SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30, 2002
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING 5 YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_|yes |_|no
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 29, 2002, there were 4,645,589 shares of the registrant's common
stock, $.10 par value shares, outstanding.
31
FORM 10-Q
COMMUNITY BANCSHARES, INC.
JUNE 30, 2002
Table of Contents Page No.
Part 1 - Financial Information
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income and Consolidated Statements of Comprehensive
Income for the Three Months Ended June 30, 2002 and 2001 4 - 5
Consolidated Statements of Income and Consolidated Statements of Comprehensive
Income for the Six Months Ended June 30, 2002 and 2001 6 - 7
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 8 - 9
Notes to Consolidated Financial Statements 10 - 20
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 21 - 26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Part 2 - Other Information
Item 1 - Legal Proceedings 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 6 - Exhibits and Reports on Form 8-K 29
Certification of Management 30
Signatures 31
2
PART 1
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
June 30, 2002 December 31, 2001
---------------- -----------------
(UNAUDITED)
Assets
Cash ................................................................ $ 4,502,013 $ 8,312,263
Due from banks ....................................................... 16,228,534 14,724,745
Interest-bearing deposits with banks. ................................ 200,000 200,000
Federal funds sold ................................................... 6,000,000 30,000,000
Securities available for sale ........................................ 119,958,022 121,679,303
Capitalized lease receivable.......................................... 3,099,545 -
Loans ................................................................ 384,729,812 501,583,650
Less: Unearned income. ............................................... 51,973 63,991
Allowance for loan losses ......................................... 8,239,779 7,292,370
---------------- ----------------
Net Loans ......................................................... 376,438,060 494,227,289
Premises and equipment, net .......................................... 29,702,856 39,626,868
Accrued interest. .................................................... 4,734,144 7,061,043
Intangibles, net. .................................................... 2,588,016 2,629,682
Other real estate .................................................... 4,720,836 4,287,273
Other assets ......................................................... 6,484,964 6,733,102
---------------- ----------------
Total Assets....................................................... $ 574,656,990 $ 729,481,568
================ ================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing................................................ $ 54,995,846 $ 67,695,615
Interest-bearing................................................... 408,999,457 550,010,415
---------------- ----------------
Total Deposits ................................................. 463,995,303 617,706,030
Other short-term borrowings .......................................... 1,935,614 4,359,927
Accrued interest. .................................................... 3,064,792 4,400,000
FHLB borrowing ....................................................... 38,000,000 38,000,000
Capitalized lease obligations ........................................ 4,093,703 5,766,076
Long-term debt ....................................................... 4,124,913 4,666,599
Guaranteed preferred beneficial interest in the
Company's junior subordinated deferrable interest debentures ...... 10,000,000 10,000,000
Other liabilities .................................................... 3,423,788 3,917,567
---------------- ----------------
Total Liabilities ................................................. 528,638,113 688,816,199
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, 4,828,011 and 4,808,331 shares
issued, as of June 30, 2002 and December 31 2001, respectively. ... 482,801 480,833
Capital surplus ...................................................... 30,882,747 30,753,008
Retained earnings .................................................... 16,449,834 12,390,300
Treasury Stock, 20,803 shares ........................................ (396,768) (396,768)
Unearned ESOP shares - 161,619 and 174,267 shares
as of June 30, 2002 and December 31, 2001, respectively ........... (2,126,328) (2,317,902)
Accumulated other comprehensive income (loss)......................... 726,591 (244,102)
---------------- ----------------
Total Shareholders' Equity ........................................ 46,018,877 40,665,369
---------------- ----------------
Total Liabilities and Shareholders' Equity............................... $ 574,656,990 $ 729,481,568
================ ================
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
For the Three Months Ended June 30,
2002 2001
---------------- ---------------
Interest Income
Interest and fees on loans............................................ $ 9,417,916 $ 13,110,590
Interest on investment securities:
Taxable securities................................................. 1,594,748 1,515,813
Securities exempt from federal income taxes ....................... 124,408 161,369
Interest on federal funds sold ....................................... 83,107 143,313
Interest on deposits in other banks .................................. 7,430 11,389
---------------- ---------------
Total Interest Income ............................................. 11,227,609 14,942,474
---------------- ---------------
Interest Expense
Interest on deposits ................................................. 3,816,507 7,165,353
Interest on other short-term borrowings .............................. 13,316 27,524
Interest on capitalized lease obligations. ........................... 61,487 109,581
FHLB borrowings ...................................................... 569,609 597,472
Interest on long-term debt. .......................................... 51,237 76,225
Interest on guaranteed preferred
beneficial interest in the
Company's junior subordinated
deferrable interest debentures .................................... 280,303 288,731
---------------- ---------------
Total Interest Expense. ........................................ 4,792,459 8,264,886
---------------- ---------------
Net Interest Income. .................................................... 6,435,150 6,677,588
Provision for loan losses ............................................ 3,088,559 1,381,161
---------------- ---------------
Net Interest Income After Provision
For Loan Losses ...................................................... 3,346,591 5,296,427
Noninterest Income
Service charges on deposits .......................................... 920,042 1,041,782
Insurance commissions. ............................................... 552,804 415,223
Bank club dues ....................................................... 131,537 168,530
Debt cancellation fees ............................................... 85,804 113,342
Gain on sale of branches.............................................. 6,520,542 -
Other operating income ............................................... 493,908 389,911
Investment securities gains .......................................... 107,295 25,006
---------------- ---------------
Total Noninterest Income........................................... 8,811,932 2,153,794
---------------- ---------------
Noninterest Expenses
Salaries and employee benefits ....................................... 3,957,297 3,956,588
Occupancy expense .................................................... 644,654 728,153
Furniture and equipment expense. ..................................... 441,784 474,597
Director and committee fees .......................................... 110,750 134,000
Net gain/loss on disposal of assets................................... (80,150) 851
Other operating expenses ............................................. 2,503,153 2,514,866
---------------- ----------------
Total Noninterest Expenses ........................................ 7,577,488 7,809,055
---------------- ---------------
Income (loss) before income taxes ....................................... 4,581,035 (358,834)
Income tax expense (benefit)............................................. 1,754,013 (202,471)
---------------- ----------------
Net Income (Loss).................................................. $ 2,827,022 $ (156,363)
================ ================
Earnings (loss) per common share - basic................................. $ 0.61 $ (0.03)
Earnings (loss) per common share - diluted............................... $ 0.61 $ (0.03)
Dividends per share...................................................... $ - $ -
See notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
For the Three Months Ended June 30,
2002 2001
---------------- ---------------
Net Income (loss)......................................................... $ 2,827,022 $ (156,363)
Components of other comprehensive income:
Unrealized holding gains arising during the period
before income tax and reclassification adjustments ................. 2,351,133 21,858
Reclassification adjustments for net gains included in net income ..... (107,295) (25,006)
---------------- ---------------
Other comprehensive gains (losses), before income taxes ............... 2,243,838 (3,148)
Income tax (expense) benefit related to other comprehensive income..... (897,535) 1,260
---------------- ---------------
Total other comprehensive income (loss), net of income tax............. 1,346,303 (1,888)
---------------- ----------------
Comprehensive income (loss).............................................. $ 4,173,325 $ (158,251)
See notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
For the Six Months Ended June 30,
2002 2001
---------------- ---------------
Interest Income
Interest and fees on loans............................................ $ 20,432,531 $ 26,527,580
Interest on investment securities:
Taxable securities................................................. 3,145,293 2,859,898
Securities exempt from federal income taxes ....................... 269,496 361,178
Interest on federal funds sold ....................................... 226,190 270,334
Interest on deposits in other banks .................................. 14,424 28,704
---------------- ---------------
Total Interest Income ............................................. 24,087,934 30,047,694
---------------- ---------------
Interest Expense
Interest on deposits ................................................. 8,716,392 14,863,023
Interest on other short-term borrowings .............................. 32,213 64,215
Interest on capitalized lease obligations. ........................... 130,185 232,080
FHLB borrowings ...................................................... 1,132,959 1,167,081
Interest on long-term debt. .......................................... 105,135 192,433
Interest on guaranteed preferred
beneficial interest in the
Company's junior subordinated
