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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
68149 MAIN STREET
BLOUNTSVILLE, ALABAMA 35031
(Address of principal executive offices)
(205) 429-1000
(Registrant's telephone number)
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:
[X] YES [ ] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN EXCHANGE ACT RULE 12b-2):
[ ] YES [X] NO
AS OF OCTOBER 31, 2003, THERE WERE 4,673,622 SHARES OF THE REGISTRANT'S
COMMON STOCK, $.10 PAR VALUE, OUTSTANDING.
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FORM 10-Q
COMMUNITY BANCSHARES, INC.
SEPTEMBER 30, 2003
TABLE OF CONTENTS PAGE NO.
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Special Cautionary Notice Regarding Forward-Looking Statements............................ 3
Part 1 - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Condition as of
September 30, 2003 and December 31, 2002............................ 4
Consolidated Statements of Income for the Three Months Ended
September 30, 2003 and 2002......................................... 5-6
Consolidated Statements of Income for the Nine Months Ended
September 30, 2003 and 2002......................................... 7-8
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002......................................... 9-10
Notes to Consolidated Financial Statements.............................. 11-20
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 21-40
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.............. 41-42
Item 4 - Controls and Procedures................................................. 42
Part 2 - Other Information
Item 1 - Legal Proceedings....................................................... 43
Item 2 - Changes in Securities and Use of Proceeds............................... 43
Item 3 - Defaults Upon Senior Securities......................................... 43
Item 4 - Submission of Matters to a Vote of Security Holders..................... 43
Item 5 - Other Information....................................................... 43
Item 6 - Exhibits and Reports on Form 8-K........................................ 43-44
Signatures ............................................................................... 45
2
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this report, including
those under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere, are "forward-looking statements" within
the meaning of, and subject to the protections of, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, assumptions, estimates,
intentions, and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond the our control, and which
may cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that may
be forward-looking statements. Readers can identify these forward-looking
statements through the use of words such as "may," "will," "anticipate,"
"assume," "should," "indicate," "would," "believe," "contemplate," "expect,"
"estimate," "continue," "plan," "point to," "project," "could," "intend,"
"target," and other similar words and expressions of the future. These
forward-looking statements may not be realized due to a variety of factors,
including, without limitation:
- future economic or business conditions;
- governmental monetary and fiscal policies, as well as legislative and
regulatory changes, including changes in tax laws and regulations;
- the risks of changes in interest rates on the levels, composition and
costs of deposits, loan demand, and the values of loan collateral,
securities, and interest sensitive assets and liabilities;
- interest rate risks and credit risks of borrowers;
- the effects of competition from a wide variety of local, regional,
national and other providers of financial, investment and insurance
services;
- the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates;
- the risks of mergers, acquisitions and divesitures, including, without
limitation, the related time and costs of implementing such
transactions, and the possible failure to achieve expected gains,
revenue growth and/or expense savings expected from such transactions;
- changes in accounting policies, rules and practices;
- changes in technology and/or products may be more difficult or costly,
or less effective than anticipated;
- the effects of war or other conflict, acts of terrorism or other
catastrophic events that affect general economic conditions; and
- other factors and other information contained in this report and in
other reports that the Company makes with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
All written or oral statements that are made by or are attributable to us are
expressly qualified in their entirety by this cautionary notice. We have no
obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or the respective
dates on which such statement are otherwise made.
3
PART 1
ITEM 1 - FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
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ASSETS
Cash and due from banks ................................................ $ 31,025,322 $ 15,976,613
Interest-bearing deposits in banks and federal funds sold .............. 12,925,875 24,230,000
Securities available for sale .......................................... 134,094,190 123,901,469
Loans (net of unearned income) ......................................... 316,745,476 359,183,888
Allowance for possible loan losses .................................. (12,059,535) (9,784,269)
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Net loans ........................................................... 304,685,941 349,399,619
Capitalized lease receivable ........................................... 2,983,466 3,053,542
Premises and equipment, net ............................................ 24,492,850 25,435,491
Accrued interest receivable ............................................ 3,407,299 4,369,748
Goodwill and other intangible assets, net .............................. 2,653,828 2,713,389
Other real estate owned ................................................ 10,759,351 7,676,442
Other assets ........................................................... 12,285,306 10,840,086
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TOTAL ASSETS ........................................................ $ 539,313,428 $ 567,596,399
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................. $ 57,291,556 $ 52,920,683
Interest-bearing .................................................... 382,654,327 406,543,121
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Total deposits ................................................... 439,945,883 459,463,804
Other short-term borrowings ............................................ 494,549 1,725,133
Accrued interest payable ............................................... 3,916,255 3,622,765
FHLB long-term debt .................................................... 38,000,000 38,000,000
Capitalized lease obligations .......................................... 3,998,482 4,058,169
Other long-term debt ................................................... 3,273,337 3,577,687
Trust preferred securities ............................................. 10,000,000 10,000,000
Other liabilities ...................................................... 6,255,861 6,837,884
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Total liabilities ................................................... 505,884,367 527,285,442
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, 4,890,177 and 4,810,089 shares issued as of
September 30, 2003 and December 31, 2002, respectively) ............. 482,712 481,009
Additional paid in capital ............................................. 30,866,541 30,806,862
Retained earnings ...................................................... 6,569,865 11,023,962
Treasury stock (86,861 and 23,803 shares as of September 30, 2003 and
December 31, 2002, respectively) .................................. (894,029) (441,768)
Unearned ESOP shares (129,694 and 148,972 shares as of
September 30, 2003 and December 31, 2002, respectively) ........... (1,807,078) (1,999,858)
Accumulated other comprehensive income (loss), net of taxes ............ (1,788,950) 440,750
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Total shareholders' equity .......................................... 33,429,061 40,310,957
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 539,313,428 $ 567,596,399
================== ==================
See accompanying notes to consolidated financial statements
4
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
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INTEREST INCOME
Interest and fees on loans ............................................. $ 6,645,482 $ 8,248,749
Interest on investment securities:
Taxable securities ..................................................... 924,482 1,599,851
Non taxable securities ................................................. 83,578 94,881
Interest on federal funds sold ......................................... 39,622 76,313
Other interest ......................................................... 131,366 9,087
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Total interest income ............................................... 7,824,530 10,028,881
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INTEREST EXPENSE
Interest on deposits ................................................... 2,438,689 3,290,504
Interest on short-term borrowings ...................................... 814 2,601
FHLB long-term debt .................................................... 575,870 575,868
Interest on capitalized lease obligations .............................. 41,643 48,940
Interest on trust preferred securities ................................. 306,522 313,331
Interest on other long-term debt ....................................... 61,710 48,073
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Total interest expense .................................................... 3,425,248 4,279,317
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Net interest income ....................................................... 4,399,282 5,749,564
Provision for loan losses .............................................. 1,864,539 2,389,403
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Net interest income after provision for loan losses ....................... 2,534,743 3,360,161
NONINTEREST INCOME
Service charges on deposits ............................................ 594,493 777,935
Insurance commissions .................................................. 597,911 500,392
Bank club dues ......................................................... 101,031 112,239
Debt cancellation fees ................................................. 25,764 65,585
Other operating income ................................................. 119,653 235,822
Securities gains, net .................................................. 374,371 305,180
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Total noninterest income ............................................ 1,813,223 1,997,153
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NONINTEREST EXPENSE
Salaries and employee benefits ......................................... 3,444,171 3,579,141
Occupancy expense ...................................................... 564,741 579,363
Furniture and equipment expense ........................................ 359,006 417,435
Insurance expense ...................................................... 349,345 345,097
Director and committee fees ............................................ 118,350 113,750
Professional services .................................................. 917,052 75,960
Net loss on sale or write-down of other
real estate owned ................................................... 447,054 1,359,597
Net loss on disposal or write-down of assets ........................... 58,553 18,760
Other operating expenses ............................................... 1,329,501 3,196,152
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Total noninterest expense ........................................... 7,587,773 9,685,255
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LOSS BEFORE INCOME TAXES .................................................. (3,239,807) (4,327,941)
Applicable income tax benefit ............................................. 1,876,026 1,824,406
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NET LOSS ............................................................ $ (1,363,781) $ (2,503,535)
================== ==================
See accompanying notes to consolidated financial statements
5
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
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OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) arising during period,
net of income taxes of $963,759 and $441,933, respectively ....... $ (1,445,638) $ 662,899
Reclassification adjustment related to net realized gains, net of
income taxes of $149,748 and $122,072, respectively .............. (224,623) (183,108)
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OTHER COMPREHENSIVE INCOME (LOSS) ................................... (1,670,261) 479,791
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COMPREHENSIVE LOSS ........................................................ $ (3,034,042) $ (2,023,744)
================== ==================
Net loss per common share:
Basic ............................................................... $ (0.29) $ (0.54)
Diluted ............................................................. $ (0.29) $ (0.54)
Weighted average number of shares outstanding:
Basic ............................................................... 4,669,789 4,649,782
Diluted ............................................................. 4,669,789 4,649,782
Dividends per share ....................................................... $ - $ -
See accompanying notes to consolidated financial statements
6
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
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INTEREST INCOME
Interest and fees on loans ............................................. $ 21,025,694 $ 25,540,746
Interest on investment securities:
Taxable securities ..................................................... 3,540,965 4,745,144
Non taxable securities ................................................. 258,833 364,377
Interest on federal funds sold ......................................... 196,904 302,503
Other interest ......................................................... 145,620 23,511
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Total interest income ............................................... 25,168,016 30,976,281
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INTEREST EXPENSE
Interest on deposits ................................................... 7,985,237 10,232,158
Interest on short-term borrowings ...................................... 2,527 34,814
FHLB long-term debt .................................................... 1,708,829 1,708,827
Interest on capitalized lease obligations .............................. 126,804 179,125
Interest on trust preferred securities ................................. 954,488 873,937
Interest on other long-term debt ....................................... 139,680 153,108
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Total interest expense .............................................. 10,917,565 13,181,969
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Net interest income ....................................................... 14,250,451 17,794,312
Provision for loan losses .............................................. 5,475,019 6,443,255
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Net interest income after provision for loan losses ....................... 8,775,432 11,351,057
NONINTEREST INCOME
Service charges on deposits ............................................ 1,915,315 2,314,086
Insurance commissions .................................................. 1,734,497 1,593,052
Bank club dues ......................................................... 312,394 329,009
Debt cancellation fees ................................................. 74,331 204,439
Other operating income ................................................. 651,133 872,623
Securities gains, net .................................................. 1,102,967 429,121
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Total noninterest income ............................................ 5,790,637 5,742,330
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NONINTEREST EXPENSE
Salaries and employee benefits ......................................... 10,083,128 10,789,335
Occupancy expense ...................................................... 1,736,461 1,731,289
Furniture and equipment expense ........................................ 1,114,004 1,243,194
Insurance expense ...................................................... 930,544 527,800
Director and committee fees ............................................ 337,967 315,750
Professional services .................................................. 3,185,481 1,681,690
Net loss on sale or write-down of other
real estate owned ................................................... 979,958 1,563,201
Net loss on disposal or write down of assets ........................... 95,435 334,185
Other operating expenses ............................................... 3,376,115 5,311,178
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Total noninterest expense ........................................... 21,839,093 23,497,622
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LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................................... (7,273,024) (6,404,235)
Applicable income tax benefit ............................................. 2,818,928 2,033,004
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LOSS FROM CONTINUING OPERATIONS ..................................... (4,454,096) (4,371,231)
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See accompanying notes to consolidated financial statements
7
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
DISCONTINUED OPERATIONS:
Income from operations of divested branches
(includes gain on disposal of $8,071,985) ........................... - 8,504,062
Applicable income taxes ................................................ - (2,576,731)
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NET INCOME (LOSS) ...................................................... $ (4,454,096) $ 1,556,100
================== ==================
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) arising during period,
net of income taxes of $1,045,279 and $1,138,638 respectively .... $ (1,567,920) $ 1,707,957
Reclassification adjustment related to net realized gains, net of
income taxes of $ 441,187 and $171,648, respectively ............. (661,780) (257,473)
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OTHER COMPREHENSIVE INCOME (LOSS) ................................... (2,229,700) 1,450,484
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COMPREHENSIVE INCOME (LOSS) ............................................... $ (6,683,796) $ 3,006,584
================== ==================
Loss per common share - loss from continuing operations:
Basic ............................................................... $ (0.96) $ (0.94)
Diluted ............................................................. $ (0.96) $ (0.94)
Earnings (loss) per common share - net income (loss):
Basic ............................................................... $ (0.96) $ 0.34
Diluted ............................................................. $ (0.96) $ 0.34
Weighted average number of shares outstanding:
Basic ............................................................... 4,652,012 4,638,801
Diluted ............................................................. 4,652,012 4,638,801
Dividends per share ....................................................... $ - $ -
See accompanying notes to consolidated financial statements
8
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ...................................................... $ (4,454,096) $ 1,556,100
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses .............................................. 5,475,019 6,518,381
Provision for depreciation and amortization ............................ 1,317,228 1,545,833
Amortization of investment security premiums
and accretion of discounts .......................................... 828,729 213,157
Deferred tax expense (benefit) ......................................... (929,822) (189,543)
Realized investment security gains ..................................... (1,102,967) (429,121)
Gain on sale of branches ............................................... - (8,071,985)
Loss on sale of premises and equipment ................................. 20,409 334,185
Net loss on sale or write-down of other real estate owned .............. 979,958 1,563,201
Decrease in accrued interest receivable ................................ 962,449 1,880,377
Increase (decrease) in accrued interest payable ........................ 293,490 (294,940)
Other .................................................................. 194,267 (354,643)
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Net cash provided by operating activities ........................... 3,584,664 4,271,002
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and pay downs of securities
available for sale .................................................. 107,845,745 65,081,103
Proceeds from maturity of securities
available for sale .................................................. 18,200,000 15,000,000
Purchase of securities available for sale .............................. (139,680,392) (78,485,625)
Cash disbursed in settlement of branch divestitures .................... - (32,054,765)
Net decrease in loans to customers ..................................... 33,765,837 26,111,889
Proceeds from sale of premises and equipment ........................... 94,885 60,350
Capital expenditures ................................................... (569,575) (463,139)
Net proceeds from sale of other real estate owned ...................... 1,615,962 625,870
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Net cash provided by (used in) investing activities ................. 21,272,462 (4,124,317)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts ................................... 23,120,925 (906,019)
Net decrease in certificates of deposit and other time deposits ........ (42,638,846) (8,156,804)
Net decrease increase in short-term borrowings ......................... (1,230,584) (2,878,041)
Net decrease in capitalized lease obligations .......................... (59,687) (75,395)
Repayment of long-term debt ............................................ (304,350) (681,253)
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Net cash used in financing activities ............................... (21,112,542) (12,697,512)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 3,744,584 (12,550,827)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 40,206,613 53,237,008
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CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 43,951,197 $ 40,686,181
================== ==================
See accompanying notes to consolidated financial statements
9
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest ............................................................... $ 10,624,075 $ 15,907,788
Income taxes ........................................................... - 1,650,484
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Foreclosure of other real estate owned ................................. 6,426,542 4,001,499
Loan charge-offs, net of recoveries .................................... 3,199,753 4,420,673
Treasury stock acquired through debts previously contracted ............ 452,261 -
See accompanying notes to consolidated financial statements
[The remainder of this page intentionally left blank]
10
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The consolidated financial statements include the accounts of Community
Bancshares, Inc. ("Community Bancshares") and its wholly-owned subsidiaries,
which are hereinafter referred to collectively as the "Company." The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to the Securities
and Exchange Commission's (the "Commission") Form 10-Q and Article 10 of the
Commission's Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three or nine month periods ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003 or for any other interim periods. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the
"Form 10-K").
