. At the Effective Time, the Seller will terminate the employment of all employees assigned to the Branches, and such employees will become "at will" employees of Purchaser under such terms as may be established by Purchaser in its sole discretion, except as otherwise expressly provided in Section 6.03 below. The Seller and Purchaser shall mutually agree upon any additions to or replacements of staff after the date of this Agreement through the Closing Date, and Seller shall not employ any employees at the Branches during such time other than on an "at will" basis. 6.02 Re-Employment Restriction. The Seller agrees that for a period of one year following the Closing Date it shall not solicit the employment of any of its former employees who transfer to Purchaser at the Closing Date. 6.03 Benefits. Each employee of Seller who transfers to Purchaser will receive pension, profit sharing, insurance, vacation, sick leave and other benefits that are substantially similar to comparable employees of Purchaser. Purchaser shall give each of Seller's employees who transfer to Purchaser credit for service with Seller for purposes of any vacation or sick leave policy, and for purposes of determining eligibility and vesting (but not benefit accrual) under Purchaser's qualified benefit plans. 6.04 Responsibility for Employees Transferring. With respect to all employees of the Branches transferring to Purchaser, the Seller will be responsible for all salaries, wages and benefits payable to such employees during employment by the Seller up to and including the Closing Date, and all benefits under Seller's 401(k), employee stock ownership plan, and other employee benefit plans or options shall be paid as soon as practicable in accordance with the plan. 196 6.05 Employee Information. The Seller shall provide Purchaser, at times Purchaser may deem necessary, such records and information regarding such transferred employees' service with the Seller as Purchaser may reasonably need for purposes of Purchaser's employment and benefits program records, including the complete personnel file on each transferring employee. Purchaser and the Seller agree to assist each other by providing the employee information needed to open and close employee files on those employees transferred. To the extent required by applicable law, the Seller reserves the right to obtain the employee's prior consent to release information which the Seller reasonably believes (upon advice of counsel) cannot be released to Purchaser without the employee's prior consent. Should information be withheld, the Seller must advise Purchaser of such prior to the Closing Date, and Purchaser will have no obligation to hire such employee. ARTICLE VII ACCESS TO PROPERTIES AND RECORDS 7.01 Access and Confidential Treatment. From and after the date of this Agreement, the Seller shall permit Purchaser, its agents and representatives, full access, during normal business hours and upon reasonable notice, to all assets, properties, books, records (except employee records and information excluded by Section 6.05 hereof), agreements and commitments of the Seller relating to the Branches, and the Seller shall furnish representatives of Purchaser during such period with all such information concerning the affairs of the Branches as Purchaser may reasonably request. Purchaser will hold in strict confidence all documents and information concerning the Seller so furnished that is not in the public domain and will not publicly disclose such documents or information except to its attorneys, accountants, or other advisers and representatives, to regulatory and self-regulatory authorities, or as required by law or pursuant to legal process. If the transactions contemplated by this Agreement are not consummated, all such documents and information shall promptly be returned to the Seller. Nothing in this Section 7.01 shall be deemed to require Seller to reveal any proprietary information, trade secrets or marketing or strategic plans, and if such information is the subject of a confidentiality agreement between the Seller and a third party, any disclosure will be subject also to the provisions of such confidentiality agreement, which shall be provided to the Purchaser. The Seller shall provide the Purchaser, on a confidential basis, the names and addresses of all directors, officers, affiliates (as defined in Securities and Exchange Commission Rule 405), and their relatives and the business interests, related to each of the foregoing (individually, and collectively, "Seller Affiliates"). 7.02 Recordkeeping and Access Following the Closing Date. Purchaser and Seller will preserve and safely keep, for as long as may be required by applicable law, all of the files, books of account and records, or copies thereof, delivered to Purchaser through the Closing Date related to the Branches for the joint benefit of itself and the Seller. Either party shall permit the other party or its representatives, at such party's expense, to inspect and make extracts from or copies of any files, books of account or records as may be necessary for the requesting party to satisfy any auditing or regulatory, or litigation requirements placed upon such party. The Seller will not use such documents or information for the purpose of competing with Purchaser. 197 ARTICLE VIII SELLER'S REPRESENTATIONS AND WARRANTIES The Seller represents and warrants to Purchaser as follows: 8.01 Corporate Organization. The Seller is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Alabama. 8.02 Corporate Authority. Except as disclosed on Exhibit 8.02(a), the Seller has full corporate right, power, capacity and authority validly to enter into and to perform this Agreement and the transactions contemplated by this Agreement, and to sell, transfer, assign and deliver the Purchased Assets referred to in Article II, and to assign the assets and to carry on its business as currently conducted. The execution, delivery and performance of this Agreement, and the transactions contemplated by this Agreement have been duly and validly authorized by all requisite corporate action, and this Agreement is binding and enforceable against the Seller in accordance with its terms. No further corporate authorization or applications or notices to ("Applications") any governmental or regulatory authority, agency or entity ("Governmental Authorities"), or any consents, waivers, approvals or orders ("Consents") from any Governmental Authority or any other person or entity is necessary for Seller to execute and deliver this Agreement or to consummate the transactions contemplated hereunder or perform its obligations hereunder. At the Closing, Seller shall provide Purchaser with a certificate of the secretary of the Seller, dated as of the Closing Date certifying the resolution of the Seller's Board of Directors, or its Executive Committee and its sole shareholder, approving the sale of the assets and the assumption of the liabilities contemplated by this Agreement and also certifying and attaching the Bylaws and Charter of the Seller to the same. A form of such certificate, which is acceptable to Seller and Purchaser, is attached hereto as Exhibit 8.02(b). 8.03 Title to or Right to Occupy Real Estate. Exhibit 8.03 describes all real estate, improvements, and any related rights owned, leased, or otherwise held by Seller with respect to the Branches and the property, and with respect to owned Real Property, the fully depreciated net book value thereof. Seller (a) has and at the Closing Date will have indefeasible fee simple title to, and owns and at the Closing Date will be the sole owner of all the Real Property to be purchased by Purchaser pursuant to Article II, subject to no mortgage, indenture, pledge, lien, adverse claim, security interest, tenant leases, participation, charge, encumbrance or conditional sale of other title retention agreement (each, a "Lien") except for real estate taxes not yet due and payable, and restrictions, easements and rights of way of record that do not affect the current use of such property or materially and adversely affect its value, and (b) is and at the Closing Date will be the sole lessee with respect to the leases to be assigned to Purchaser pursuant to said Article II, with the right to convey to Purchaser the leasehold interest therein so as to assure that Purchaser shall have the full, exclusive and peaceful possession of such leasehold interest. All Real Property and improvements thereon will at the Closing Date be in good operating condition and repair, subject only to ordinary wear and tear, and will otherwise be received in "AS IS" condition with no other warranties by Seller as to their condition or future performance, except as those warranties related to title. All Real Property held under leases or subleases by the Seller, are held under valid contracts enforceable in accordance with their respective terms, and each such contract is in full force and effect, and no event has occurred which would be a breach or default under such lease or contract whether with notice, the passage of time, or both. All improvements on the Real Property leased to, or used by, the Seller 198 conform to all applicable state and local laws, regulations, zoning and building ordinances and health and safety ordinances, and the Real Property is zoned for the various purposes for which the real estate and improvements thereon are presently being used. No condemnation proceedings or proceedings for the taking of any Real Property by eminent domain by any governmental authority are pending or, to the Seller's knowledge, are threatened. Seller has not entered into any agreement regarding the Real Property and neither Seller nor the Real Property is subject to any claim, demand, suit, unfiled lien, proceeding or Litigation of any kind, pending or outstanding, or to the knowledge of Seller, threatened or likely to be made or instituted, which would in any way be binding upon Purchaser or its successors or assigns or materially affect or limit Purchaser's or its successors' or assigns' use and enjoyment of the Real Property, the value of such Real Property or any leasehold interest, or which would limit or restrict Seller's right or ability to enter into this Agreement and consummate the sale and purchase contemplated hereby. 8.04 Condition of Personal Property. Exhibit 8.04 sets forth by category or item all of the tangible personal property owned or leased (identified as such) which is used or useful in connection with the operation of the Branches, with the fully depreciated net book value of owned property being also set forth on Exhibit 8.04. The tangible personal property included in the Purchased Assets is, and at the Closing Date will be, in good operating condition and repair, subject only to ordinary wear and tear and will be usable in the ordinary course of business consistent with the Seller's past practices. All Personal Property held under leases or subleases by the Seller, are held under valid contracts enforceable in accordance with their respective terms, and each such contract is in full force and effect and assignable to Purchaser. Seller has not entered into any agreement regarding the Personal Property and neither Seller nor the Personal Property is subject to any claim, demand, suit, unfiled Lien, or Litigation of any kind, pending or outstanding, or to the knowledge of Seller, threatened or likely to be made or instituted, which would in any way be binding upon Purchaser or its successors or assigns or materially affect or limit Purchaser's or its successors' or assigns' use and enjoyment of the Personal Property or which would materially limit or restrict Seller's right or ability to enter into this Agreement and consummate the sale and purchase contemplated hereby. 8.05 Loans. With respect to each Loan within the Purchased Assets: the Loan complies in all material respects with all applicable laws and regulations and is a valid loan enforceable in accordance with its terms; the Seller is the sole owner thereof, no participation or other interest therein having been sold, granted or transferred; the Loan is not pledged or encumbered except as set forth on Exhibit 8.05 and all of such Liens on such Loans shall have been satisfied and released prior to the Closing; the principal balance of the Loan as shown on either Exhibit 2.01(a)(1) or Exhibit 2.01(a)(2) is true and correct as of the last date shown thereon; all purported signatures on and executions of any document in connection with such Loan are genuine and authorized; all Loan documentation has been actually signed or executed by all necessary parties; the Seller has and will transfer to Purchaser, custody of all original executed documents, and microfilm or photocopy records thereof related to such Loan and there are no other written or unwritten agreements, understandings, or other arrangements with respect to such Loan; provided, however, that all Loans (and any notes, other evidences of indebtedness or security agreements associated therewith) transferred at Closing by the Seller to Purchaser are transferred and without any other warranties or representations as to the collectibility of any such Loans, the value of the collateral securing same or the creditworthiness of any of the makers, guarantors or other obligors thereof except as set forth in Section 10.10 hereof. None of the Loans is to or for the benefit of a Seller Affiliate. 199 8.06 No Violations. The Branches have been operated, in all material respects, in accordance with all applicable laws, rules and regulations, including the provision of the Code and related regulations pertaining to back-up withholding and tax reporting. Subject to receipt of all necessary corporate, regulatory and other third party approvals or consents, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate or conflict with the Seller's Articles of Incorporation, Bylaws or other governing documents or any provisions of law or regulations to which the Seller is subject and do not and will not conflict with or result in the violation or breach of any material condition or provision of, or constitute a material default under, any material contract, right, lease, Lien, instrument, agreement, order, writ, injunction, decree or judgment to which the Seller is a party or which is binding on Seller or to which any of the property or assets of Seller is subject, or create or result in any Lien upon the Assets or Assumed Liabilities. Except as disclosed on Exhibit 8.06, no consent, license, approval or authorization of or designation, declaration or filing with any Governmental Authority or other person or entity is required on the part of Seller. The Seller is not in default under any lease, agreement, contract, commitment, Assumed Liability or other obligation or Asset which Purchaser is assuming or which affects the property rights or obligations being transferred hereunder to Purchaser. 8.07 Limitations of Warranties. Except as may be expressly represented or warranted in this Agreement or in any document of transfer, the Seller makes no representations or warranties whatsoever with regard to any Purchased Asset being transferred to Purchaser, any liability or obligation being assumed by Purchaser. 8.08. Legal Proceedings. (a) Except as set forth in Exhibit 8.08, Seller is not a party to any, and there are no pending or, to Seller's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Seller relating in any way to the Branches, the Loans, the other Purchased Assets and Assumed Liabilities, or seeking to enjoin, restrain, or challenge the validity, enforceability, or propriety of this Agreement or the transactions contemplated by this Agreement. There are no employee disputes or labor relations problems with respect to any employees of the Branches. (b) Except as set forth in Exhibit 8.08, there is no injunction, order, judgment, decree, or regulatory or Governmental Authority restriction imposed upon Seller or the assets or the liabilities of Seller, including the Assets and the Assumed Liabilities. 8.09. Environmental Matters. Except as set forth in Exhibit 8.09: (a) Seller, and to the knowledge of Seller, each of the Seller's Other Real Estate, Real Property, Participation Facilities and Loan Properties (each as hereinafter defined), are in compliance with all applicable federal, state and local laws, including common law, regulations and ordinances, and with all applicable decrees, orders and contractual obligations relating to pollution or the protection of human health or the environment or the emission or release or threatened release, discharge of, or exposure to, Hazardous Materials (as hereinafter defined) in the environment or workplace or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of any Hazardous Material ("Environmental Laws"); 200 (b) There is no suit, claim, action or proceeding, pending or, to the knowledge of Seller, threatened, before any governmental entity or other forum in which Seller, any Other Real Estate, Real Property, Participation Facility or any Loan Property, has been or, with respect to threatened proceedings, may be, named as a defendant (x) for alleged noncompliance (including by any predecessor) with any Environmental Laws, or (y) relating to the release, threatened release or exposure to any Hazardous Material whether or not occurring at or on a site owned, leased or operated by Seller, any Participation Facility or any Loan Property; (c) During the period of (x) Seller's ownership or operation of any of their respective current or former properties, including the Real Property and Other Real Estate, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there has been no release of Hazardous Materials in, on, under or affecting any such property. To the knowledge of Seller, prior to the period of (x) Seller's ownership or operation of current or former properties, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there has been no release of Hazardous Materials in, on, under or affecting any such property, Participation Facility or Loan Property; and (d) The following definitions apply for purposes of this Section: (x) "Hazardous Materials" means any hazardous substance, hazardous material, hazardous waste, regulated substance, or toxic substance (as those terms are defined by any applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and specifically shall include asbestos requiring abatement, removal, or encapsulation pursuant to the requirements of Governmental Authorities and any polychlorinated biphenyls)., (y) "Loan Property" means any property in which Seller holds a security interest or other Lien which security interest will be transferred to Purchaser pursuant to this Agreement, and, where required by the context, said term means the owner or operator of such property; and (z) "Participation Facility" means any facility in which Seller participates in the management and, where required by the context, said term means the owner or operator of such property. 