deferrable interest debentures .................................... 560,606 560,606
---------------- ---------------
Total Interest Expense. ........................................ 10,677,490 17,079,438
---------------- ---------------
Net Interest Income. .................................................... 13,410,444 12,968,256
Provision for loan losses ............................................ 4,128,978 2,332,279
---------------- ---------------
Net Interest Income After Provision
For Loan Losses ...................................................... 9,281,466 10,635,977
Noninterest Income
Service charges on deposits .......................................... 1,905,123 2,067,884
Insurance commissions. ............................................... 1,087,932 956,065
Bank club dues ....................................................... 287,933 337,961
Debt cancellation fees ............................................... 158,759 265,409
Gain on sale of branches.............................................. 8,071,985 -
Other operating income ............................................... 710,968 823,437
Investment securities gains .......................................... 123,941 378,021
---------------- ---------------
Total Noninterest Income........................................... 12,346,641 4,828,777
---------------- ---------------
Noninterest Expenses
Salaries and employee benefits ....................................... 7,935,836 8,038,030
Occupancy expense .................................................... 1,400,001 1,440,241
Furniture and equipment expense. ..................................... 905,798 924,403
Director and committee fees .......................................... 218,350 251,498
Net loss on disposal of assets........................................ 315,425 14,046
Other operating expenses ............................................. 4,425,029 4,018,621
---------------- ---------------
Total Noninterest Expenses ........................................ 15,200,439 14,686,839
---------------- ---------------
Income before income taxes .............................................. 6,427,668 777,915
Income tax expense....................................................... 2,368,133 129,188
---------------- ---------------
Net Income......................................................... $ 4,059,535 $ 648,727
================ ===============
Earnings per common share - basic........................................ $ 0.88 $ 0.14
Earnings per common share - diluted...................................... $ 0.88 $ 0.14
Dividends per share...................................................... $ - $ -
See notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
For the Six Months Ended June 30,
2002 2001
---------------- ---------------
Net Income................................................................ $ 4,059,535 $ 648,727
Components of other comprehensive income:
Unrealized holding gains arising during the period
before income tax and reclassification adjustments ................. 1,741,763 886,389
Reclassification adjustments for net gains included in net income ..... (123,941) (378,021)
---------------- ---------------
Other comprehensive gains, before income taxes ........................ 1,617,822 508,368
Income tax expense related to other comprehensive income............... (647,129) (203,347)
---------------- ---------------
Total other comprehensive income, net of income tax................... 970,693 305,021
---------------- ---------------
Comprehensive income..................................................... $ 5,030,228 $ 953,748
================ ===============
See notes to consolidated financial statements
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
Six Months Ended June 30,
2002 2001
----------------- ---------------
Operating Activities:
Net income........................................................... $ 4,059,535 $ 648,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................................... 4,128,978 2,332,279
Provision for depreciation and amortization ......................... 1,068,169 1,275,233
Amortization of investment security premiums
and accretion of discounts. ...................................... 149,811 36,209
Deferred tax expense (benefit) ...................................... 622,232 (81,570)
Realized investment security gains. ................................. (123,941) (378,021)
Gain on sale of branches............................................. (8,071,985) -
Loss on sale of premises and equipment .............................. 315,425 14,046
Decrease in accrued interest receivable. ............................ 1,673,633 1,011,589
Decrease in accrued interest payable ................................ (679,167) (73,281)
Other ............................................................... (1,195,103) (1,865,065)
--------------- ----------------
Net cash provided by operating activities ........................ 1,947,587 2,920,146
--------------- ----------------
Investing Activities:
Proceeds from sales of securities available for sale ................ 35,674,381 10,567,117
Proceeds from maturity of securities available for sale ............. 15,000,000 25,782,082
Purchase of securities available for sale .......................... (47,361,146) (52,087,440)
Decrease in interest-bearing deposit with other banks................ - 500,000
Net decrease in loans to customers .................................. 17,809,200 9,653,210
Proceeds from sale of assets. ....................................... 60,350 87,478
Capital expenditures ................................................ (252,404) (1,690,336)
Net proceeds from sale of other real estate ......................... 398,403 478,307
Cash disbursed in settlement of branch sale.......................... (32,054,765) -
--------------- ----------------
Net cash used in investing activities ............................ (10,725,981) (6,709,582)
--------------- ----------------
Financing Activities:
Net increase in demand deposits, NOW accounts,
savings and time open deposit accounts............................ 310,669 1,443,965
Net (decrease) increase in certificates of deposit .................. (14,941,161) 11,258,768
Net (decrease) increase in short-term borrowings .................... (2,424,313) 1,241,258
Net increase in FHLB borrowings...................................... - 8,000,000
Net decrease in capitalized lease obligations ....................... (58,055) (34,290)
Repayment of long-term debt, net .................................... (415,207) (488,245)
Issuance of common stock. ........................................... - 209,865
--------------- ----------------
Net cash (used) provided by financing activities ................. (17,528,067) 21,631,321
--------------- ----------------
Net (decrease) increase in cash and cash equivalents ................... (26,306,461) 17,841,885
Cash and cash equivalents at beginning of year ......................... 53,037,008 29,006,611
--------------- ----------------
Cash and cash equivalents at end of period.............................. $ 26,730,547 $ 46,848,496
=============== ================
See notes to consolidated financial statements
8
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
Six Months Ended June 30,
2002 2001
----------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest expense..................................................... $ 12,012,698 $ 17,152,719
Income taxes......................................................... 1,611,346 (1,080,464)
Supplemental schedule of non-cash investing and financing activities:
Real estate acquired through foreclosure............................. $ 2,148,108 $ 2,036,541
Assets (except cash) disposed of in branch sale...................... 104,262,635 -
Deposit liabilities including accrued interest
released in branch sale......................................... 139,736,275 -
Capitalized lease receivable recorded as a result of branch sale..... 3,107,157 -
[The remainder of this page intentionally left blank]
See notes to consolidated financial statements
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE 1 - GENERAL
The consolidated financial statements include the accounts of Community
Bancshares, Inc. and its wholly-owned subsidiaries, collectively, hereinafter
referred to 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 Form 10-Q and Article 10 of 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 six month period ending June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. The consolidated statement of financial condition, at
December 31, 2001 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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, 2001.
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.
NOTE 2 - BRANCH DIVESTITURES
During the first six months of 2002, Community Bank consummated the sale of
the following branch offices: 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. The following outlines the total
assets sold and total liabilities released on the transactions.
Loans $ 95,130,132
Less: Allowance for loan losses 752,193
---------------
Loans, net 94,377,939
Premises and equipment, net 8,686,603
Accrued interest receivable 653,266
Other real estate owned 451,280
Other assets 93,547
---------------
Total assets $ 104,262,635
===============
Deposits $ 139,080,234
Accrued interest payable 656,041
Capitalized lease obligation 1,614,318
Other liabilities 19,036
---------------
Total liabilities $ 141,369,629
===============
The Company paid $32,054,765 in cash on the transactions and recorded a
capitalized lease receivable of $3,107,157. The Company recognized total gains
of $8,071,985 representing the premium received on core deposits less discounts
on loans and fixed assets. The Company also recognized a gain of $87,400 on the
assignment of the capitalized lease on the Boaz, Alabama location. See also Note
6 - Capitalized Leases.
NOTE 3 - CAPITAL SECURITIES
In March 2000, the Company formed a wholly-owned Delaware statutory
business trust, Community (AL) Capital Trust I (the "Trust"), which issued
$10,000,000 of guaranteed preferred securities representing undivided
10
beneficial interests in the assets of the Trust ("Capital Securities"). All of
the common securities of the Trust are owned by the Company. The proceeds from
the issuance of the Capital Securities ($10,000,000) and common
securities($310,000) were used by the Trust to purchase $10,310,000 of junior
subordinated deferrable interest debentures of the Company which carry an annual
interest rate of 10.875%. Under the terms of the indenture, the Company may
elect to defer payments of interest for up to ten semiannual payment periods.
The Company elected to defer its March 2002 interest payment and may elect to do
so again based on the liquidity needs of the Company when future payments become
due. For the duration of such deferral period, the Company is restricted from
paying dividends to shareholders or paying debt that is junior to the debenture.
The debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines.
The Capital Securities accrue and pay distributions semiannually at a rate
of 10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.
