CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Nine Months Ended September 30, 1996
Commission File Number 2-83166
COMMUNITY BANCORP.
(Exact Name of Registrant as Specified in its Chapter)
Vermont 03-0284070
(State of Incorporation) (IRS Employer Identification Number)
Derby Road, Derby, Vermont 05829
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number: (802) 334-7915
Not Applicable
------------------------------------------------------------
Former Name, Former Address and Formal Fiscal Year
(If Changed Since Last Report)
Indicate by checkmark 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 for such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
At September 30, 1996, there were 1,398,638 shares of the
Corporation's $2.50 par value common stock issued and 1,369,274 shares
outstanding.
Total Pages - 20 Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statement of Condition
( Unaudited )
<TABLE>
<CAPTION>
September 30 December 31 September 30
1996 1995 1995
<S> <C> <C> <C>
Assets
Cash and due from banks 5,033,780 5,068,955 4,714,224
Federal funds sold 7,875,000 3,825,000 575,000
Total cash and cash equivalents 12,908,780 8,893,955 5,289,224
Securities held-to-maturity (approximate
market value of $41,541,002 at 9/30/96,
$32,925,570 at 12/31/95, and
$25,933,847 at 9/30/95). 41,721,046 32,602,657 25,755,691
Securities available-for-sale,
at market value 5,023,675 14,105,688 21,604,594
Loans 143,880,667 137,240,198 135,800,230
Allowance for loan losses (1,397,299) (1,519,247) (1,557,312)
Unearned net loan fees (902,644) (908,731) (908,884)
Net loans 141,580,724 134,812,220 133,334,034
Bank premises and equipment, net 3,452,285 3,263,166 3,328,594
Accrued interest receivable 1,569,683 1,524,175 1,594,661
Other real estate owned 959,685 761,362 1,035,362
Other assets 1,543,419 1,418,576 1,564,158
Total assets 208,759,297 197,381,799 193,506,318
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 18,215,175 15,777,469 15,826,684
NOW and money market accounts 42,424,302 34,450,952 31,408,489
Savings 32,994,879 31,395,227 32,577,836
Time deposits, $100,000 and over 18,554,320 18,616,586 18,249,518
Other time deposits 77,173,500 78,643,288 77,599,517
Total deposits 189,362,176 178,883,522 175,662,044
Other borrowed funds 65,000 65,000 65,000
Accrued interest and other liabilities 578,232 587,860 590,139
Subordinated debentures 201,000 265,000 287,000
Total liabilities 190,206,408 179,801,382 176,604,183
Stockholders' Equity
Common stock - $2.50 par value;
2,000,000 shares authorized and
1,398,638 shares issued at 09/30/96,
1,359,869 issued at 12/31/95, and
1,347,408 issued at 09/30/96 3,496,596 3,399,674 3,368,521
Additional paid-in capital 5,968,568 5,513,703 5,134,335
Retained earnings 9,527,226 9,056,562 8,876,568
Unrealized gain (loss) on securities
available-for-sale, net of tax 681 50,501 (37,315)
Less: Treasury stock, at cost
(29,364 shares at 9/30/96, 29,355
at 12/31/95, and 29,352 at 9/30/95.) (440,182) (440,023) (439,974)
Total stockholders' equity 18,552,889 17,580,417 16,902,135
Total liability and stockholders' equity 208,759,297 197,381,799 193,506,318
</TABLE>
COMMUNITY BANCORP. AND SUBSIDIARY
Statements of Income
( Unaudited )
<TABLE>
<CAPTION>
For The Third Quarter Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Interest income
Interest and fees on loans 3,387,327 3,186,035 2,789,907
Interest and dividends on invest. securities
U.S. Treasury securities 469,933 416,722 305,655
U.S. Treasury agencies 25,443 21,975 5,857
Obligations of state and political subdiv. 183,372 247,519 222,466
Other securities 19,432 21,090 19,950
Interest on federal funds sold 77,315 35,148 26,804
Total interest income 4,162,822 3,928,489 3,370,639
Interest expense
Interest on deposits 2,035,788 2,090,354 1,669,164
Interest on other borrowed funds 410 2,574 46,653
Interest on subordinated convert. debentures 4,847 7,260 12,923
Total interest expense 2,041,045 2,100,188 1,728,740
Net interest income 2,121,777 1,828,301 1,641,899
Provision for loan losses (80,000) (30,000) (45,000)
Net interest income after provision 2,041,777 1,798,301 1,596,899
Other operating income
Trust department income 27,110 23,104 26,916
Service fees 163,138 142,870 130,086
Securities gains (losses) 0 0 8,734
Other 131,951 114,579 120,986
Total other operating income 322,199 280,553 286,722
Other operating expenses
Salaries and wages 681,742 562,241 542,229
Pension and other employee benefits 181,774 181,654 119,780
Occupancy expenses, net 300,210 287,717 206,668
Other 478,931 430,902 518,729
Total other operating expenses 1,642,657 1,462,514 1,387,406
Income before income taxes 721,319 616,340 496,215
Applicable income taxes (credit) 181,834 125,516 86,884
Net Income 539,485 490,824 409,331
Earnings per share on weighted average
Primary 0.40 0.37 0.33
Fully diluted 0.39 0.37 0.32
Weighted average number of common shares
used in computing earnings per share
Primary 1,365,004 1,316,946 1,256,546
Fully diluted 1,391,171 1,353,212 1,318,834
Dividends per share 0.26 0.24 0.22
All 1994 per share data restated to reflect a 5% stock dividend paid
on February 1, 1995.