Certain reclassifications of prior years' amounts have been made to conform to
current year presentation. These reclassifications had no effect on net income,
total assets, total liabilities, or shareholders' equity.
The Company has not changed its accounting and reporting policies from those
stated in the Company's Form 10-K. The unaudited interim financial statements
included in this report should be read in conjunction with the audited financial
statements and footnotes included in the Company's Form 10-K. The allowance for
loan losses is an accounting policy applied by the Company which is deemed
critical. Critical accounting policies are defined as policies which are
important to the portrayal of the Company's financial condition and results of
operations, and that require management's most difficult, subjective or complex
judgments. The Company's financial results could differ significantly if
different judgments or estimates are applied in the application of this policy.
The Company recognizes as critical accounting policies the Accounting for
Allowance for Loan Losses and Accounting for Income Taxes.
Accounting for Allowance for Loan Losses. Management analyzes the loan portfolio
to determine the adequacy of the allowance for loan losses and the appropriate
provision required to maintain a level management considers adequate to absorb
anticipated loan losses. When management believes the collection of the
principal of a loan is unlikely, a loan is charged off against the allowance for
loan losses. Subsequent recoveries of principal are added back to the allowance
for loan losses. Management's evaluation of the adequacy of the allowance for
loan losses is based on a formal analysis which assesses the risks within the
loan portfolio. Among other factors that management considers: (i) the Company's
past loan loss experience, (ii) known and inherent risks in the loan portfolio,
including past due and nonperforming loans, (iii) adverse situations that may
affect the borrowers' ability to repay those loans, (iv) the estimated value of
any underlying collateral, (v) the reviews of regulators, and (vi) an analysis
of current economic conditions. The consideration and application of many of
these factors involve assumptions, estimates and judgments that are subject to
change. Management believes the allowance for loan losses was adequate at
September 30, 2003. While management uses available information to recognize
losses on loans, future additions to the allowance for loan losses may be
necessary based on economic changes and changes to various borrowers. Certain
economic and interest rate factors could have a material effect on the
determination of the allowance for loan losses. The Bank's allowance for loan
losses is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance for loan losses and the size of the allowance for loan
losses in comparison to a group of peer banks identified by the regulators.
During their routine examinations of banks, the FDIC and the Alabama
Superintendent may require a bank to make additional provisions to its allowance
for loan losses where, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of management.
11
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Accounting for Income Taxes. The Company uses the asset and liability method of
accounting for income taxes. The Company's determination of the deferred and
current provision for income taxes requires analysis by the Company's management
of certain transactions and the related tax laws and regulations applicable to
those transactions. Management exercises significant judgment in evaluating the
amount and timing of the recognition of the resulting tax liabilities and
assets. Those judgments and estimates are re-evaluated on a continual basis as
regulatory and business factors change. However, because management's judgments
and estimates are inherently subjective and subject to change, there can be no
assurance that the Company's determination of the provision for income taxes
will not be changed, upward or downward, in future periods.
NOTE 2 - STOCK BASED COMPENSATION
Statement of Financial Accounting Standards, or "FAS," No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), defines a fair value based method of
accounting for an employee stock option or similar equity instrument. However,
FAS No. 123 allows an entity to continue to measure compensation costs for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principal Board, or "APB," Opinion No. 25, "Accounting for Stock
issued to Employees" ("APB 25"). Entities electing to remain subject to the
method of accounting described in APB 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of accounting
defined in FAS 123 had been applied. Under the fair value based method,
compensation cost is measured at the grant date, based on the value of the
award, and is recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation cost is equal to
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount that an employee must pay to acquire the
stock. The Company has elected to continue to measure compensation cost for its
stock option plans under the intrinsic value method of accounting described in
APB 25 and has calculated the fair value of outstanding options for purposes of
making pro forma disclosures utilizing the Black-Scholes method.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective, and inherently uncertain, assumptions, including, among other
things, the expected stock price volatility. The Company's stock, while not
traded on any active market or exchange, has experienced unusual volatility in
recent years. Because the Company's employee stock options have characteristics
significantly different from those of traded options with no vesting or
transferability restrictions, and because changes or differences in the
subjective assumptions made by management can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
The Company's options granted during the first nine months of 2003 and 2002 vest
immediately; therefore, for purposes of pro forma disclosure, the compensation
expense related to those options was recognized when granted.
12
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The Company's pro forma information follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net income (loss):
As reported ...................................... $ (1,363,781) $ (2,503,535) $ (4,454,096) $ 1,556,100
Deducts:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax ............................... 717,466 406,164 887,795 406,164
-------------- -------------- -------------- --------------
Pro forma net income (loss) ........................... $ (2,081,247) $ (2,909,699) $ (5,341,891) $ 1,149,936
============== ============== ============== ==============
Basic earnings (loss) per share:
As reported ...................................... $ (0.29) $ (0.54) $ (0.96) $ 0.34
Pro forma ........................................ $ (0.45) $ (0.63) $ (1.15) $ 0.25
Diluted earnings (loss) per share:
As reported ...................................... $ (0.29) $ (0.54) $ (0.96) $ 0.34
Pro forma ........................................ $ (0.45) $ (0.63) $ (1.15) $ 0.25
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the options granted in 2003 and 2002: (i) dividend yield of
0%; (ii) expected volatility of .283 in 2003 and .232 in 2002; (iii) risk-free
interest rates of 3.10% for options issued in the first quarter of 2003, 2.50%
for options issued in the second quarter of 2003, 2.94% and 3.31% for options
issued in the third quarter of 2003 and 2.63% for options issued in 2002; and
(iv) expected lives of 5 years.
13
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 3 - CONTINGENCIES
BACKGROUND
At a June 20, 2000 meeting of the board of directors of Community Bank, the
wholly-owned commercial banking subsidiary (the "Bank"), one of the Bank's
directors brought to the attention of the board of directors the total amount of
money that the Bank had paid to subcontractors in connection with the
construction of a new Bank branch office in Guntersville, Alabama. Based upon
the size of this amount, management commenced an investigation into these
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 the Bank on July 15 and July 18, 2000, respectively. At the July 18,
2000 meeting of the board of directors of the Bank, another director alleged
that the Bank had been overcharged by subcontractors on that construction
project, as well as on another construction project that remained uncompleted at
that time.
On July 18, 2000, the boards of directors of the Company and the Bank appointed
a joint committee comprised of independent directors to investigate these
alleged overcharges. The joint committee retained independent legal counsel and
an independent accounting firm to assist its investigation and has since made
its report to the boards of directors.
The Bank's directors who alleged the construction overcharges have also informed
bank regulatory agencies and law enforcement authorities of their concerns.
These agencies and authorities have conducted their own investigations into this
matter. Based on its findings, the FDIC has issued restitution and/or removal
orders against Kennon R. Patterson, Sr., former Chairman and Chief Executive
Officer of the Company and the Bank, and Larry Bishop, former Vice President of
Community Bank. The board of directors of the Company and the board of
directors of the Bank terminated Kennon R. Patterson, Sr. on January 27, 2003,
and the board of directors of the Bank terminated Larry Bishop on February 6,
2003. These regulatory actions are still pending at this time. On
October 29, 2003, the United States Department of Justice announced the filing
of a 25-count indictment against Messrs. Patterson and Bishop, a construction
contractor, in connection with a scheme to divest the Bank's funds for Mr.
Patterson's personal benefit. The Company and the Bank continue to seek Mr.
Patterson's resignation as a director of the Company and recover all amounts
owed by Mr. Patterson to the Bank.
PATTERSON LITIGATION
Plaintiffs: Kennon R. Patterson, Sr., the Company's former Chairman,
President and Chief Executive Officer
Defendants: The Company, the Bank, five of the directors of the
Company and the Bank, and Powell, Goldstein, Frazer and
Murphy, LLP, as counsel to the Bank's Audit Committee
On April 9, 2003, Mr. Patterson filed an adversary proceeding against the
defendants in the United States Bankruptcy Court for the Northern District of
Alabama in connection with his petition for protection under Chapter 11 of the
United States Bankruptcy Code. Mr. Patterson's complaint:
- alleges that the Company breached its employment agreement with Mr.
Patterson by terminating his employment on January 27, 2003 and failing
to pay him for compensation and benefits that had accrued prior to his
termination; and
14
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
- alleges that the Bank, members of the Bank's Audit Committee, the Audit
Committee's independent counsel and the Company's current Chairman,
President and Chief Executive Officer conspired to interfere with Mr.
Patterson's contract and business relationship with the Company.
The suit seeks damages in excess of $150.0 million for, among other things, lost
compensation and benefits, mental anguish, and damage to Mr. Patterson's
reputation. The Company presently believes that this lawsuit is without merit
and intends to vigorously defend itself against this action.
On May 9, 2003 the defendants filed a motion to dismiss the suit, and, on June
17, 2003, the court denied the motion to dismiss the suit as to the Company, the
Bank and the named directors. On July 7, 2003, those defendants filed a
counterclaim against Mr. Patterson asserting that Mr. Patterson breached his
employment agreement with the Company, engaged in fraudulent conduct, and
converted property belonging to the Bank to his personal use.
Although the Company presently believes that this action will not have a
material adverse effect on its financial condition or results of operations,
this action, regardless of the outcome, could be costly, time consuming and a
diversion of management's attention.
CORR FAMILY LITIGATION
Plaintiffs: Bryan A. Corr and six other of the Company's stockholders
related to Mr. Corr
Defendants: The Company, the Bank, and certain named directors and
officers of the Company and the Bank
On September 14, 2000, the plaintiffs filed an action against the defendants in
the Circuit Court of Blount County, Alabama, alleging that the named directors
actively participated in or ratified the misappropriation of corporate income by
Mr. Patterson and others. Because the action was not styled as a stockholder
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 stockholders. On May 15, 2003, the court granted
the defendants' motion for summary judgment, and the plaintiffs have appealed
the court's ruling.
Although the Company presently believes that this action will not have a
material adverse effect on its financial condition or results of operations,
this action, regardless of the outcome, could be costly, time consuming, and a
diversion of management's attention.
BENSON LITIGATION
Plaintiffs: M. Lewis Benson, Doris E. Benson, John M. Packard, Jr. and
Andy C. Mann, four of the Company's stockholders
Defendants: The Company, the Bank, certain of the present and former
directors of the Company and the Bank, an employee of the
Bank and two construction subcontractors previously hired
by the Company
On July 21, 2000, the plaintiffs filed a lawsuit, styled as a stockholder
derivative suit, in the state Circuit Court of Marshall County, Alabama against
the defendants, relating to alleged overcharges in construction costs. At the
time, these charges were being investigated by a joint committee of the boards
of directors of the Company and the Bank.