NOTE 4 - SEGMENT REPORTING
The Company's segment information is presented by line of business. Each
line of business is a distinct unit that offers products and services unique to
its operations and customers. The Company's reportable operating segments are
commercial banking, appraisal services and insurance services. The appraisal
services segment's income and expenses are those of Community Bank's subsidiary,
Community Appraisals, Inc., and the insurance services segment's income and
expense are those of Community Insurance Corp. also a subsidiary of Community
Bank. Support services are the activities of the parent company and are not
directly attributable to the reporting segments. The commercial banking segment
does include fees from the sale of ancillary insurance products in connection
with certain loans. The segment results shown below include certain intercompany
transactions that are eliminated for financial statement presentation. The
following tables reflect the approximate amounts of revenues and expenses for
the Company's segments as of and for the six months and three months ended June
30, 2002 and 2001.
Commercial Appraisal Insurance Support
For the six months ended June 30, 2002 Banking Services Services Services Consolidated
-------------- ------------- ------------- ------------ --------------
Net interest income $ 14,089,716 $ - $ (18,010) $ (661,262) $ 13,410,444
Provision for loan losses 4,128,978 - - - 4,128,978
Noninterest income 11,114,809 159,278 919,029 150,600 12,343,716
Noninterest expense 13,241,802 110,434 850,601 994,677 15,197,514
-------------- ------------- ------------- ------------ --------------
Segment income before income tax $ 7,833,745 $ 48,844 $ 50,418 $ (1,505,339) 6,427,668
============== ============= ============= ============
Consolidated income tax expense 2,368,133
--------------
Net income $ 4,059,535
==============
Total assets at June 30, 2002 $ 568,224,473 $ 332,630 $ 3,606,356 $2,493,531 $574,656,990
============== ============= ============= ============ ==============
11
Commercial Appraisal Insurance Support
For the six months ended June 30, 2001 Banking Services Services Services Consolidated
-------------- ------------- ------------- ------------ --------------
Net interest income $ 13,704,667 $ - $ (33,544) $ (702,867) $ 12,968,256
Provision for loan losses 2,332,279 - - - 2,332,279
Noninterest income 3,748,356 153,690 898,278 164,407 4,964,731
Noninterest expense 12,126,726 126,568 937,523 1,631,976 14,822,793
-------------- ------------- ------------- ------------ --------------
Segment income before income tax $ 2,994,018 $ 27,122 $ (72,789) $ (2,170,436) 777,915
============== ============= ============= ============
Consolidated income tax expense 129,188
--------------
Net income $ 648,727
==============
Total assets at June 30, 2001 $ 728,541,427 $ 273,069 $ 4,662,154 $ 2,677,772 $ 736,154,422
============== ============= ============= ============ ==============
Commercial Appraisal Insurance Support
For the three months ended June 30, 2002 Banking Services Services Services Consolidated
-------------- ------------- ------------- ------------ --------------
Net interest income $ 6,772,971 $ - $ (8,663) $ (329,158) $ 6,435,150
Provision for loan losses 3,088,559 - - - 3,088,559
Noninterest income 8,435,725 73,075 456,034 75,323 9,040,157
Noninterest expense 6,842,600 59,734 411,134 492,245 7,805,713
-------------- ------------- ------------- ------------ --------------
Segment income before income tax $ 5,277,537 $ 13,341 $ 36,237 $ (746,080) 4,581,035
============== ============= ============= ============
Consolidated income tax expense 1,754,013
--------------
Net income $ 2,827,022
==============
Commercial Appraisal Insurance Support
For the three months ended June 30, 2001 Banking Services Services Services Consolidated
-------------- ------------- ------------- ------------ --------------
Net interest income $ 7,038,507 $ - $ (16,451) $ (344,468) $ 6,677,588
Provision for loan losses 1,381,161 - - - 1,381,161
Noninterest income 1,691,638 76,690 370,485 89,130 2,227,943
Noninterest expense 6,379,248 48,727 422,059 1,033,170 7,883,204
-------------- ------------- ------------- ------------ --------------
Segment income before income tax $ 969,736 $ 27,963 $ (68,025) $ (1,288,508) (358,834)
============== ============= ============= ============
Consolidated income tax expense (202,471)
--------------
Net income $ (156,363)
==============
NOTE 5 - CONTINGENCIES
Background
At a meeting of Community Bank's Board of Directors on June 20, 2000, a
director brought to the attention of the Board the total amount of money
Community Bank had paid subcontractors in connection with the construction of a
new Community Bank office. Management of the Company commenced an investigation
of the expenditures. At the request of management, the architects and
subcontractors involved in the construction project made presentations to the
Boards of Directors of the Company and Community Bank on July 15 and July 18,
2000, respectively. At the July 18, 2000 meeting of the Board of Directors of
Community Bank, another director made a presentation alleging that Community
Bank had been overcharged by subcontractors on that construction project and
another ongoing construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee
12
comprised of independent directors of the Company and of Community Bank to
investigate the alleged overcharges. Upon completion of its investigation, the
joint committee was to inform the Boards of Directors of the Company and
Community Bank of its findings and recommendations. The joint committee retained
legal counsel and an independent accounting firm to assist the committee in its
investigation. Management was also informed that the directors of Community Bank
who alleged the construction overcharges have contacted bank regulatory agencies
and law enforcement authorities. Management believes that these agencies and
authorities either have conducted or are currently conducting investigations
regarding this matter.
Benson Litigation
On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris
E. Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court
of Marshall County, Alabama against the Company, Community Bank, certain
directors and officers of the Company and Community Bank, an employee of
Community Bank and two construction subcontractors. The plaintiffs purported to
file the lawsuit as a shareholder derivative action, which relates to the
alleged construction overcharges being investigated by the joint committee of
the Boards of Directors of the Company and Community Bank. The complaint alleges
that the directors, officers and employee named as defendants in the complaint
breached their fiduciary duties, failed to properly supervise officers and
agents of the Company and Community Bank, and permitted waste of corporate
assets by allegedly permitting the subcontractor defendants to overcharge
Community Bank in connection with the construction of two new Community Bank
offices, and to perform the construction work without written contracts,
budgets, performance guarantees and assurances of indemnification. In addition,
the complaint alleges that Kennon R. Patterson, Sr., the Chairman, President and
Chief Executive Officer of the Company, breached his fiduciary duties by
allegedly permitting the two named subcontractors to overcharge for work
performed on the two construction projects in exchange for allegedly discounted
charges for work these subcontractors performed in connection with the
construction of Mr. Patterson's residence. The complaint further alleges that
the director defendants knew or should have known of this alleged arrangement
between Mr. Patterson and the subcontractors. The complaint also alleges that
Mr. Patterson, the Community Bank employee and the two subcontractor defendants
made false representations and suppressed information about the alleged
overcharges and arrangement between Mr. Patterson and the subcontractors.
On August 15, 2000, the plaintiffs filed an amended complaint adding Andy
C. Mann, a shareholder of the Company, as a plaintiff and adding a former
director of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition, the
amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the August 2000. The amended
complaint also alleges that the defendants breached their fiduciary duties and
were guilty of gross financial mismanagement, including allegations concerning
the making or approval of certain loans and taking allegedly improper actions to
conceal the fact that certain loans were uncollectible. On September 18, 2000
the plaintiffs filed a second amended complaint. The second amended complaint
generally reiterates the allegations of the original and first amended
complaints. In addition, the second amended complaint alleges that the
plaintiffs were improperly denied their rights to inspect and copy certain
records of the Company and Community Bank. The second amended complaint also
alleges that the directors of the Company abdicated their roles as directors
either by express agreement or as a result of wantonness and gross negligence.
The second amended complaint asserts that the counts involving inspection of
corporate records and director abdication are individual, nonderivative claims.
The second amended complaint seeks, on behalf of the Company, an unspecified
amount of compensatory damages in excess of $1 million, punitive damages,
disgorgement of allegedly improperly paid profits and appropriate equitable
relief. Upon motion of the defendants, the case was transferred to the state
Circuit Court in Blount County, Alabama by order dated September 21, 2000, as
amended on October 12, 2000.