201 8.10 ERISA Matters. The Seller is in compliance in all material respect with the provisions of ERISA. No steps have been taken by the Seller to terminate any employee benefit plan (as defined in Section 3(3) of ERISA) the assets of which are not sufficient to satisfy all of its benefit liabilities (as determined under Title IV of ERISA), no contribution failure has occurred with respect to any employee benefit plan sufficient to give rise to a lien under Section 302(f) of ERISA, and each of Seller's employee benefit plans has been administered in all material respects in compliance with its terms and applicable provision of ERISA and the Internal Revenue Code of 1986, as amended and all regulations thereunder (the "Code"). To Seller's knowledge, no prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) has occurred under any employee benefit plan of Seller. "ERISA" means the Retirement Income Security Act of 1974, as amended and all related regulations of the Department of the Treasury and the Department of Labor thereunder. 8.11 Employees; Labor Matters. (a) No employee of the Branches is bound by any agreement that purports to limit his or her ability to engage in or continue or perform any conduct, activity, duties or practice relating to the business conducted by the Branches or by Seller; (b) Seller has operated the Branches in compliance in all material respects with all Laws and regulations relating to the employment of labor, and has made all withholdings and other payments with respect to such employment and employment taxes and charges; and (c) there is no collective bargaining agreement to which Seller is a party and no collective bargaining agreement is currently being negotiated or proposed. 8.12 Books and Records. The books of account and other records of Seller, to the extent they relate to the Branches, the Assets and the Assumed Liabilities, all of which have been made available to Buyer, are complete and correct in all material respects and represent actual, bona fide transactions and have been maintained in accordance with customary business practices and generally accepted accounting practices consistently applied ("GAAP"). 8.13 Consents of Third Parties. Seller shall use all commercially reasonable efforts to obtain and preserve any consents or approvals to third parties, whether of regulatory or Governmental Authorities or third parties or persons necessary, appropriate or expedient to the consummation of the transactions contemplated by this Agreement, including, but not limited to, the consents of lenders to the Seller or to Community Bancshares, Inc. or any subsidiary of Community Bancshares, Inc. and shall cooperate with Purchaser in seeking and obtaining any consents or approvals it may require from any Governmental Authorities or third parties in connection with this Agreement and the transactions contemplated hereby. 8.14 USA PATRIOT Act Compliance. The Seller is in compliance in all material respects with the provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") and all regulations promulgated thereunder including, but not limited to, those provisions of the USA Patriot Act that address money-laundering, know-your customer, account maintenance and customer verification. ARTICLE IX PURCHASER'S REPRESENTATIONS AND WARRANTIES Purchaser represents and warrants to the Seller as follows: 202 9.01 Corporate Organization. Purchaser is a national banking association duly organized, validly existing and in good standing under the laws of the United States. 9.02 Corporate Authority. Subject to regulatory approval, Purchaser has full right, power, capacity and authority as a national banking association to validly enter into and to perform this Agreement and the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by Purchaser have been, or will be prior to the Closing Date, duly and validly authorized by all requisite corporate action and this Agreement is binding and enforceable against Purchaser in accordance with its terms. 9.03 No Violations. Subject to the conditions set forth in Article XII below, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate or conflict with the Purchaser's Articles of Incorporation, Bylaws, or other governing documents, or any provisions of law or regulations to which Purchaser is subject and do not and will not conflict with or result in the violation or breach of any material condition or provision of, or constitute a material default under, any material contract, right, lease, pledge, lien, security interest, instrument, indenture, mortgage, charge, encumbrance, agreement, order, writ, injunction, decree or judgment to which Purchaser is a party or which is binding on Purchaser or to which any of the property or assets of Purchaser is subject. Except as set forth in Article XII, no consent, license, approval or authorization of or designation, declaration or filing with any governmental authority or other person or entity is required on the part of Purchaser in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated herein. 9.04 Regulatory Approvals. Purchaser will promptly apply for, within 10 Banking Days of execution of this Agreement by both parties, and in good faith diligently pursue all required regulatory approvals that it needs to consummate the transactions contemplated hereby. 9.05 Consents of Third Parties. In addition to obtaining the requisite regulatory approvals, Purchaser shall use all commercially reasonable best efforts to obtain and preserve any consents or approvals of third parties necessary, appropriate or expedient to the consummation of the purchase of the Branches, including, but not limited to, the consents of lenders to the Purchaser or its parent holding company. 9.06. Legal Proceedings. Except as set forth in Exhibit 9.06, Purchaser is not a party to any, and there are no pending or, to Purchaser's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature challenging the validity or propriety of the transactions contemplated by this Agreement. ARTICLE X ADDITIONAL UNDERTAKINGS OF SELLER 10.01 Conduct of Business Pending the Closing Date. The Seller agrees that from the date of this Agreement to the Closing Date, it will: 203 (a) maintain the operations of the Branches as presently conducted, and avoid any act that would materially and adversely affect the amount or value of the Purchased Assets or the Assumed Liabilities; (b) carry on the business of the Branches substantially in the same manner as conducted on the date hereof, operate the business of the Branches only in the ordinary and usual manner including interest rates and terms on Loans and Deposits, provide the same services and hours of operation as is now being provided by such Branches, and use all reasonable efforts to preserve intact its present business organization, to keep available the services of its present employees and to preserve its relations with customers having business dealings with the Branches; (c) maintain fire, casualty, and extended coverage insurance for the benefit of the Seller and Purchaser, as their interests may appear, on the Branches and the Purchased Assets in an amount reasonably adequate to cover the replacement costs of the Branches and the Purchased Assets, and continue all credit insurance and debt cancellation protection for the benefit of the Purchaser with respect to Loans purchased hereby; (d) maintain the Real Property, Personal Property, and the other Purchased Assets in their respective current conditions, and not waive or modify any rights or agreements with respect to any Assets; (e) maintain its books of account and records concerning the Branches in the ordinary and usual manner, in accordance with generally accepted accounting principles applied on a basis consistent with prior years and Seller shall prepare and provide Purchaser with monthly internal financial reports of the Branches in the form currently prepared for each monthly period subsequent to the execution of this Agreement and prior to the Closing Date; and (f) not take any action which would cause any representation or warranty made herein to be untrue at the Closing Date. 204 10.02 Documentation Delivered at the Closing Date and Further Assurances. At the Closing Date, the Seller shall transfer, assign and deliver to Purchaser all original (to the extent these exist and are held by the Seller) and other records, books, papers, documents, instruments, collateral in its possession and agreements of Seller relating to the Purchased Assets and the Assumed Liabilities being assumed by Purchaser hereunder, including but not limited to, signature cards, stop payment orders, contracts, deposit slips, canceled checks, withdrawal orders and records of accounts which may be requested by Purchaser prior to the Closing Date. The Seller agrees that it will, at the Closing Date and at any time and from time to time after the Closing Date, upon Purchaser's request do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances and assurances as may be required to complete the process of assigning, transferring, granting, conveying, assuring and confirming to Purchaser, any and all of the Purchased Assets and the Assumed Liabilities purchased and assumed by Purchaser hereunder and the performance of any or all obligations of the Seller hereunder; including, without limitation, the making of all filings and recordations of the assignment at all applicable county courthouses or other locations as may be necessary to transfer and assign the Loans. 10.03 Non-Solicitation of Business. The Seller will not, for a period of two years after the Closing Date, (i) own or operate any commercial bank branch within DeKalb County, Alabama, or (ii) directly compete for or solicit any Transferred Accounts or any Loans sold hereunder, but the Seller shall be entitled to conduct mass mailings, statement stuffers and mailings generally to persons holding accounts with the Seller outside the Branches or having other relations with the Seller's other offices without limiting such materials to any former Branch customers, and newspaper, radio, television, billboard and other advertisements of a general nature. This subsection shall not apply to those deposits and Loans not transferred to Purchaser at the Closing Date and the restrictions on the Seller contained in this section are intended to apply only to the deposits and loan business that the Seller's customers would normally be expected to conduct at the Branches. 10.04 Notice to Customers of Sale of Branches. To the extent required by law or otherwise agreed upon by the parties, the Seller and Purchaser shall jointly notify the customers of the Branches affected by the transaction of the pending transfer of their deposit accounts, Loans or safe deposit boxes to Purchaser. 10.05 Conversion of Transferred Accounts. The Seller agrees to cooperate with the conversion of the customer asset and liability accounts in an orderly and expeditious fashion, and to provide reasonable, appropriate support to Purchaser for the timely conversion of such accounts, and related data processing, computer, customer research and information conversions. 10.06 Post-Conversion Processing. After conversion of all accounts to Purchaser's processing systems, as between Seller and Purchaser, the Seller shall be and have the rights and obligations of a "Collecting Bank" or "Intermediary Bank" under Article 4 of the Uniform Commercial Code, as adopted in Alabama (Code of Alabama, 1975, Sections 7-4-101 et. seq.), with respect to items drawn on Transferred Accounts received by it for processing after the Closing Date. Items received for processing against the Transferred Accounts shall be grouped and delivered to Purchaser within the time limits provided by the Alabama Uniform Commercial Code in a special cash letter separately identified as "Transferred Accounts Cash Letter". Purchaser shall indemnify the Seller against all 205 claims, suits, damages or losses and expenses (including reasonable attorneys' fees) arising after the Closing Date out of any claim by an owner of a Transferred Account that the Seller is the "Payor Bank" with respect to such items. 10.07 Diligence and Good Faith. The Seller will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Article XII below (except the conditions set forth in Section 12.06); and (b) cooperate in good faith with Purchaser in its seeking the satisfaction of all conditions set forth in Article XIII below. 10.08 Indemnity. Seller agrees to indemnify and hold harmless Purchaser and its officers, directors, employees, affiliates, representatives, successors, and assigns (each a "Purchaser Indemnitee") against, from and in respect of: (i) Any damage, expense (including reasonable attorneys' fees) or deficiency resulting from any default, misrepresentation, breach of representation or warranty, or nonfulfillment of any agreement on the part of Seller under this Agreement, or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Purchaser pursuant to this Agreement; (ii) Any liability of Seller except the Assumed Liabilities including all liabilities under the Seller's credit insurance policies and debt cancellation agreements; (iii) Any and all expenses (including reasonable attorneys' fees and disbursements), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Purchaser Indemnitee arising out of Seller's operations or arising out of Seller's ownership of the Branches including any suit, action, proceeding, claim, demand or Litigation arising out of the Discounted Loans. Seller agrees promptly to advance to any Purchaser Indemnitee, on demand, any expenses, attorney's fees and disbursements incurred by any Purchaser Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Seller relates; Notwithstanding any other provision of this Agreement to the contrary, Purchaser and Seller will cooperate with respect to any environmental cleanup and any related proceeding with respect to which indemnity may be sought under this Section. 10.09 Indemnity Claims. If any Purchaser Indemnitee desires to make a claim under Section 10.08 hereof which does not involve a claim by any person other than Purchaser Indemnitee, then such Purchaser Indemnitee shall make such claim by promptly delivering written notice to the Seller. If any Purchaser Indemnitee desires to make a claim against Seller under Section 10.08 hereof which involves a claim by a person other than Purchaser Indemnitee, then Purchaser Indemnitee, upon receipt of written notice of any claim or the service of a summons, or other initial legal process upon it in any action instituted against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in Section 10.08 (an "Asserted Liability"), shall promptly give notice 206 (a "Claims Notice") of such claim or the commencement of such action, or threat thereof, to the Seller. If a Claims Notice is not provided promptly as required by this Section 10.09, Purchaser Indemnitee nonetheless shall be entitled to indemnification by the Seller to the extent that the Seller has not established that it has been materially prejudiced by such late receipt of the Claims Notice. The Seller shall be entitled at its own expense to participate in the defense of such claim or action, or, if it shall so elect, to assume the defense of such claim or action, in which case the defense shall be conducted by counsel reasonably acceptable to Purchaser Indemnitee and such assumption shall constitute an acknowledgement by the Seller of its obligations to indemnify Purchaser Indemnitee with respect to such Asserted Liability, and such Purchaser Indemnitee shall bear the fees and expenses of any additional counsel retained by it; but if the Seller shall elect not to assume the defense of such claim or action, the Seller shall reimburse each Purchaser Indemnitee for the reasonable fees and expenses of any counsel retained by it. Notwithstanding the above, should Purchaser Indemnitee reasonably conclude that there may be defenses available to it which are different from or additional to those available to the Seller or that conflicts of interest exist that are objected to by the Purchaser Indemnitees, the Seller shall not have the right to direct the defense of such action on behalf of Purchaser Indemnitee and all such fees and expenses of Purchaser Indemnitee shall be borne by the Seller. The Claims Notice may be amended on one or more occasions with respect to the amount of the Asserted Liability at any time prior to final resolution of the obligation to indemnify relating to the Asserted Liability. The Seller shall not, without the written consent of Purchaser Indemnitee, settle or compromise any such claim or consent to the entry of any judgment which does not include any unconditional term releasing the Indemnified Party from all liability in respect of such Asserted Liability. ARTICLE XI ADDITIONAL UNDERTAKINGS OF PURCHASER 11.01 Purchaser's Contact with Customers. Purchaser and the Seller, as and to the extent provided in Section 10.04, may jointly notify the customers of the Branches of the pending transfer of their deposit accounts, Loans or safe deposit boxes to Purchaser. Purchaser and Seller agree that any notices, letters or other material which Purchaser or Seller wish to send or give to customers of the Branches prior to the Closing Date shall be approved by both parties in advance, which approval shall not be unreasonably withheld. Purchaser shall also provide all customers holding Transferred Accounts with all necessary checkbooks, check order forms, passbooks, loan coupon books and other materials bearing the name of Purchaser which shall be available for use by customers of the Branches promptly after the Effective Time. Purchaser shall also direct each transferring customer that, as of the Effective Time, such customers should no longer use and should destroy all checkbooks and check order forms of the Seller pertaining to accounts at the Branches transferred to the Seller. Except, and only to the extent and manner specifically permitted hereby, Purchaser shall not contact, or solicit the Loan and deposit business of any customers of the Branches prior to the Effective Time. 11.02 Safe Deposit Box and Night Depository Business. Purchaser shall assume and discharge from and after the Effective Time, the duties and obligations of the Seller with respect to the Branches' safe deposit box and night depository business. Purchaser shall maintain all necessary facilities for the use of such boxes by the renters thereof, and night deposit facilities by the users thereof, during the period for which such persons have paid rent therefor in advance to the Seller, 207 subject to the provisions of the written rental and night depository agreements between the Seller and the respective renters of such boxes or users of such night depository facilities delivered to Purchaser. 