15
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The complaint:
- alleges that the directors, officers and employee named as defendants
(i) breached their fiduciary duties, (ii) failed to properly supervise
officers and agents of the Company and the Bank, and (iii) permitted
waste of corporate assets by permitting the subcontractor defendants to
overcharge the Bank in connection with the construction of two new Bank
branch offices, and to perform the construction work without written
contracts, budgets, performance guarantees and assurances of
indemnification;
- alleges that Kennon R. Patterson, Sr., the Company's former Chairman,
President and Chief Executive Officer, breached his fiduciary duties by
permitting the two named subcontractors to overcharge for work
performed on the two construction projects in exchange for discounted
charges for work these subcontractors performed in connection with the
construction of Mr. Patterson's residence;
- alleges that the director defendants knew or should have known of this
alleged arrangement between Mr. Patterson and the subcontractors; and
- alleges that Mr. Patterson, the Bank employee and the two subcontractor
defendants made false representations and suppressed information about
the overcharges and arrangement between Mr. Patterson and the
subcontractors.
On August 15, 2000, the plaintiffs filed an amended complaint that generally
reiterates the allegations of the original complaint, and further:
- alleges that the Bank was overcharged on all construction projects from
January 1997 to the present; and
- alleges that the defendants breached their fiduciary duties and are
guilty of gross financial mismanagement, including making or approving
loans and taking improper actions to conceal the fact that the loans
were uncollectible.
16
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
On September 18, 2000, the plaintiffs filed a second amended complaint generally
reiterating the allegations of the original and first amended complaints, and
further:
- alleging that the plaintiffs were improperly denied their rights to
inspect and copy certain records of the Company and the Bank; and
- alleging 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 further asserts that the counts involving
inspection of corporate records and director abdication are individual,
non-derivative claims. The second amended complaint seeks, on behalf of the
Company, an unspecified amount of compensatory damages in excess of $1.0
million, punitive damages, disgorgement of improperly paid profits and
appropriate equitable relief. Upon a 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.
Tentative settlements of the lawsuit were announced in November 2002 and August
2003 but were not finalized. On November 11, 2003 the Company, the Bank and
certain individual defendants entered into a new agreement to settle this case,
which settlement was approved by the Company's insurers and the Alabama
Department, and the Packard Derivative Litigation, which supersedes the prior
settlement agreements. The court is scheduled to hold a hearing on December 18,
2003 to consider the fairness of this settlement. The Company's insurer is
expected to pay all or substantially all of the costs of settlement on behalf
of the Company and its subsidiaries.
At this time, the Company is unable to predict the outcome of this lawsuit and
its effect on the Company's financial condition and results of operations.
PACKARD DERIVATIVE LITIGATION
Plaintiffs: M. Lewis Benson, Doris E. Benson, John M. Packard, Jr. and
Andy C. Mann, four of the Company's stockholders
Defendants: Sheffield Electrical Contractors, Inc., Steve Sheffield,
Jay Bolden, Dudley, Hopton-Jones, Sims & Freeman, PLLP,
Glynn C. Debter, Kennon R. Patterson, Jr., Robert O.
Summerford, Jimmie A. Trotter, John L. Lewis, Jr.,
Merritt M. Robbins, Stacey W. Mann, B. K. Walker, Jr.,
Denny Kelly, Roy B. Jackson, Loy D. McGruder, and Hodge
Patterson
On April 4, 2003, the plaintiffs, which are the same as in the Benson case
described above, filed a derivative action against the defendants. This action,
while stemming from the same facts alleged in the Benson Litigation, is based
not upon what the director-defendants "did (and did not do) before learning of
the over billing [sic.] allegations against [Mr.] Patterson in July 2000" but,
instead, is based upon "what they have done (and failed to do) after the filing
of the Benson lawsuit - that is, after they learned of the allegations against
[Mr.] Patterson in July 2000."
On June 18, 2003, the court granted the motion filed by the Company, the Bank
and most of the individual defendants to transfer the suit to the Circuit Court
of Blount County, Alabama.
On or about October 1, 2003, one of the defendants, Dudley, Hopton-Jones, Sims &
Freeman, PLLP, formerly the certified public accountants and outside auditors
for the Company and the Bank, filed a cross-claim against the Bank, the Company,
Glynn C. Debter, Kennon R. Patterson, Jr., Robert O. Summerford, Jimmie A.
Trotter, John L. Lewis, Jr., Merritt M. Robbins, Stacey W. Mann, B. K. Walker,
Jr., Denny Kelly, Roy B. Jackson, Loy D.
17
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
McGruder, and Hodge Patterson, all of whom are directors or former directors of
the Company and/or the Bank. The cross-claim demands "compensatory damages,
interest, and costs, including the amount of any adverse judgment entered in
this cause" against Dudley, Hopton-Jones. Punitive damages are also demanded in
some counts. The basis for the claims is common law indemnity, contractual
indemnity, negligence, misrepresentation, suppression, and concealment of
material facts, and, civil conspiracy.
On November 11, 2003 the Company, the Bank, and certain individual defendants
entered into an agreement to settle this case, which settlement was approved by
the Company's insurers and the Alabama Department, and the Benson Litigation.
The court is scheduled to hold a hearing on December 18, 2003 to consider the
fairness of this settlement. The Company's insurer is expected to pay all or
substantially all of the costs of settlement on behalf of the Company and its
subsidiaries. The proposed settlement does not include settlement of the
cross-claim filed by Dudley, Hopton-Jones.
At this time, the Company is unable to predict the outcome of this litigation
and its effect on the Company's financial condition and results of operations.
LENDING ACTS LITIGATION
Plaintiffs: William Alston, Murphy Howard, and Jason Tittle
Defendants: The Company, the Bank, Holsombeck Motors, Inc., Lee Brown
d/b/a Alabama Bond & Investigation a/k/a ABI Recovery,
Chris Holmes d/b/a Alabama Bond & Investigation a/k/a ABI
Recovery, Regina Holsombeck, Kennon "Ken" Patterson, Sr.,
Hodge Patterson, James Timothy "Tim" Hodge, Ernie
Stephens, and the State of Alabama Department of Revenue
On October 11, 2002, the plaintiffs filed a class action against the defendants
alleging that the Bank and others conspired or used extortionate methods to
effect a lending scheme of "churning phantom loans," and that profits from the
scheme were used to secure an interest in and/or to invest in an enterprise that
affects interstate commerce. The plaintiffs specifically allege that the Bank
used various methods to get uneducated customers with fair to poor credit to
sign numerous "phantom loans" when the customers only intended to sign for one
loan. Claims include racketeering activity within the meaning of the Racketeer
Influenced and Corrupt Organizations Act of 1970, conspiracy, spoliation,
conversion, negligence, wantonness, outrage, and civil conspiracy.
Although the Company is unable to presently predict the outcome or its potential
effects on the Company's financial condition or results of operations, this
action, regardless of the outcome, could be costly, time consuming, and a
diversion of management's attention.
EMPLOYEE LITIGATION
Plaintiffs: Bishop K. Walker, Jr., former Senior Executive Vice
President and General Counsel of the Company, and Denny
G. Kelly, former President of the Bank
Defendants: The Company, the Bank, Kennon R. Patterson, Sr., and a
number of unidentified defendants
On May 5, 2003, the plaintiffs filed separate suits in the Circuit Court of
Blount County, Alabama, against the defendants alleging that they were induced
to retire based upon misrepresentations made by Kennon R. Patterson, Sr., who at
the time was the Company's Chairman, President and Chief Executive Officer. The
plaintiffs claim that Mr. Patterson's actions constituted fraud, promissory
fraud, fraudulent suppression, fraud in the inducement, deceit, fraudulent
deceit, negligence, recklessness, wantonness and breach of contract. The
complaints seek an unspecified amount of compensatory and punitive damages.
18
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
On October 23, 2003 the Company and the Bank filed counter claims against Mr.
Walker and Mr. Kelly seeking repayment of amounts paid to them as part of a
severance arrangement and, in the case of Mr. Kelly, amount owed to the Bank in
connection with the two loans from the Bank to Mr. Kelly.
Although the Company presently believes that this action will not have a
material adverse effect on the Company's financial condition or results of
operations, this action, regardless of the outcome, could be costly, time
consuming, and a diversion of management's attention.
OTHER LITIGATION
In addition to the foregoing, the Company and its affiliates also are from time
to time parties to other legal proceedings arising in the ordinary course of the
Company's business. The Company presently believe that, other than the
litigation discussed above, there is no other litigation to which the Company or
its affiliates presently are subject that, if such litigation were to result in
an outcome unfavorable to the Company, would, individually or in the aggregate,
have a material adverse effect on the Company's financial condition or results
of operations.
The Company's Certificate of Incorporation and Bylaws provide that, in certain
circumstances, the Company will indemnify its directors and officers, and,
provided such persons acted in accordance with the standards set forth in the
Delaware General Corporation Law and the Company's organizational documents,
advance expenses to its directors and officers in connection with investigations
and proceedings in connection with their service as officers and directors of
the Company.
NOTE 4 - DISCONTINUED OPERATIONS
During 2002, the Bank consummated the sale of the following full-service
commercial bank branches: two Pulaski, Tennessee locations on March 31, 2002,
two DeKalb County, Alabama locations on May 3, 2002, and six Marshall County,
Alabama locations on May 31, 2002. Income and expenses related to these
locations are included in discontinued operations for the nine months ended
September 30, 2002.
NOTE 5 - OTHER REAL ESTATE OWNED
As discussed in Note 4, the Company consummated the sale of six branch locations
in Marshall County, Alabama on May 31, 2002. The Company retained ownership of a
partially developed parcel of land in Marshall County that was originally
intended for branch expansion. The total investment in the property was
$2,702,907, which included $252,631 of capitalized interest.
Subsequent to the sale of the Marshall County branches, the Company had
continued to formally assess potential uses for the property. As part of this
assessment, management requested and obtained an appraisal of the property in
late September 2002. Upon review of the appraisal, the Company decided to
abandon any future plans of enhancing the property and recorded the property at
the appraised value of $1,508,000. This amount was transferred into Other Real
Estate Owned, or "OREO," as of September 30, 2002, resulting in an after tax
loss of $756,734 related to this transaction.
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board, or "FASB," issued
FASB Interpretation, or "FIN," 46, which clarifies the application of Accounting
Research Bulletin, or "ARB," 51, Consolidated Financial Statements, to certain
entities -- called variable interest entities -- in which equity investors do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of FIN 46 are effective for all financial statements issue after
January 31, 2003. The consolidation requirements apply to all variable interest
19
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
entities created after January 31, 2003. In addition, public companies must
apply the consolidation requirements to variable interest entities that existed
prior to February 1, 2003 and remain in existence as of the beginning of annual
or interim periods beginning after June 15, 2003. Management is currently
assessing the impact of FIN 46, and presently does not expect FIN 46 to have a
material effect on the Company. However, in connection with FIN 46, the Company
understands that the SEC is considering whether or not to require that
statutory trusts used to issue trust preferred securities be deconsolidated
from their affiliated bank holding company. Deconsolidation would result in the
trust preferred securities being ineligible as Tier 1 capital under the Federal
Reserve's Capital Adequacy Guidelines. It is uncertain whether or not currently
outstanding trust preferred securities, including the $10 million of the
Company's 10-7/8% trust preferred securities would be "grandfathered" and
remain as Tier 1 capital. If not grandfathered by the Federal Reserve, the
Company would have the right, subject to prior Federal Reserve approval, and
adequate capital and liquidity, to redeem its outstanding junior subordinated
debentures, or "debentures", and trust preferred securities upon payment of the
redemption price described below. Also, if the outstanding trust preferred
securities are not grandfathered as Tier 1 capital, the amount of the trust
preferred securities that would be includible in the Company's Tier 2 capital
for regulatory purposes is uncertain. Accordingly, a determination by the SEC
requiring deconsolidation of statutory trusts generally could have a material
adverse effect on the Company's capital adequacy and financial condition. If
the trust preferred securities are no longer Tier 1 capital, and the Company
elects to redeem the trust preferred securities and related debentures prior to
March 8, 2010, the redemption price would be greater of (i) 100% of the
principal amount of the debentures being redeemed, and (ii) the sum of the
present values of scheduled payments of principal and interest from the
redemption date to March 8, 2010, discounted to the redemption date on a
semi-annual basis at the Treasury Rate plus 0.45%. In each case the redemption
price would also include all accrued and unpaid interest to the redemption
date. If such a capital treatment event occurs and the Company elects to redeem
the debentures on or after March 8, 2010, the redemption price would range from
105.438% during the 12 months following March 8, 2010 to 100% of the principal
amount of debentures being redeemed following March 8, 2020, together with all
accrued and unpaid interest. The Treasury Rate is the yield published by the
Federal Reserve representing the average for the week immediately prior to the
redemption date on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for a
maturity corresponding to the period beginning on the redemption date and
ending on March 8, 2010. Currently, the Company does not have the capital or
liquidity to redeem the $10 million of outstanding trust preferred securities,
and the approximate $2.5 million of accrued interest thereon.
On April 30, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
The provisions of FAS No. 149 were effective for fiscal quarters beginning after
June 15, 2003. The adoption of the provisions of FAS No. 149 did not have a
material impact on the Company's results of operations.