On August 24, 2000, the Board of Directors of the Company designated the
directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. On June 8, 2001,
the special litigation committee filed its report under seal with the court. On
June 18,
13
2001, the court entered an order affirming the confidentiality of the special
committee's report. On June 28, 2001, the Company, Community Bank and various
other defendants filed a motion with the court to adopt the report of the
special committee, for partial summary judgment and to realign the Company and
Community Bank as plaintiffs in the lawsuit. Following a hearing on August 29,
2001, the court denied these motions on November 8, 2001. The court also ruled
that the plaintiffs were entitled to conduct discovery except as it related to
one of the subcontractor defendants and granted the plaintiffs' motion to unseal
the report of the special litigation committee. On November 14, 2001, the
directors of the Company filed a motion for the court to alter, amend or vacate
its November 8, 2001 rulings. On February 7, 2002, the Company and Community
Bank filed a motion to disqualify Maynard, Cooper & Gale, P.C., the law firm
representing the plaintiffs, due to conflicts of interest. The court held a
hearing on these motions on February 22, 2002 and the parties are awaiting a
ruling. On February 25, 2002, the Company and Community Bank filed a motion for
limited discovery relating to its motion to disqualify the plaintiffs' law firm.
As a result of the inherent uncertainties of the litigation process, the Company
is unable at this time to predict the outcome of this lawsuit and its effect on
the Company's financial condition and results of operations. Regardless of the
outcome, however, this lawsuit could be costly, time-consuming and a diversion
of management's attention.
Towns Derivative Litigation
On November 19, 1998, Mr. William Towns, a shareholder of the Company,
filed a shareholder derivative action against the directors of the Company in
the state Circuit Court of Blount County, Alabama. Mr. Towns amended his
complaint on January 14, 1999 to add the Company and Community Bank as
defendants in the action. On February 11, 1999, the complaint was again amended
to add Mr. Pat Bellew and Mrs. Mary Bellew, who are also shareholders of the
Company, as additional plaintiffs. The complaint alleged that the directors of
the Company breached their fiduciary duty to the Company and its shareholders,
engaged in fraud, fraudulent concealment, suppression of material fact and
suppression of the plaintiff shareholders, failed to supervise management, and
conspired to conceal wrongful acts from the Company's shareholders and paid
themselves excessive director fees. The complaint also alleged that the Board of
Directors acquiesced in mismanagement and misconduct by Kennon R. Patterson,
Sr., the Chairman of the Board, Chief Executive Officer and President of the
Company, including alleged self dealing, payment of excessive compensation,
misappropriation of corporate opportunities and misappropriation of funds. The
complaint sought an unspecified amount of compensatory and punitive damages,
removal of the current directors, appointment of a new Board of Directors, and
attorneys fees and cost.
On December 21, 1998, the Company and its directors filed a motion with the
court seeking to have the complaint dismissed. On March 1, 1999, the Company's
Board of Directors appointed a special Board committee comprised of non-employee
directors of the Company, to review the plaintiffs' allegations in accordance
with Delaware law. On April 6, 1999, each of the parties to the action requested
that the court stay the litigation and related discovery, motions and hearings,
pending completion of the special committee's review. On April 30, 1999, the
court entered an order staying the litigation and related discovery, motions and
hearing in accordance with the parties' request. On October 15, 1999, the
special committee filed its final report with the court. On October 21, 1999,
the parties forwarded to the court an agreed-upon order governing the
confidentiality of the special committee's report, which the court entered on
January 2, 2000. On August 3, 2000, the Company, Community Bank and the
Company's directors filed a motion to stay the proceedings until the Company's
and Community Bank's joint investigative committee had completed its
investigation of the alleged construction overcharges discussed above. At the
request of the Company and the other defendants in the action, the court
continued a hearing on the motion to dismiss. On February 23, 2001, the court
indicated that there was no reason to continue the stay of this action. The
parties are awaiting a hearing on the defendants' motion to dismiss the case.
Management of the Company believes that the plaintiffs' allegations are false
and that the action lacks merit. The Company and its directors intend to defend
the action vigorously, and management of the Company believes that the action
will not have a material adverse effect on the Company's financial condition or
results of operations. Regardless of the outcome, however, this lawsuit could be
costly, time consuming and a diversion of management's attention.
14
Corr Family Litigation
On September 14, 2000, another action was filed in the state Circuit Court
of Blount County, Alabama, against the Company, Community Bank and certain
directors and officers of the Company and Community Bank by Bryan A. Corr and
six other related shareholders of the Company alleging that the directors
actively participated in or ratified the misappropriation of corporate income.
The action was not styled as a shareholder derivative action. On January 3,
2001, the defendants filed a motion for summary judgment on the basis that these
claims are derivative in nature and cannot be brought on behalf of individual
shareholders. The court has not ruled on the motion. The Company and its
directors believe that this lawsuit is without merit and intend to defend the
action vigorously. Although management currently believes that this action will
not have a material adverse effect on the Company's financial condition or
results of operations, regardless of the outcome, the action could be costly,
time consuming and a diversion of management's attention.
Auto Loan Litigation
On June 28, 2000, Community Bank filed an action in the United States
District Court for the Northern District of Alabama against Carl Gregory Ford
L-M, Inc., an automobile dealership located in Ft. Payne, Alabama, Carl Gregory
and Doug Broaddus, the owners of the dealership, several employees and former
employees of the dealership and Gerald Scot Parrish, a former employee of
Community Bank, with respect to certain loans originated during 1998 in
Community Bank's Wal-Mart office in Ft. Payne, Alabama. In the complaint
Community Bank alleged that the defendants willingly and knowingly conducted,
participated in, were employed by or associated with, or aided and abetted an
enterprise within the meaning of the Racketeer Influenced and Corrupt
Organizations Act (RICO) for the purpose of defrauding Community Bank. The
complaint also asserted that the defendants committed fraud, misrepresentation
and deceit by submitting to Community Bank and/or approving applications for
automobile loans which contained false and/or fraudulent information for the
purpose of deceiving, influencing and persuading Community Bank to provide loans
to customers of the automobile dealership who were otherwise not qualified to
receive such loans, and suppressed material facts regarding the veracity of
information contained in loan applications and the ability of persons seeking
the loans to repay them. Community Bank also alleged in the complaint that the
automobile dealership is responsible for the acts of its officers, agents and
employees, and that the dealership and its management failed to adequately train
and/or supervise its employees. The complaint stated that the defendants
participated in a conspiracy to violate RICO and Alabama statutes dealing with
fraud, misrepresentation and suppression of material facts, and asserted civil
liability under Alabama law for violation of federal statutes dealing with
financial institution fraud, mail and wire fraud and making false statements for
the purpose of influencing the actions of a financial institution upon an
application or loan.
On June 29, 2000 and August 31, 2000, the court granted Community Bank's
motions to dismiss without prejudice two of the employees of the automobile
dealership as defendants in the action. On September 13, 2000, the court granted
Mr. Parrish's action to dismiss the complaint, but granted Community Bank 15
days to amend the complaint. On September 27, 2000, Community Bank filed an
amended complaint which generally reiterated the allegations of the original
complaint and added specific information concerning the allegedly fraudulent
activity and the use of the United States mail, telephone and other wire
transmissions in the conduct of such activity. On December 1, 2000, the court
dismissed Community Bank's claims based upon mail and wire fraud in the amended
complaint but otherwise denied Mr. Parrish's motion to dismiss the complaint. On
October 10, 2001, the court granted a joint motion to bifurcate the trial into
separate stages of liability and damages. On October 23 and November 19, 2001,
the court granted Community Bank's motion to dismiss without prejudice three of
the employees of the automobile dealership as defendants in the action.
The defendants have filed answers to the amended complaint which generally
deny the material allegations in the complaint and allege that any injury
suffered by Community Bank was the result of the contributory negligence of
Community Bank, its officers, employees and agents. In the lawsuit, Community
Bank seeks damages of an unspecified amount to recover losses incurred in
connection with the loans made at Community Bank's Wal-Mart office in Ft. Payne,
15
Alabama, along with all costs associated with the lawsuit. Any amounts received
by Community Bank as a result of this litigation will be treated as a recovery
on loan losses.
Employee Litigation
On November 15, 2000, Michael W. Alred and Michael A. Bean, two former
directors and executive officers of Community Bank, filed suit against Community
Bank in the United States District Court for the Northern District of Alabama
alleging that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees. According to the complaint, the information which these two
individuals provided to authorities concerned certain bank construction
projects, specific loans, charge-offs, expenses and past due accounts. The
complaint seeks reinstatement of the plaintiffs to their former positions as
officers and directors of Community Bank as well as compensatory and punitive
damages. Community Bank and its directors believe this lawsuit is without merit
and intend to defend the action vigorously. Management of the Company believes
that this action will not have a material adverse effect on the Company's
financial condition or results of operations. Regardless of the outcome, the
litigation could be costly, time consuming and a diversion of management's
attention.