</TABLE>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Income
( Unaudited )
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Interest income
Interest and fees on loans 9,951,961 9,122,532 8,195,165
Interest and dividends on invest. securities
U.S. Treasury securities 1,477,896 1,230,716 1,056,195
U.S. Treasury agencies 56,926 50,183 17,456
Obligations of state and political subdiv. 606,726 733,881 653,719
Other securities 57,983 62,216 58,008
Interest on federal funds sold 188,228 111,191 74,347
Total interest income 12,339,720 11,310,719 10,054,890
Interest expense
Interest on deposits 6,206,424 6,096,563 4,860,326
Interest on other borrowed funds 4,449 6,837 101,731
Interest on subordinated convert. debentures 16,499 25,223 38,903
Total interest expense 6,227,372 6,128,623 5,000,960
Net interest income 6,112,348 5,182,096 5,053,930
Provision for loan losses (240,000) (90,000) (135,000)
Net interest income after provision 5,872,348 5,092,096 4,918,930
Other operating income
Trust department income 78,186 68,435 59,570
Service fees 437,602 420,475 375,599
Securities gains (losses) (1,928) 0 20,649
Other 423,170 356,897 353,548
Total other operating income 937,030 845,807 809,366
Other operating expenses
Salaries and wages 1,980,638 1,727,759 1,593,351
Pension and other employee benefits 502,550 469,937 360,994
Occupancy expenses, net 898,886 802,700 630,326
Other 1,437,095 1,465,261 1,434,846
Total other operating expenses 4,819,169 4,465,657 4,019,517
Income before income taxes 1,990,209 1,472,246 1,708,779
Applicable income taxes (credit) 470,651 261,260 333,605
Net Income 1,519,558 1,210,986 1,375,174
Earnings per share on weighted average
Primary 1.12 0.93 1.10
Fully diluted 1.11 0.91 1.07
Weighted average number of common shares
used in computing earnings per share
Primary 1,355,601 1,299,846 1,247,634
Fully diluted 1,382,968 1,344,351 1,310,334
Book value per share on shares outstanding
on September 30, $13.55 $12.82 $12.14
All 1994 per share data restated to reflect a 5% stock dividend paid
on February 1, 1995.
</TABLE>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income 1,519,558 1,210,986 1,375,174
Adjustments to Reconcile Net Income to Net
Cash Provided by operating activities:
Depreciation 287,860 229,041 180,282
Provisions for possible loan losses 240,000 90,000 135,000
Provisions for deferred taxes 110,097 82,893 (58,229)
Securities (gains) losses 1,928 0 (20,649)
(Gain) Loss on sales of OREO (96,888) 2,921 0
Subsequent writedowns on OREO 12,320 15,000 25,769
Amortization of bond premium 67,746 341,244 338,388
Increase (decrease) in taxes payable (46,446) 22,367 83,166
(Increase) decrease in interest receivable (45,508) (207,661) (95,644)
(Increase) decrease in other assets (162,524) (112,619) (209,437)
Increase (decrease) unamortized loan fees (6,087) (15,926) 80,151
Interest (decrease) in interest payable (33,387) 15,179 (23,395)
Increase (decrease) in accrued expenses 23,802 49,284 (124,087)
Increase (decrease) in other liabilities 53,814 13,087 13,029
Net Cash Provided by Operating Activities 1,926,285 1,735,796 1,699,518
Cash Flows from Investing Activities:
Investments - held to maturity
Sales and maturities 14,119,362 14,553,071 12,192,162
Purchases (23,277,597)(18,021,728)(18,205,503)
Investments - available for sale
Sales and maturities 9,000,000 6,500,000 10,500,000
Purchases (23,300) (4,078,200) (8,085,500)
Investment in limited partnership (54,161) (103,476) (85,750)
Increase in loans, net of payments (7,576,927) (3,017,541) (5,902,079)
Capital expenditures (476,979) (420,188) (343,514)
Recoveries of loans charged off 73,484 130,211 87,210
Proceeds from sales of OREO 387,271 137,900 171,993
Net Cash Used in Investing Activities (7,828,847) (4,319,951) (9,670,981)
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW,
money market and savings 12,010,708 (7,179,342) 7,139,513
Net increase in certificates of deposit (1,532,054) 8,165,377 1,850,413
Payments to acquire treasury stock (159) (4,286) (105)
Dividends paid (561,108) (501,087) (435,252)
Net Cash Provided by Financing Activities 9,917,387 480,662 8,554,569
Net Increase in Cash and Cash Equivalents 4,014,825 (2,103,493) 583,106
Cash and Cash Equivalents:
Beginning 8,893,955 7,392,717 7,242,958
Ending 12,908,780 5,289,224 7,826,064
Supplemental Schedule of Cash Paid During the Year
Interest Paid $6,203,358 $6,113,444 $5,024,630
Income Taxes $407,000 $156,000 $309,000
Supplemental Schedule of Noncash Investing and
Financing Activities:
Net change in securities valuation ($75,485) $627,285 ($40,587)
OREO / acquired in settlements of loans $638,599 $431,138 $91,109
Debentures converted to common stock $64,000 $264,000 $16,000
5% Stock dividend at market value $0 $1,019,716 $0
Dividends Paid:
Dividends payable $1,048,895 $925,565 $779,586
Dividends reinvested ($487,787) ($424,478) ($344,334)
$561,108 $501,087 $435,252
</TABLE>
AVERAGE BALANCES AND INTEREST RATES
The table below presents the following information: average earning assets
(including non-accrual loans) and average interest bearing liabilities
supporting earning assets; and interest income and interest expense