11.03 Use of Names, Trademarks, Etc. Purchaser will not, upon and after the Closing Date, use the name "Community Bank" or any of the Seller's trade names, trademarks or service marks. 11.04 Diligence and Good Faith. Purchaser will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Section 12.06 and in Article XIII below; and (b) cooperate in good faith with the Seller in its seeking the satisfaction of all conditions set forth in Article XII below (except those conditions set forth in Section 12.06). 11.05 Indemnity. Purchaser agrees to indemnify and hold harmless Seller and its officers, directors, employees, affiliates, representatives, successors and assigns (each a "Seller Indemnitee") against, from and in respect of: (i) Any damage, expense or deficiency resulting from any default, misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Seller pursuant to this Agreement. (ii) Any and all expenses (including reasonable attorneys' fees and disbursements), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Seller Indemnitee arising out of Purchaser's operations or arising out of Purchaser's ownership of the Branches after the Effective Time. Purchaser agrees promptly to advance to any Seller Indemnitee, on demand, any expenses, attorneys' fees and disbursements incurred by any Seller Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Purchaser relates. 11.06 Indemnity Claims. If any Seller Indemnitee desires to make a claim under Section 11.05 hereof which does not involve a claim by any person other than Seller Indemnitee, then such Seller Indemnitee shall make such claim by promptly delivering written notice to the Purchaser. If any Seller Indemnitee desires to make a claim against Purchaser under Section 11.05 hereof which involves a claim by a person other than Seller Indemnitee, then Seller Indemnitee, upon receipt of written notice of any claim or the service of a summons, or other initial legal process upon it in any action instituted against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in Section 11.05 (a "Seller Asserted Liability"), shall promptly give notice (a "Seller Claims Notice") of such claim or the commencement of such action, or threat thereof, to the Seller. If a Seller Claims Notice is not provided promptly as required by this Section 11.05, Seller Indemnitee nonetheless shall be entitled to indemnification by the Purchaser to the extent that the Purchaser has not established that it has been materially prejudiced by such late receipt of the Seller Claims Notice. The Purchaser shall be entitled at its own expense to participate in the defense of such claim or action, or, if it shall so elect, to assume the defense of such claim or action, in which case the defense shall be conducted by counsel reasonably acceptable to Seller Indemnitee and such 208 assumption shall constitute an acknowledgement by the Purchaser of its obligations to indemnify Seller Indemnitee with respect to such Seller Asserted Liability, and such Seller Indemnitee shall bear the fees and expenses of any additional counsel retained by it; but if the Purchaser shall elect not to assume the defense of such claim or action, the Purchaser shall reimburse each Seller Indemnitee for the reasonable fees and expenses of any counsel retained by it. Notwithstanding the above, should Seller Indemnitee reasonably conclude that there may be defenses available to it which are different from or additional to those available to the Purchaser or that conflicts of interest exist that are objected to by the Seller Indemnitees, the Purchaser shall not have the right to direct the defense of such action on behalf of Seller Indemnitee and all such fees and expenses of Seller Indemnitee shall be borne by the Purchaser. The Seller Claims Notice may be amended on one or more occasions with respect to the amount of the Seller Asserted Liability at any time prior to final resolution of the obligation to indemnify relating to the Seller Asserted Liability. The Purchaser shall not, without the written consent of Seller Indemnitee, settle or compromise any such claim or consent to the entry of any judgment which does not include any unconditional term releasing the Indemnified Party from all liability in respect of such Seller Asserted Liability. ARTICLE XII CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS The obligations of Purchaser to close under this Agreement shall be subject to the following conditions (all or any of which, except the conditions of Section 12.06, may be waived in whole or in part by Purchaser to the extent permitted by law): 12.01 Representations and Warranties True. The representations and warranties made by Seller in this Agreement shall have been true and correct when made and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of such date. 12.02 Obligations Performed. The Seller shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. 12.03 Certificate of Compliance. The Seller shall have executed and delivered to Purchaser a certificate substantially in the form and substance as attached hereto as Exhibit 12.03, dated as of the Closing Date. 12.04 No Adverse Litigation. No action, suit, proceeding or Litigation shall have been instituted or threatened against the Seller or Purchaser by or before any court or Governmental Authority to restrain or prohibit, or to obtain damages in respect of this Agreement or the consummation of the transactions contemplated hereby which in the opinion of Purchaser makes it inadvisable to proceed to the Closing Date under this Agreement. 12.05 Opinion of Counsel. Purchaser shall have received an opinion of counsel for the Seller, dated the Closing Date, in substantially the same form and substance as the opinion attached hereto as Exhibit 12.05. 209 12.06 Regulatory Approvals. Purchaser shall have obtained, at its expense, from all necessary governmental and regulatory authorities, all necessary consents to and authorizations and approvals of this Agreement and the transactions contemplated by this Agreement and the related transfers of ownership and control of all licenses, permits or other governmental authorizations necessary to carry on the business of the Branches, and the Seller shall have obtained any consents and approvals required hereby, including those set forth on Exhibit 8.06. 12.07 Due Diligence Review. Purchaser shall have completed and be satisfied, in its sole discretion, with the scope and results of its review of the business operations, assets, properties, liabilities, and other matters regarding Seller and the Branches, and shall have reached agreements with Seller satisfactory to Purchaser in all respects regarding any matter or matters relating to such investigation, including without limitation, agreements with respect to the Loans being purchased and the purchase price for Loans pursuant to Section 2.01. 12.08 Title Insurance. Purchaser shall have obtained at its own cost and expense such owner's and leasehold policies of title insurance as it shall desire, free of any exception or other qualification other than standard exceptions and exclusions. 12.09 Material Adverse Change. From the date of this Agreement until the Closing Date, no material adverse change shall have occurred or been threatened with respect to the Branches or the Purchased Assets or the Assumed Liabilities. A "material adverse change" shall mean a change of ten percent (10%) or more in the Purchased Assets or Assumed Liabilities from those existing at January 31, 2002, and any material adverse change in the composition, maturities, interest rates or other material terms of the Loans or Assumed Liabilities. 12.10 Seller's Exhibits and Schedules. The Seller shall have delivered all exhibits and schedules as required by this Agreement and such exhibits and schedules shall be satisfactory to the Purchaser, in the Purchaser's sole discretion. ARTICLE XIII CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS The obligations of the Seller to close under this Agreement shall be subject to the following conditions (all or any of which may be waived, in whole or in part, by the Seller to the extent permitted by law): 13.01 Representations and Warranties True. The representations and warranties made by Purchaser in this Agreement shall have been true and correct when made and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of such date. 13.02 Obligations Performed. Purchaser shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by Purchaser on or before the Closing Date. 210 13.03 Certificate of Compliance. Purchaser shall have executed and delivered to the Seller a certificate in substantially the same form and substance as the one attached hereto as Exhibit 13.03, dated as of the Closing Date. 13.04 No Adverse Litigation. No action, suit or proceeding shall have been instituted or threatened against the Seller, or Purchaser by or before any court or governmental agency to restrain or prohibit, or to obtain damages in respect of, this Agreement or the consummation of the transactions contemplated hereby which in the opinion of Seller makes it inadvisable to proceed to the Closing Date under this Agreement. 13.05 Approvals. Purchaser shall have obtained the approvals referenced in Section 12.06 and the Seller shall have obtained any consents and approvals required hereby, including those set forth on Exhibit 8.06. 13.06 Opinion of Counsel. Seller shall have received an opinion of counsel for the Purchaser, dated the Closing Date, in substantially the same form and substance as the opinion attached hereto as Exhibit 13.06. ARTICLE XIV CLOSING DATE 14.01 Time and Place. The hour, date and location of the Closing under this Agreement shall be at a location and on a date mutually acceptable to Purchaser and Seller as soon as practicable after the receipt of all regulatory and governmental approvals and other consents and the expiration of any required waiting period (the "Closing Date"). ARTICLE XV TERMINATION 15.01 Methods of Termination. This Agreement may be terminated as follows: (a) at any time by the mutual written consent of Purchaser and the Seller; (b) by Purchaser in writing at any time that it determines in good faith that the conditions set forth in Article XII of this Agreement will not be met by May 3, 2002; (c) by the Seller in writing at any time that it determines in good faith that the conditions set forth in Article XIII of this Agreement will not be met by May 3, 2002; (d) by the Seller or Purchaser in writing at any time after any of the regulatory authorities has denied any application of the other party for approval of the transactions contemplated herein; (e) by Purchaser in writing on or before March 10, 2002 if as a result of its due diligence review it discovers a fact or circumstance or the parties cannot agree on a valuation of 211 assets that makes it inadvisable in Purchaser's sole discretion for Purchaser to proceed with the transaction contemplated hereby; (f) by Purchaser or the Seller if the Closing Date shall not have occurred on or prior to May 3, 2002, unless the failure of such occurrence is due to the failure of the party seeking termination failing to perform or observe any of its agreements and conditions set forth herein; (g) any time on or prior to the Closing Date, by Purchaser or Seller in writing if the other shall have been in breach of any representation and warranty in any material respect (as if such representation and warranty had been made on and as of the date hereof and on the date of the notice of breach referred to below), or in breach of any covenant, undertaking or obligation contained herein, and such breach has not been cured by the earlier of 30 days after the giving of notice to the breaching party of such breach or the Closing Date. 15.02 Procedure Upon Termination. In the event of termination pursuant to Section 15.01 hereof, written notice thereof shall forthwith be given to the other party in accordance with Section 17.08 of this Agreement, and this Agreement shall terminate immediately unless an extension is consented to by the party having the right to terminate. If this Agreement is terminated as provided herein: (a) each party will return all documents, work papers and other materials and information of the other party relating to this transaction, whether obtained before or after the execution hereof, to the party furnishing the same; (b) all information received by either party hereto with respect to the business of the other party (other than information which is a matter of public knowledge or which has heretofore been or hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for any business purpose by such party or disclosed or delivered by such party to third persons; and (c) if the termination is due to a failure or breach on the part of Purchaser hereunder, Purchaser shall immediately pay the Seller 50% of the total out of pocket costs expended for notices to customers and joint mailings as provided in section 10.04, as approved at such time. ARTICLE XVI MUTUAL COVENANTS AND AGREEMENTS 16.01 Cooperation. Subject to the terms and conditions hereof, each party hereto agrees promptly to take, or cause to be taken, all commercially reasonable actions and to do or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations, or otherwise, including, without limitation, attempting to obtain all necessary consents, waivers and regulatory approvals, to consummate and make effective at the earliest practicable time, the transactions contemplated by this Agreement. The officers and employees of each party shall fully cooperate with officers and employees, accountants, counsel and other representatives of the other in all matters contemplated by this Agreement. 212 16.02 Assignments of Certain Assets. Seller and Purchaser hereby agree that Purchaser (in its sole discretion) may direct that at Closing Seller assign the Discount Loans, Other Real Estate and any other low quality assets directly to a subsidiary or other affiliate of Purchaser; provided, that such transfer to a subsidiary or other affiliate of Purchaser shall not affect Purchaser's obligation to pay, or cause the payment of, the Purchase Price for such assets. ARTICLE XVII MISCELLANEOUS 17.01 Modifications and Waivers. This Agreement may not be modified except by an instrument in writing duly executed by the parties. Any waiver of any term of this Agreement must be in writing. 17.02 No Brokers or Finders. Purchaser and the Seller each represent and warrant to each other that no broker or finder has been employed by or has acted for it in connection with this Agreement or the transactions contemplated hereby, and each party agrees to indemnify the other against all losses, costs, damages or expenses arising out of claims for fees or commissions of brokers or finders alleged to have been employed or engaged by such party. 17.03 Survival of Representations and Warranties. All representations and warranties contained herein and in any written agreement or instrument delivered or executed in connection herewith are true at and as of the times provided herein, and all of which will survive the execution and delivery of this Agreement, any examination on behalf of any party hereto, and the consummation of all transactions contemplated herein. 17.04 Binding Effect. All terms of this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. 17.05 Counterparts; Electronic Signatures. This Agreement is being executed simultaneously in two or more identical counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. To expedite the process of entering into this Agreement, the parties acknowledge that Transmitted Copies of the Agreement will be equivalent to original documents until such time as original documents are completely executed and delivered. "Transmitted Copies" will mean copies that are reproduced or transmitted via photocopy, facsimile or other process of complete and accurate reproduction and transmission. 17.06 Expenses. Each party shall bear its own expenses incurred in connection with this Agreement and all transactions contemplated herein. 17.07 Notices and Primary Contact Personnel. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, overnight courier or if mailed, postage prepaid, by United States first class mail, or facsimile transmission to the other party at its address shown on Exhibit 17.07 hereto. The parties hereto, as a matter of convenience, are designating primary contact personnel on Exhibit 17.07, and each party may contact such persons in day-to-day, routine dealings with the other party leading up to and following the Closing Date. 213 17.08 Publicity. Purchaser and the Seller shall cooperate with each other as to the content and timing of public and customer filings, publicity, press releases and announcements concerning this Agreement, and all transactions contemplated hereby, and prior to releasing any such information each party will send such material to the other party for its review and consent, which consent may not be withheld unreasonably. 17.09 Time of the Essence. The parties hereto acknowledge that time is of the essence with respect to the performance of this Agreement and the consummation of the transactions contemplated herein in accordance with the terms hereof. 17.10 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Alabama applicable to contracts made and to be performed wholly within such state. 17.11 Cover, Index and Headings, Etc. The cover, index and headings contained in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation hereof. The use of the singular in this Agreement shall be deemed to be or include the plural (and vice versa), whenever appropriate. The words "include," "including," and similar phrases shall mean including without limitation by enumeration or otherwise. 17.12 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, the balance of this Agreement shall remain in full force and effect except to the extent otherwise agreed by the parties in writing. 17.13 Entire Agreement. This Agreement including any exhibits hereto, represent the entire agreement of the parties relating to the subject matter hereof. All prior negotiations and understandings between the parties are merged into this Agreement and there are no understandings or agreements other than those incorporated herein. 