General
The Company and its subsidiaries are from time to time also parties to
other legal proceedings arising in the ordinary course of business. Management
believes, after consultation with legal counsel, that no such proceedings, if
resulting in an outcome unfavorable to the Company, will, individually or in the
aggregate, have a material adverse effect on the Company's financial condition
or results of operations.
The Company's Certificate of Incorporation provides that, in certain
circumstances, the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements and legal expenses incurred as a result
of their service as officers and directors of the Company. Community Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.
NOTE 6 - CAPITALIZED LEASES
On May 31, 2002, the purchaser of Community Bank's Marshall County branch
offices assumed the Company's lease on the Boaz, Alabama location. This lease
had been accounted for under capitalized lease rules. The balances of the
capitalized lease asset and capitalized lease obligation on May 31, 2002 were as
follows:
Capitalized lease asset $ 1,696,576
Less: Accumulated depreciation 169,658
----------------
Net capitalized lease asset $ 1,526,918
================
Capitalized lease obligation $ 1,614,318
================
A gain of $87,400 was recognized to account for the sale of the asset and
the release of the obligation and is included in "net loss on disposal of
assets" on the Consolidated Statements of Income.
The purchaser also acquired the land, building and land improvements
located in Albertville, Alabama under a sales type lease. The lease agreement
calls for 60 payments of $14,000 per month beginning June 1, 2002. The lease
ends on May 31, 2007 and is subject to options which give the right for the
seller to require the purchaser to purchase the property and gives the right to
the purchaser to require the seller to sell the property. The purchase price
upon option by either party is $2,621,544. This lease/sale qualifies and is
accounted for under capitalized lease rules.
16
The following is a schedule by year of the future minimum lease payments to
be received together with the present value of the net minimum lease payments as
of June 30, 2002.
Years ending December 31,
2002 $ 84,000
2003 168,000
2004 168,000
2005 168,000
2006 168,000
2007 2,691,591
--------------
Total minimum lease payments 3,447,591
Less: Amount representing interest 348,046
--------------
Present value of net minimum lease payments $ 3,099,545
==============
NOTE 7 - INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. The statement requires that goodwill and other intangible
assets with indefinite useful lives no longer be amortized, but instead an
entity must perform an assessment of whether these assets are impaired as of the
date of adoption and test for impairment at least annually in accordance with
the provisions of the statement. The statement also required that intangible
assets with determinable lives be amortized. The Company adopted Statement No.
142 on January 1, 2002.
Acquired goodwill and other intangible assets at June 30, 2002, are
detailed as follows:
As of June 30, 2002
-------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------------- --------------- --------------
Identifiable amortizing assets................................. $ 2,063,311 $ 1,268,102 $ 795,209
Nonamortizing goodwill......................................... 2,851,372 1,058,565 1,792,807
-------------- --------------- --------------
Total acquired intangible asset................................ $ 4,914,683 $ 2,326,667 $ 2,588,016
============== =============== ==============
Aggregate amortization expense for the period ended June 30, 2002, was
$41,656. Aggregate amortization expense of $83,312 is estimated for the years
ending December 31, 2002 and 2003.
17
The following table presents net income and earnings per share as reported
and adjusted to exclude tax effected amortization of goodwill that is no longer
being amortized.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------- -------------- --------------- --------------
Reported net income (loss)..................... $ 2,827,022 $ (156,363) $ 4,059,535 $ 648,727
Add back: Goodwill amortization................ - 58,223 - 116,447
------------- -------------- --------------- --------------
Adjusted net income (loss)..................... $ 2,827,022 $ (98,140) $ 4,059,535 $ 765,174
============= ============== =============== ==============
Basic earnings per share:
Reported net income (loss).................. $ 0.61 $ (0.03) $ 0.88 $ 0.14
Add back: Goodwill amortization............. - 0.01 - 0.03
------------- -------------- --------------- --------------
Adjusted net income (loss)..................... $ 0.61 $ (0.02) $ 0.88 $ 0.17
============= ============= =============== ==============
Diluted earnings per share:
Reported net income (loss).................. $ 0.61 $ (0.03) $ 0.88 $ 0.14
Add back: Goodwill amortization............. - 0.01 - 0.03
------------- -------------- --------------- --------------
Adjusted net income (loss)..................... $ 0.61 $ (0.02) $ 0.88 $ 0.17
============= ============= =============== ==============
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. In June 2000, the Financial Accounting Standards Board also issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as
amended by SFAS No. 138 did not have a material impact on the Company's
consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of
the provisions of SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, it provides new standards
for reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving the
use of special purpose entities. SFAS No. 140 also prescribes additional
disclosures for collateral transactions and for securitization transactions
accounted for as sales. The new collateral standards and disclosure requirements
are effective for fiscal years ending after December 15, 2000, while the new
standards for the derecognition of financial assets are effective for transfers
made after March 31, 2001. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
18
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes ABP Opinion No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method, the purchase method. Prior to the issuance of this statement,
subject to certain criteria, business combinations were accounted for using one
of two methods, the pooling-of-interests method or the purchase method. The two
methods produce different financial statement results. The single-method
approach used in SFAS No. 141 reflects the conclusion that virtually all
business combinations are acquisitions and therefore should be accounted for in
the same manner as other asset acquisitions based on the values exchanged. This
statement provides expanded and revised guidance related to the allocation of
the purchase price to goodwill and other intangibles arising from the business
combination. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 has not had a
material effect on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS No. 142 provides new standards for accounting relating to
intangible assets after initial recognition in the financial statements. This
statement proscribes the accounting practice of amortizing or expensing
intangibles ratably over a prescribed period of time and imposes new guidance
requiring that goodwill and certain other intangibles be tested for impairment
at least annually by comparing fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001. The adoption of this statement has not had a material effect on the
Company's consolidated financial statements. See also Note 7 - Intangible
Assets.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business (as previously defined in that
opinion). This statement also amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement has not had a material effect
on the Company's consolidated financial statements.
NOTE 9 - RECENTLY PASSED LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Acts
of 1933 and 1934. It has far reaching effects on the standards of integrity for
corporate management, board of directors, and executive management. Additional
disclosures, certifications and possibly procedures will be required of the
Company. We do not expect any material adverse effect on the Company as a result
of the passage of this legislation; however, the full scope of the Act has not
been determined. The Act provides for additional regulations and
19
requirements of publicly-traded companies which have yet to be issued.
NOTE 10 - SUBSEQUENT EVENTS
On August 2, 2002, Community Bank received notice from the Alabama Banking
Department (the "Department") that the Department had denied Community Bank's
request of April 11, 2002, that Dudley, Hopton-Jones, Sims & Freeman PLLP
("Dudley Hopton") be approved as Community Bank's independent auditor. Dudley
Hopton also serves as the Company's independent auditor. Management of the
Company understands that representatives of Dudley Hopton have scheduled
meetings with the staff of the Department to review the basis of the
Department's decision and to seek its reversal. Based in large part on the
outcome of those discussions and the availability of additional information
regarding the basis for the Department's decision, the Audit Committee of the
Company will consider whether it will continue to engage Dudley Hopton as the
Company's independent auditor. In connection with the Department's notice, the
Audit Committee is presently unaware of facts that would cause it to conclude
that there are any material misstatements in the Company's previously issued
audited financial statements.
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. (the "Company)
and its subsidiaries. Unless the context otherwise indicates, the Company shall
include the Company and its subsidiaries. All dollar amounts are rounded to the
nearest thousand. This analysis should be read in conjunction with the 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
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Forward looking information
Certain statements in this Report are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are not based on historical facts and may be
identified by their reference to a future period or by the use of
forward-looking terminology, such as "anticipate," "estimate," "expect," "may"
and "should." These forward-looking statements include, without limitation,
those relating to the Company's future growth and profitability, economic
prospects of market areas, dividends, pending litigation, branch office
divestitures, non-compliant or impaired loans, capital requirements, operating
strategy, deposits, consumer base, allowance for loan losses, non-performing
assets, interest rate sensitivity, market risk and impact of inflation. We
caution you not to place undue reliance on these forward-looking statements.