as a yield/rate for the first nine months of 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans (gross) 139,676,073 9,951,961 9.52% 133,686,836 9,122,532 9.12%
Taxable Investment
Securities 35,042,332 1,534,822 5.85% 30,481,850 1,280,899 5.62%
Tax-Exempt Investment
Securities(1) 15,581,548 919,282 7.88% 18,437,054 1,111,939 8.06%
Federal Funds Sold 4,896,752 188,228 5.13% 2,624,489 111,191 5.66%
Other Securities (2) 1,207,758 57,983 6.41% 1,160,946 62,217 7.17%
TOTAL 196,404,463 12,652,276 8.60% 186,391,175 11,688,778 8.38%
INTEREST BEARING LIABILITIES
Savings Deposits 32,342,513 720,731 2.98% 34,029,818 761,764 2.99%
NOW & Money Market
Funds 40,971,704 1,167,274 3.81% 35,780,215 1,029,572 3.85%
Time Deposits 96,601,732 4,318,418 5.97% 92,105,325 4,305,227 6.25%
Other Borrowed Funds 86,089 4,449 6.90% 138,334 6,836 6.61%
Subordinated Debentures 224,000 16,499 9.84% 371,000 25,223 9.09%
TOTAL 170,226,038 6,227,371 4.89% 162,424,692 6,128,622 5.04%
Net Interest Income 6,424,905 5,560,156
Net Interest Spread(3) 3.71% 3.34%
Interest Differential(4) 4.37% 3.99%
<FN>
<F01> Income on investment securities of state and political subdivisions is
stated on a fully tax equivalent basis (assuming a 34 percent tax rate).
<F02> Included in other securities are taxable industrial development bonds
(VIDA), with income of approximately $6,260 for 1996 and 7,274 for 1995.
<F03> Net interest spread is the difference between the yield on earning assets
and the rate paid on interest bearing liabilities.
<F04> Interest differential is net interest income divided by average earning
assets.
</TABLE>
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income for the first nine
months of 1996 and 1995 resulting from volume changes in assets and
liabilities; and fluctuations in rates earned and paid.
<TABLE>
<CAPTION>
1996 compared to 1995
RATE / VOLUME VARIANCE VARIANCE
DUE TO DUE TO TOTAL
RATE(1) VOLUME(1) VARIANCE
EARNING ASSETS
<S> <C> <C> <C>
Loans 420,359 409,070 829,429
Taxable Investment Securities 62,107 191,816 253,923
Tax-Exempt Investment Securities(2) (24,188) (168,469) (192,657)
Federal Funds Sold (19,320) 96,357 77,037
Other Securities (6,481) 2,247 (4,234)
Total Interest Earnings 432,477 531,021 963,498
INTEREST BEARING LIABILITIES
Savings Deposits (3,433) (37,600) (41,033)
NOW & Money Market Funds (11,820) 149,522 137,702
Time Deposits (197,176) 210,367 13,191
Other Borrowed Funds 313 (2,700) (2,387)
Subordinated Debentures 2,103 (10,827) (8,724)
Total Interest Expense (210,012) 308,761 98,749
<FN>
<F01> Items which have shown a year-to-year increase in volume have
variances allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have
variances allocated as follows:
Variance due to rate = Change in rate x old volume
Variances due to volume = Change in volume x new rate
<F02> Income on tax-exempt securities is stated on a fully tax equivalent
basis. The assumed rate is 34%.
</TABLE>
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
For The Third Quarter Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Net Income 539,485 490,824 409,331
Average Number of Common Shares Outstanding 1,365,004 1,316,946 1,256,546
Earnings Per Common Share 0.40 0.37 0.33
For The Nine Months Ended September 30, 1996 1995 1994
Net Income 1,519,558 1,210,986 1,375,174
Average Number of Common Shares Outstanding 1,355,601 1,299,846 1,247,634
Earnings Per Common Share 1.12 0.93 1.10
</TABLE>
COMMUNITY BANCORP.
FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
For The Third Quarter Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Net Income 539,485 490,824 409,331
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures) 3,199 4,792 8,529
Adjusted Net Income 542,684 495,616 417,860
Average Number of Common Shares Outstanding 1,365,004 1,316,946 1,256,546
Increase in Shares (Assuming Conversion of
Convertible Debentures) 26,167 36,266 62,288
Average Number of Common Shares Outstanding
(Fully Diluted) 1,391,171 1,353,212 1,318,834
Earnings Per Common Share Assuming
Full Dilution 0.39 0.37 0.32
For The Nine Months Ended September 30, 1996 1995 1994
Net Income 1,519,558 1,210,986 1,375,174
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures) 10,889 16,647 25,676
Adjusted Net Income 1,530,447 1,227,633 1,400,850
Average Number of Common Shares Outstanding 1,355,601 1,299,846 1,247,634
Increase in Shares (Assuming Conversion of
Convertible Debentures) 27,367 44,505 62,700
Average Number of Common Shares Outstanding
(Fully Diluted) 1,382,968 1,344,351 1,310,334
Earnings Per Common Share Assuming
Full Dilution 1.11 0.91 1.07
</TABLE>
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996
Community Bancorp. is a one-bank holding company whose only subsidiary
is Community National Bank. The Bank's main office is located in Derby,
with branch offices located in Newport, Troy, Derby Line, Barton and Island
Pond. All these offices are located in Orleans County with the exception
of Island Pond, which is located in Essex County. In June of '95 the Bank
accomplished a major goal with the opening of the St. Johnsbury office.