17.14 Arbitration. All disputes arising or otherwise under this Agreement shall be resolved by senior executives of each party, and if they cannot resolve such dispute within 30 days of notice to the other party, then by each party's chief executive officer, and if the chief executive officers cannot resolve such dispute within 30 days of referral to them, then by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Arbitration shall be by a single arbitrator experienced in the matters at issue and selected by Seller and Purchaser in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in Atlanta, Georgia (or any place agreed to by Seller and Purchaser). The decision of the arbitrator shall be final and binding as to any matters submitted under this Section 17.14; provided, however, if necessary, such decision and satisfaction procedure may be enforced by either Seller or Purchaser in any court of record having jurisdiction over the subject matter or over any of the parties to this Agreement. All costs and expenses incurred in connection with any such arbitration proceeding (including reasonable attorney's fees) shall be borne by the party against which the decision is rendered, or, if no decision is rendered, such costs and expenses shall be borne equally by the Seller and Purchaser. If the arbitrator's decision is a compromise, the determination of which party or parties bears the costs and expenses incurred in connection with any such arbitration 214 proceeding shall be made by the arbitrator on the basis of the arbitrator's assessment of the relative merits of the parties' positions. 17.15 Conversion. Seller and Purchaser shall cooperate with each other and shall use their reasonable efforts (as consistent with their internal day-to-day operations) in order to cause the timely transfer of information concerning the Deposit Liabilities and the Loans which are maintained on Seller's data processing systems in accordance with a conversion plan to be developed by the Purchaser and mutually agreed upon by Purchaser and Seller (the "Conversion"). Within fifteen (15) after the date of this Agreement, Seller and Purchaser shall each designate an appropriate officer or officers to be responsible for the necessary cooperation of the parties and to act as an initial contact for responding to questions and requests for information. The parties acknowledge that the goal of such cooperation is to enable Purchaser to obtain and conform data prior to the Effective Time so that such back office conversion is completed and Purchaser is processing all data relating to the operations of the Branches following the Effective Date; and [SIGNATURES ON NEXT PAGE] 215 IN WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to be executed by their respective duly authorized officers and their respective corporate seals to be affixed hereto as of the day and year first above written. FIRST SOUTHERN NATIONAL BANK By /s/ Mike Ellenburg ------------------------------------ Its President ------------------------------------ ATTEST: /s/ Billy H. Vinson - ------------------------------------------ Its Executive Vice President and Secretary -------------------------------------- [CORPORATE SEAL] COMMUNITY BANK By /s/ Kennon R. Patterson, Sr. ------------------------------------ Its Chairman and Chief Executive Officer ------------------------------------ ATTEST: /s/ William H. Caughran - ------------------------------------------- Its Secretary --------------------------------------- [CORPORATE SEAL] 216 STATE OF ALABAMA ) JACKSON COUNTY ) I, Stacey Crabtree, a Notary Public in and for said county in said state hereby certify that Mike Ellenburg as President and Billy H. Vinson as Executive Vice President and Secretary of First Southern National Bank, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 25th day of February, 2002. /s/ Stacey Crabtree -------------------------------- Notary Public My Commission expires: 1-22-2005 --------- [NOTARIAL SEAL] STATE OF ALABAMA ) ) BLOUNT COUNTY ) I, Elaine E. Corvin, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson, Sr. as Chairman and CEO and William H. Caughran as Secretary of Community Bank, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 25th day of February, 2002. /s/ Elaine E. Corvin ------------------------------------- Notary Public My Commission expires: August 1, 2005 -------------- [NOTARIAL SEAL] 217 EX-10.30 11 g75225ex10-30.txt ACQUISITION AGREEMENT DATED FEBRUARY 25, 2002 EXHIBIT 10.30 ---------------------------------------------- ACQUISITION AGREEMENT BETWEEN PEOPLES BANK OF NORTH ALABAMA AND COMMUNITY BANK ---------------------------------------------- 218 ACQUISITION AGREEMENT This Acquisition Agreement (the "Agreement") is made and entered into as of the 25th day of February, 2002, by and between Peoples Bank of North Alabama, an Alabama banking corporation (the "Purchaser"), and Community Bank, an Alabama banking corporation (the "Seller"). W I T N E S S E T H: The Seller has offered for sale its branch offices located at (i) 100 N. Main Street, Arab, Alabama, (ii) 910 N. Brindlee Mountain Parkway, Arab, Alabama, (iii) 610 Gunter Avenue, Guntersville, Alabama, (iv) 407 N. Broad Street, Albertville, Alabama, (v) 11697 U. S. Highway 431, Guntersville, Alabama and (vi) 190 Billy Dyar Boulevard, Boaz, Alabama (the "Branches") together with substantially all of the deposit and Loan business of such Branches. The Purchaser has received summary information regarding the Branches and has offered to purchase substantially all of the assets and liabilities of the Branches on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINED TERMS 1.01 Definitions. The following terms used in this Agreement shall have the meanings specified below: (a) "Available Core Deposit Base" means the daily average total Core Deposit balances, as indicated by the general ledger books of account of the Branches for the approximately 30-day period immediately preceding the Settlement Date. (b) "Closing" means the closing of the purchase of the assets and the assumption of the liabilities of the Branches as provided herein. (c) "Core Deposits" means all deposits maintained at the Branches, exclusive of (i) public funds time deposits including deposits of the State of Alabama and its political subdivisions, authorities and agencies, including time deposit open accounts or TDOA, (ii) deposits represented by certificates of deposit representing at Closing a liability of $100,000 or more and (iii) any accounts designated by mutual agreement of Seller and Purchaser on Exhibit 1.01(c) attached hereto as not expected to transfer to Purchaser ("NETT Deposits"). (d) "Lien" means any conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, 219 restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge, or claim of any nature whatsoever of, on, or with respect to any property or property interest. (e) "Litigation" means any action, arbitration, cause of action, lawsuit, claim, complaint, criminal prosecution, governmental or other examination or investigation, audit (other than regular audits of financial statements by outside auditors), compliance review, inspection, hearing, administrative or other proceeding relating to or affecting a party, its business, its records, its policies, its practices, its compliance with applicable law, its actions, its assets (including contracts and agreements related to it), or the transactions contemplated by this Agreement. (f) "Loan" means each loan agreement, note or borrowing arrangement (including all collateral relating thereto) to which Seller is a party and which are properly booked on the Branches' books and records at Closing, including, without limitation, all overdraft lines of credit. ARTICLE II SALE OF ASSETS 2.01 Assets Sold. On the terms and subject to the conditions of this Agreement, at the Closing, the Seller shall transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase and receive from the Seller, all of Seller's right, title and interest in the following assets, properties and rights (the "Purchased Assets") free and clear of all Liens: (a) all Loans properly booked on the Branches' books and records at Closing at their respective then outstanding principal amounts, together with accrued interest thereon, including the following: (1) Loans in which the collateral securing same has been repossessed or in which collection efforts have been instituted or, claim and delivery or foreclosure proceedings have been commenced); (2) Loans 30 days or more past due, including nonaccrual status; (3) Loans upon which insurance has been force-placed; (4) Loans in connection with which the borrower has filed a petition for relief or is the subject of a proceeding under the United States Bankruptcy Code prior to the Closing Date; (5) Loans that do not meet the credit standards of the Purchaser; (6) Loans otherwise identified by Purchaser as uncollectible; and (7) Loans classified or classifiable as special, uncertain, substantial or loss. All Loans that fit the criteria of (1) - (7) above shall hereinafter be referred to as "Discounted Loans" and shall be purchased by the Purchaser at mutually agreed amounts to be shown as Exhibit 220 2.01(a)(1), which amounts shall appropriately reflect the risks, collectibility or realization and costs of collection and realization. All other Loans to be purchased shall be purchased at the value thereof shown on Seller's books (the "Regular Loans"). Purchaser shall not be required to take any Loans which are to any employee of the Seller (other than to employees of the Branches) nor any Loans to any affiliates of Seller or its related entities. (b) all overdraft lines of credit related to deposit accounts of Seller or overdrawn deposit accounts of Seller that are 60 or more days past due or otherwise charged off by Seller ("Overdue Lines of Credit"); (c) all of the Seller's rights and title to the real property and improvements set forth on Exhibit 8.03, whether owned or leased by the Seller, with any owned real property and improvements to be purchased at the fully depreciated net book value thereof (set forth on Exhibit 8.03) and any leased real property and improvements being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder, to the extent assignable ("Real Property"); (d) all cash on hand at the Branches at Closing; (e) all furniture, fixtures and equipment and any replacements thereof or repairs thereto (together with any manufacturer's warranties or maintenance or service agreements thereon which are in effect and are assignable) located in the Branches (exclusive of those items referred to in Section 2.03 of this Agreement), whether leased or owned as identified on Exhibit 8.04, with owned property being purchased at the fully depreciated net book value thereof (set forth in Exhibit 8.04) and any leased property being transferred to Purchaser by a valid assignment of such lease(s) and an assumption by Purchaser of the obligations thereunder ("Furniture, Fixtures and Equipment"); (f) all rights to the extent assignable in, to and under any vendor single interest insurance or other insurance on Loans or collateral transferred to the Purchaser with the Loans, and any payment received by Seller before the Closing prorated based on the term of the Loan, and after Closing with respect to such insurance; (g) all unearned credit insurance or debt cancellation premiums under the control of the Seller with respect to Loans sold to the Purchaser hereunder; (h) all agreements, contracts, instruments, files (written or electronic), credit analysis and reports, ledgers, or other documents relating to any of the foregoing; and (i) all real property categorized on the books of the Branches as "other real estate" and set forth on Exhibit 2.01(i) hereto (the "Other Real Estate") at the mutually agreed upon prices set forth opposite each item of Other Real Estate on Exhibit 2.01(i). 2.02 Value of Equipment and Additions. The Seller represents and warrants that the net book value of the Real Property and the Furniture, Fixtures and Equipment of the Branches on Seller's books (excluding the items listed in Section 2.03 of this Agreement) is as set forth in Exhibits 8.03 and 8.04 as of the date of this Agreement and which exhibits shall be updated to Closing Date. 221 2.03 Assets Not Sold. The following are expressly excluded from the Purchased Assets: (a) the Seller's signs and logos, except that all sign poles and time and temperature signs will remain and become Purchaser's property; (b) the Seller's proprietarily marked stationery, forms, labels, shipping material, brochures, advertising material and similar property; provided, however, it is the intention of the parties, that items not bearing proprietary marks and which are necessary or useful in operating the Branches not be removed; (c) any Loans to any Seller Affiliate (as defined in Section 7.01), except for Loans made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or other unfavorable features to persons employed and performing services at the Branches; and (d) any Loans or participations or other interests in any Loans originated and transferred from another financial institution to Seller as part of a loan sale, sale of participations or interests, including syndicated creditors or otherwise. 2.04 Purchase Price. As full consideration for the purchase of the Branches and the Purchased Assets, the Purchaser shall pay Seller a purchase price (the "Purchase Price") equal to the sum of the following: (a) fully depreciated net book value for the owned Real Property and owned Furniture, Fixtures and Equipment; (b) a premium for the Core Deposits equal to 8.00% of the Available Core Deposit Base; (c) the book value for the Regular Loans as set forth on Exhibit 2.01(a)(2); (d) with respect to all Discounted Loans, an amount to be mutually agreed upon by the Seller and Purchaser and set forth on Exhibit 2.01(a)(1); (e) the aggregate sum of one dollar ($1.00) for all of the Overdue Lines of Credit; (f) the face amount of the cash on hand at the Branches at Closing; (g) with respect to the Other Real Estate, the aggregate of the purchase prices mutually agreed upon by Seller and Purchaser and set forth on Exhibit 2.01(i) for each item of Other Real Estate; and (h) with respect to all other Purchased Assets listed in Section 2.01, the aggregate sum of one dollar ($1.00). 222 2.05 Documents of Transfer. The sale, transfer, assignment and delivery of the Purchased Assets pursuant to this Article II shall be effected by general warranty deeds, bills of sale, endorsements, assignments and other instruments of transfer and conveyance sufficient to convey all of Seller's right, title and interest as agreed hereunder and satisfactory in form and substance to counsel for the Seller and the Purchaser, including, without limitation, the making of all filings and the recordation of all mortgages and other Loans in the respective county courthouses where the property covered by such mortgages and other Loans relate. At the Closing, the Seller will give the Purchaser possession and control of the Purchased Assets and assumed liabilities and will deliver to the Purchaser all keys, combinations, codes and other necessary access devices relating to the Branches, the Purchased Assets and the assumed liabilities. At Closing, the Seller will deliver to the Purchaser originals of the promissory notes, security agreements, and related agreements, documents and instruments or information relating to or evidencing all Loans purchased, to the extent these exist, and otherwise will deliver the best copies available. 2.06 Removal of Assets Not Sold. As soon as reasonably possible following the Closing, the Seller will remove all of its personal property referred to in Section 2.03 of this Agreement; provided, however, the Seller shall coordinate with the Purchaser to have the Seller's signs and logos (other than all sign poles and time and temperature signs) removed from the Branches at Closing; provided further, that Seller shall not remove any property items not bearing Seller's proprietary marks and which are necessary or useful in operating the Branches. The Seller shall remove all such signs, logos and equipment at its own cost and in a manner that will not damage the premises or improvements or unduly disturb operations. 2.07 Title to Real Property and Leases. The Seller shall provide the Purchaser with originals (or copies if originals are not available) of all deeds and leases with respect to the Branches' real property and improvements, and all real estate records to the extent held by the Seller relating to the Branches. 2.08 Breaches with Third Parties. Nothing in this Agreement shall constitute an agreement to assign any claim, contract, license, lease, commitment, sales order or purchase order or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach thereof or would in any way affect the rights of the Seller thereunder so that Purchaser would not in fact receive all such rights and all such items are listed on Exhibit 2.08 hereto. The Seller will cooperate with the Purchaser in any arrangement desired to provide Purchaser with the benefits under any such claims, contracts, licenses, leases, commitments, sales or purchase orders. Seller shall obtain at its sole cost and expense evidence satisfactory to the Purchaser of transfer or assignment to the Purchaser of any such property or property rights or any contract or agreement which shall require the consent or approval of any third party. 2.09 Payments and Information Received After Closing. The Seller agrees to forward promptly to the Purchaser: (a) any payments (properly endorsed as necessary) which are received by the Seller on or after the Closing Date that relate in any way to the Loans being purchased by the 223 Purchaser hereunder, together with sufficient information so that any such payments may be properly applied to the extent such information is available to the Seller; (b) any notices or other correspondence received on or after the Closing Date that relate in any way to the Loans purchased or to other Purchased Assets; and (c) a listing of all customer deposit accounts at the Branches previously closed by customers or charged-off by Seller since January 1, 2001, including the names, addresses and phone numbers for such customers. ARTICLE III ASSUMPTION OF LIABILITIES 3.01 Liabilities Assumed. At the Closing, the Seller shall transfer to Purchaser and the Purchaser shall assume and agree to pay and discharge only those specific existing liabilities of the Branches described in Exhibit 3.01 hereto (the "Assumed Liabilities"). No assurance is given by the Seller that the Branches' present deposit customers will become or continue to be customers of the Purchaser, the same being at the sole discretion of such customers. 