Actual results could differ materially from those indicated in such
forward-looking statements due to a variety of factors. These factors include,
but are not limited to, changes in economic conditions and government fiscal and
monetary policies, changes in prevailing interest rates and effectiveness of the
Company's interest rate strategies, laws, regulations and regulatory authorities
affecting financial institutions, changes in and effectiveness of the Company's
operating or expansion strategies, geographic concentration of the Company's
assets and operations, competition from other financial services companies,
unexpected financial results or outcomes of legal proceedings, the effects of
recent bank sales, changes in accounting rules and securities laws and other
risks detailed from time to time in the Company's press releases and filings
with the Securities and Exchange Commission. We undertake no obligation to
update these forward-looking statements to reflect events or circumstances
occurring after the date of this Report.
FINANCIAL CONDITION
June 30, 2002 compared to December 31, 2001
Summary
Total assets at June 30, 2002 were $574,657,000, down from $729,482,000 at
December 31, 2001. The decrease in total assets was mainly attributable to
Community Bank branch divestitures as well as an overall decrease in loan
volume. Refer to "Notes to Consolidated Financial Statements, Note 2 - Branch
Divestitures" throughout the discussion of financial condition.
Earning Assets
The earning assets of the Company are mainly composed of investment
securities, federal funds sold and loans. Investment securities decreased
$1,721,000, or 1.4%, to $119,958,000 at June 30, 2002 from $121,679,000 at
December 31, 2001. The investment securities portfolio is used to make various
term investments, to provide a source of liquidity and to serve as collateral to
secure certain government deposits. Short-term investments in the form of
interest-bearing deposits with banks were $200,000 at both June 30, 2002 and
December 31, 2001. The Company had $6,000,000 in federal funds sold at June 30,
2002, compared to $30,000,000 at December 31, 2001, representing a decrease of
$24,000,000, or 80.0%. The decrease in federal funds sold was primarily due to
the cash outlay used in the branch divestiture transactions. Management had kept
federal funds sold balances at high levels in anticipation of funding necessary
to consummate the sale of its branch offices and depleted those funds upon the
aforementioned consumation.
21
Loans comprise the largest single category of the Company's earning assets.
Loans, net of unearned income, were $384,678,000 at June 30, 2002 down
$116,842,000, or 23.3%, from $501,520,000 at December 31, 2001. This decrease is
partly attributable to the sale of the loan portfolio in the branch
divestitures, but the Company continues to experience a decline in total loans
because of economic downturns, the tightening of the Company's credit standards,
and increased loan charge-offs.
Nonperforming Assets and Past Due Loans
Overall delinquency trends have slowed in terms of new additions, but the
migration is disappointing. Loans past due 30-89 days have decreased $4,688,000
since December 31, 2001 which depicts a slowing down of new past due accounts;
however, each category of nonperforming assets (defined as nonaccruing loans,
loans past due 90 days or greater, restructured loans, nonaccruing securities,
and other real estate) have increased since December 31, 2001, indicating an
overall trend of past due loans eventually migrating to nonperforming status.
Between December 31, 2001 and June 30, 2002, the ratio of the allowance for
loan losses to total nonperforming assets declined from 58.37% at year-end 2001
to 42.82% at June 30, 2002. The ratio of total nonperforming assets to total
assets increased to 3.35% at June 30, 2002 from 1.71% at year-end 2001, while
the ratio of nonperforming loans to total loans, net of unearned income,
increased to 3.77% at June 30, 2002 from 1.64% at December 31, 2001. These
changes were primarily due to an increase in nonaccruing loans of $2,081,000, or
35.5%, to $7,940,000 at June 30, 2002 from $5,859,000 at December 31, 2001 and
an increase in other real estate of $434,000, or 10.1%, to $4,721,000 at June
30, 2002 from $4,287,000 at December 31, 2001. The Company also experienced an
increase in loans past due 90 days or more of $625,000, or 26.6%, to $2,971,000
at June 30, 2002 from $2,346,000 at December 31, 2001. Total nonperforming
assets increased $6,750,000, or 54.0%, to $19,242,000 at June 30, 2002 from
$12,492,000 at December 31, 2001. In their efforts to improve the asset quality
and credit standards of the Company, management continues its efforts to
recognize problem credits in a timely manner through the loan review process
implemented in 2001.
Funding
The Company's primary sources of funding are from deposits from the
customers of Community Bank and from other short-term and long-term borrowings.
Total deposits of $463,995,000 at June 30, 2002 reflected a decrease of
$153,711,000, or 24.9%, from $617,706,000 at year-end 2001. Deposits are
Community Bank's primary source of funds. Noninterest-bearing deposits decreased
$12,700,000, or 18.8%, to $54,996,000 at June 30, 2002 from $67,696,000 at
December 31, 2001, while interest-bearing deposits decreased $141,011,000, or
25.6%, to $408,999,000 at June 30, 2002 from $550,010,000 at December 31, 2001.
Certificates of deposit of $100,000 or more decreased $31,998,000, or 26.8%, to
$87,538,000 at June 30, 2002 from $119,536,000 at December 31, 2001. The branch
divestitures accounted for $139,080,000 of the decrease in total deposits.
Total short-term borrowings decreased $2,424,000, or 55.6%, to $1,936,000
at June 30, 2002 from $4,360,000 at December 31, 2001. This decrease was
attributable to a commercial account set up as "securities sold under agreements
to repurchase" arrangement that transferred after the Marshall County, Alabama
divestiture. FHLB borrowings remained constant at $38,000,000 for both June 30,
2002 and December 31, 2001, while long-term debt decreased $542,000, or 11.6%,
to $4,125,000 at June 30, 2002 from $4,667,000 at December 31, 2001.
In March 2000, the Company formed a wholly-owned Delaware statutory
business trust, Community (AL) Capital Trust I (the "Trust"), which issued
$10,000,000 of guaranteed preferred securities representing undivided beneficial
interests in the assets of the Trust ("Capital Securities"). All of the common
securities of the Trust are owned by the Company. The proceeds from the issuance
of the Capital Securities ($10,000,000) and common securities ($310,000) were
used by the Trust to purchase $10,310,000 of junior subordinated deferrable
interest debentures of the Company which carry an annual interest rate of
10.875%. Under the terms of the indenture, the Company may elect to defer
payments of interest for up to ten semiannual payment periods. The Company
elected to defer its March 2002 interest payment and may elect to do so again
based on the liquidity needs of the Company when future payments become due. For
the duration of such deferral period, the Company is restricted from paying
dividends to shareholders
22
or paying debt that is junior to the debentures. The debentures represent the
sole asset of the Trust. The debentures and related income statement effects are
eliminated in the Company's consolidated financial statements. The Company is
entitled to treat the aggregate liquidation amount of the debentures as Tier I
capital under Federal Reserve guidelines.
The Capital Securities accrue and pay distributions semiannually at a rate
of 10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.
Liquidity
The following is a discussion of cash flows. The Company experienced a
$26,306,000 decrease in cash and cash equivalents during the first six months of
2002. Cash provided by operating activities was $1,948,000. Investing activities
used only $10,726,000 despite a cash payment of $32,055,000 in the divestiture
of ten Community Bank branches. This payment was offset by increases in cash
from other investing activities such as proceeds from the sale or calls of
securities and decreases in loans to customers. Financing activities used
$17,528,000 of cash and cash equivalents during the first six months of 2002.
Certificates of deposits decreased $14,941,000, excluding any decreases for the
divested branches, but was partially offset by increases in cash from the growth
of demand deposits, NOW deposits, and other savings deposits totaling $311,000
also excluding any decreases due to the branch divestitures.
Dividends paid by Community Bank are the primary source of funds available
to the Company. The Company relies on dividends from Community Bank in order to
pay expenses, service debt and pay dividends to shareholders. Certain
restrictions exist regarding the ability of Community Bank to transfer funds to
the Company in the form of cash dividends, loans or advances. Although dividends
from Community Bank are the primary source of funding, the Company also receives
cash from Community Bank in the form of management fee income and generally
retains cash for its portion of tax benefit on intercompany income tax
settlements. Without dividends or management fee income from Community Bank, the
Company would not be able to pay expenses or service debt. Management fees for
the first six months of 2002 were $150,000. Community Bank cannot pay a dividend
to the Company without prior approval of the regulatory authorities, nor is the
Company able to increase the management fee charged to Community Bank without
the prior written approval of the Federal Reserve.