This branch is located in Caledonia County, which expands the Bank's servicing
area to cover three counties of the Northeast Kingdom. This was not an easy
goal to meet, with all the paperwork involved, numerous meeting to attend, as
well as the presence of a grim economy, all playing a role in the long and
costly process. The end result made everything worthwhile as deposit accounts
and the loan portfolio continue to grow steadily for this branch. A more
detailed discussion of this growth follows in the section labeled "Financial
Condition". This new office is the Bank's only branch open seven days a
week, all other branches are open Monday through Saturday. The supermarket
is open 24 hours a day, seven days a week, therefore, extended hours at the
bank were deemed necessary to accommodate shoppers.
While most of the financial statements preceding this narrative reflect
consolidated figures, the following discussion refers primarily to the Bank's
operations, as most of the Bancorp's business is conducted through the Bank.
Many of the comparisons throughout the following paragraphs refer to the
preceding tables for a visual comparison of the figures and percentages
disclosed.
LIQUIDITY
Liquidity management refers to the ability of Community National Bank
to adequately cover fluctuations in assets and liabilities. Meeting loan
demand (assets) and covering the withdrawal of deposit funds (liabilities)
are two key components of the liquidity management process. The repayment
of loans and growth in deposits are two of the major sources of liquidity.
Our time deposits greater than $100,000 increased from $18.25 million for
the first nine months of 1995 to $18.55 million for the first nine months of
1996, an increase if 1.7 percent. Other time deposits decreased from $77.6
million at the end of the first nine months of 1995 to $71.2 million at the
end of the first nine months of 1996, a decrease just over one-half of one
percent. A review of these deposits, primarily the time deposits over $100,000
indicates that growth is notably generated locally and regionally and are
established customers of the Bank. The Bank has no brokered deposits. Now
and money market accounts increased favorably from $31.8 million for the
first nine months of 1995 to $42.4 million at the end of the first nine
months of 1996, an increase of $11 million or 35 percent. Savings accounts
increased 1.3 percent to end the nine month comparison period at $33 million
for 1996 compared to $32.6 million for 1995. Our gross loan portfolio
increased $8.1 million from $135.8 million for the first nine months of 1995
to $143.9 million for the same period of 1996 or by six percent. Of this
total portfolio of $143.9 million, $72 million are scheduled to reprice
within one year and $6.7 million are scheduled to mature within one year.
At the end of the first nine months of 1996, the Bank reported investments of
"Available-for-Sale" securities at a market price of just over $5 million,
compared to $21.6 million for the same period in 1995, while the book value
of securities classified as "Held-to-Maturity" increased to $41.7 million
from $25.7 million for the same comparison period.
RESULTS OF OPERATIONS
Net income for the third quarter ended September 30, 1996 was $539
thousand, representing an increase of almost 10 percent compared to a net
income of $491 thousand for the third quarter ended September 30, 1995.
The results of this are primary earnings per share of $0.40 for the third
quarter of 1996 compared to $0.37 for the third quarter of 1995, and fully
diluted earnings per share of $0.39 and $0.37 respectively. Net income for
the first nine months of 1996 was $1.52 million compared to $1.21 million
for the first nine months of 1995, an increase of 25 percent. As a result,
primary earnings per share of $1.12 and $0.93 were reported for 1996 and 1995,
respectively, and fully diluted earnings per share ended the nine month
period at $1.11 for 1996, compared to $0.91 for 1995.
A 5% stock dividend was declared on January 10, 1995, payable February
1, 1995 to stockholders of record on January 15, 1995. All 1994 per share
data has been restated to reflect the 5% stock dividend. A cash dividend
of $0.26 per share was declared in each of the first three quarters of 1996,
compared to cash dividends for the same comparison periods last year of $0.24
per share, per quarter. The most recent 1996 cash dividend reported was
payable on August 1, 1996 to shareholders of record as of July 15, 1996.
Net interest income, the difference between interest income and expense,
represents the largest portion of the Bank's earnings, and is affected by
the volume, mix, and interest rate sensitivity of earning assets versus
interest bearing liabilities.
Net interest income for the third quarter of 1996 increased to
$2.1 million from $1.8 million in 1995, or 16 percent, and net interest
income for the first nine months increased from $5.2 million in 1995
to $6.1 million in 1996, an increase of 18 percent. Interest income
increased by $234 thousand or six percent for the third quarter of 1996,
from $3.93 million in 1995 to $4.16 million in 1996. Interest income
for the first nine months of 1996 increased to $12.34 million compared
to $11.31 million in 1995, an increase just over $1 million or 9.1
percent. Interest expense decreased $59 thousand or 2.8 percent for
the third quarter of 1996 compared to 1995, while interest expense for
the first nine months increased to $6.23 million from $6.13 million in
1995, an increase of 1.6 percent. A supporting factor for the increase
in net interest income is supplied through a review of the nine month
figures for interest earned on loans, the major source of interest
income revealing an increase of 9.1 percent, compared to an increase
of 1.8 percent for interest paid on deposits, the major source of
interest expense. The result is an interest rate differential of 4.37%
in 1996, and 3.99% in 1995.