3.02 Liabilities Not Assumed. Except for the Assumed Liabilities specifically assumed by the Purchaser under Section 3.01 above, the Purchaser is not assuming any other liabilities or obligations of the Seller, including, but not limited to the following: (a) cashier's checks, money orders, interest checks, official checks, letters of credit, consignments of U.S. Savings bonds, drafts and expense checks issued by the Seller prior to Closing; (b) all liabilities and obligations of any nature arising from or connected with the Branches and their operations, including relating to circumstances or events arising or existing prior to the Closing, including, but not limited to, liabilities or obligations with respect to any Litigation or governmental proceedings arising, commencing or made known to Seller prior to Closing and related to the Branches, or which thereafter arise with respect to matters occurring prior to Closing; (c) all liabilities and obligations of the Seller for fees, commissions, costs and expenses incurred by the Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, legal, consulting, accounting and appraisal fees and expenses; and (d) all liabilities and obligations of Seller under any debt cancellations or credit insurance contracts or similar arrangements. 3.03 Documentation of Assumption. At Closing the Purchaser shall deliver to the Seller an undertaking, reasonably satisfactory in form and substance to counsel for the Seller, under which the Purchaser will assume and agree to perform, discharge and pay the obligations and liabilities assumed by the Purchaser pursuant to this Agreement. An acceptable form of such undertaking is attached as Exhibit 3.03 hereto and made a part hereof. 224 3.04 Assumption Subject to Certain Terms. The liabilities being assumed by the Purchaser pursuant to this Article shall be assumed subject to the terms and conditions of the contracts of deposit and other written agreements relating thereto and provided by Seller to Purchaser and the laws, rules and regulations applicable thereto. 3.05 Payment of Items by Seller After Closing. If, subsequent to the assumption of liabilities pursuant to this Article III, the Seller shall properly honor any valid check or withdrawal on a deposit assumed by Purchaser ("Transferred Account"), then in that event the Purchaser shall pay the Seller any monies so paid by the Seller to or for the benefit of such Transferred Account, if there are sufficient available collected funds in such Transferred Account to fully pay such check or item. 3.06 Payment of Items by Purchaser After Closing. The Purchaser agrees that after Closing it will pay in accordance with applicable law and customary banking practices all properly payable checks, drafts and withdrawal orders drawn by the parties to the Transferred Accounts if the available collected balance of each Transferred Account is sufficient to permit the payment thereof. 3.07 Transfer of Credits by Seller; Information Received After Closing. (a) The Seller agrees to transfer to the Purchaser any deposits received by it after the Closing Date for credit to Transferred Accounts, however, the Seller shall be under no obligation after 60 days from the Closing Date to accept such deposits or for any claims resulting from such procedure. (b) Any notices or correspondence received by the Seller on or after the Closing with respect to any liabilities assumed or Loans or assets purchased by the Purchaser hereunder will be sent promptly to the Purchaser. 3.08 Safe Deposit Boxes. The keys, contracts, signature cards and other material or equipment related to safe deposit boxes located in the Branches, together with such boxes which shall contain all contents thereof, shall be delivered by the Seller to the Purchaser at Closing. Safe deposit box rentals collected by the Seller prior to the Closing shall be prorated between the Seller and the Purchaser at Closing. 3.09 Seller Not Liable to Pay. In the event any deposit customer holding a Transferred Account shall demand payment from the Seller for all or any part of any deposit liabilities assumed by the Purchaser with respect to the Transferred Account, the Seller shall not be liable or responsible for making such payment. If Seller does make any such payment to a deposit customer relating to a Transferred Account, Purchaser shall promptly reimburse Seller for the amount thereof; provided, there are sufficient available collected funds in such Transferred Account to fully pay such reimbursement. 3.10 Purchaser Responsible for Returned Items. The Purchaser agrees to pay promptly to the Seller an amount equal to the amount of any checks, drafts or withdrawal orders credited to a Transferred Account as of the Closing Date and reflected in the Settlement Statement, but which are returned to the Seller after the Closing Date. 225 3.11 Final Statements. Seller will render a final statement to each depositor of a Transferred Account assumed under this Agreement as to transactions occurring through the Closing Date. Seller will be entitled to impose normal fees and service charges on a per item basis through Closing, but Seller will not impose periodic fees or blanket charges in connection with such final statements. 3.12 Automated Clearing House. The Purchaser, at its expense, will timely notify all Automated Clearing House ("ACH") originators of the transfers and assumptions to be made pursuant to the Agreement as of the Closing Date, and the Seller will cooperate with the Purchaser and provide, at Seller's expense, all tapes and data reasonably requested by Purchaser for such purpose. For a period of 60 days beginning on the Effective Time, Seller will honor all ACH items related to accounts assumed under this Agreement which are mistakenly routed or presented to Seller. Seller will make no charge to Purchaser for honoring such items, and will electronically transmit such ACH data to Purchaser. If Purchaser cannot receive an electronic transmission, Seller will make available to Purchaser at Seller's operations center receiving items from the ACH tapes containing such ACH data. Items mistakenly routed or presented after the 60-day period will be returned to the presenting party. 3.13 Debit Card Transactions. After the Closing, Purchaser agrees to use its reasonable efforts to collect from Purchaser's customers amounts equal to any debit card connected with a Transferred Account and any Visa or MasterCard chargebacks under the MasterCard and Visa Merchant Agreements between Seller and its customers or amounts equal to any deposit items on Transferred Accounts and that are returned to Seller after the Closing which were honored by Seller prior to the Closing and remit such amounts so collected to Seller. Purchaser agrees to immediately remit to Seller any funds held in the customer's related Transferred Account when the Purchaser receives such notice from the Seller, up to the amount of the charged back or returned item that had been previously credited by Seller, if such funds are available in such customer account at the time of notification by Seller to Purchaser of the charged back or returned item. Notwithstanding the foregoing, Purchaser shall have no duty to remit funds for any item or charge that has been improperly returned or charged to Seller. ARTICLE IV ASSUMPTION OF RISKS 4.01 Insurance Policies. Effective immediately following the Closing Date, the Seller will discontinue any casualty and public liability insurance coverage maintained with respect to the premises of the Branches. The Purchaser shall be solely responsible for all casualty losses and liability claims arising from the premises of the Branches after the time of Closing. Nothing in this Section 4.01 shall be construed or deemed to require the Purchaser to insure the furniture, fixtures or equipment of the Seller which may not be removed from the Branches at Closing, and the Seller shall solely bear all risk of loss to such property following Closing. 4.02 Safe Deposit Boxes. Immediately following the Closing Date, the Purchaser shall assume all risks arising after the Closing with respect to granting access to and protecting the contents of the safe deposit boxes located at the Branches. 226 4.03 Security of Persons and Property Immediately following the Closing Date, the Seller will discontinue providing any security for persons and property provided by the Seller prior to Closing. ARTICLE V SETTLEMENT 5.01 Settlement. The amount of cash to be received or paid by Purchaser at Closing shall be calculated in accordance with the formula set forth in the Settlement Statement attached hereto as Exhibit 5.01 and incorporated herein by reference. The Purchased Assets to be transferred at Closing shall be valued as provided in Article II of this Agreement. At least five (5) days prior to the Closing Date (the "Settlement Date"), the Seller shall deliver to the Purchaser a copy, certified by a duly authorized officer of the Seller, of such Settlement Statement, which sets forth the computation of the cash payable to or due from the Purchaser at Closing, and upon acceptance by the Purchaser, the Seller or the Purchaser, as the case may be, shall pay said amount to the other at Closing. 5.02 Post-Closing Adjustments to Purchase Price. As soon as reasonably practicable, but within five (5) business days following the Closing Date, the Purchaser shall, based upon the general ledger and other books and records relating to the Branches, recalculate the amount of cash to be received or paid by the Purchaser as of the Closing Date using the Final Settlement Statement attached hereto as Exhibit 5.02 and incorporated herein by reference, and the amount of cash to be received or paid by the Purchaser shall be agreed upon by the Purchaser and Seller and shall be adjusted and paid, by the Seller or the Purchaser, as the case may be, as provided in such Exhibit 5.02. 5.03 Casualty and Other Losses Prior to Closing. If the buildings in which the Branches are located or any other Real Property, improvements or Furniture, Fixtures and Equipment with respect to the Branches or which are included in or are securing any Purchased Assets shall be damaged by fire or other casualty, whether insured or uninsured, and shall not be repaired or restored to its original condition prior to the Closing, Seller shall promptly assign and pay over to Purchaser any insurance proceeds with respect to such assets. 5.04 Pro Rata Adjustments of Expenses. All property taxes, rents and utility payments, salaries, and all other similar expenses and taxes itemized in a writing delivered by the Seller to Purchaser at least five (5) business days prior to the Closing Date relating to the ownership and operation of the Branches, and the Federal Deposit Insurance Corporation ("FDIC") insurance premiums relating to Transferred Accounts, shall be prorated between the parties as of the Closing Date. 227 ARTICLE VI EMPLOYEES 6.01 Transfer of Certain Employees. Seller will use its reasonable efforts to maintain the employees as employees of Seller at the Branches until the Closing Date. Any employee whose employment shall be terminated for any reason prior to the Closing Date or who shall elect not to be an employee of Purchaser shall be dealt with by Seller in its sole and absolute discretion, and Purchaser shall have no liability whatsoever therefor. Effective at Closing, the Seller will terminate the employment of all employees assigned to the Branches, and such employees will become "at will" employees of the Purchaser under such terms as may be established by Purchaser in its sole discretion, except as otherwise expressly provided in Section 6.03 below. The Seller and the Purchaser shall mutually agree upon any additions to or replacements of staff after the date of this Agreement through Closing, and Seller shall not employ any employees at the Branches during such time other than on an "at will" basis and upon prior notice to Purchaser. 6.02 Re-Employment Restriction. The Seller agrees that for a period of two years following the Closing it shall not solicit the employment of any of its former employees who transfer to the Purchaser at Closing. 6.03 Benefits. Each employee of Seller who transfers to the Purchaser will receive pension, profit sharing, insurance, vacation, sick leave and other benefits that are substantially similar to comparable employees of Purchaser. Purchaser shall give each of Seller's employees who transfer to Purchaser credit for service with Seller for purposes of any vacation or sick leave policy, and for purposes of determining eligibility and vesting (but not benefit accrual) under Purchaser's qualified benefit plans. 6.04 Responsibility for Employees Transferring. With respect to all employees of the Branches transferring to the Purchaser, the Seller will be responsible for all salaries, wages and benefits payable to such employees during employment by the Seller up to and including the Closing Date, and all benefits under Seller's 401(k), employee stock ownership plan, and other employee benefit plans or options shall be paid as soon as reasonably practicable in accordance with the applicable plan to the extent that such benefits become vested at the Closing Date as a result of the transactions contemplated hereby. 6.05 Employee Information. The Seller shall provide the Purchaser at times the Purchaser may deem necessary such records and information regarding such transferred employees' service with the Seller as the Purchaser may reasonably need for purposes of the Purchaser's employment and benefits program records including the complete personnel file on each transferring employee. The Purchaser and the Seller agree to assist each other by providing the employee information needed to open and close employee files on those employees transferred. To the extent required by applicable law, the Seller reserves the right to obtain the employee's prior consent to release information which the Seller reasonably believes (upon advice of counsel) cannot be released to the Purchaser without the employee's prior consent. Should information be withheld, the Seller must advise the Purchaser of such prior to Closing, and Purchaser shall have no obligation to hire the related employee. 228 ARTICLE VII ACCESS TO PROPERTIES AND RECORDS 7.01 Access and Confidential Treatment. From and after the date of this Agreement, the Seller shall permit the Purchaser's agents and representatives full access, during normal business hours and upon reasonable notice, to all assets, properties, books, records (except employee records and information excluded by Section 6.05 hereof), agreements and commitments of the Seller relating to the Branches, and the Seller shall furnish representatives of the Purchaser during such period with all such information concerning the affairs of the Branches as the Purchaser may reasonably request. The Purchaser will hold in strict confidence all documents and information concerning the Seller so furnished that is not in the public domain and will not publicly disclose such documents or information except to its attorneys, accountants, or other advisers and representatives, to regulatory and self-regulatory authorities, or as required by law or pursuant to legal process. If the transactions contemplated by this Agreement are not consummated, all such documents and information shall promptly be returned to the Seller. Nothing in this Section 7.01 shall be deemed to require Seller to reveal any proprietary information, trade secrets or marketing or strategic plans, and if such information is the subject of a confidentiality agreement between the Seller and a third party, any disclosure will be subject also to the provisions of such confidentiality agreement, which shall be provided to Purchaser. The Seller shall provide the Purchaser, on a confidential basis, the names and addresses of all directors, officers, affiliates (as defined in SEC Rule 405) and their relatives and the business interests related to each of the foregoing (individually and collectively, "Seller Affiliates"). 7.02 Recordkeeping and Access Following Closing. The Purchaser will preserve and safely keep, for as long as may be required by applicable law, all of the files, books of account and records delivered to the Purchaser through Closing related to the Branches for the joint benefit of itself and the Seller. Purchaser shall permit the Seller or its representatives, at Seller's expense, to inspect, make extracts from or copies of, any files, books of account or records as may be necessary for Seller to satisfy any auditing or regulatory requirements placed upon Seller or as may be required by Seller in connection with any Litigation. The Seller will not use such documents or information for the purpose of competing with the Purchaser. ARTICLE VIII SELLER'S REPRESENTATIONS AND WARRANTIES The Seller represents and warrants to the Purchaser as follows: 8.01 Corporate Organization. The Seller is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Alabama. 8.02 Corporate Authority. The Seller has full corporate right, power, capacity and authority validly to enter into and to perform this Agreement and the transactions contemplated by this Agreement, to sell, transfer, assign and deliver the Purchased Assets referred to in Article II, and to carry on its business as currently conducted. The execution, delivery and performance of this Agreement, and the transactions contemplated by this Agreement have been duly and validly authorized by all requisite corporate action, and this Agreement is binding and enforceable against the Seller in accordance with its terms. Except as disclosed on Exhibit 8.02, no further corporate 229 authorization or applications or notices to any governmental or regulatory authority, agency or entity or any consents, waivers or approvals from any such governmental authority is necessary for Seller to execute and deliver this Agreement or to consummate the transactions contemplated hereunder or perform its obligations hereunder. 