CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Three Months Ended March 31, 1997
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 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 for such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ( X ) No ( )
At March 31, 1997, there were 1,498,296 shares issued of the Corporation's
$2.50 par value common stock and 1,468,674 shares outstanding.
Total Pages - 18 Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statement of Condition
( Unaudited ) March 31 December 31 March 31
1997 1996 1996
Assets
<S> <C> <C> <C>
Cash and due from banks 3,961,514 8,245,398 4,765,265
Federal funds sold 25,000 0 2,075,000
Total cash and cash equivalents 3,986,514 8,245,398 6,840,265
Securities held-to-maturity (market value
$40,565,495 at 3/31/97, $37,915,448 at
12/31/96, and $46,224,018 at 3/31/96) 40,813,179 37,967,786 46,286,876
Securities available-for-sale 8,993,813 9,037,113 11,055,550
Loans 145,624,180 145,603,582 137,553,629
Allowance for loan losses (1,491,326) (1,401,042) (1,472,095)
Unearned net loan fees (883,155) (904,303) (898,617)
Net loans 143,249,699 143,298,237 135,182,917
Bank premises and equipment, net 3,379,143 3,421,359 3,353,089
Accrued interest receivable 1,594,440 1,538,637 1,735,628
Other real estate owned, net 719,032 662,544 610,925
Other assets 1,665,580 1,365,129 1,473,781
Total assets 204,401,400 205,536,203 206,539,031
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 17,762,133 18,098,323 16,400,661
NOW and money market accounts 39,358,522 40,026,689 42,042,007
Savings 32,317,846 31,879,729 32,356,009
Time deposits, $100,000 and over 18,072,591 17,878,261 18,665,791
Other time deposits 76,394,885 75,971,474 78,414,422
Total deposits 183,905,977 183,854,476 187,878,890
Short term borrowings 0 1,600,000 0
Borrowed funds 65,000 65,000 65,000
Accrued interest and other liabilities 901,142 735,372 513,411
Subordinated convertible debentures 135,000 170,000 224,000
Total liabilities 185,007,119 186,424,848 188,681,301
Stockholders' Equity
Common stock - $2.50 par value;
2,000,000 shares authorized and
1,498,296 shares issued at 3/31/97,
1,412,493 shares issued at 12/31/96
and 1,374,143 issued at 3/31/96 3,745,981 3,531,233 3,435,358
Additional paid-in capital 7,451,478 6,140,962 5,673,737
Retained earnings 8,690,893 9,871,409 9,177,847
Unrealized gain on securities
available-for-sale, net of tax (49,067) 7,963 10,835
Less: treasury stock, at cost
(29,622 shares at 3/31/97, 29,365 shares
at 12/31/96 and 29,356 shares at 3/31/96) (445,004) (440,212) (440,047)
Total stockholders' equity 19,394,281 19,111,355 17,857,730
Total liabilities and stockholders' equity 204,401,400 205,536,203 206,539,031
</TABLE>
<TABLE>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Income
( Unaudited )
<CAPTION>
For The First Quarter Ended March 31, 1997 1996 1996
<S> <C> <C> <C>
Interest income
Interest and fees on loans 3,324,518 3,232,788 2,880,745
Interest and dividends on investments
U.S. treasury securities 534,499 491,736 397,596
U.S. government agencies 20,727 10,823 5,867
States and political subdivisions 138,605 196,370 243,559
Other securities 17,178 17,818 19,930
Interest on federal funds sold 4,942 82,601 46,069
Total interest income 4,040,469 4,032,136 3,593,766
Interest expense
Interest on deposits 1,881,874 2,084,823 1,949,053
Interest on other borrowed funds 12,680 1,915 1,237
Interest on subordinated debentures 3,282 5,400 10,433
Total interest expense 1,897,836 2,092,138 1,960,723
Net interest income 2,142,633 1,939,998 1,633,043
Provision for loan losses (205,000) (37,500) (30,000)
Net interest income after provision 1,937,633 1,902,498 1,603,043
Other operating income
Trust department income 22,049 26,202 21,820
Service fees 162,386 111,069 134,094
Security gains (losses) 0 0 0
Other 96,237 113,663 94,295
Total other operating income 280,672 250,934 250,209
Other operating expenses
Salaries and wages 628,928 640,430 573,140
Pension and other employee benefits 133,331 150,867 143,714
Occupancy expenses, net 290,569 301,117 285,944
Other 470,561 453,649 505,567
Total other operating expenses 1,523,389 1,546,063 1,508,365
Income before income taxes 694,916 607,369 344,887
Applicable income taxes (credit) 174,828 140,151 42,348
Net Income 520,088 467,218 302,539
Earnings per share on weighted average
Primary 0.35 0.33 0.23
Fully diluted 0.35 0.33 0.22
Weighted average number of common shares
Used in computing earnings per share
Primary 1,466,979 1,411,755 1,344,436
Fully diluted 1,487,488 1,442,180 1,402,521
Dividends per share 0.28 0.26 0.24
Book value per share on shares outstanding $13.21 $12.65 $11.85
All per share data restated to reflect a 5% stock dividend paid on
February 1, 1997.