The following paragraphs are comparisons of average balances and
the respective average yield for interest earning assets and interest
bearing liabilities. Figures for these comparisons were obtained from
the table labeled "Average Balances and Interest Rates", which can be
found in the preceding section. Income on tax-exempt securities is
stated on a fully tax equivalent basis on this table, therefore, figures
presented are higher than those in the Statement of Income included with
the financial statements.
Income from loans for the first nine months of 1996 increased to
$9.95 million or by 9.1 percent compared to $9.12 million for the same
period in 1995. The average volume of loans increased 4.5 percent, or
by $6 million and the yield on those loans increased from 9.12% for the
first nine months of 1995 to 9.52% for the first nine months of 1996,
an increase of 40 basis points.
The average volume of taxable investments increased to $35 million
or by 15 percent, and the yield on these investments for the first nine
months of 1996 rose by 23 basis points, from a yield of 5.62% in 1995
to 5.85% in 1996. Of the total taxable investments, approximately
$4 million are investments classified as available-for-sale, with the
remaining $31 million classified as held-to-maturity. A decrease is
noted in the average volume of tax-exempt investments from $18.4
million for the first nine months of 1995 to $15.6 million for the same
period in 1996, a decrease of 15.5 percent. The tax equivalent yield
also decreased from 8.06% to 7.88%, or by 18 basis points for the
comparison period. All of these investments are classified as held-to-
maturity. Other securities ended the nine month period in 1996 at an
average volume of $1.21 million, resulting in an increase of four
percent compared to the same period last year while the yield decreased
76 basis points from 7.17% for the first nine months of 1995 to 6.14%
for the same period in 1996. The Bank currently has no investments
classified as trading securities, and does not intend to carry any of
these securities. The yield on treasuries remains above the yield on
other short term investments such as federal funds, therefore, the Bank
continues to invest more in these higher yielding securities.
The average volume of federal funds sold increased to $4.9 million
from $2.6 million for the first nine months of 1996 compared to the same
period a year ago, while the average yield on these funds decreased from
5.66% for the first nine months of 1995 to 5.13% for the first nine months
of 1996.
In total, our average earning assets increased to $196.4 million or
by 5.4 percent during the first nine months of 1996, compared to the same
period in 1995, and the average yield on those earning assets increased
by 22 basis points to end the nine month period in 1996 at 8.60% compared
to 8.38% for the same period last year. Our net yield, or net interest
spread as defined on the "Average Balances and Interest Rates" table,
was 3.71% for the first nine months of 1996, compared to 3.34% for 1995.
Savings deposits decreased from an average volume of $34 million
in 1995 to an average volume of $32.3 million, or five percent, for the
same period in 1996. Interest expense decreased from $762 thousand to
$721 thousand for the comparison period, a decrease just over five percent.
Now and money market funds increased to almost $41 million or by
14.5 percent in volume in 1996 and interest expense on these funds
increased by $138 thousand, or by 13.4 percent to a nine month expense
figure for 1996 of almost $1.2 million. This resulted in a decrease
in the average rate paid on these funds of four basis points to a rate
of 3.81% compared to 3.85% a year ago.
An increase of 4.9 percent in volume for average time deposits was
reported at the end of the first nine months of 1996 ending the period
at $96.6 million, compared to the same period in 1995. Interest paid
on time deposits increased slightly from $4.31 million in 1995 to
$4.32 million for the first nine months of 1996, resulting in a decrease
of 28 basis points on the average yield paid of 6.25% for 1995 to 5.97%
for 1996.
Other borrowed funds decreased to an average volume of $86
thousand with an average yield of 6.90% for the first nine months of
1996, compared to an average volume of $138 thousand yielding 6.61%
last year. Interest expense decreased 35 percent for the nine month
comparison period to end at $4,449 as of September 30, 1996 compared
to $6,836 for September 30, 1995.
Subordinated debentures have been decreasing steadily in the first
nine months of 1996. The 9% debentures are being redeemed more because it
is to the debenture holder's economic benefit. As of September 30, 1996,
the average volume of 9% debentures outstanding totaled $146,000 and 11%
debentures outstanding totaled $78,000, compared to September 30, 1995
totals of $287,000 and $84,000, respectively. This decrease in debentures
outstanding leads to the decrease in interest expense, which was reported
at $25,223 for the first nine months of 1995 and $16,499 for the first nine
months of1996.
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
In the opinion of management, adequate loan loss coverage is
considered to be one of the most crucial areas of financial safety and
profitability of the Bank. As a result, loans are typically reviewed
on a loan-by-loan basis, focusing more intently on potential problem
loans. A review of the overall level of risk within the portfolio helps
to insure adequate coverage in the event of future chargeoffs. Emphasis
is placed on each borrower's financial condition, the industry or sector
for the economy in which the borrower operates, and overall economic
conditions. The Executive Officers and Board of Directors review the
loan portfolio on a monthly basis noting existing and potential problems
in the portfolio. The Bank also employs a Loan Review and Compliance
Officer whose duties, among others, include an ongoing review of delinquent
and non-performing loans. All findings and recommendations are then
brought to senior management for further assessment and final judgement
as to the appropriate action to follow.