8.03 Title to or Right to Occupy Real Estate. Exhibit 8.03 describes all real estate, improvements, and any related rights owned, leased, or otherwise held by Seller with respect to the Branches, and with respect to owned Real Property, the fully depreciated net book value thereof. Seller (a) has and at Closing will have indefeasible fee simple title to, and owns and at Closing will be the sole owner of all the Real Property to be purchased by Purchaser pursuant to Article II, subject to no Lien, tenant leases, participation, charge, encumbrance or conditional sale of other title retention agreement except for real estate taxes not yet due and payable, restrictions, easements and rights of way of record, and (b) is and at Closing will be the sole lessee with respect to the leases to be assigned to Purchaser pursuant to said Article II, with the right to convey to Purchaser the leasehold interest therein so as to assure that Purchaser shall have the full, exclusive and peaceful possession of such leasehold interest. All Real Property and Furniture, Fixtures and Equipment will at the time of Closing be in good operating condition and repair, subject only to ordinary wear and tear, and will otherwise be received in "AS IS" condition with no other warranties by Seller as to their condition or future performance, except those warranties related to title. All Real Property and Furniture, Fixtures and Equipment held under leases or subleases by the Seller, are held under valid contracts enforceable in accordance with their respective terms, and each such contract is in full force and effect. All improvements on the Real Property leased to, or used by, the Seller conform to all applicable state and local laws, regulations, zoning and building ordinances and health and safety ordinances, and the Real Property is zoned for the various purposes for which the real estate and improvements thereon are presently being used. To the Knowledge of the Seller, no condemnation proceedings or proceedings for the taking of any Real Property by eminent domain by any Governmental Authority are pending or threatened. Seller has not entered into any agreement regarding the Real Property or the Furniture, Fixtures and Equipment, and neither Seller nor the Real Property is subject to any claim, demand, suit, Lien or Litigation of any kind, pending or outstanding, or to the knowledge of Seller, threatened or likely to be made or instituted, which would in any way be binding upon Purchaser or its successors or assigns or materially affect or limit Purchaser's or its successors' or assigns' use and enjoyment of the Real Property or which would materially limit or restrict Purchaser's right or ability to enter into this Agreement and consummate the sale and purchase contemplated hereby. 8.04 Condition of Personal Property. Exhibit 8.04 sets forth by category or item all of the tangible personal property owned or leased (identified as such) which is used or useful in connection with the operation of the Branches, with the fully depreciated net book value of owned property being also set fort on Exhibit 8.04. The tangible personal property included in the Purchased Assets is, and at the Closing will be, in good operating condition and repair, subject only to ordinary wear and tear, and will be usable in the ordinary course of business consistent with the Seller's past practices."" 8.05 Loans. With respect to each Loan within the Purchased Assets: the Loan complies in all material respects with all applicable laws and banking regulations and is a valid loan enforceable in accordance with its terms; the Seller is the sole owner thereof, no participation or other interest therein having been sold or transferred; the Loan is not pledged or encumbered except as set forth on 230 Exhibit 8.05 and all such Liens shall have been satisfied and released prior to Closing; the principal balance of the Loan as shown on Exhibit 8.05 is true and correct as of the last date shown thereon; all purported signatures on and executions of any document in connection with such Loan are genuine and authorized; all loan documentation has been actually signed or executed by all necessary parties; the Seller has and will transfer to Purchaser, custody of all originally executed documents, and microfilm or photocopy records thereof related to such Loan and there are no other written or unwritten agreements, understandings, or other arrangements with respect to such Loan; provided, however, that all Loans (and any notes, other evidences of indebtedness or security agreements associated therewith) transferred at Closing by the Seller to the Purchaser are transferred and without any other warranties or representations as to the collectibility of any such Loans, the value of the collateral securing same or the creditworthiness of any of the makers, guarantors or other obligors thereof. None of the Loans is to or for the benefit of a Seller Affiliate. 8.06 No Violations. The Branches have been operated in all material respects in accordance with all applicable laws, rules and regulations, including the provisions of the Internal Revenue Code and related regulations pertaining to back-up withholding and tax reporting. Subject to receipt of all necessary corporate, regulatory and other third party approvals or consents, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate or conflict with the Seller's Articles of Incorporation, Bylaws or other governing documents or any provisions of law to which the Seller is subject and do not and will not conflict with or result in the violation or breach of any material condition or provision of, or constitute a material default under, any material contract, right, lease, pledge, Lien, instrument, agreement, order, writ, injunction, decree or judgment to which the Seller is a party or which is binding on Seller or to which any of the property or assets of Seller is subject, or create or result in any Lien upon the Purchased Assets or Assumed Liabilities. Except as disclosed on Exhibit 8.06, no consent, license, approval or authorization of or designation, declaration or filing with any governmental authority or other person or entity is required on the part of Seller. The Seller is not in default under any lease, agreement, contract, commitment, Assumed Liability or other obligation or Purchased Asset which the Purchaser is assuming or purchasing or which affects the property rights being transferred hereunder to the Purchaser. 8.07 Limitations of Warranties. Except as may be expressly represented or warranted in this Agreement or in any document of transfer, the Seller makes no representations or warranties whatsoever with regard to any Purchased Asset being transferred to Purchaser, any liability or obligation being assumed by the Purchaser or as to any other matter or transaction contemplated by this Agreement. 8.08. Legal Proceedings. (a) Except as set forth in Exhibit 8.08, Seller is not a party to any, and there are no pending or, to Seller's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Seller relating in any way to the Branches, the Loans, the other Purchased Assets and Assumed Liabilities, or seeking to enjoin, restrain or challenging the validity, enforceability or propriety of this Agreement or the transactions contemplated by this Agreement. There are no employee disputes or labor relations problems with respect to any employees of the Branches. 231 (b) Except as set forth in Exhibit 8.08, there is no injunction, order, judgment, decree, or regulatory restriction imposed upon Seller or the assets or liabilities of Seller, including the Purchased Assets and Assumed Liabilities. 8.09. Environmental Matters. Except as set forth in Exhibit 8.09: (a) Seller, and to the knowledge of Seller, each of Seller's Other Real Estate, Real Property or the Participation Facilities and the Loan Properties (each as hereinafter defined), are in compliance with all applicable federal, state and local laws, including common law, regulations and ordinances, and with all applicable decrees, orders and contractual obligations relating to pollution or the protection of human health or the environment or the discharge, emission, release or threatened release of, or exposure to, Hazardous Materials (as hereinafter defined) in the environment or workplace or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of any Hazardous Material ("Environmental Laws"); (b) There is no suit, claim, action or proceeding, pending or, to the knowledge of Seller, threatened, before any governmental entity or other forum in which Seller, any Other Real Estate, Real Property or Participation Facility or any Loan Property, has been or, with respect to threatened proceedings, may be, named as a defendant (x) for alleged noncompliance (including by any predecessor) with any Environmental Laws, or (y) relating to the release, threatened release or exposure to any Hazardous Material whether or not occurring at or on a site owned, leased or operated by Seller, any Participation Facility or any Loan Property; (c) During the period of (x) Seller's ownership or operation of any of their respective current or former properties including the Other Real Estate, Real Property or, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there has been no release of Hazardous Materials in, on, under or affecting any such property, Participation Facility or Loan Property. To the knowledge of Seller, prior to the period of (x) Seller's ownership or operation of current or former properties, (y) Seller's participation in the management of any Participation Facility, or (z) Seller's interest in a Loan Property, there was no release of Hazardous Materials in, on, under or affecting any such property, Participation Facility or Loan Property; and (d) The following definitions apply for purposes of this Section: (x) "Hazardous Materials" means (i) any hazardous substance, hazardous material, hazardous waste, regulated substance, or toxic substance (as those terms are defined by any applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and specifically shall include asbestos requiring abatement, removal, or encapsulation pursuant to the requirements of any governmental authorities and any polychlorinated biphenyls)., (y) "Loan Property" means any property in which Seller holds a security interest which security interest or other Lien will be transferred to Purchaser pursuant to this Agreement, and, where required by the context, said term means the owner or operator of such property; and (z) "Participation Facility" means any facility in which Seller participates in the management and, where required by the context, said term means the owner or operator of such property. 232 8.10 ERISA Matters. The Seller is in compliance in all material respects with the provisions of ERISA. No steps have been taken by the Seller to terminate any employee benefit plan (as defined in Section 3(3) of ERISA) the assets of which are not sufficient to satisfy all of its benefit liabilities (as determined under Title IV of ERISA), no contribution failure has occurred with respect to any employee benefit plan sufficient to give rise to a lien under Section 302(f) of ERISA, and each of Seller's employee benefit plans has been administered in all material respects in compliance with its terms and applicable provision of ERISA and the Internal Revenue Code of 1986, as amended and all regulations thereunder (the "Code"). To Seller's Knowledge, no prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) has occurred under any employee benefit plan of Seller. "ERISA" means the Retirement Income Security Act of 1974, as amended and all related regulations of the Department of the Treasury and the Department of Labor thereunder. 8.11 Employees; Labor Matters. (a) No employee of the Branches is bound by any agreement that purports to limit his or her ability to engage in or continue or perform any conduct, activity, duties or practice relating to the business conducted by the Branch or by Seller; (b) Seller has operated the Branches in compliance in all material respects with all applicable laws and regulations relating to the employment of labor, and has made all withholdings and other payments with respect to such employment and employment taxes and charges; and (c) There is no collective bargaining agreement to which Seller is a party and no collective bargaining agreement is currently being negotiated or proposed. 8.12 Books and Records. The books of account and other records of Seller, to the extent they relate to the Branches, the Purchased Assets and the Assumed Liabilities, all of which have been made available to Purchaser, are complete and correct in all material respects and represent actual, bona fide transactions and have been maintained in accordance with customary business practices and generally accepted accounting practices consistently applied. 8.13 Consents of Third Parties. Seller shall use all commercially reasonable efforts to obtain and preserve any consents or approvals to third parties, whether of regulatory or governmental authorities or third parties or persons necessary, appropriate or expedient to the consummation of the transactions contemplated by this Agreement, including, but not limited to, the consents of lenders to the Seller or to Community Bancshares, Inc. or any subsidiary of Community Bancshares, Inc. and shall cooperate with Purchaser in seeking and obtaining any consents or approvals it may require from any governmental authorities or third parties in connection with this Agreement and the transactions contemplated hereby. 8.14 USA Patriot Act Compliance. The Seller is in compliance in all material respects with the provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") and all regulations promulgated thereunder including, but not limited, to those provisions of the USA Patriot Act that address money-laundering, know-your customer, account maintenance and customer verification. 233 ARTICLE IX PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Seller as follows: 9.01 Corporate Organization. The Purchaser is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Alabama. 9.02 Corporate Authority. Subject to regulatory approval, the Purchaser has full corporate right, power, capacity and authority validly to enter into and to perform this Agreement and the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Purchaser have been, or will be prior to Closing, duly and validly authorized by all requisite corporate action and this Agreement is binding and enforceable against the Purchaser in accordance with its terms. 9.03 No Violations. Subject to the conditions set forth in Article XII below, the execution, delivery and performance of this Agreement and the transactions contemplated herein do not and will not violate or conflict with the Seller's Articles of Incorporation, Bylaws or other governing documents or any provision of law to which the Purchaser is subject and do not and will not conflict with or result in the violation or breach of any material condition or provision of, or constitute a material default under, any material contract, right, lease, pledge, lien, security interest, instrument, indenture, mortgage, charge, encumbrance, agreement, order, writ, injunction, decree or judgment to which the Purchaser is a party or which is binding on the Purchaser or to which any of the property or assets of Purchaser is subject. Except as set forth in Article XII, no consent, license, approval or authorization of or designation, declaration or filing with any governmental authority or other person or entity is required on the part of the Purchaser in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated herein. 9.04 Regulatory Approvals. The Purchaser will promptly apply for within 5 business days of execution of this Agreement and in good faith diligently pursue all required regulatory approvals that it needs to consummate the transactions contemplated hereby. 9.05 Consents of Third Parties. In addition to obtaining the requisite regulatory approvals, the Purchaser shall use all commercially reasonable efforts to obtain and preserve any consents or approvals of third parties necessary, appropriate or expedient to the consummation of the purchase of the Branches, including, but not limited to, those consents of its lenders. 9.06. Legal Proceedings. Except as set forth in Exhibit 9.06, Purchaser is not a party to any, and there are no pending or, to Purchaser's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature challenging the validity or propriety of the transactions contemplated by this Agreement. 9.07 Limitations of Warranties. Except as may be expressly represented or warranted in this Agreement or in any document of transfer, the Seller makes no representations or warranties 234 whatsoever with regard to the Purchaser, any liability or obligation being assumed by the Purchaser or as to any other matter or transaction contemplated by this Agreement. ARTICLE X ADDITIONAL UNDERTAKINGS OF SELLER 10.01 Conduct of Business Pending Closing. The Seller agrees that from the date of this Agreement to the Closing Date, it will: (a) maintain the operations of the Branches as presently conducted, and avoid any act that would materially and adversely affect the amount or value of the Purchased Assets or the liabilities being assumed; (b) carry on the business of the Branches substantially in the same manner as conducted on the date thereof (including interest rates and terms on Loans and deposits), operate the business of the Branches only in the ordinary and usual manner, provide the same services and hours of operation as is now being provided by such Branches, and use all reasonable efforts to preserve intact its present business organization, to keep available the services of its present employees and to preserve its relations with customers having business dealings with the Branches; (c) maintain fire, casualty, and extended coverage insurance for the benefit of the Seller and Purchaser, as their interests may appear, on the Branches and the Purchased Assets in an amount reasonably adequate to cover the replacement costs of the Branches and the Purchased Assets and continue all credit insurance and debt cancellation protection for the benefit of Purchaser with respect to the Loans; (d) maintain the Real Property, Furniture, Fixtures and Equipment, and other Purchased Assets in their respective current conditions; (e) maintain its books of account and records concerning the Branches in the ordinary and usual manner, in accordance with generally accepted accounting principles applied on a basis consistent with prior years; and (f) not take any action which would cause any representation or warranty made herein to be untrue at the Closing Date. 10.02 Documentation Delivered at Closing and Further Assurances. At the Closing, the Seller shall transfer, assign and deliver to the Purchaser all original (to the extent these exist and are held by the Seller) and other records, books, papers, documents, instruments, collateral in its possession and agreements of Seller relating to the Purchased Assets and the liabilities being assumed by the Purchaser hereunder, including but not limited to, signature cards, stop payment orders, contracts, deposit slips, canceled checks, withdrawal orders and records of accounts which may be requested by the Purchaser prior to Closing. The Seller agrees that it will, at the Closing and at any time and from time to time after the Closing, upon the Purchaser's request do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances and assurances as may be required to complete the process of 235 assigning, transferring, granting, conveying, assuring and confirming to Purchaser, any and all of the Purchased Assets and liabilities purchased and assumed by the Purchaser hereunder and the performance of any or all obligations of the Seller hereunder, including, without limitation, the making of all filings and recordations at all applicable county courthouses or other locations as may be necessary to transfer and assign the Loans secured by mortgages or similar Liens. 