</TABLE>
<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
rate/yield for the first three months of 1997 and 1996.
<CAPTION>
1997 1996
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans (gross) 145,399,144 3,324,518 9.27% 136,595,652 3,232,788 9.52%
Taxable Investment
Securities 37,744,850 555,226 5.97% 34,414,603 502,559 5.87%
Tax-exempt Investment
Securities(1) 10,582,618 206,832 7.93% 14,661,806 294,386 8.08%
Federal Funds Sold 331,667 4,942 6.04% 6,065,659 82,601 5.48%
Other Securities(2) 1,213,693 19,274 6.44% 1,196,652 19,893 6.69%
TOTAL 195,271,972 4,110,792 8.47% 192,934,372 4,132,227 8.69%
INTEREST BEARING LIABILITIES
Savings Deposits 32,038,143 216,936 2.75% 31,371,082 234,418 3.01%
NOW & Money Market
Funds 40,113,900 350,483 3.54% 38,904,950 367,975 3.80%
Time Deposits 94,361,737 1,314,455 5.65% 97,188,763 1,482,430 6.13%
Other Borrowed Funds 820,964 12,680 6.26% 65,000 1,245 7.70%
Subordinated
Debentures 138,000 3,283 9.65% 226,000 5,400 9.61%
TOTAL 167,472,744 1,897,837 4.56% 167,755,795 2,091,468 5.06%
Net Interest Income 2,212,955 2,040,759
Net Interest Spread(3) 3.91% 3.63%
Interest Differential(4) 4.60% 4.29%
<FN>
<F01> Income on investment securities of state and political subdivisions is
stated on a tax equivalent basis (assuming a 34% tax rate).
<F02> Included in other securities are taxable industrial development bonds
(VIDA), with income of approximately $2,100 for 1997 and 1996.
<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>
<TABLE>
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income for the first
three months of 1997 and 1996 resulting from volume changes in assets and
liabilities and fluctuations in rates earned and paid.
<CAPTION>
RATE VOLUME Variance Variance
Due to Due to Total
Rate(1) Volume(1) Variance
EARNING ASSETS
<S> <C> <C> <C>
Loans (gross) (114,896) 206,626 91,730
Taxable Investment Securities 4,438 48,229 52,667
Tax-Exempt Investment Securities(2) (7,828) (79,726) (87,554)
Federal Funds Sold 7,780 (85,439) (77,659)
Other Securities (900) 281 (619)
Total Interest Earnings (111,406) 89,971 (21,435)
INTEREST BEARING LIABILITIES
Savings Deposits (22,425) 4,943 (17,482)
NOW & Money Market Funds (28,832) 11,340 (17,492)
Time Deposits (128,595) (39,380) (167,975)
Other Borrowed Funds (2,925) 14,360 11,435
Subordinated Debentures (23) (2,094) (2,117)
Total Interest Expense (182,800) (10,831) (193,631)
<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 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 tax equivalent basis.
The assumed rate is 34%.