Capital Resources
Total shareholders' equity at June 30, 2002 was 8.00% of total assets as
compared to 5.57% at December 31, 2001. The increase experienced during the
first six months of 2002 is primarily a result of increased retained earnings
from net income of $4,060,000 coupled with an increase in accumulated other
comprehensive income and a decline in total assets attributable to the Community
Bank branch divestitures.
Bank regulatory authorities have issued risk-based capital guidelines that
take into consideration risk factors associated with various categories of
assets, both on and off the balance sheet. Under the guidelines, capital
strength is measured in two tiers, which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier I capital, which includes common stock, retained earnings and guaranteed
preferred beneficial interest in the Company's junior subordinate deferrable
interest debentures, amounted to $53,499,000 at June 30, 2002, compared to
$49,118,000 at December 31, 2001. Tier II capital components include
supplemental capital components,
23
such as qualifying allowance for loan losses and qualifying subordinated debt.
Tier I capital plus the Tier II capital components are referred to as Total
Risk-based capital, which was $59,814,000 at June 30, 2002 as compared to
$56,833,000 at year-end 2001. The percentage ratios, as calculated under the
guidelines, for Tier I and Total Risk-based capital were 14.11% and 15.78%,
respectively, at June 30, 2002, compared to 10.02% and 11.59%, respectively, at
year-end 2001. At June 30, 2002, both Tier I and Total Risk-based capital of the
Company exceeded the regulatory minimum ratios of 4% and 8%, respectively.
Another important indicator of capital adequacy in the banking industry is
the leverage ratio. The Tier I Leverage ratio is defined as the ratio that the
Company's Tier I capital bears to total average assets minus goodwill. The
Company's Tier I Leverage ratios were 8.39% and 6.70% at June 30, 2002 and
December 31, 2001, respectively, exceeding the regulatory minimum requirement of
4%.
RESULTS OF OPERATIONS
Three months and six months ended June 30, 2002 and 2001
Summary
The Company's net income for the three months ended June 30, 2002 was
$2,827,000, an increase of $2,983,000 from a net loss of $156,000 for the same
period in 2001. Both basic and diluted net income per share was $0.61 for the
three months ended June 30, 2002, as compared to a net loss per share of $0.03
for the same period in 2001. This increase during the second quarter of 2002
compared to the same period of 2001 resulted only from the gain on sale of ten
Community Bank branches.
The Company's net income for the six months ended June 30, 2002 was
$4,060,000 up $3,411,000 from June 30, 2001 net income of $649,000. Included in
this increase is the gain on sale of branches of $8,072,000 along with an
increase of $442,000 in net interest income and offset by an increase in
provision for loan losses of $1,797,000, a decrease in noninterest income
(excluding the gain on sale of branches) of $554,000, an increase in noninterest
expenses of $514,000 and an increase in income tax expense of $2,239,000.
Net Interest Income
The following discussion is on a fully taxable equivalent basis. Net
interest income, the difference between interest earned on assets and the cost
of interest-bearing liabilities, was $13,623,000 for the six months ended June
30, 2002. Net interest income, before provision for loan losses, increased
$365,000, or 2.8%, from $13,258,000 for the same period of 2001. Revenues from
interest earning assets of the Company decreased $6,037,000, or 19.9%, to
$24,300,000 for the six months ended June 30, 2002 from $30,337,000 for the same
period in 2001. This decrease was due to lower yields on interest earning assets
as well as lower average balances of interest earning assets. Average earning
assets outstanding during the first six months of 2002 were $609,356,000, which
represents a decrease of $32,154,000, or 5.0%, from $641,510,000 for the first
six months of 2001. The Company's fully taxable equivalent yield on its average
earning assets decreased 150 basis points to 8.04% for the first six months of
2002, compared to 9.54% for the same period of 2001. This decrease is reflective
of the overall decrease in interest rates experienced during the year 2001.
Interest expense for the six months ended June 30, 2002 decreased $6,402,000, or
37.5%, to $10,677,000 from $17,079,000 for the corresponding period of 2001.
This decrease occurred due to a decline in rates paid on interest-bearing
liabilities and more than offset the decline in income on interest-bearing
assets. Average interest-bearing liabilities during the first six months of 2002
were $566,047,000, which represents a decrease of $32,993,000, or 5.5%, from
$599,040,000 for the same period of 2001. The rate paid on average
interest-bearing liabilities decreased 195 basis points to 3.80% for the six
month period ended June 30, 2002, compared to 5.75% for the first six months of
2001. This decrease is also attributable to the overall decline in interest
rates during the year 2001.
24
The Company's net interest margin, on a fully taxable equivalent basis, for
the six months ended June 30, 2002 increased 34 basis points to 4.51%, from
4.17% for the six months ended June 30, 2001, due to the increase in net
interest income, on a fully taxable equivalent basis. Net interest margin is
computed by dividing net interest income, on a fully taxable equivalent basis,
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, on a fully taxable equivalent basis, for
the six months ended June 30, 2002 increased 45 basis points to 4.24%, from
3.79% for the six months ended June 30, 2001, as the average cost of
interest-bearing sources of funds decreased 195 basis points while the fully
taxable equivalent average yield on interest earning assets decreased 150 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.
Provision for Loan Losses and Allowance for Loan Losses
At June 30, 2002, the allowance for loan losses was $8,240,000 which
represented an increase of $948,000, or 13.0%, from the December 31, 2001 amount
of $7,292,000. This increase resulted from management's decision to make
provisions for current losses in the loan portfolio as it continues its effort
to improve the overall credit quality of the Company. The provision for loan
losses was $4,129,000 and $2,332,000 for the six months ended June 30, 2002 and
2001, respectively. The allowance for loan losses account as a percent of loans
to reserve for potential losses in the loan portfolio has increased by virtue of
additional provisions for loan loss expense as well as a reduction in total
loans. As a percentage of total loans, net of unearned income, the allowance for
loan losses increased to 2.14 % at June 30, 2002, compared to 1.45% at December
31, 2001. Loan charge-offs exceeded recoveries by $2,429,000 during the first
six months of 2002, which represented a decrease of $334,000, or 12.1%, from
$2,763,000 for the same period during 2001.
Provision for loan losses for the three month period ended June 30, 2002
were $3,089,000 an increase of $1,707,000, or 123.6%, over the same period for
2001. Loan charge-offs exceeded recoveries by $1,575,000 for the three month
period ended June 30, 2002. Management believes that the allowance for loan
losses at June 30, 2002 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.
Noninterest Income
Noninterest income for the six months ended June 30, 2002 increased
$7,518,000 to $12,347,000, from $4,829,000 for the same period of 2001, due to a
gain recognized on the sale of ten Community Bank branches. Service charges on
deposit accounts decreased $163,000, or 7.9%, to $1,905,000 for the first six
months of 2002 from $2,068,000 in the first six months of 2001. Debt
cancellation fees decreased during the first six months of 2002, as compared to
the first six months of 2001, $107,000, or 40.2%, due to decreased volume in
debt cancellation coverage associated with the decline in the Company's loan
portfolio. Other operating income decreased $112,000, or 13.7%, to $711,000 for
the first six months of 2002 from $823,000 for the same period of 2001. The
Company recorded net gains on the sale of investment securities of $124,000
during the six months ended June 30, 2002, compared to net gains on the sale of
investment securities of $378,000 for the same period of 2001. The gain
recognized on the sale of ten Community Bank branches was $8,072,000 which
represented a range of 7%-8% premium on the 30 day average of core deposits less
an agreed upon discount on loans and fixed assets.
For the three month period ended June 30, 2002, noninterest income was
$8,812,000 as compared to $2,154,000 for the same period in 2001. This increase
was attributable to the $6,521,000 gain recognized on the sale of the DeKalb
County, Alabama and Marshall County, Alabama branch offices during the second
quarter of 2002. The Company has experienced increases of $138,000 for the three
month period ended June 30, 2002 as compared to the three month period ended
June 30, 2001 in its insurance commissions income due to increased revenues at
Community Bank's subsidiary Community Insurance Corp., but has experienced
decreases in service charges on deposit accounts, bank club dues and debt
cancellation fees.