10.03 Non-Solicitation of Business. The Seller will not, for a period of two (2) years after the Closing, (i) own or operate any commercial bank branch within Marshall County, Alabama, or (ii) directly compete for or solicit any Transferred Accounts or any Loans sold hereunder, but the Seller shall be entitled to conduct mass mailings, statement stuffers and mailings generally to persons holding accounts with the Seller outside the Branches or having other relations with the Seller's other offices without limiting such materials to any former Branch customers, and newspaper, radio, television, billboards and other advertisements of a general nature. This subsection shall not apply to those Assumed Liabilities and Loans not transferred to the Purchaser at Closing and the restrictions on the Seller contained in this section are intended to apply only to the deposits and loan business that the Seller's customers would normally be expected to conduct at the Branches. 10.04 Notice to Customers of Sale of Branches. To the extent required by law or otherwise agreed upon by the parties, the Seller and the Purchaser shall jointly notify the customers of the Branches affected by the transaction of the pending transfer of their deposit account, Loan or safe deposit box to the Purchaser. 10.05 Conversion of Transferred Accounts. The Seller agrees to cooperate with the conversion of the customer asset and liability accounts in an orderly and expeditious fashion, and to provide reasonable appropriate support to the Purchaser for the timely conversion of such accounts, and related data processing, computer, customer research and information conversions. 10.06 Post-Conversion Processing. After conversion of all accounts to Purchaser's processing systems, as between Seller and Purchaser, the Seller shall be and have the rights and obligations of a "Collecting Bank" or "Intermediary Bank" under Article 4 of the Uniform Commercial Code as adopted in Alabama (Code of Alabama, 1975, Sections 7-4-101 et. seq.), with respect to items drawn on Transferred Accounts received by it for processing after the Closing Date. Items received for processing against the Transferred Accounts shall be grouped and delivered to Purchaser within the time limits provided by the Alabama Uniform Commercial Code in a special cash letter separately identified as "Transferred Accounts Cash Letter". The Purchaser shall indemnify the Seller against all claims, suits, damages or losses and expenses (including reasonable attorneys' fees) arising after the Closing Date out of any claim by an owner of a Transferred Account that the Seller is the "Payor Bank" with respect to such items. 10.07 Diligence and Good Faith. The Seller will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Article XII below (except the conditions set forth in Section 12.06); and (b) cooperate in good faith with the Purchaser in its seeking the satisfaction of all conditions set forth in Article XIII below. 236 10.08 Indemnity. Seller agrees to indemnify and hold harmless Purchaser and its officers, directors, employees, affiliates, representatives, successors and assigns (each a "Purchaser Indemnitee") against, from and in respect of: (i) Any damage, expense (including reasonable attorney fees and disbursements) or deficiency resulting from any default, misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Seller under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Purchaser pursuant to this Agreement. (ii) Any liability of Seller except the Assumed Liabilities, including all liabilities under the Seller's credit insurance policies and debt collection agreements. (iii) Any and all expenses (including reasonable attorney fees), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Purchaser Indemnitee arising out of Seller's operations or arising out of Seller's ownership of the Branches, including any Litigation arising out of the Discounted Loans. Seller agrees promptly to advance to any Purchaser Indemnitee, on demand, any expenses, attorney's fees and disbursements incurred by any Purchaser Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Seller relates. 10.09 Indemnity Claims. If any Purchaser Indemnitee desires to make a claim under Section 10.08 hereof which does not involve a claim by any person other than the Purchaser Indemnitee, then such Purchaser Indemnitee shall make such claim by promptly delivering written notice to the Seller. If any Purchaser Indemnitee desires to make a claim against Seller under Section 10.08 hereof which involves a claim by a person other than the Purchaser Indemnitee, then the Purchaser Indemnitee, upon receipt of written notice of any claim or the service of a summons, or other initial legal process upon it in any action instituted against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in Section 10.08 (an "Asserted Liability"), shall promptly give notice (a "Claims Notice") of such claim or the commencement of such action, or threat thereof, to the Seller. If a Claims Notice is not provided promptly as required by this Section 10.09, the Purchaser Indemnitee nonetheless shall be entitled to indemnification by the Seller to the extent that the Seller has not established that it has been materially prejudiced by such late receipt of the Claims Notice. The Seller shall be entitled at its own expense to participate in the defense of such claim or action, or, if it shall so elect, to assume the defense of such claim or action, in which case the defense shall be conducted by counsel reasonably acceptable to the Purchaser Indemnitee and such assumption shall constitute an acknowledgement by the Seller of its obligations to indemnify the Purchaser Indemnitee with respect to such Asserted Liability, and such Purchaser Indemnitee shall bear the fees and expenses of any additional counsel retained by it; provided, however, if the Seller shall elect not to assume the defense of such claim or action, the Seller shall reimburse the Purchaser Indemnitee for the reasonable fees and expenses of any counsel retained by it. Notwithstanding the above, should the Purchaser Indemnitee reasonably conclude that there may be defenses available to it which are different from or additional to those available to the Seller, the Seller shall not have the right to direct the defense of such action on behalf of the Purchaser Indemnitee and all such fees and expenses of the Purchaser Indemnitee shall be borne by the Seller. The Claims Notice may be 237 amended on one or more occasions with respect to the amount of the Asserted Liability at any time prior to final resolution of the obligation to indemnify relating to the Asserted Liability. The Seller shall not, without the written consent of the Purchaser Indemnitee, settle or compromise any such claim or consent to the entry of any judgment which does not include any unconditional term releasing the Indemnified Party from all liability in respect of such Asserted Liability. ARTICLE XI ADDITIONAL UNDERTAKINGS OF PURCHASER 11.01 Purchaser's Contact with Customers. The Purchaser and the Seller, as and to the extent provided in Section 10.04, may jointly notify the customers of the Branches of the pending transfer of their deposit account, Loan or safe deposit box to the Purchaser. The Purchaser agrees that any notices, letters or other material which the Purchaser wishes to send or give to customers of the Branches prior to Closing shall be approved by the Seller in advance, which approval shall not be unreasonably withheld. The Purchaser shall also provide all customers holding Transferred Accounts all necessary checkbooks, check order forms, passbooks, loan coupon books and other materials bearing the name of the Purchaser which shall be available for use by customers of the Branches promptly after the Closing. The Purchaser shall also direct each transferring customer that, effective as of Closing, such customers should no longer use and should destroy all checkbooks and check order forms of the Seller pertaining to accounts at the Branches transferred to the Seller. Except, and only to the extent and manner specifically permitted hereby, the Purchaser shall not contact, or solicit the Loan and deposit business of any customers of the Branches prior to the Closing. 11.02 Safe Deposit Box and Night Depository Business. The Purchaser shall assume and discharge from and after the Closing Date, the duties and obligations of the Seller with respect to the Branches' safe deposit box and night depository business. The Purchaser shall maintain all necessary facilities for the use of such boxes by the renters thereof and night deposit facilities by the users thereof, during the period for which such persons have paid rent therefor in advance to the Seller, subject to the provisions of the written rental and night depository agreements between the Seller and the respective renters of such boxes or users of such night depository facilities delivered to the Purchaser. 11.03 Use of Names, Trademarks, Etc. The Purchaser will not, upon and after the Closing Date, use the name "Community Bank" or any of the Seller's trade names, trademarks or service marks. 11.04 Diligence and Good Faith. The Purchaser will diligently and expeditiously: (a) proceed in good faith in seeking the satisfaction of all conditions set forth in Section 12.06 and in Article XIII below; and (b) cooperate in good faith with the Seller in its seeking the satisfaction of all conditions set forth in Article XII below (except those conditions set forth in Section 12.06). 11.05 Indemnity. Purchaser agrees to indemnify and hold harmless Seller and its officers, directors, employees, affiliates, and assigns (each a "Seller Indemnitee") against, from and in respect of: 238 (i) Any damage, expense or deficiency resulting from any default, misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Seller pursuant to this Agreement. (ii) Any and all expenses (including reasonable attorney fees), obligations, assessments, suits, actions, proceedings, claims or demands resulting from or in connection with any claim, liability, or obligation asserted against any Seller Indemnitee arising out of Purchaser's operations or arising out of Purchaser's ownership of the Branches after the Closing Date. Purchaser agrees promptly to advance to any Seller Indemnitee, on demand, any expenses, attorney's fees and disbursements incurred by any Seller Indemnitee, in respect of any liability, obligation, or claim to which the foregoing indemnity by Purchaser relates. 11.06 Indemnity Claims. If any Seller Indemnitee desires to make a claim under Section 11.05 hereof which does not involve a claim by any person other than the Seller Indemnitee, then such Seller Indemnitee shall make such claim by promptly delivering written notice to the Purchaser. If any Seller Indemnitee desires to make a claim against Purchaser under Section 11.05 hereof which involves a claim by a person other than the Seller Indemnitee, then the Seller Indemnitee, upon receipt of written notice of any claim or the service of a summons, or other initial legal process upon it in any action instituted against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in Section 11.05 (an "Asserted Liability"), shall promptly give notice (a "Claims Notice") of such claim or the commencement of such action, or threat thereof, to the Purchaser. If a Claims Notice is not provided promptly as required by this Section 11.06, the Seller Indemnitee nonetheless shall be entitled to indemnification by the Purchaser to the extent that the Purchaser has not established that it has been materially prejudiced by such late receipt of the Claims Notice. The Purchaser shall be entitled at its own expense to participate in the defense of such claim or action, or, if it shall so elect, to assume the defense of such claim or action, in which case the defense shall be conducted by counsel reasonably acceptable to the Seller Indemnitee and such assumption shall constitute an acknowledgement by the Purchaser of its obligations to indemnify the Seller Indemnitee with respect to such Asserted Liability, and such Seller Indemnitee shall bear the fees and expenses of any additional counsel retained by it; provided, however, if the Purchaser shall elect not to assume the defense of such claim or action, the Purchaser shall reimburse the Seller Indemnitee for the reasonable fees and expenses of any counsel retained by it. Notwithstanding the above, should the Seller Indemnitee reasonably conclude that there may be defenses available to it which are different from or additional to those available to the Purchaser, the Purchaser shall not have the right to direct the defense of such action on behalf of the Seller Indemnitee and all such fees and expenses of the Seller Indemnitee shall be borne by the Purchaser. The Claims Notice may be amended on one or more occasions with respect to the amount of the Asserted Liability at any time prior to final resolution of the obligation to indemnify relating to the Asserted Liability. The Purchaser shall not, without the written consent of the Seller Indemnitee, settle or compromise any such claim or consent to the entry of any judgment which does not include any unconditional term releasing the Indemnified Party from all liability in respect of such Asserted Liability. 239 ARTICLE XII CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS The obligations of the Purchaser to close under this Agreement shall be subject to the following conditions (all or any of which, except the conditions of Section 12.06, may be waived in whole or in part by the Purchaser to the extent permitted by law): 12.01 Representations and Warranties True. The representations and warranties made by Seller in this Agreement shall have been true and correct when made and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of such date. 12.02 Obligations Performed. The Seller shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. 12.03 Certificate of Compliance; Secretary's Certificate. The Seller shall have executed and delivered to the Purchaser a certificate substantially in the form and substance as attached hereto as Exhibit 12.03, dated as of the Closing Date. At the Closing, Seller shall provide Purchaser with a certificate of the secretary of the Seller, dated as of the Closing Date, certifying the resolutions of the Seller's Board of Directors, or its Executive Committee, approving the sale of the assets and the assumption of the liabilities contemplated by this Agreement, certifying and attaching the Bylaws and Charter of the Seller, and also certifying the authenticity of the signatures of officers of Seller. 12.04 No Adverse Litigation. No action, suit, proceeding or Litigation shall have been instituted or threatened against the Seller or the Purchaser by or before any court or governmental agency to restrain or prohibit, or to obtain damages in respect of this Agreement or the consummation of the transactions contemplated hereby which in the opinion of the Purchaser makes it inadvisable to proceed to Closing under this Agreement. 12.05 Opinion of Counsel. The Purchaser shall have received an opinion of counsel for the Seller, dated the Closing Date, in substantially the same form and substance as the opinion attached hereto as Exhibit 12.05. 12.06 Regulatory Approvals. The Purchaser shall have obtained, at its expense, from all necessary governmental and regulatory authorities, all necessary consents to and authorizations and approvals of this Agreement and the transactions contemplated by this Agreement and the related transfers of ownership and control of all licenses, permits or other governmental authorizations necessary to carry on all aspects of the business of the Branches, and the Seller shall have obtained any consents and approvals required hereby. 12.07 Due Diligence Review. Purchaser shall have completed and be satisfied with the scope and results of a review of the business operations, assets, properties, liabilities, and other matters regarding Seller and the Branches, and shall have reached agreements with Seller satisfactory to Purchaser in all respects regarding any matter or matters relating to such investigation, including 240 without limitation, agreements with respect to the Loans being purchased and the purchase price for Loans pursuant to Section 2.01. 12.08 Title Insurance. Purchaser shall have obtained at its own cost and expense such owner's and leasehold policies of title insurance as it shall desire, free of any exception or other qualification other than standard exceptions and exclusions. 12.09 Material Adverse Change. From the date of this Agreement until the Closing Date, no material adverse change shall have occurred or been threatened with respect to the Branches or the Purchased Assets or the Assumed Liabilities. A "material adverse change" shall mean a change of ten percent (10%) or more in the Purchased Assets or Assumed Liabilities from those existing at January 31, 2002, and any material adverse change in the composition, maturities, interest rates or other material terms of the Loans or Assumed Liabilities. 