In May 2003, FASB FAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The changes in FAS No. 150 require that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
In particular, the changes in FAS No. 150 (1) is expected to result in a more
complete depiction of an entity's liabilities and equity and should, therefore,
assist investors and creditors in assessing the amount, timing, and likelihood
of potential future cash outflows and equity share issuances, (2) is expected to
enhance the relevance of accounting information by providing more information
about an entity's obligations to transfer assets or issue shares, thus,
improving its predictive value to users. Reliability of accounting information
should be improved by providing a portrayal of an entity's capital structure
that is unbiased, verifiable, and more representationally faithful than
information reported prior to issuance of FAS No. 150. Those changes may result
in more consistent reporting of these financial instruments. The adoption of the
provisions of this standard did not have a material impact on the Company.
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to assist in an understanding of the financial
condition and results of operations of Community Bancshares, Inc. and its
subsidiaries. Unless the context otherwise clearly indicates, the term "Company"
includes Community Bancshares, Inc. and its subsidiaries, and the terms "Bank"
and "Community Bank" refer to Community Bank, the Company's wholly-owned
commercial banking subsidiary. This analysis should be read in conjunction with
the unaudited financial statements and related notes appearing in Item 1 of this
Report and Management's Discussion and Analysis of Financial Condition and
Results of Operations and the notes to consolidated financial statements
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are in accordance with generally accepted
accounting principles in the United States and general practices within the
Company's industry. The application of certain of these accounting policies
involves a significant amount of judgment as well as the use of estimates and
assumptions based upon information that the Company has at the time. These
estimates and judgments involve significant uncertainties, and are susceptible
to change. If different assumptions or conditions were to prevail, depending
upon the magnitude of any discrepancies from the Company's estimates and
judgments, then the Company's financial condition and results of operations may
prove to be materially different from the presentation herein.
The Company recognizes as critical accounting policies the Accounting for
Allowance for Loan Losses and Accounting for Income Taxes.
- Accounting for Allowance for Loan Losses. Management analyzes the loan
portfolio to determine the adequacy of the allowance for loan losses
and the appropriate provision required to maintain a level management
considers adequate to absorb anticipated loan losses. When management
believes the collection of the principal of a loan is unlikely, a loan
is charged off against the allowance for loan losses. Subsequent
recoveries of principal are added back to the allowance for loan
losses. Management's evaluation of the adequacy of the allowance for
loan losses is based on a formal analysis which assesses the risks
within the loan portfolio. Among other factors that management
considers: (i) the Company's past loan loss experience, (ii) known and
inherent risks in the loan portfolio, including past due and
nonperforming loans, (iii) adverse situations that may affect the
borrowers' ability to repay those loans, (iv) the estimated value of
any underlying collateral, (v) the reviews of regulators, and (vi) an
analysis of current economic conditions. The consideration and
application of many of these factors involve assumptions, estimates and
judgments that are subject to change. Management believes the allowance
for loan losses was adequate at September 30, 2003. While management
uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on
economic changes and changes to various borrowers. Certain economic and
interest rate factors could have a material effect on the determination
of the allowance for loan losses. The Bank's allowance for loan losses
is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology
used to calculate the allowance for loan losses and the size of the
allowance for loan losses in comparison to a group of peer banks
identified by the regulators. During their routine examinations of
banks, the Federal Reserve and the Alabama Superintendent may require a
bank to make additional provisions to its allowance for loan losses
where, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of
management.
- Accounting for Income Taxes. The Company uses the asset and liability
method of accounting for income taxes. The Company's determination of
the deferred and current provision for income taxes requires analysis
by the Company's management of certain transactions and the related tax
laws and regulations applicable to those transactions. Management
exercises significant judgment in evaluating the amount and timing of
the recognition of the resulting tax liabilities and assets. Those
judgments and estimates are re-evaluated on a continual basis as
regulatory and business factors change. However, because management's
judgments and
21
estimates are inherently subjective and subject to change, there can
be no assurance that the Company's determination of the provision for
income taxes will not be changed, upward or downward, in future
periods.
FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2003 COMPARED TO DECEMBER 31, 2002
GENERAL
The Company's total assets at September 30, 2003 were $539.3 million, a decrease
of $28.3 million (5.0%) from $567.6 million at December 31, 2002. The Company
continued to experience declines in loans of $42.5 million due to pay-offs in
the loan portfolio and the lack of new loan growth. The Company also experienced
a decline in deposits since year end 2002 of $19.6 million (4.3%) due mostly to
management's decision not to rebid on higher priced certificates of deposits,
since the decline in loans has reduced our funding needs and we have sought to
focus on building profitable relationships. Funding is not currently needed for
liquidity at the Company's subsidiary, Community Bank. Noninterest-bearing
deposits increased $4.4 million (8.3%) from December 31, 2002 to September 30,
2003,and interest-bearing deposits have decreased by $23.8 million (5.9%).
EARNING ASSETS
The earning assets of the Company are mainly comprised of:
- investment securities;
- interest-bearing balances in other banks
- federal funds sold; and
- loans.
The Company's investment securities portfolio is used by the Company to make
various term investments, to provide a source of liquidity for the Company and
to serve as collateral to secure certain government deposits. The Company's
investment securities increased $10.2 million to $134.1 million at September 30,
2003 from $123.9 million at December 31, 2002. This increase in investment
securities was related to the decreases in the loan portfolio and federal funds
sold and the reinvestment of these dollars in securities. The Company also
maintains short-term investments in the form of interest-bearing deposits with
banks. These interest-bearing deposits with other banks amounted to $260,000 at
September 30, 2003 compared to $200,000 at December 31, 2002. At September 30,
2003, the Company had $12.7 million in federal funds sold, compared to $24.0
million at December 31, 2002, representing a decrease of $11.3 million, or
47.1%. This significant decline in the Company's federal funds sold is due to
the Company's focus on increasing its longer term, higher yielding investment
securities.
Cash and amounts due from banks increased $15.0 million during the first nine
months of 2003, from $16.0 million at December 31, 2002 to $31.0 million at
September 30, 2003. The significant increase experienced by the Company is due
primarily to earnings credit rates. Earnings credit rates are applied to
balances held in the Company's correspondent bank accounts that are maintained
with other banks. The Company receives credits based on its balances at these
correspondent banks and the credits are used to offset the service charges
experienced by the Company. These earnings credit rates the Company is receiving
are currently higher than the federal funds sold rates for the Company. The
Company, therefore, increased its balances in its main correspondent account
during the first nine months of 2003 to take advantage of the better rate. The
Company ultimately received a larger credit against the service charges it would
have paid compared to the interest income it otherwise would have received had
the funds been held in federal funds sold.
Loans comprise the largest single category of the Company's earning assets.
Loans, net of unearned income, were $316.7 million at September 30, 2003, which
represented a decrease of approximately $42.5 million, or 11.8%, from
22
$359.2 million at December 31, 2002. The Company continues to experience a
decline in total loans because of refinancing of mortgage loans at other
institutions, the tightening of the Company's credit standards, increased
charge-offs of loans made in previous years, and lack of loan demand in the
markets it currently serves.
NONPERFORMING ASSETS AND PAST DUE LOANS
The Company's nonperforming assets are comprised of:
- nonaccruing loans;
- loans 90 days past due or greater;
- restructured loans;
- nonaccruing securities; and
- other real estate owned.
Between December 31, 2002 and September 30, 2003, the Company's ratio of the
allowance for loan losses to these total nonperforming assets declined from
43.95% at year-end 2002 to 42.34% at September 30, 2003. The ratio of total
nonperforming assets to total assets increased to 5.28% at September 30, 2003
from 3.92% at year-end 2002, while the ratio of nonperforming loans to total
loans, net of unearned income, increased to 5.60% at September 30, 2003 from
4.06% at December 31, 2002. These changes were primarily due to an increase in
nonaccruing loans of $4.1 million, or 41.1%, to $14.2 million at September 30,
2003 from nonaccruing loans of $10.1 million at December 31, 2002 due to a $5.2
million first mortgage real estate loan to the Company's former Chairman and
Chief Executive Officer who filed for reorganization under the federal
Bankruptcy Code in January, 2003. It is the Company's policy to place loans on
nonaccrual status when a borrower files for bankruptcy protection. The changes
related to the nonperforming assets were also due to the Company's increase in
other real estate owned of $3.1 million, or 40.3%, to $10.8 million at September
30, 2003 from other real estate owned of $7.7 million at December 31, 2002, as
the Company has taken actions to foreclose on problem real estate loans. In
addition, loans 90 days or more past due increased to $1.4 million at September
30, 2003 from $1.2 million at December 31, 2002. Total nonperforming assets
increased $6.2 million, or 27.8%, to $28.5 million at September 30, 2003 from
total nonperforming assets of $22.3 million at December 31, 2002. The Company
has continuously recognized problem assets that have resulted from the credit
standards applied by prior management. This recognition along with the
tightening of the Company's credit standards has resulted in significantly
higher nonperforming assets.
The following table summarizes the Company's nonperforming assets at September
30, 2003 and 2002, as well as December 31, 2002.
NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31,
----------------------------- ------------
2003 2002 2002
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Nonaccruing loans .................................................. $ 14,248 $ 8,193 $ 10,099
Loans past due 90 days or more ..................................... 1,404 1,045 1,241
Restructured loans ................................................. 2,076 1,155 3,244
------------ ------------ ------------
Total nonperforming loans .......................................... 17,728 10,393 14,584
Other real estate owned ............................................ 10,759 7,794 7,676
------------ ------------ ------------
Total nonperforming assets .................................. $ 28,487 $ 18,187 $ 22,260
============ ============ ============
Ratios:
Allowance for loan losses to loans, net of unearned income ......... 3.81% 2.32% 2.72%
Allowance for loan losses to total nonperforming assets ............ 42.34 47.50 43.95
Total nonperforming loans to total loans (net of unearned income) .. 5.60 2.79 4.06
Total nonperforming assets to total assets ......................... 5.28 3.14 3.92
23
If nonaccrual loans had performed in accordance with their original contractual
terms, gross interest income would have increased an estimated $653,000 for the
nine month period ended September 30, 2003. If nonaccrual loans had performed in
accordance with their original contractual terms, gross interest income would
have increased an estimated $220,000 for the three month period ended September
30, 2003.
FUNDING AND OTHER DEBT OBLIGATIONS
The Company's primary sources of funding are from deposits from the customers of
Community Bank and from the Company's short and long-term borrowings. Total
deposits of $440.0 million at September 30, 2003 reflected a decrease of $19.5
million, or 4.2%, from total deposits of $459.5 million at year-end 2002.
Deposits are Community Bank's primary source of funds. Noninterest-bearing
deposits increased $4.4 million, or 8.3%, to $57.3 million at September 30,
2003, from $52.9 million at December 31, 2002, while interest-bearing deposits
decreased $23.8 million, or 5.9%, to $382.7 million at September 30, 2003, from
$406.5 million at December 31, 2002. Certificates of deposit and other time
deposits of $100,000 or more decreased $14.8 million, or 17.2%, to $71.1 million
at September 30, 2003 from $85.9 million at December 31, 2002.
Total short-term borrowings decreased $1.2 million, or 70.6%, to $0.5 million at
September 30, 2003 from $1.7 million at December 31, 2002. Community Bank is a
member of the Federal Home Loan Bank of Atlanta, or the "FHLBA," and, since
1999, has been approved to borrow up to $38.0 million under the FHLBA's
"Convertible Advance Program." As of September 30, 2003, Community Bank had
borrowed the entire $38.0 million available under this program. These borrowings
accrue interest at a fixed rate of 5.93% per annum and have a final maturity of
March 1, 2010. These borrowings are subject to a call feature upon every
quarterly payment date during the life of the obligation. The first call date
for this advance was March 1, 2001, and the advance has not been called to date.
These borrowings are secured under a blanket lien agreement on qualifying
mortgage instruments in Community Bank's loan and investment portfolios. Under
this lien agreement, in an "event of default," the FHLBA may declare all or any
part of the indebtedness and accrued interest, including any prepayment fees, to
be immediately due and payable. Included in the list of "events of default" is
the situation where the FHLBA 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 FHLBA. The
Company's FHLBA long-term debt remained constant at $38.0 million for both
September 30, 2003 and December 31, 2002 while other long-term debt decreased
$0.3 million, or 8.3%, to $3.3 million at September 30, 2003, from $3.6 million
at December 31, 2002.
Included in the Company's other long-term debt is the Company's promissory note
to Mr. Jeffrey K. Cornelius, a former director and officer of Community
Bancshares. On October 4, 1994, the Company purchased 115,978 shares of its
common stock, including 7,144.384 shares vested under the Company's Employee
Stock Option Plan, from Mr. Cornelius at a price per share of approximately
$25.00. The Company paid Mr. Cornelius $899,450 in cash, with the balance
payable by a subordinated promissory note in the original amount of $2.0
million. The note is subordinated to all Company senior indebtedness, bears
interest on the outstanding principal amount at a rate of 7.0% per annum, is
payable in 240 equal monthly installments of principal and interest until
maturity on October 1, 2014, and may be repaid in whole or in part by the
Company at any time without penalty.