Specific Allocations are made in situations management feels are at
a greater risk for loss. A quarterly review of the qualitative factors,
which, among others, are "Levels of, and Trends in, Delinquencies and Non-
Accruals" and "National and Local Economic Trends and Conditions" helps to
ensure that areas with potential risk are noted and coverage increased to
reflect upward trends in delinquencies and non-accruals. Residential first
mortgage loans make up the largest part of the loan portfolio and have the
lowest historical loss ratio which helps to alleviate the overall risk.
The valuation allowance for loan losses of $1.4 million as of
September 30, 1996 constitutes just under one percent of the total loan
portfolio, compared to $1.6 million or 1.15 percent for the same period
in 1995. This allowance figure is sufficient in light of the fact that
of the total loan portfolio of $143.9 million, $116.8 million or 81.2
percent are real estate mortgage loans; and of this total, $93 million
or 80 percent constitute one to four family residential mortgage loans.
Increases are noted in all volumes compared to last years figures of
$135.8 million in totals loans, $110.7 million in real estate mortgage
loans, representing 81.5 percent of the total portfolio, and a further
breakdown shows $90 million in one to four family residential mortgage
loans, representing 81.3 percent of the real estate loan portfolio.
Historically, the Bank has experienced minimal loan loss with this
particular portfolio of loans which further help support the basis for
managements opinion of adequate loan loss coverage. Furthermore, a loan
portfolio consisting of 81.2 percent in residential and commercial real
estate secured mortgage loans is by far more stable and less vulnerable
than a portfolio with a higher concentration of unsecured commercial and
industrial loans or personal loans.
In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." The Bank was required to adopt this new rule
effective as of the beginning of the 1995 calendar year, although earlier
adoption was allowed. This statement allows the Bank to classify its
in-substance foreclosures as loans and disclose them as impaired loans,
as long as regulatory guidelines are followed. Loans will generally be
valued at the lower of either the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Since it's adoption in 1995, this new rule has had
insignificant effect on the financial position and results of operation of
the Corporation as of the end of the first nine months of 1996.
Non-Performing assets for the bank are made up of three different
types of loans, "90 Days or More Past Due", "Other Real Estate Owned"
(OREO), and "Non-Accruing Loans". A comparison of these non-performing
assets for 1996 and 1995 reveals a decrease in all portfolios ranging from
a decrease of $202 thousand or 11.85 percent in non-accruing loans, followed
by a decrease of $76 thousand or 7.3 percent in OREO, and finally a decrease
of $58 thousand or 15.22 percent in loans 90 days or more past due. The
biggest portfolio is the non-accruing loans, however, due to the fact that
of the balance of $1.5 million, $1.36 million or 91 percent are real estate
secured mortgages, loss from this portfolio is greatly reduced.
Non-performing assets as of September 30, 1996 and 1995 were
made up of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Non-Accruing loans $1,500,135 $1,701,860
Loans past due 90 days or more and still accruing 322,008 379,842
Other real estate owned 959,685 1,035,362
Total $2,781,828 $3,117,064
</TABLE>
These totals of $2.78 million for 1996 and $3.12 million for 1995
equal 1.93 percent and 2.29 percent, respectively, of total gross loans,
as well as 1.33 percent and 1.61 percent, respectively, of total assets.
As of September 30, 1996, our reserve coverage of non-performing loans
was 50.23 percent compared to 50 percent a year ago.
While these statistics show that non-performing loans have decreased
over the past year, management will continue to maintain the reserve
requirement at a level sufficient to cover total eligible loans. The
local economy is still a bit unstable and is experiencing a slower recovery
than other areas which is typical in an area like ours, therefore, we will
continue our conservative approach to the reserve requirements and adjust
accordingly for any changes.
Other real estate owned is made up of property that the Bank owns
in lieu of foreclosure or through normal foreclosure proceedings, and
property that the Bank does not hold title to but is in actual control
of, known as in-substance foreclosure. It is the policy of the Bank to
value property in other real estate owned at the appraised value or book
value of the loan, whichever is lesser. Our policy is to appraise the
property to determine the value as well as to determine if a write down
is necessary to bring the book value of the loan equal to the appraised
value, prior to including the property in other real estate owned.
Appraisals are then done annually thereafter with any additional write
downs being made at that time.
Our current portfolio of other real estate owned equals $959,685,
with $591,719 obtained through the normal foreclosure process and
$367,966 deeded in lieu of foreclosure. All of the properties are
located in Vermont and consist of the following; a condominium
project in Jay, five condominium units in Newport, a residential
property in Newport, a commercial property in Island Pond, building
lots and a farm in Irasburg, a residential property and a commercial
building in Derby, and a commercial property in Derby Line. During
the second week of October, auctions were held at many of these
properties in an effort to reduce our OREO portfolio. As a result,
our portfolio of $959,685 will be reduced by $640,309, or 67 percent.
Other real estate owned is by definition a non-earning asset, and as
such has a negative impact on the Bank's earnings.
OTHER OPERATING INCOME AND EXPENSES
Other operating income for the third quarter of 1996 was $322
thousand, compared to $281 thousand for the third quarter of 1995, an
increase of $41 thousand or 15 percent. Service fees reports the
biggest increase of $20,268 with income figures of $163 thousand for
the third quarter of 1996, compared to $143 thousand for the same
period in 1995. A change in the method in which fees are assessed for
both deposit accounts and overdraft charges has helped to generate
more income through service fees. Other income increased $17,372 with
reported figures of $132 thousand for the third quarter of '96
compared to $115 thousand a year ago. Other operating income for the
first nine months increased from $846 thousand in 1995 to $937
thousand in 1996, an increase of $91 thousand or 11 percent. Other
income showed the biggest increase for the nine month comparison,
reporting $423 thousand for 1996 compared to $357 thousand for 1995.