12.10 Lease of Albertville Branch. Seller shall enter into a five year lease with Purchaser for this property at a monthly rental of $14,000, and a related agreement of sales of all this property for $2,621,544, which includes $983,804 for the land, and the net depreciated book value of all improvements, which shall be $1,637,740 at the end of the lease term. 12.11 Exhibits and Schedules. Seller shall deliver to Purchaser prior to the Closing Date all schedules and exhibits required to be delivered by Seller hereunder (including all exhibits required by Article VIII hereof) in form and substance reasonably acceptable to Purchaser. ARTICLE XIII CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS The obligations of the Seller to close under this Agreement shall be subject to the following conditions (all or any of which may be waived, in whole or in part, by the Seller to the extent permitted by law): 13.01 Representations and Warranties True. The representations and warranties made by the Purchaser in this Agreement shall have been true and correct when made and shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of such date. 13.02 Obligations Performed. The Purchaser shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by the Purchaser on or before the Closing Date. 13.03 Certificate of Compliance. The Purchaser shall have executed and delivered to the Seller a certificate in substantially the same form and substance as the one attached hereto as Exhibit 13.03, dated as of the Closing Date. 13.04 No Adverse Litigation. No action, suit or proceeding shall have been instituted or threatened against the Seller, or the Purchaser by or before any court or governmental agency to restrain or prohibit, or to obtain damages in respect of, this Agreement or the consummation of the 241 transactions contemplated hereby which in the opinion of Seller makes it inadvisable to proceed to Closing under this Agreement. 13.05 Opinion of Counsel. The Seller shall have received an opinion of counsel for the Purchaser dated the date of Closing, in substantially the form attached hereto as Exhibit 13.05. 13.06 Approvals. The Purchaser shall have obtained the approvals referenced in Section 12.06 and the Seller shall have obtained any consents and approvals required hereby, including those set forth on Exhibit 8.06. ARTICLE XIV CLOSING 14.01 Time and Place. The hour, date and location of Closing under this Agreement shall be at a location and on a date mutually acceptable to Purchaser and Seller as soon as practicable after the receipt of all regulatory and governmental approvals and other consents and the expiration of any required waiting period (the "Closing Date"). ARTICLE XV TERMINATION 15.01 Methods of Termination. This Agreement may be terminated as follows: (a) at any time by the mutual written consent of the Purchaser and the Seller; (b) by the Purchaser in writing at any time that it determines in good faith that the conditions set forth in Article XII of this Agreement will not be met by May 3, 2002; (c) by the Seller in writing at any time that it determines in good faith that the conditions set forth in Article XIII of this Agreement will not be met by May 3, 2002; (d) by the Seller or the Purchaser in writing at any time after any of the regulatory authorities has denied any application of the other party for approval of the transactions contemplated herein; (e) by the Purchaser in writing on or before the Closing Date if as a result of its due diligence review or its review of the exhibits and schedules to be provided by Seller pursuant to this Agreement and attached hereto, it discovers a fact, circumstance or valuation issue that makes it inadvisable in Purchaser's sole discretion for Purchaser to proceed with the transaction contemplated hereby; (f) by the Purchaser or the Seller if the Closing shall not have occurred on or prior to May 3, 2002, unless the failure of such occurrence is due to the failure of the party seeking termination failing to perform or observe any of its agreements and conditions set forth herein. 242 (g) any time on or prior to the Closing Date, by Purchaser or Seller in writing if the other shall have been in breach of any representation and warranty in any material respect (as if such representation and warranty had been made on and as of the date hereof and on the date of the notice of breach referred to below), or in breach of any covenant, undertaking or obligation contained herein, and such breach has not been cured by the earlier of 30 days after the giving of notice to the breaching party of such breach or the Closing Date. 15.02 Procedure Upon Termination. In the event of termination pursuant to Section 15.01 hereof, written notice thereof shall forthwith be given to the other party in accordance with Section 17.08 of this Agreement, and this Agreement shall terminate immediately unless an extension is consented to by the party having the right to terminate. If this Agreement is terminated as provided herein: (a) each party will return all documents, work papers and other materials and information of the other party relating to this transaction, whether obtained before or after the execution hereof, to the party furnishing the same; (b) all information received by either party hereto with respect to the business of the other party (other than information which is a matter of public knowledge or which has heretofore been or hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for any business purpose by such party or disclosed or delivered by such party to third persons; and (c) If the termination is due to a failure or breach on the part of the Purchaser, the Purchaser shall immediately pay the Seller 50% of the total out of pocket costs expended for notices to customers and joint mailings as provided in section 10.04, as approved at such time. ARTICLE XVI MUTUAL COVENANTS AND AGREEMENTS 16.01 Cooperation. Subject to the terms and conditions hereof, each party hereto agrees promptly to take, or cause to be taken, all commercially reasonable actions and to do or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations, or otherwise, including, without limitation, attempting to obtain all necessary consents, waivers and regulatory approvals, to consummate and make effective at the earliest practicable time, the transactions contemplated by this Agreement. The officers and employees of each party shall fully cooperate with officers and employees, accountants, counsel and other representatives of the other in all matters contemplated by this Agreement. 16.02 Assignments of Certain Assets. Seller and Purchaser hereby agree that Purchaser (in its sole discretion) may direct that at Closing Seller assign the Discounted Loans, Other Real Estate and any other low quality assets directly to a subsidiary or other affiliate of Purchaser; provided, that such transfer to a subsidiary or other affiliate of Purchaser shall not affect Purchaser's obligation to pay, or cause the payment of, the Purchase Price for such assets. 243 ARTICLE XVII MISCELLANEOUS 17.01 Modifications and Waivers. This Agreement may not be modified except by an instrument in writing duly executed by the parties. Any waiver of any term of this Agreement must be in writing. 17.02 No Brokers or Finders. The Purchaser and the Seller each represent and warrant to each other that no broker or finder has been employed by or has acted for it in connection with this Agreement or the transactions contemplated hereby, and each party agrees to indemnify the other against all losses, costs, damages or expenses arising out of claims for fees or commissions of brokers or finders alleged to have been employed or engaged by such party. 17.03 Survival of Representations and Warranties. All representations and warranties contained herein and in any written agreement or instrument delivered or executed in connection herewith are true at and as of the times provided herein, and all of which will survive the execution and delivery of this Agreement, any examination on behalf of any party hereto, and the consummation of all transactions contemplated herein. 17.04 Binding Effect. All terms of this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns.' 17.05 Counterparts. This Agreement is being executed simultaneously in two or more identical counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 17.06 Expenses. Each party shall bear its own expenses incurred in connection with this Agreement and all transactions contemplated herein. 17.07 Notices and Primary Contact Personnel. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, overnight courier or if mailed, postage prepaid, by United States first class mail, or facsimile transmission to the other party at its address shown on Exhibit 17.07 hereto. The parties hereto, as a matter of convenience, are designating primary contact personnel on Exhibit 17.07, and each party may contact such persons in day-to-day, routine dealings with the other party leading up to and following the Closing. 17.08 Publicity. The Purchaser and the Seller shall cooperate with each other as to the content and timing of public and customer filings, publicity, press releases and announcements concerning this Agreement, and all transactions contemplated hereby, and prior to releasing any such information each party will send such material to the other party for its review and consent, which consent may not be withheld unreasonably. 17.09 Time of the Essence. The parties hereto acknowledge that time is of the essence with respect to the performance of this Agreement and the consummation of the transactions contemplated herein in accordance with the terms hereof. 244 17.10 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Alabama applicable to contracts made and to be performed wholly within such state. 17.11 Cover, Index and Headings, Etc. The cover, index and headings contained in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation hereof. The use of the singular in this Agreement shall be deemed to be or include the plural (and vice versa), whenever appropriate. The words "include," "including" and similar phrases shall mean including, without limitation, by enumeration or otherwise. 17.12 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, the balance of this Agreement shall remain in full force and effect except to the extent otherwise agreed by the parties in writing. 17.13 Entire Agreement. This Agreement including any exhibits hereto, represent the entire agreement of the parties relating to the subject matter hereof. All prior negotiations and understandings between the parties are merged into this Agreement and there are no understandings or agreements other than those incorporated herein. 17.14 Arbitration. All disputes arising or otherwise under this Agreement shall be resolved first by the senior executive officers of each party, and if they cannot resolve such disputes within 30 days, then by each party's chief executive officers and if such chief executive officers cannot resolve such dispute within 30 days, then by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Arbitration shall be by a single arbitrator experienced in the matters at issue and selected by Seller and Purchaser in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in such place in Atlanta, Georgia as may be specified by the arbitrator (or any place agreed to by Seller and Purchaser). The decision of the arbitrator shall be final and binding as to any matters submitted under this Section 17.14; provided, however, if necessary, such decision and satisfaction procedure may be enforced by either Seller or Purchaser in any court of record having jurisdiction over the subject matter or over any of the parties to this Agreement. All costs and expenses incurred in connection with any such arbitration proceeding (including reasonable attorney's fees) shall be borne by the party against which the decision is rendered, or, if no decision is rendered, such costs and expenses shall be borne equally by the Seller and Purchaser. If the arbitrator's decision is a compromise, the determination of which party or parties bears the costs and expenses incurred in connection with any such arbitration proceeding shall be made by the arbitrator on the basis of the arbitrator's assessment of the relative merits of the parties' positions. [ Signatures on Next Page ] 245 IN WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to be executed by their respective duly authorized officers and their respective corporate seals to be affixed hereto as of the day and year first above written. PEOPLES BANK OF NORTH ALABAMA By: /s/ Robin Cummings ------------------------------------- Its: President and Chief Executive Officer ------------------------------------- ATTEST: /s/ Kenneth Weldon - ------------------------------ Its Senior Vice President - ------------------------------ [CORPORATE SEAL] COMMUNITY BANK By: /s/ Kennon R. Patterson, Jr. --------------------------------------- Its: Chairman and Chief Executive Officer --------------------------------------- ATTEST: /s/ William H. Caughran, Jr. - ------------------------------ Its Secretary - ------------------------------ [CORPORATE SEAL] 246 STATE OF ALABAMA ) ) CULLMAN COUNTY ) I, Aundrea Kelley, a Notary Public in and for said county in said state hereby certify that Robin Cummings as President & CEO and Kenneth Weldon as Senior Vice President of Peoples Bank of North Alabama, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 25th day of February, 2002. /s/ Aundrea Kelley -------------------------------- Notary Public My Commission expires: 09-13-03 [NOTARIAL SEAL] STATE OF ALABAMA ) ) BLOUNT COUNTY ) I, Elaine E. Corvin, a Notary Public in and for said county in said state hereby certify that Kennon R. Patterson, Sr. as Chairman and CEO and William H. Caughran as Secretary of Community Bank, whose names are signed to the foregoing agreement, and who are known to me, acknowledged before me on this day that being informed of the contents of this agreement, they, as such officers and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and seal this 25th day of February, 2002. /s/ Elaine E. Corvin ----------------------------------- Notary Public My Commission expires: August 1, 2005 [NOTARIAL SEAL] EX-10.31 12 g75225ex10-31.txt AMENDMENT TO SUBORDINATED PROMISSORY NOTE EXHIBIT 10.31 --------------------------------- AMENDMENT TO SUBORDINATED PROMISSORY NOTE --------------------------------- Page 248 AMENDMENT TO SUBORDINATED PROMISSORY NOTE This Amendment is hereby made as of this 26th day of March, 2002 by Jeffrey K. Cornelius (the "Holder") and Community Bancshares, Inc (the "Borrower"), a Delaware corporation. WHEREAS, the parties entered into a Subordinated Promissory Note (the "Note") dated as of October 4, 1994 pursuant to which the Borrower promised to pay the Holder the sum of Two Million Dollars ($2,000,000); and WHEREAS, the Borrower is current in performing its obligations pursuant to the Note; and WHEREAS, its is unclear whether the Note is subordinated to certain other indebtedness of the Borrower; and WHEREAS, the parties desire to resolve an ambiguity in the provisions of the Note and provide that the Note is senior to such other indebtedness; NOW, THEREFORE, the parties hereby agree that the Note is amended by adding the following sentence to the end of paragraph 4(f): "Notwithstanding the foregoing, the term `Senior Indebtedness' shall not refer to any indebtedness of the Borrower, whether currently outstanding or hereafter created, which purports to be subordinated indebtedness of the Borrower, unless the instrument creating or evidencing such indebtedness specifically identifies this Note and expressly states that it is superior to the indebtedness represented by this Note." IN WITNESS WHEREOF, the parties have causes this Amendment to be executed as of the day and year first above written. /s/ Jeffrey K.Cornelius ------------------------------------------ Jeffrey K. Cornelius COMMUNITYBANCSHARES, INC. By: /s/ Kennon R. Patterson, Sr. ------------------------------------ Its Chairman, President & CEO ------------------------------------ Page 249 EX-11 13 g75225ex11.txt STATEMENT OF COMPUTATIONS OF PER SHARE EARNINGS 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, 2001, 2000 and 1999.
2001 2000 1999 ------------- ------------- -------------- Reported net income (loss)....................................... $ (1,100,499) $ (2,214,931) $ 1,658,110 ============= ============= ============== Earnings (loss) on common shares................................. $ (1,100,499) $ (2,214,931) $ 1,658,110 ============= ============= ============== Weighted average common shares outstanding - basic............... 4,572,301 4,460,295 4,429,303 ============= ============= ============== Earnings (loss) per common share- basic Income from continuing operations............................. $ (.24) $ (0.50) $ .37 ============= ============= ============== Net income (loss)............................................. $ (.24) $ (0.50) $ .37 ============= ============= ============== Weighted average common shares outstanding - diluted............. 4,572,301 4,671,430 4,595,072 ============= ============= ============== Earnings (loss) per common share- diluted Income from continuing operations............................. $ (.24) $ (0.47) $ .36 ============= ============= ============== Net income (loss)............................................. $ (.24) $ (0.47) $ .36 ============= ============= ==============
[The remainder of this page intentionally left blank] EX-12 14 g75225ex12.txt STATEMENT OF COMPUTATION OF RATIO EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS COMMUNITY BANCSHARES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31, 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Pretax income ........................................................ $(1,100) $ 2,161 $ 5,106 Add fixed charges: Interest on deposits .............................................. 27,244 23,594 21,963 Interest on borrowings ............................................ 3,941 1,023 730 Portion of rental expense representing interest expense ........... 601 227 180 ------- ------- ------- Total fixed charges ............................................. 31,786 24,844 22,873 ------- ------- ------- Income before fixed charges .......................................... $30,686 $27,005 $27,979 ======= ======= ======= Pretax income ........................................................ $(1,100) $ 2,161 $ 5,106 Add fixed charges: Interest on borrowings ............................................ 3,941 1,023 730 Portion of rental expense representing interest expense ........... 601 227 180 ------- ------- ------- Total fixed charges (excluding interest on deposits) ............ 4,542 1,250 910 ------- ------- ------- Income before fixed charges (excluding interest on deposits) ......... $ 3,442 $ 3,411 $ 6,016 ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES: Including interest on deposits .................................... 0.97x .88x 1.09x Excluding interest on deposits .................................... 0.76x .10x 2.73x
EX-21 15 g75225ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation - ---------------------------------- ---------------------- Community Bank Alabama Community (AL) Capital Trust I Delaware 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
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