24
In March 2000, the Company completed an offering of $10.0 million of trust
preferred securities, pursuant to which:
- the Company organized a Delaware statutory business trust called
Community (AL) Capital Trust I, or the "Trust," governed by an Amended
and Restated Declaration of Trust;
- the Company issued and sold to the Trust approximately $10.3 million in
aggregate principal amount of unsecured junior subordinated debentures,
or "debentures," which were issued under an Indenture, and which
represent the sole assets of the Trust;
- the Trust issued and sold:
- $10,000,000 of preferred capital securities, or "trust
preferred securities," representing undivided beneficial
interests in the assets of the Trust, to a third party special
purpose company, which in turn pooled the trust preferred
securities together with similar securities of other issuers
and sold certificates representing interests in that
closed-end, unmanaged pool to investors; and the Trust used
the proceeds from the sale of the trust preferred securities
to the pool to purchase the debentures from the Company; and
- $310,000 of its common securities to the Company, which
represent all of the Trust's outstanding common securities;
and
- pursuant to a Guarantee Agreement, the Company fully and
unconditionally guaranteed the payments of all amounts due on the trust
preferred securities, which guarantee is limited to the extent the
Trust has funds available for payment of distributions.
Both the debentures and the trust preferred securities accrue and pay interest
semiannually at a rate of 10-7/8% per annum and have a maturity date of March 8,
2030, at which time the principal amount of the debentures becomes due and the
trust preferred securities become mandatorily redeemable by the Company. When
the Company makes payments to the Trust, as the holder of the debentures, the
Trust, in turn, makes payments to the pool, as the holder of the trust preferred
securities. 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 1 capital under Federal
Reserve guidelines.
The Company may elect to defer payments of interest due on the debentures for up
to ten semiannual payment periods. The Company has elected to defer its March
2002, September 2002, March 2003 and September 2003 interest payments and may
elect to defer future payments based upon the Company's future liquidity needs
when those payments become due. Interest continues to accrue, on a compounded
basis, on any interest payments that the Company defers.
As of September 30, 2003, the aggregate deferred interest payments owed by the
Company on the trust preferred securities and the debentures totaled
approximately $2.5 million. In accordance with the terms of the indenture, the
Company is restricted, during any period of time that the Company has deferred
interest payments due upon the debentures, from paying dividends to the
Company's stockholders or making payments on any debt that ranks equal with or
junior to the debentures.
The trust preferred securities are mandatorily redeemable upon their maturity,
or upon their earlier redemption as provided in the indenture. Additionally, the
Company has the right to redeem the debentures purchased by the Trust:
- in whole or in part, on or after, but not at any time before, March 8,
2010; and
- 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," as those terms are
defined in the indenture.
25
As specified in the indenture, if the debentures are redeemed prior to
maturity, then the redemption price will be a percentage of the principal
amount, ranging from 105.438% during the 12 months following March 8, 2010 to
100.00% following March 8, 2020, plus any accrued but unpaid interest due on
the debentures at the time of redemption. If the debentures are redeemed prior
to March 8, 2010 following a "tax event", "capital treatment event" or
investment company event," the redemption price will be the greater of (i) 100%
of the principal amount of debentures redeemed and (ii) the present value of
the remaining principal and interest payments between the redemption date and
March 8, 2010, plus, in either case, any accrued but unpaid interest due on the
debentures at the time of redemption.
The Company sponsors an Employee Stock Ownership Plan, or "ESOP," to provide the
Company's employees with a means of owning its common stock. An employee becomes
an eligible participant in the ESOP on June 30 or December 31 of any given year
after completing 12 months of employment during which the employee is credited
with 1,000 or more hours of service. Contributions by the Company 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 any debt service due on the ESOP's loan,
which is described below.
On November 3, 1993, the ESOP borrowed $1.2 million from Colonial Bank to
purchase shares of the Company's common stock, and the Company guaranteed all
obligations of the ESOP under this ESOP loan. The ESOP loan has been amended
from time to time, including additional borrowings, and, as of September 30,
2003, $1.8 million remained outstanding under the ESOP note, which amount was
secured by 129,694 shares of the Company's common stock previously purchased and
held by the ESOP. As the ESOP note is paid off, the lender releases shares from
the pledge, and these shares are allocated to ESOP participants annually. The
ESOP presently holds 382,622 shares of the Company's common stock that are not
subject to the pledge.
Under the terms of the Company's guaranty of the ESOP loan, Colonial has
contractual provisions which provide it can hold as collateral for the ESOP loan
any of the Company's property that it otherwise from time to time holds. The
Company previously had a line of credit with Colonial Bank, unrelated to the
ESOP, which was secured by the Company's pledge of all of the outstanding shares
of the common stock of the Bank. Although the Company has paid off this line of
credit, Colonial Bank continues to hold all of the shares of the common stock of
the Bank. Accordingly, if the ESOP or the Company defaulted on the ESOP loan
from Colonial Bank, Colonial Bank could seek to foreclose upon all the
outstanding Bank stock, which is the Company's primary asset and primary source
of earnings.
The ESOP loan bears interest at a floating rate at the prime rate of interest.
As of September 30, 2003, the interest rate for the note was 4.0%. Principal and
interest payments on the ESOP loan are due monthly through November 16, 2010,
with the remaining principal and interest, if any, due upon that date. The ESOP
loan may be prepaid in whole or in part without penalty under the Colonial loan
agreement. The Company makes contributions to the ESOP that enables the ESOP to
make payments due under the ESOP loan and to make cash distributions to eligible
participants. The Company made contributions of approximately $685,000 and
$480,000 for the nine month periods ended September 30, 2003 and 2002,
respectively.
Under the terms of the ESOP, after a person ceases to be an employee of
Community Bancshares and/or its affiliates, that person is no longer eligible to
participate in the ESOP. In that case, the person may demand to receive, as a
lump sum payment, all amounts accrued to his benefit under the ESOP as of the
end of the year immediately preceding that person's termination of employment
with the Company.
Mr. Kennon R. Patterson, Sr., whose employment with the Company terminated in
January 2003, has demanded to receive from the ESOP a total of approximately
$298,000, representing the total amount accrued by Mr. Patterson during his
participation in the ESOP.
In addition, Mr. Loy McGruder, who retired from the Company in June 2003, has
requested to receive from the ESOP a total of approximately $88,000,
representing the total amount accrued by Mr. McGruder during his participation
in the ESOP.
26
To enable the ESOP to make these lump sum cash payments, the Company may be
required to contribute cash to the ESOP totaling $386,000 in addition to its
ongoing requirement to make contributions to service the ESOP debt. The Company
is evaluating its obligations to Mr. Patterson in light of Mr. Patterson's
recent indictment and the requirements of law applicable to ESOPs.
LIQUIDITY
The following is a discussion of cash flows. The Company experienced an
approximate $3.7 million increase in cash and cash equivalents during the first
nine months of 2003, due primarily to cash flows from operating activities. Cash
provided by operating activities was $3.6 million, compared to $4.3 million for
the nine month period ended September 30, 2002. Investing activities provided an
increase in cash of $21.3 million, mostly from sales, calls, pay downs and
maturities of securities, and loan payments from customers. The Company used
$21.1 million of cash and cash equivalents for financing activities during the
first nine months of 2003, compared to its use of $12.7 million for financing
activities during the first nine months of 2002. Certificates of deposits
decreased $42.6 million during the first nine months of 2003, but this was
partially offset by increases in cash from the growth of demand deposits, NOW
deposits, and other savings deposits totaling $23.1.
Community Bank represents the Company's principal operating subsidiary and
source of earnings. Dividends paid by Community Bank historically have been the
primary source of funds available to the Company, to pay expenses, service debt
and pay dividends to stockholders. Generally, the Federal Reserve Act, Section
23A, limits loans and extensions of credit from banks to their affiliated
holding companies. The Company also receives cash from its subsidiaries for its
portion of tax benefit on intercompany income tax settlements. The intercompany
tax settlements, however, are only possible if the subsidiaries generate taxable
income sufficient to pay income taxes. Community Bank discontinued paying the
Company a management fee in 2003. As described below under "- Regulatory
Restrictions," the Bank currently cannot pay dividends to the Company without
the prior approval of the regulatory authorities. As a result of these
restrictions, the Company has been unable to pay when due interest on its trust
preferred securities, of which approximately $2.5 million has been accrued. The
Company is current on its ESOP loan, but any payment default under the ESOP loan
could result in the foreclosure and loss of 100% of the Bank's common stock,
which Colonial holds and claims as collateral for the ESOP loan.
In addition to debt service, as described above, the Company also will expend
capital to settle, resolve and pay legal and other professionals to assist it in
defending against, the litigation to which it presently is subject, as described
above in "Note 3. Contingencies" to the Company's unaudited consolidated
financial statements included in this report. The Company also may apply cash to
maintain and improve capital levels at the parent company and at each
subsidiary, as described below under "-- Capital Resources." The Company also
may use cash if it determines to review and possibly sell any of its branches
that do not contribute to the Company's improved operations, or if it determines
to resolve its non-performing assets.
The Company's management is evaluating various alternatives to improve its cash
flows, liquidity, and capital position. Since the Bank cannot make payments to
the Company without prior regulatory approval, the Company has relied since
April, 2001 upon income tax refunds to fund its obligations. Such refunds have
resulted from carrybacks to prior years, which have been largely utilized and
will be limited in the future. Accordingly, to pay its ordinary expenses, as
well as, debt service requirements and the expenses of litigation and
restructuring, the Company needs additional capital. In addition, management
believes that as part of its plan to restore the Bank's profitability and grow
in its core markets, it will need capital in order to dispose of other real
estate owned and non-performing assets, to rationalize and/or sell certain
branches, to refinance or repay approximately $3.3 million of long-term
indebtedness, and to seek a restructuring of approximately $12.6 million of
outstanding trust preferred securities obligations. Management believes that new
capital is needed for these purposes. As a result of the Bank's inability to pay
dividends or otherwise make distributions to the Company, without prior
regulatory approval, and the Company's deferral of its interest obligations on
its trust preferred securities, it is believed that the Company will
27
need to sell common stock to meet the Company's liquidity and capital needs.
However, there is no assurance that such capital can be raised.
CAPITAL RESOURCES
The Company's total shareholders' equity at September 30, 2003 was 6.20% of
total assets, as compared to 7.10% at December 31, 2002. This decrease is
primarily a result of net operating losses of $4.5 million.
The Federal Reserve and the FDIC have adopted risk-based capital guidelines for
bank holding companies and state banks, respectively. The guideline for a
minimum ratio of capital to risk-weighted assets (including certain off-
balance-sheet activities, such as standby letters of credit) is 8%. At least
half of the total capital must consist of Tier 1 Capital, which includes common
equity, retained earnings and a limited amount of qualifying preferred stock,
less goodwill. The remainder may consist of non-qualifying preferred stock,
qualifying subordinated, perpetual, and/or mandatory convertible debt, term
subordinated debt and intermediate term preferred stock and up to 45% of the
pretax unrealized holding gains on available-for-sale equity securities with
readily determinable market values that are prudently valued, and a limited
amount of any loan loss allowance ("Tier 2 Capital" and, together with Tier 1
Capital, "Total Capital").
In addition, the federal agencies have established minimum leverage ratio
guidelines for bank holding companies, national banks, and state member banks,
which provide for a minimum leverage ratio of Tier 1 Capital to adjusted average
quarterly assets ("leverage ratio") equal to 3%, plus an additional cushion of
1.0% to 2.0%, if the institution has less than the highest regulatory rating.
The guidelines also provide that institutions experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Higher capital may be required in individual cases,
depending upon a bank holding company's risk profile. All bank holding companies
and banks are expected to hold capital commensurate with the level and nature of
their risks, including the volume and severity of their problem loans. Lastly,
the Federal Reserve's guidelines indicate that the Federal Reserve will continue
to consider a "Tangible Tier 1 Leverage Ratio" (deducting all intangibles) in
evaluating proposals for expansion or new activity.
The Federal Deposit Insurance Corporation Improvement Act of 1992 ("FDICIA")
requires the federal banking agencies to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized."
The capital measures used by the federal banking regulators are the Total
Capital ratio, Tier 1 Capital ratio, and the leverage ratio. Under the
regulations, a state bank will be (i) well capitalized if it has a Total Capital
ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and is not
subject to any written agreement, order, capital directive, or prompt corrective
action directive by a federal bank regulatory agency to meet and maintain a
specific capital level for any capital measure, (ii) adequately capitalized if
it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or
greater, and a leverage ratio of 4% or greater (3% in certain circumstances) and
is not well capitalized, (iii) undercapitalized if it has a Total Capital ratio
of less than 8%, a Tier 1 Capital ratio of less than 4% (3% in certain
circumstances), or (iv) critically undercapitalized if its tangible equity is
equal to or less than 2% of average quarterly tangible assets.
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 growth
limitations and are required to submit a capital restoration plan for approval.
An acceptable capital restoration plan requires the depository institution's
parent holding company to guarantee that the institution comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of 5% of the depository institution's total assets at
the time it became undercapitalized and the amount necessary to bring the
institution into compliance with applicable capital standards. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
28
significantly undercapitalized. If the controlling holding company fails to
fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third party creditors of the bank
holding company.
On December 20, 1996, the FDIC adopted the Federal Financial Institutions
Examination Council's ("FFIEC") updated internal rating system used by the
federal and state regulators for assessing the soundness of financial
institutions on a uniform basis and for identifying those institutions requiring
special supervisory attention. Each financial institution is assigned a
confidential composite rating based on an evaluation and rating of five
essential components of an institution's financial condition and operations
including Capital adequacy, Asset quality, Management, Earnings, and Liquidity.