Foreign exchange, a component of other income, increased $57 thousand
from a nine month income figure of $27 thousand for 1995, compared to
$84 thousand for the same period in 1996. Canadian traffic is
improving as the year progresses generating more favorable income
typical to this area of the Northeast Kingdom. Year to date income of
$27 thousand is recognized with the implementation of FASB 122.
In May 1995, the FASB issued SFAF No. 122 "Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement #65". This
statement requires the Bank to recognize as separate assets the rights
to service mortgage loans for others however those rights are
acquired. The Bank allocates the total cost of the mortgage loans to
the mortgage servicing rights and the loans (without the mortgage loan
servicing rights, based on their relative fair value. This value is
determined through use of market prices under comparable servicing
sales contracts.
Other operating expense for the third quarter of 1996 was $1.64
million compared to $1.46 million for 1995, an increase of $180
thousand or 12.3 percent. Salaries, the largest portion of other
operating expense, showed the greatest increase of $119 thousand or
21.3 percent, followed by other expenses with an increase of $48
thousand or 11.2 percent. Telephone expense, a component of other
expenses reports an increase of $23 thousand over last years figure
primarily due to the installation of more phone lines to better serve
our customers, and an 800 number used by customers to inquire about
balances on deposit accounts and to transfer money between different
accounts, among other services. Other operating expense for the first
nine months increased by $354 thousand from $4.5 million in 1995 to
$4.8 million in 1996. Topping the increase for this comparison period
was again salaries and wages with an increase of $253 thousand or 15
percent. Although the number of full time equivalent employees has
decreased, positions have been created at a higher pay scale than some
of the positions that have been eliminated. Overtime during the summer
months is another contributing factor to the increase in salary expense.
Earlier this year, a consulting company was hired in an attempt to find
more efficient and cost effective ways of managing operating income and
expenses of the bank. The fee for their services was approximately $76
thousand, and is another component of other expenses. Management feels
this was money well spent as many of their recommendations have been
implemented and reductions in expenses, as well as increases in income
are noted, helping to offset the fee charged. To that end, other expenses
notes the only decrease, reporting $1.44 million for the first nine months
of 1996 compared to $1.47 million for the same period a year ago.
All components of other operating expenses are monitored by
management, however, a more diligent quarterly review is performed on
crucial components to assure that the accruals for these expenses are
accurate. This helps alleviate the need to make drastic adjustments
to these accounts that in turn effect the net income of the bank.
APPLICABLE INCOME TAXES
Income before taxes increased from $616 thousand for the third quarter
of 1995 to $721 thousand for the third quarter of 1996, an increase of
$105 thousand or 17 percent. As a result of this increase, provision for
income taxes for the third quarter of 1996 increased 45 percent compared to
the same period for 1995, ending the third quarter period at $182 thousand.
Income before taxes for the first nine months increased from $1.5 million
for 1995 to just under $2 million for 1996, an increase of $518 thousand or
35 percent. This lead to an increase in provision for income taxes of $209
thousand to end the first nine months of 1996 at $471 thousand.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results
of operations of all industries, including the banking industry. The effect
of monetary inflation is generally magnified in bank financial and operating
statements as costs and prices rise during periods of monetary inflation,
cash and credit demands of individuals and businesses increase, and the
purchasing power of net monetary assets declines. While high rates of
inflation have in the past strained the capital structure of financial
institutions, in recent months this trend has been somewhat alleviated by
declining rates of inflation, with a resulting relaxation of the erosion of
the purchasing power of monetary assets.
The Corporation's ability to preserve its purchasing power depends
primarily on its ability to manage net interest income. Net interest
income for the third quarter improved 16 percent over the 1995 third
quarter figure and 25 percent over the 1994 third quarter figure. Year to
date net interest income is reported at $6.1 million, improving 18 percent
and 21 percent over the nine months ended 1995 and 1994, respectively.
FINANCIAL CONDITION
Average earning assets grew by 5.4 percent in the first nine months
of 1996 compared to the same period in 1995 to an average volume of $196.4
million. Loans, which totaled $139.7 million in 1996 and $133.7 million in
1995, comprised 71 percent and 71.7 percent, respectively, of our earning
assets with the average volume of loans increasing $10 million or 5.4 percent
in the first nine months of 1996, compared to the same period in 1995. On
September 30, 1996, residential real estate mortgages made up 65 percent of
our portfolio, commercial loans made up 22 percent, and personal loans made
up 13 percent, which varies slightly from the nine month figures for last
year of 67%, 22%, and 11% respectively.
Taxable investments made up 17.8 percent of our average earning assets
in the first nine months of 1996, compared to 16.4 percent in 1995 to end
the period at an average volume of $35 million. Tax-exempt investments of
$15.6 million made up 7.9 percent of our average earning assets in the first
nine months of 1996, compared to $18.4 million or 10 percent in 1995.
Federal funds sold, which had an average volume of $4.9 million, made
up 2.5 percent of our earning assets in the first nine months of 1996 and
1.4 percent for the same period in 1995, with an average volume of $2.6
million. And ending the list of earning assets, other securities with an
average volume of $1.21 million for 1996 made up .61 percent of total earning
assets compared to an average volume of $1.16 million or .62 percent for the
same period a year ago.