25
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 2002 were
$15,200,000, representing a $513,000, or 3.5%, increase from $14,687,000 for the
same period of 2001. This increase is in most part due to a loss recognized on
the disposal of one building located in Uniontown, Alabama and one building
located in New Hope, Alabama in the first quarter of 2002 and included in the
$315,000 net loss on disposal of assets. The primary components of noninterest
expenses are salaries and employee benefits, which decreased $102,000, or 1.3%,
to $7,936,000 for the six months ended June 30, 2002 from $8,038,000 for the
same period of 2001. The decrease in salaries and employee benefits is
attributable to the branch divestitures as well as managements continued effort
to lower staff costs. Occupancy costs decreased $40,000, or 2.8%, to $1,400,000
for the first six months of 2002 from $1,440,000 for the same period of 2001.
Furniture and equipment expenses for the six month period ended June 30, 2002
decreased $18,000, or 1.9%, to $906,000 from $924,000 for the same period of
2001. Director and committee fees decreased $33,000, or 13.1%, to $218,000 for
the first six months of 2002 from $251,000 for the first six months of 2001.
Other operating expenses were $4,425,000 and $4,019,000 for the six month
periods ended June 30, 2002 and 2001, respectively. This increase of $406,00, or
10.1%, was primarily due to increased expenses, especially legal fees, related
to the continued litigation against the Company.
Noninterest expenses for the three month period ended June 30, 2002
decreased $232,000, or 3.0%, from $7,809,000 for the same period in 2001 to
$7,577,000. All categories of expenses for the three month period ended June 30,
2002 are down from the same period in 2001 with the exception of salaries and
benefits which remained even. For the three month period ended June 30, 2002 as
compared to the same period in 2001, occupancy costs decreased $83,000 or 11.5%,
furniture, fixtures and equipment costs decreased $33,000 or 6.9%, directors and
committee fees decreased $23,000 or 17.4%, and other expenses decreased $12,000
or 0.5%. All of the decreases are attributable to the reduction in the number of
Community Bank locations as a result of the sale of ten branches.
Income Taxes
The Company attempts to maximize its net income through active tax
planning. The provision for income taxes increased $2,239,000 to $2,368,000 for
the six months ended June 30, 2002 from $129,000 for the same period of 2001 due
to tax provision recognized on the gain on the sale of branches. The effective
tax rate of approximately 36.8% for the first six months of 2002 represents an
increase from the effective tax rate of approximately 16.6% for the same period
of 2001.
26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
Community Bank's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. Community
Bank manages its exposure to fluctuations in interest rates through policies
established by its Asset/Liability Committee ("ALCO"). The ALCO meets
periodically to monitor its interest rate risk exposure and implement strategies
that might improve its balance sheet positioning and/or earnings. Management
utilizes an Interest Rate Simulation model to estimate the sensitivity of the
Bank's net interest income and net income to changes in interest rates. Such
estimates are based upon a number of assumptions for each scenario, including
balance sheet growth, deposit repricing characteristics and prepayment rates.
The estimated impact on Community Banks net interest income sensitivity
over a one year time horizon at June 30, 2002 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.................................................... 3.75% 4.75% 5.75%
Interest Income............................................... $ 38,548 $ 40,067 $ 41,504
Interest Expense.............................................. 14,440 15,802 16,817
----------- ----------- -----------
Net Interest Income...................................... $ 24,108 $ 24,265 $ 24,687
=========== =========== ===========
Dollar change from Level...................................... $ (157) $ 422
Percentage change from Level.................................. -0.65% 1.74%
As shown above, in a 100 basis point rising rate environment, the net
interest margin is projected to increase 1.74% from the level rate scenario and
in a 100 basis point falling rate environment, the net interest margin is
projected to decrease 0.65% from the level rate scenario. These percent changes
fall comfortably within Community Bank's ALCO policy limit of +/-10.00% change
in net interest income from the level rate senario in a 100 basis point rise and
fall in the prime rate.
27
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
Except as noted below, no reportable events or material developments have
occurred since the filing of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 and filed on April 16, 2002.
In the case of Community Bancshares, Inc. and Community Bank v. Bryan A.
Corr et al., on May 31, 2002, the court denied defendants' motion to dismiss,
abate or stay the action. The court did dismiss Community Bank's state law
claims against Michael Alred and Michael Bean on the grounds that these claims
were compulsory counterclaims in the suit brought by Messrs. Alred and Bean
against Community Bank alleging wrongful termination of employment. See Note 5 -
Contingencies "Employee Litigation" in the Notes to the Consolidated Financial
Statements. The court did not dismiss the state law claims of the Company
against Messrs. Alred and Bean.
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on Tuesday, July
2, 2002, at which the following matter was voted upon by the stockholders of the
Company:
Election of Class III Directors
Denny G. Kelly, Kennon R. Patterson, Sr. and Merritt M. Robbins were elected to
serve as Class III directors of the Company until the annual meeting of
stockholders in 2005 or until their successors are elected and qualified. The
vote with respect to such election was as follows:
Votes Cast Abstentions
Votes Cast Against or or Broker
Name In Favor Withheld Non-Votes
- ---------------------------------------------------- ------------- --------------- ----------------
Denny G. Kelly . 2,901,851 618,283 6,803
Kennon R. Patterson, Sr. 2,893,495 626,639 6,803
Merritt M. Robbins 2,904,317 615,817 6,803
The following directors continued in office following the stockholders meeting:
Name Term Expires
- ---- ------------
Roy B. Jackson 2003
Kennon R. Patterson, Jr. 2003
Robert O. Summerford 2003
Jimmie Trotter 2003
Glynn Debter 2004
Loy McGruder 2004
John J. Lewis, Jr. 2004
28
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement of computation of per share earnings
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the quarter ended
June 30, 2002 as follows:
June 14, 2002 - Press release commenting on federal indictment
charging the owners of Morgan City Construction, Inc. of Union Grove,
Alabama with a fraud scheme related to construction projects for
Community Bank.
June 14, 2002 - Acquisition or Disposition of Assets - announcing sale
of six banking offices in Marshall County, Alabama to Peoples Bank of
North Alabama headquartered in Cullman, Alabama as well as the
previous sale of two offices in Pulaski, Tennessee and two offices in
Rainsville and Ft. Payne, Alabama.
29
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Community Bancshares, Inc. ("Company") Quarterly Report
on Form 10-Q for the period ended June 30, 2002 ("Report"), each of the
undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: August 14, 2002 By: /s/ Kennon R. Patterson, Sr.
----------------- -----------------------------------------------
Kennon R. Patterson, Sr.
Chairman, Chief Executive Officer and President
Date: August 14, 2002 By: /s/ Kerri C. Newton
----------------- ----------------------------------------------
Kerri C. Newton
Chief Financial Officer
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, in the city of
Blountsville, State of Alabama, on August 14, 2002.
COMMUNITY BANCSHARES, INC.
By: /s/ KENNON R. PATTERSON, SR.
-----------------------------------------------
Kennon R. Patterson, Sr.
Chairman, Chief Executive Officer and President
By: /s/ KERRI C. NEWTON
-----------------------------------------------
Kerri C. Newton
Chief Financial Officer
31
Exhibit 11 - Statements Re: Computation of Per Share Earnings
Community Bancshares, Inc.
Computation of Net Income per Common Share
The following tabulation presents the calculation of basic and fully diluted
earnings per common share for the three months and six months ended June 30,
2002 and 2001.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------ ------------- --------------
Reported net income (loss).............................. $ 2,827,022 $ (156,363) $ 4,059,535 $ 648,727
============= ============= ============= ==============
Earnings (losses) on common shares...................... $ 2,827,022 $ (156,363) $ 4,059,535 $ 648,727
============= ============= ============= ==============
Weighted average common shares outstanding - basic...... 4,642,330 4,595,760 4,632,811 4,538,622
============= ============= ============= ==============
Earnings per common share- basic
Income (loss) from continuing operations............. $ 0.61 $ (0.03) $ 0.88 $ 0.14
============ ============= ============= =============
Net income (loss).................................... $ 0.61 $ (0.03) $ 0.88 $ 0.14
============ ============== ============= =============
Weighted average common shares outstanding - diluted.... 4,642,330 4,595,760 4,632,811 4,538,622
============ ============= ============= =============
Earnings per common share- diluted
Income (loss) from continuing operations............. $ 0.61 $ (0.03) $ 0.88 $ 0.14
============ ============= ============= =============
Net income (loss).................................... $ 0.61 $ (0.03) $ 0.88 $ 0.14
============ ============= ============= =============
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