The major changes include an increased emphasis on the quality of risk
management practices and the addition of a sixth component of Sensitivity to
market risk. For most institutions, the FDIC has indicated that market risk
primarily reflects exposures to changes in interest rates. When regulators
evaluate this component, consideration is expected to be given to management's
ability to identify, measure, monitor and control market risk; the institution's
size; the nature and complexity of its activities and its risk profile; and the
adequacy of its capital and earnings in relation to its level of market risk
exposure. Market risk is rated based upon, but not limited to, an assessment of
the sensitivity of the financial institution's earnings or the economic value of
its capital to adverse changes in interest rates, foreign exchange rates,
commodity prices, or equity prices; management's ability to identify measure,
and control exposure to market risk; and the nature and complexity of interest
rate risk exposure arising from nontrading positions. 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 institutions are subject to the appointment of a receiver or
conservator.
The Company's Tier 1 capital, including the $10 million guaranteed preferred
beneficial interest in the Company's junior subordinated deferrable interest
debentures issued in connection with the Company's trust preferred securities
offering, totaled $42.2 million at September 30, 2003, compared to $46.8 million
at December 31, 2002. Tier 1 capital plus Tier 2 capital components are referred
to as total risk-based capital, which was equal to $46.5 million at September
30, 2003, as compared to $52.9 million at year-end 2002.
The Company's Tier 1 and total risk-based capital ratios were 12.49% and 13.77%,
respectively, at September 30, 2003, compared to 12.95% and 14.63%,
respectively, at year-end 2002. At September 30, 2003, both Tier 1 and total
risk-based capital of the Company exceeded the regulatory minimum ratios of 4.0%
and 8.0%, respectively.
The Company's Tier 1 leverage ratio was 7.76% and 8.20% at September 30, 2003
and December 31, 2002, respectively. As described below under "- Regulatory
Restrictions," the Company is currently required by its regulators to maintain a
minimum Tier 1 leverage ratio of 6.50%. The Company was in compliance with that
requirement at September 30, 2003.
The Bank is required to maintain a Tier 1 capital ratio of at least 7.0%
pursuant to a "Memorandum of Understanding" issued by the FDIC and the Alabama
State Banking Department, as further described below under "- Regulatory
Restrictions."
29
The following table shows both the Company's and the Bank's regulatory total
risk based capital and Tier 1 capital amounts and ratios as of September 30,
2003 and December 31, 2002:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
TOTAL RISK BASED CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED ....................................... $ 46,483 13.77% $ 52,897 14.63%
COMMUNITY BANK ..................................... 51,935 15.49 55,693 15.50
TIER 1 CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED ....................................... 42,165 12.49 46,817 12.95
COMMUNITY BANK ..................................... 47,646 14.21 51,135 14.23
TIER 1 CAPITAL
(TO QUARTERLY AVERAGE ASSETS):
CONSOLIDATED ....................................... 42,165 7.76 46,817 8.20
COMMUNITY BANK ..................................... 47,646 8.81 51,135 9.00
FDIC INSURANCE ASSESSMENTS
The Bank's deposits are insured by BIF, and the Bank is subject to FDIC
Insurance Assessments. The FDIC utilizes a risk-based deposit insurance premium
scheme to determine the assessment rates for BIF-insured depository
institutions. Each financial institution is assigned to one of three capital
groups - "well capitalized," "adequately capitalized" or "undercapitalized" -
and further assigned to one of three subgroups within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state regulators and other information relevant to the institution's
financial condition and the risk posed to the applicable insurance fund. The
actual assessment rate applicable to a particular institution will, therefore,
depend in part upon the risk assessment classification so assigned to the
institution by the FDIC.
The FDIC's deposit insurance assessment schedule continues to range from zero to
27 basis points per annum, and has remained unchanged since 2001. The FDIC also
collects Financing Corporation ("FICO") deposit assessments. The FICO
assessments are set quarterly and ranged from 1.72 to 1.82 basis points in 2002,
and have declined from 1.68 basis points for the first quarter of 2003 to 1.52
basis points for the fourth quarter of 2003.
During the nine months ended September 30, 2002, the Bank paid approximately
$416,000 in total deposit premiums calculated at the rate of 17 basis points per
annum, and has paid approximately $643,000 of total deposit insurance premiums
through September 30, 2003, also based upon the 17 basis point per annum
assessment schedule.
30
REGULATORY RESTRICTIONS
The Company and the Bank presently are subject to a number of restrictions that
have been imposed by their regulators under four separate orders summarized
below.
Memorandum of Understanding between Community Bancshares and the Federal
Reserve Bank of Atlanta
On April 9, 2001, the Company's board of directors entered into a Memorandum of
Understanding, or "MOU," with the Federal Reserve Bank of Atlanta, or the "FRB,"
after the FRB rated the Company's condition as "less than satisfactory." Under
the terms of the MOU:
- Community Bancshares is prohibited from conducting the following
activities without the FRB's prior written approval:
- declaring or paying any dividends or any other capital
distributions on its capital stock, including repurchasing of
corporate stock;
- incurring additional indebtedness or altering the terms of existing
indebtedness; or
- increasing the annual management fees charged by Community
Bancshares to Community Bank;
- Community Bancshares must maintain a Tier 1 leverage ratio of at least
6.5% as of the end of every fiscal quarter, and must notify the FRB in
the event that the ratio is anticipated to fall below that level at the
end of any calendar quarter;
- Community Bancshares must review at least quarterly and update and
provide to the FRB its Capital and Income Plan, detailing the capital
positions and earnings performance of Community Bank and describe how
those positions and performance would be maintained at adequate levels;
- Within 60 days of the date of the MOU, Community Bancshares was
required, among other things, to:
- establish a capital and dividend policy, including minimum target
levels of capital and establishing appropriate guidelines for
dividends; and
- provide the FRB with a plan to strengthen its overall internal
audit program;
- Within 30 days of the date of the MOU, Community Bancshares was
required to provide the FRB with a contingency plan for conserving or
raising cash, as well as a listing of loans or other credit extended by
Community Bank to facilitate the purchase of Community Bancshares'
common stock;
- For any loans determined not to be in compliance with Section 23A of
the Federal Reserve Act, Community Bancshares agreed to provide a plan
detailing how the violation(s) would be corrected;
- Community Bancshares agreed to provide the FRB, within 30 days of the
end of each quarter, a written report detailing the action taken to
ensure compliance with the MOU, which must include:
- updated cash flow statements showing the projected sources and uses
of funds for a 3-year period, consisting of the current year and
the next two years;
- parent-only balance sheets, income statements and statement of
changes in stockholders' equity for the period ending that quarter;
- a litigation update concerning suits involving current or former
stockholders; and
- copies of any Community Bank correspondence with the Alabama
Banking Department, which, together with the Alabama Superintendent
of Banks, is referred to as the "Department," and the FDIC
regarding compliance with their supervisory actions.
31
In addition, on March 8, 2002, the FRB requested, and Community Bancshares
agreed, to an amendment to the MOU, which prohibits Community Bancshares from
making any distributions of interest, principal or other sums on junior
subordinated debentures or trust preferred securities without the FRB's prior
written approval. A second amendment was agreed to on November 27, 2002, which
prohibits Community Bancshares, including any of its non-bank subsidiaries and
the Employee Stock Ownership Plan, from amending any existing compensation
arrangements or initiating any new compensation, indemnification or other
payment arrangements with or on behalf of any employee, officer or director of
Community Bancshares without the FRB's prior approval.
The Company believes it was in compliance in all material respects at September
30, 2003 with the MOU, as amended.
Safety and Soundness Compliance Plan between Community Bank and the FDIC
Based on an examination as of June 30, 2001, the FDIC and the Department
requested Community Bank to develop and adopt a Safety and Soundness Compliance
Plan. This Plan was adopted on March 5, 2002, and it replaced a similar document
known as a "Memorandum of Understanding" that had been issued by the FDIC and
the Department on April 18, 2001. Pursuant to the Plan:
- the board of directors was required to review Community Bank's
organizational structure and staffing requirements and then hire and
train any additional personnel necessary to comply with the Plan;
- the board of directors was required to review and revise Community
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 board of directors had to adopt an internal audit program, an
internal controls program, procedures for internal and external loan
documentation review and a plan to reduce classified assets;
- the Bank is restricted from extending credit to borrowers holding
classified loans;
- the board of directors committed to maintaining a Tier 1 capital ratio
of at least 7.0% and to obtain regulatory approval prior to paying any
dividends to Community Bancshares;
- the board of directors is required to submit a budget and profit plan,
and has to review the adequacy of loan loss allowances to assure an
adequate balance prior to submitting Community Bank's Reports of
Condition and Income;
- Community Bank must engage an outside accounting firm to perform its
internal audit function, and must form an administration department to
strengthen its internal controls; and
- management is required to make monthly progress reports to the board of
directors regarding its success in meeting the Plan requirements and to
submit quarterly progress reports to the regulators.
The Safety and Soundness Compliance Plan is still in effect, and detailed
quarterly progress reports continue to be made to the Company's regulators. The
Company believes it was in compliance at September 30, 2003 in all material
respects with the Plan.
Cease and Desist Order between Community Bank and the Alabama State Banking
Department
On December 10, 2002, the board of directors of Community Bank entered into an
agreement with the Alabama State Banking Department. The agreement provided that
the board of directors would take certain actions regarding:
32
- an investigation into payments made in connection with several
construction projects of Community Bank;
- approval and management of payments and loans involving the Company's
directors, officers and employees; and
- expense controls and review of financial statements.
With respect to the investigation of construction payments, Community Bank's
Audit Committee, with the assistance of independent accountants and counsel, was
required to determine whether any directors, officers or employees improperly
benefited from payments made by Community Bank for construction projects. If
improper benefits were received, then the Audit Committee must determine the
amount of such benefits, fix an appropriate rate of interest due to Community
Bank on the principal amount of any benefit, require restitution of the amount
of the benefit, plus accrued interest, and investigate any apparent negligence
on the party of Community Bank employees with regard to improper payments.
Community Bank has reported the Audit Committee's progress and findings to the
Department for its review.
The board of directors of Community Bank has agreed, among other things, to
require board approval of all extensions of credit to insiders, as defined in
the FRB's Regulation O. The board also has agreed to implement certain
procedures for managing existing loans to insiders, including limitations on
renewals, methods of collection of adversely classified loans to certain
insiders, obtaining current appraisals on collateral, and securing adversely
classified loans. In addition, the board has agreed to:
- limit future extensions of credit and any payments other than ordinary
compensation to any director, officers or employee who, after
investigation, is deemed to owe restitution to Community Bank or whose
loans have been adversely classified;
- consult with the Department regarding settlement of certain litigation;
and
- obtain prior approval for sales or transfers of Community Bank's assets
benefiting any director, officer or employee deemed to owe restitution.
In an effort to control Community Bank's expenses, the board has directed the
Audit Committee to review for adequacy and appropriateness of bills paid by
Community Bank for professional services from 1998 to the present, to recover
fees improperly paid, if any, for the benefit of third parties and to establish
additional internal controls for the payment of future bills.
The Company believes it is in compliance at September 30, 2003 in all material
respects with this cease and desist order.
Stipulation and Consent to the Issuance of an Order to Cease and Desist
between Community Bank and the FDIC
On March 4, 2003, the board of directors of Community Bank and the FDIC entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist.
The Order was effective on March 22, 2003. The FDIC alleged in the Order to
Cease and Desist deficiencies relating to the supervision of the board of
directors over active management of Community Bank, supervision and control of
lending to insiders and accurate maintenance of Community Bank's books and
records. The FDIC characterized these deficiencies as unsafe and unsound banking
practices. The board of directors consented to the Order without admitting or
denying those allegations. Pursuant to the Order, the board of directors agreed
to cease and desist from conduct giving rise to the noted deficiencies and to:
- develop, within 30 days of the effective date of the Order, a written
plan specifying the responsibilities and lines of authority for
Community Bank's executive officers and outlining internal controls to
ensure compliance with the plan;
33
- refrain from making, renewing or modifying any loans to current or
former executive officers or directors without prior approval of the
FDIC and the Department;
- amend Community Bank's books and records to reflect the actual value of
bank premises and fixed assets; and
- supply a copy of the Order to Community Bancshares and provide
Community Bancshares with a summary of the Order for inclusion in
Community Bancshares' next stockholder communication.
The Company believes it is in compliance at September 30, 2003 in all material
respects with all provisions of the Order and the only on-going requirement
relates to loans to former executive officers and directors.
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth
composition, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares, and such other standards as the federal regulatory
agencies deem appropriate.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Bank, including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from the FDIC. The Bank had no brokered deposits as of September 30,
2003.
ENFORCEMENT POLICIES AND ACTIONS
The Federal Reserve, the FDIC and the Department monitor compliance with laws
and regulations. Violations of laws and regulations, or other unsafe and unsound
practices, may result in these agencies imposing fines or penalties, cease and
desist orders, or taking other enforcement actions. Under certain circumstances,
these agencies may enforce these remedies directly against officers, directors,
employees and others participating in the affairs of a bank or bank holding
company. The regulatory agencies have extensive powers to enforce their
agreements with banks and bank holding companies, including, among other
actions, civil money penalties, and possible proceedings to terminate FDIC
insurance.