The St. Johnsbury office continues to report growth in both assets
and liabilities with total gross loans ending the first nine months of
1996 at a volume of $7.3 million compared to $1.37 million a year ago.
Total deposits ended the same period at $7.9 million for 1996 versus $1.74
million for 1995. Real estate loans continue to account for the greatest
portion of the loan portfolio with a balance of approximately $3.3 million
or 45 percent, and money market accounts with a balance of $4.2 million
account for 53 percent of total liabilities.
Historically, the Bank has funded its growth by steady increases in
its core deposits. The Bank has no brokered deposits, nor does it rely
on large certificates or other forms of volatile deposits to fund its
growth in earning assets. As interest rates decline, there is a shift
to savings and money market accounts, as customers await an opportunity
to reinvest at higher rates. Conversely as rates increase, funds shift
from savings and money market accounts to certificates of deposit to lock
in higher yields. Rates on CD's have decreased slightly, however, they
remain more favorable than other deposit accounts resulting in an increase
of approximately five percent to an average volume of $96.6 million making
up 56.7 percent of the total interest bearing liabilities, while savings
accounts made up 19 percent of the total, decreasing almost five percent to
an average volume of $32.3 million. An increase of 14.5 percent is noted
in NOW and money market funds with an average volume of $41 million, or
24 percent of the total interest bearing liabilities reported at the end
of the first nine months of 1996, compared to an average volume of $35.8
million or 22 percent of total interest bearing liabilities for the same
period a year ago. Other borrowed funds decreased in volume 37.7 percent,
from $138,334 at the end of September '95 to $86,089 at the end of September
'96, comprising .08 percent of the total interest bearing liabilities for
1995 compared to .05 percent for 1996. Subordinated debentures, with an
average volume of $224,000 made up .13 percent of interest bearing liabilities
for the comparison period, versus an average volume of $371,000 or .23
percent for the same period in 1995, a decrease of approximately 40 percent.
CAPITAL RESOURCES
The Corporation's stockholders' equity, which started the year at
$17,580,417, was increased through earnings of $1,519,558 and sales of
common stock through dividend reinvestment and debenture conversions of
$551,788. It was decreased by dividends of $1,048,895, purchase of
treasury stock of $159, and adjustments of $49,820 for valuation of
allowance for securities to end the first nine months of 1996 at
$18,552,889 with a book value of $13.55 per share. All stockholder's
equity is unrestricted. Additionally, it is noted that while the
unrealized gain on valuation allowance for securities has decreased
from the December '95 balance, it has increased compared to the
September 30, 1995 balance. A review of this activity shows that as
the maturity date of the investments gets closer, the market price
becomes favorably better, therefore, material loss is greatly reduced.
The Bank is required to maintain minimum amounts of capital to
"risk weighted" assets, as defined by the banking regulators. The
minimum requirements for Tier I and Total Capital are 4% and 8%,
respectively. As of September 30, 1996, the Bank continued to
maintain ratios far above the minimum requirements with reported
ratios of approximately 17.8% for Tier I and 19% for Total Capital.
The Corporation intends to continue the Bank's past policy of
maintaining a strong capital resource position to support its asset
size and level of operations. Consistent with that policy, management
will continue to anticipate the Corporation's future capital needs.
PART II.
Item 1
Legal Proceedings
The Corporation is not a party to any pending legal proceedings
before any court, administrative agency or other tribunal.
There are no pending legal proceedings to which the Bank is a
party or of which any of its property is the subject, other than
routine litigation incidental to its banking business.
Item 6
Exhibits and Reports on Form 8-K
Exhibits - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMUNITY BANCORP.
DATED: October 31, 1996 By:/s/ Richard C. White
------------------------
Richard C. White, President
DATED: October 31, 1996 By:/s/Stephen P. Marsh
-----------------------
Stephen P. Marsh,
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,034
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,024
<INVESTMENTS-CARRYING> 41,721
<INVESTMENTS-MARKET> 41,541
<LOANS> 143,881
<ALLOWANCE> 1,397
<TOTAL-ASSETS> 208,759
<DEPOSITS> 189,362
<SHORT-TERM> 65
<LIABILITIES-OTHER> 578
<LONG-TERM> 201
0
0
<COMMON> 3,496
<OTHER-SE> 15,026
<TOTAL-LIABILITIES-AND-EQUITY> 208,759
<INTEREST-LOAN> 9,952
<INTEREST-INVEST> 2,199
<INTEREST-OTHER> 188
<INTEREST-TOTAL> 12,339
<INTEREST-DEPOSIT> 6,206
<INTEREST-EXPENSE> 21
<INTEREST-INCOME-NET> 6,112
<LOAN-LOSSES> 240
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 4,819
<INCOME-PRETAX> 1,990
<INCOME-PRE-EXTRAORDINARY> 1,990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,520
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 8.30
<LOANS-NON> 1,500
<LOANS-PAST> 322
<LOANS-TROUBLED> 378
<LOANS-PROBLEM> 1,523
<ALLOWANCE-OPEN> 1,519
<CHARGE-OFFS> 432
<RECOVERIES> 70
<ALLOWANCE-CLOSE> 1,397
<ALLOWANCE-DOMESTIC> 1,246
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 151
</TABLE>