34
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
GENERAL
The Company's net loss from continuing operations for the nine months ended
September 30, 2003 was approximately $4.5 million, representing an increase in
net losses of $ 0.1 million from its net loss from continuing operations of
approximately $4.4 million for the same period in 2002. The Company experienced
income from discontinued operations during the first nine months of 2002, which
included a gain on disposal of branches amounting to $5.9 million, which
increased the Company's net income during that nine month period, which was
approximately $1.6 million. During the nine months ended September 30, 2003, the
Company did not experience any income from discontinued operations. Other
comprehensive losses totaled $2.2 million for the nine month period ended
September 30, 2003 and were due to swings in the market value of the Company's
investment portfolio along with reclassification adjustments for net realized
gains on the sale of securities. Other comprehensive losses are not included in
the calculation of earnings per share. Both basic and diluted net loss per share
was $0.96 for the nine months ended September 30, 2003, as compared to net
income per share of $0.34 for the same period in 2002.
The Company's net loss for the three month period ended September 30, 2003 was
approximately $1.4 million as compared to net loss of $2.5 million for the same
period of 2002. The Company experienced decreased net losses during the third
quarter of 2003 compared to the third quarter of 2002 due to decreases in "other
operating expenses" related to large declines in both losses on other real
estate owned and other operating expenses despite significant increases in
professional fees. Losses per share were $0.29 for the three months ended
September 30, 2003 as compared to net losses per share of $0.54 for the same
period in 2002. For the three months ended September 30, 2003, other
comprehensive losses were $1.7 million and were also due to swings in the market
value of the Company's investment portfolio along with reclassification
adjustments for net realized gains on the sale of securities.
The following discussion relates to the Company's results of operations from
continuing operations. Please refer to Note 4 to the Company's Notes to
Consolidated Financial Statements for a description of the presentation for
discontinued operations.
NET INTEREST INCOME
Net interest income represents the difference between the interest earned by the
Company on its assets and the cost born by the Company on its interest-bearing
liabilities. For the nine months ended September 30, 2003, the Company's net
interest income before its provision for loan losses was $14.3 million. Net
interest income, before provision for loan losses, decreased approximately $3.5
million, or 19.7%, from $17.8 million for the same period of 2002. The decrease
in net interest income was primarily due to the decrease in revenues related to
interest earning assets because of lower yields on and smaller volumes of
interest earning assets. Revenues from interest earning assets of the Company
decreased $5.8 million, or 18.7%, to $25.2 million for the nine months ended
September 30, 2003 from $31.0 million for the same period in 2002. Average
earning assets outstanding during the first nine months of 2003 were $490.1
million, which represents a decrease of $39.5 million, or 7.5%, from $529.6
million for the first nine months of 2002. The Company's volume of interest
earning assets decreased due to reductions in outstanding loans as well as the
decline in funds available for investing due to the intended reduction in higher
priced deposits. In addition, and adding to the decrease in net interest income,
the Company's yield on its average earning assets decreased 93 basis points to
6.87% for the first nine months of 2003, compared to 7.80% for the same period
of 2002. The decrease in yield was related to the Company's decline in its loan
volume, which earn higher yields than investment securities, and its investment
of excess funds in securities due to lack of loan volume.
35
Interest expense for the nine months ended September 30, 2003 was $10.9 million,
a decrease of $2.3 million, or 17.4%, from its interest expense of $13.2 million
for the corresponding period of 2002. This decrease occurred due to a decline in
rates paid on and volume of interest-bearing liabilities. Average
interest-bearing liabilities during the first nine months of 2003 were $453.4
million, which represents a decrease of $18.0 million, or 3.8%, from $471.4
million for the same period of 2002. The volume of interest-bearing liabilities
decreased because of the Company's intent to not seek higher priced deposits as
it tries to establish more profitable and long lasting relationships with its
customers. The rate paid by the Company on average interest-bearing liabilities
decreased 52 basis points to 3.22% for the nine month period ended September 30,
2003, compared to 3.74% for the first nine months of 2002.
The Company's net interest margin for the nine months ended September 30, 2003
decreased 59 basis points to 3.89%, from 4.48% for the nine months ended
September 30, 2002, due to the decrease in net interest income. Net interest
margin is computed by dividing net interest income by average interest earning
assets. This ratio represents the difference between the average yield returned
on average interest earning assets and the average rate paid on funds used to
support those interest earning assets, including both interest-bearing and
noninterest-bearing sources.
The Company's net interest spread for the nine months ended September 30, 2003
decreased 41 basis points to 3.65%, from 4.06% for the nine months ended
September 30, 2002, as the average cost of interest-bearing sources of funds
decreased 52 basis points while the average yield on interest earning assets
decreased 93 basis points. Net interest spread measures the difference between
the average yield on interest earning assets and the average rate paid on
interest-bearing sources of funds. The Company has also experienced declines in
its net interest margin and net interest spread with the continued increase in
nonearning assets as a result of higher nonaccrual loans and other real estate
owned.
Net interest income for the three month period ended September 30, 2003 was $4.4
million compared to $5.7 million for the same period in 2002. Interest income on
earning assets was $7.8 million and $10.0 million for the periods ended
September 30, 2003 and 2002, respectively. Interest expense on interest-bearing
liabilities was $3.4 million and $4.3 million for the same periods,
respectively. Again, these decreases result from lower volumes of interest
earning assets and interest-bearing liabilities as well as lower yields and
rates paid on each, and margin compression due to low market rates of interest.
PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2003, the Company had an allowance for loan losses of $12.1
million which represented an increase of $2.3 million, or 23.5%, from a December
31, 2002 allowance of $9.8 million. The provision for loan losses was $5.5
million and $6.4 million for the nine months ended September 30, 2003 and 2002,
respectively. Management continues to make provisions for current losses in the
Company's loan portfolio, as well as, any other deterioration identified, as it
continues its effort to better evaluate the risks in its loan portfolio and to
improve the overall credit quality of the Company. In this effort, management
has increased the allowance for loan losses account as a percent of loans to
reserve for potential losses in the loan portfolio by recognizing additional
provisions for loan loss expense. As a percentage of total loans, net of
unearned income, the allowance for loan losses at the end of the period
increased to 3.81% at September 30, 2003, compared to 2.72% at December 31,
2002. Total loan charge-offs during the first nine months of 2003 amounted to
$3.6 million and were comprised primarily of consumer loans. During the same
period in 2002, total loan charge-offs were $4.7 million and were also comprised
of mostly consumer loans. Loan charge-offs exceeded recoveries by $3.2 million
during the first nine months of 2003, which represented an improvement of $1.2
million, or 27.3%, from $4.4 million net for the same period during 2002.
Management believes that the Company's allowance for loan losses at September
30, 2003 is adequate; however, no assurance can be given that additional losses
may not occur or that additional provisions to the allowance for loan losses
will not be necessary. More specifically, management has ordered an updated
appraisal of the real estate securing the $5.2 million first mortgage real
estate loan to the Company's former Chairman and Chief Executive Officer. This
could result in increased provisions for loan losses in order to maintain the
allowance for loan losses at an adequate level.
36
During the three months ended September 30, 2003, the Company had net loan
charge-offs totaling $1.0 million, as compared to $2.0 million in net loan
charge-offs for the corresponding period in the preceding year.
The following discussion relates to the Company's policies as presently in
effect:
Interest on loans is accrued from the date an advance is made. The performance
of loans is evaluated primarily on the basis of a review of each customer
relationship over a period of time and the judgment of lending officers as to
the ability of borrowers to meet the repayment terms of loans. If there is
reasonable doubt as to the repayment of a loan in accordance with the agreed
terms, the loan may be placed on a nonaccrual basis pending the sale of any
collateral or a determination as to whether sources of repayment exist. This
action may be taken even though the financial condition of the borrower or the
collateral may be sufficient ultimately to reduce or satisfy the obligation.
Generally, when a loan is placed on a nonaccrual basis, all payments are applied
to reduce principal to the extent necessary to eliminate doubt as to the
repayment of the loan. Thereafter, any interest income on a nonaccrual loan is
recognized only on a cash basis.
The Company's policy generally is to place a loan on nonaccrual status when it
is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Loans that are
contractually past due 90 days or more which are well secured and are in the
process of collection generally are not placed on nonaccrual status.
Lending officers are responsible for the ongoing review and administration of
loans assigned to them. As such, they make the initial identification of loans
which present some difficulty in collection or where circumstances indicate that
the possibility of loss exists. The responsibilities of the lending officers
include the collection effort on a delinquent loan. To strengthen internal
controls in the collection of delinquencies, senior management and the
Directors' Asset Quality Committee are informed of the status of delinquent and
"watch" or problem loans on a monthly basis. Senior management reviews the
allowance for loan losses and makes recommendations to the Board of Directors as
to loan charge-offs on a monthly basis.
The allowance for loan losses represents management's assessment of the risk
associated with extending credit and its evaluation of the quality of the loan
portfolio. Management analyzes the loan portfolio to determine the adequacy of
the allowance for loan losses and the appropriate provision required to maintain
a level believed adequate to absorb anticipated loan losses. In assessing the
adequacy of the allowance, management reviews the size, quality and risk of
loans in the portfolio. Management also considers such factors as the Bank's
loan loss experience, the amount of past due and nonperforming loans, specific
known risks, the status and amount of nonperforming assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors which affect the allowance for loan losses. An analysis of the
credit quality of the loan portfolio and the adequacy of the allowance for loan
losses is prepared by the Bank's Director of Risk Management and presented to
the Board of Directors on a monthly basis. In addition, the Bank is in the
process of engaging outside loan review consultants, on a quarterly basis, to
perform an independent review of the quality of the loan portfolio.
The Bank's allowance for loan losses is also subject to regulatory examinations
and determinations as to adequacy, which may take into account such factors as
the methodology used to calculate the allowance for loan losses and the size of
the allowance for loan losses in comparison to a group of peer banks identified
by the regulators. During their routine examinations of banks, the FDIC and the
Department may require a bank to make additional provisions to its allowance for
loan losses where, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of management.
While it is the Bank's policy to charge off in the current period loans for
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the
37
allowance is necessarily approximate and imprecise.
The following table summarizes the levels of the allowance for loan losses as of
September 30, 2003 and 2002 as well as December 31, 2002:
SEPTEMBER 30, DECEMBER 31,
----------------------------- ------------
2003 2002 2002
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning
of period ....................................................... $ 9,784 $ 7,292 $ 7,292
Loans charged off:
Commercial, financial and agricultural .......................... 566 803 2,033
Real estate - mortgage .......................................... 667 912 1,106
Consumer ........................................................ 2,336 2,990 4,169
------------ ------------ ------------
Total loans charged off ..................................... 3,569 4,705 7,308
------------ ------------ ------------
Recoveries on loans previously charged off:
Commercial, financial and agricultural .......................... 55 3 44
Real estate - mortgage .......................................... 23 10 57
Consumer ........................................................ 292 272 343
------------ ------------ ------------
Total recoveries ............................................ 370 285 444
Net loans charged off .............................................. 3,199 4,420 6,864
Reserves sold through
branch divestitures ............................................. - (752) (752)
Provision for loan losses included
in continuing operations ........................................ 5,475 6,443 10,033
Provision for loan losses included
in discontinued operations ...................................... - 75 75
------------ ------------ ------------
Allowance for loan losses at end of period ......................... $ 12,060 $ 8,638 $ 9,784
============ ============ ============
Loans, net of unearned income, at end of period .................... $ 316,745 $ 372,571 $ 359,184
============ ============ ============
Average loans, net of unearned income,
outstanding for the period (*) .................................. $ 339,850 $ 436,064 $ 419,337
============ ============ ============
SEPTEMBER 30, DECEMBER 31,
----------------------------- ------------
2003 2002 2002
------------ ------------ ------------
Ratios:
Allowance for loan losses to loans, net of
unearned income, at end of period ............................. 3.81% 2.32% 2.72%
Allowance for loan losses at end of period to
average loans, net of unearned income (*) ..................... 3.55 1.98 2.33
Net charge-offs (annualized) to average loans, net of
unearned income (*) ........................................... 1.26 1.35 1.64
Net charge-offs (annualized) to allowance for loan losses,
at end of period .............................................. 35.37 68.23 70.16
(*) Average loans for this purpose includes those associated with discontinued
operations.
The Bank has been engaged in enhanced reviews of its loan approval and credit
grading processes. The Bank has sought to better price its loans consistent with
its costs of funds and its assessment of potential credit risk. These efforts
have had the effect of slowing the Bank's loan growth as well as resulting in a
larger allowance for loan losses as risks are being identified better.
During the first nine months of 2003, the Company had loan charge-offs totaling
$3.6 million and recoveries of $370,000, as compared to $4.7 million in
charge-offs and recoveries of $285,000 for the same period in the prior
38
year. During the three months ended September 30, 2003, the Company had net loan
charge-offs totaling $1.0 million, as compared to $2.0 million in net loan
charge-offs for the corresponding period in the preceding year.
Management believes that the $12.1 million allowance for loan losses at
September 30, 2003 (3.81% of total outstanding loans), is adequate to absorb
known risks in the portfolio at such date. However, no assurance can be given
that adverse economic circumstances, generally, including current economic
events, or other events, including additional loan review or examination
findings or changes in borrowers' financial conditions, will not result in
increased losses in the Bank's loan portfolio or in additional provisions to the
allowance for loan losses.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 2003 increased
$49,000, or 0.9%, to $5.8 million, from the same period of 2002. Service charges
on deposit accounts decreased $0.4 million, or 17.4%, to $1.9 million for the
first nine months of 2003 from $2.3 million in the first nine months of 2002.
This decrease in service charges was directly related to the Company's decrease
in deposits during 2003. Also, the Company's debt cancellation fees decreased
$130,000, of 63.7%, during the first nine months of 2003, as compared to the
first nine months of 2002, due to the Company's decreased volume in debt
cancellation coverage associated with the decline in new loan volume in 2003.
Other operating income decreased $222,000 to $651,000 for the first nine months
of 2003 from $873,000 for the same period in 2002. The Company recorded net
gains on the sale of investment securities of $1.1 million during the nine
months ended September 30, 2003, compared to net gains on the sale of investment
securities of $429,000 for the same period of 2002. The Company was able to
restructure its investment portfolio to reduce prepayment and market risk, as
well as shorten the duration while taking gains on the sales of securities as
part of the restructuring. The net gains from the sale of investment securities
were the primary reason for the increase in noninterest income, although the
Company also experienced a 8.9%, or $141,000, increase in its insurance
commissions, attributable to the increased revenues from the Company's
subsidiary, Community Insurance Corp.
For the three months ended September 30, 2003, noninterest income was $1.8
million, a decrease of $0.2 million, or 10.0% from $2.0 million for the same
period in 2002. For the three month period ended September 30, 2003 from the
same period ended September 30, 2002, insurance commissions increased $98,000,
due to increased revenues from the Company's insurance subsidiary. Debt
cancellation fees decreased $40,000. The Company's other operating income
decreased $116,000 in the three month period ended September 30, 2003. The
Company's net securities gains increased $69,000 in the third quarter of 2003.
Most of the securities gains occurred as a result of the portfolio restructuring
during the first six months of 2003 which explains the increase in noninterest
income for the nine month period ended September 30, 2003, as opposed to the
decrease for the three month period ended September 30, 2003.
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 2003 were $21.8
million, representing a $1.7 million, or 7.2%, decrease from noninterest
expenses of $23.5 million for the same period in 2002. The primary components of
the Company's noninterest expenses are salaries and employee benefits, which
decreased $0.7 million, or 6.5%, to $10.1 million for the nine months ended
September 30, 2003 from $10.8 million for the same period of 2002. The decrease
in the Company's salaries and benefits expenses was related to the net effect of
the termination of the former Chairman and Chief Executive Officer of the
Company, offset by staff positions that have been added to build a more
effective management team. The Company is also centralizing more backroom
operations in an attempt to reduce overall staffing levels. Occupancy costs
increased slightly, by $5,000, or 0.3%, during the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. Furniture and
equipment expenses for the nine month period ended September 30, 2003 decreased
$0.1 million, or 8.3%, to $1.1 million from $1.2 million for the same period of
2002. This decrease reflects reductions in annual depreciation charges, as fixed
assets approach the end of their depreciable lives as well as the Company's
decision to significantly reduce the automobile fleet maintained by previous
management. The Company's insurance expense increased $403,000 to $931,000 for
the nine months ended September 30, 2003 from $528,000 for the same period in
2002. This increase
39
was due to the Company's difficulty in obtaining cost effective insurance
coverage due mostly to ongoing litigation related to prior management that
involves the Company. Director and committee fees increased $22,000, or 7.0%, to
$338,000 for the first nine months of 2003 from $316,000 for the first nine
months of 2002. This increase is the result of an increase in the number of
meetings of the Company's board of directors due to the increased activity of
the Company's board of directors during the first nine months of 2003 related
mostly to ongoing litigation and various regulatory orders. Other operating
expenses were $3.4 million and $5.3 million for the nine month periods ended
September 30, 2003 and 2002, respectively. Other operating expenses for 2002
include litigation losses of $1.7 million which are the primary reasons for the
decrease in 2003. The Company's professional services expense increased $1.5
million, or 88.2%, to $3.2 million during the first three quarters of 2003
compared to the first three quarters of 2002 due to professional services fees
paid by the Company in connection with its compliance with various regulatory
restrictions and agreements, and in connection with investigations and
litigation to which the Company is a party or in which the Company is involved.
For the three months ended September 30, 2003, noninterest expenses were $7.6
million, representing a decrease of $2.1 million over the noninterest expenses
of $9.7 million during the same three month period in 2002. Professional
services increased $841,000, related again to professional services fees paid by
the Company in connection with its compliance with various regulatory
restrictions and agreements, and in connection with investigations and
litigation to which the Company is a party or in which the Company is involved.
Net loss on the sale or write-down of other real estate owned decreased
$913,000, and other operating expenses decreased $1.9 million primarily due to
the Company experiencing a litigation loss in the third quarter of 2002.
Salaries and employee benefits decreased $135,000 in the third quarter of 2003
versus the third quarter of 2002.
INCOME TAXES
The Company attempts to increase its net income through active tax planning. The
resulting tax benefits were $2.8 million for the nine month period ended
September 30, 2003 compared to tax expense of $544,000 for the same period in
2002. The tax benefit for the third quarter of 2003 was $1.9 million compared to
the tax benefit for the third quarter of 2002 of $1.8 million.
40
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Interest rate risk is the risk to earnings or market value of equity from the
potential movement in interest rates. The primary purpose of managing interest
rate risk is to reduce interest rate volatility and achieve reasonable stability
to earnings from changes in interest rates and preserve the value of the
Company's equity. Changes in interest rates affect, among other things, the
Company's net interest income, volume of loan production and the fair value of
financial instruments, as well as of the Company's loan portfolio.
Community Bank manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Committee, which is referred to as
"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 of given magnitudes. Such estimates are based upon a number of
assumptions for each scenario, including balance sheet growth, deposit repricing
characteristics and prepayment rates. Because this model involves a number of
estimates and assumptions, which are inherently uncertain and subject to change,
the Company makes no assurance that the model is accurate or reliable, or that
the results are meaningful or reflective of any actual results.
The estimated impact on Community Bank's net interest income sensitivity over a
one year time horizon at September 30, 2003 is shown below. Such analysis
assumes an immediate and nonparallel 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.................................................... 3.00% 4.00% 5.00%
Interest income............................................... $ 30,269 $ 31,704 $ 32,837
Interest expense.............................................. 11,985 12,902 14,144
----------- ----------- -----------
Net interest income...................................... $ 18,284 $ 18,802 $ 18,693
=========== =========== ===========
Dollar change from level...................................... $ -518 $ -109
Percentage change from level.................................. -2.76% -0.58%
As shown above, in a 100 basis point rising rate environment, the net interest
margin is projected to decrease minimally, and in a 100 basis point falling rate
environment, the net interest margin is projected to decrease 2.76%. These
percent changes from a level rate scenario fall comfortably within Community
Bank's ALCO policy limit of +/-7.00%.
The Company uses additional tools to manage interest rate sensitivity, and
continually tries to manage and monitor its interest rate sensitivity.
Attempting to manage the Company's interest rate sensitivity is a constant
challenge in a changing interest rate environment and one of the objectives of
the Company's asset/liability management strategy. The Company manages its
interest rate sensitivity with monitoring tools such as GAP analysis, interest
rate simulation modeling and forecasting, using both interest rate shocks and
likely rate scenarios and, finally, analysis of the Company's economic value of
equity.
EFFECTS OF INFLATION
41
Inflation generally increases the cost of funds and operating overhead, and, to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the Company's assets
and liabilities, as a financial institution, are monetary in nature. As a
result, interest rates generally have a more significant impact on performance
than the effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction, or to the same extent, as the prices of
goods and services, low inflation or deflation generally has resulted in
decreased interest rates. Interest rates generally have been steady to lower in
the first nine months of 2003 compared to 2002.
In addition, inflation results in an increased cost of goods and services
purchased, cost of salaries and benefits, occupancy expense and similar items.
Inflation and related increases in interest rates generally decrease the market
value of investments and loans held and may adversely affect the liquidity and
earnings of our commercial banking and mortgage banking businesses, and our
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and increased interest rates would likely reduce our
earnings from such activities. Also, although earnings from the sale of
residential mortgage loans in the secondary market have been insignificant to
the Company's earnings over the past two years, the income from the sale of
residential mortgage loans in the secondary market could be reduced by
inflationary effects.
ITEM 4 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports and
other information filed with the Securities and Exchange Commission, or the
"Commission," under the Securities Exchange Act of 1934, or the "Exchange Act,"
is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to the management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of management, including the Company's Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon the foregoing, the Chief Executive Officer along with the
Chief Financial Officer concluded that, as of the end of the period covered by
this report, the Company's disclosure controls and procedures are effective, in
all material respects, in the timely alerting of them to material information
relating to the Company and its consolidated subsidiaries required to be
included in the Company's Exchange Act reports.
During the period covered by this report, there has not been any change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting. The Company has decided to review and improve
its procedures and processes related to the repossession of collateral pledged
to support defaulted loans, which the Company commenced during the period
covered by this report and presently expects to complete this process during the
fourth quarter of 2003. The Company does not, however, presently believe that
this improvement will be reasonably likely to materially affect the Company's
internal control over financial reporting.
42
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On November 11, 2003 the Company, the Bank, and certain individual defendants
entered into a new agreement to settle the Benson Litigation and the Packard
Derivative Litigation, which settlement was approved by the Company's insurers
and the Alabama Department (see Note 3 to the Consolidated Financial
Statements). This settlement supersedes the prior settlements which were
announced in November 2002 and August 2003. The court is scheduled to hold a
hearing on December 18, 2003 to consider the fairness of the settlement. The
Company's insurer is expected to pay all or substantially all of the costs of
settlement on behalf of the Company and its subsidiaries. The proposed
settlement does not contemplate a settlement of the cross-claim filed on October
1, 2003 by Dudley, Hopton-Jones, Sims & Freeman, PLLP, and one of the defendants
in the Packard Derivative Litigation, against the Company, the Bank, and several
current or former directors of the Company and the Bank. The cross-claim demands
compensating damages, interest, and costs, as well as punitive damages in some
courts. The basis for the claims of Dudley, Hopton-Jones is common law
indemnity, contractual indemnity, negligence, misrepresentation, suppression and
concealment of material facts and civil conspiracy.
Except as noted above, no reportable events or material developments have
occurred since the filing of the Company's Annual Report on Form 10-K (the "Form
10-K"), for the year ended December 31, 2002 and filed on April 15, 2003.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE
ITEM 5 - OTHER INFORMATION - NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference from Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q,
filed August 18, 2000).
3.2 Amended and Restated Bylaws of the Company.
10.1 Stock Option Agreement between Community Bancshares,
Inc. and Patrick M. Frawley dated August 1, 2003.
10.2 Stock Option Agreement between Community Bancshares,
Inc. and Stacey W. Mann dated August 1, 2003.
10.3 Stock Option Agreement between Community Bancshares,
Inc. and Kerri C. Kinney dated August 1, 2003.
10.4 Form of Stock Option Agreement between Community
Bancshares, Inc. and each of Kenneth K. Campbell,
Glynn Debter, Roy B. Jackson, John J. Lewis, Jr., Loy
D. McGruder, Merritt M. Robbins and Jimmie Trotter
dated August 1, 2003.
11.1 Statement Regarding Computation of Per Share
Earnings.
31.1 Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
43
32.1* Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* The certifications attached as Exhibit 32.1 accompany this Quarterly Report
on Form 10-Q and are "furnished" to the Securities and Exchange Commission
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
deemed "filed" by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
(b) Reports on Form 8-K
During the quarter ended September 30, 2003, the Company filed Current
Reports on Form 8-K on the following dates and pertaining to the
following items:
- Current Report on Form 8-K, filed July 2, 2003, including the
press release announcing changes in management changes at
Community Bank, including the cover letter provided to
stockholders.
- Current Report on Form 8-K, filed July 25, 2003, including the
press release announcing the Company's annual meeting of
stockholders.
- Current Report on Form 8-K, filed August 12, 2003, including the
notice that was mailed to stockholders on August 11, 2003; an
Order of the Circuit Court of Blount County, dated August 11 2003;
and a Letter of Agreement, dated July 29, 2003, concerning a
proposed settlement of the lawsuit styled Benson et al. v.
Community Bancshares, Inc. et al.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY BANCSHARES, INC.
Date: November 14, 2003 By: /s/ Patrick M. Frawley
-------------------------------------------
Patrick M. Frawley
Chairman, Chief Executive Officer, and
President
Date: November 14, 2003 By: /s/ Kerri C. Kinney
-------------------------------------------
Kerri C. Kinney
Chief Financial Officer
45
EXHIBIT INDEX
3.2 Amended and Restated Bylaws of the Company.
10.1 Stock Option Agreement between Community Bancshares,
Inc. and Patrick M. Frawley dated August 1, 2003.
10.2 Stock Option Agreement between Community Bancshares,
Inc. and Stacey W. Mann dated August 1, 2003.
10.3 Stock Option Agreement between Community Bancshares,
Inc. and Kerri C. Kinney dated August 1, 2003.
10.4 Form of Stock Option Agreement between Community
Bancshares, Inc. and each of Kenneth K. Campbell,
Glynn Debter, Roy B. Jackson, John J. Lewis, Jr., Loy
D. McGruder, Merritt M. Robbins and Jimmie Trotter
dated August 1, 2003.
11.1 Statement Regarding Computation of Per Share
Earnings.
31.1 Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1* Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* The certifications attached as Exhibit 32.1 accompany this Quarterly Report
on Form 10-Q and are "furnished" to the Securities and Exchange Commission
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
deemed "filed" by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
46