</TABLE>
<TABLE>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Cash Flows
<CAPTION>
For The First Quarter Ended March 31, 1997 1996 1995
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net Income 520,088 467,218 302,539
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 87,352 91,978 79,993
Provisions for possible loan losses 205,000 37,500 45,000
Provisions for deferred taxes (3,162) 21,123 3,863
Loss (gain) on sales of OREO (7,729) (1,516) (4,345)
Amortization of bond premium 6,463 8,637 182,289
Increase (decrease) in taxes payable 183,225 79,028 38,484
(Increase) decrease in interest receivable (55,803) (211,453) (268,158)
(Increase) decrease in other assets (277,453) (70,820) 11,036
Increase (decrease) in unamortized loan fees (21,148) (10,114) (14,888)
Interest (decrease) in interest payable 340 (12,403) (22,214)
Increase (decrease) in accrued expenses 4,264 (176,954) (25,300)
Increase (decrease) in other liabilities (12,516) 50,805 65,815
Net cash provided by operating activities 628,921 273,029 394,114
Cash Flows from investing activities:
Investments - held to maturity
Sales and maturities 918,463 2,824,132 919,635
Purchases (3,776,728)(16,503,650) (4,676,686)
Investments - available for sale
Sales and maturities 0 3,000,000 0
Purchases (36,700) (23,300) (2,000,000)
Increase in Loans, Net of Payments (326,679) (477,832) 1,356,668
Capital Expenditures (45,136) (181,900) 57,671
Recoveries of loans charged off 36,274 21,702 39,117
Proceeds from sales of OREO 106,332 210,000 89,463
Net Cash Used in Investing Activities (3,124,174)(11,130,848) (4,214,132)
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW,
money market and savings (566,240) 9,175,029 785,251
Net increase in certificates of deposit 617,741 (179,661) 3,469,992
Net increase (decrease) in short
term borrowing (1,600,000) 0 0
Payments to acquire treasury stock (4,792) (23) (4,210)
Dividends paid (210,340) (191,216) (158,532)
Net cash provided by financing activities (1,763,631) 8,804,129 4,092,501
Net increase in cash and cash equivalents (4,258,884) (2,053,690) 272,483
Cash and cash equivalents:
Beginning 8,245,398 8,893,955 7,392,717
Ending 3,986,514 6,840,265 7,665,200
Supplemental Schedule of Cash Paid During the Year
Interest paid 1,897,496 2,104,541 1,982,937
Income Taxes Paid (5,235) 40,000 0
Supplemental schedule of noncash investing
and financing activities:
Net change in securities valuation ($86,409) ($60,100) $329,970
OREO acquired in settlements of loans $188,091 $58,047 $217,546
Debentures converted to common stock $35,000 $41,000 $106,000
5% Stock dividend at market value $1,294,006 $0 $1,019,716
Dividends Paid:
Dividends payable $406,598 $345,934 $303,507
Dividends reinvested ($196,258) ($154,718) ($144,975)
$210,340 $191,216 $158,532
</TABLE>
<TABLE>
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
<CAPTION>
For The First Quarter Ended March 31, 1997 1996 1995
<S> <C> <C> <C>
Net Income 520,088 467,218 302,539
Average Number of Common Shares Outstanding 1,466,979 1,411,755 1,344,436
Earnings Per Common Share 0.35 0.33 0.23
FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
For The First Quarter Ended March 31, 1997 1996 1995
Net Income 520,088 467,218 302,539
Adjustments to Net Income (Assuming Conversion 2,166 3,564 6,885
of Subordinated Convertible Debentures).
Adjusted Net Income 522,254 470,782 309,424
Average Number of Common Shares Outstanding 1,466,979 1,411,755 1,344,436
Increase in Shares (Assuming Conversion of 20,509 30,425 58,085
Subordinated Convertible Debentures).
Average Number of Common Shares Outstanding 1,487,488 1,442,180 1,402,521
(Fully Diluted)
Earnings per Common Share Assuming Full Dilution 0.35 0.33 0.22
</TABLE>
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
Quarter Ended March 31, 1997
Community Bancorp. is a one-bank holding company whose only subsidiary is
Community National Bank. Most of the Bancorp's business is conducted through
the Bank, therefore, the following narrative is based primarily on the Bank's
operations. The financial statements preceding this section are consolidated
figures, and can be used in conjunction with the other reports that follow
them to provide a more detailed comparison of the information disclosed in
the following narrative.
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 decreased $593,200 or 3.2% for the first
quarter of 1997 compared to 1996. Other time deposits decreased from $78.41
million at the end of the first quarter of 1996 to $76.39 million at the end
of the first quarter of 1997, a decrease of almost $2 million or 2.58%. A
review of these deposits, primarily the time deposits over $100,000 indicates
that they are primarily generated locally and regionally and are established
customers of the Bank. The Bank has no brokered deposits. All other interest
bearing deposit accounts in total decreased 3.66% to end the three month
comparison period at $71.7 million for 1997 compared to $74.4 million for
1996. Our gross loan portfolio increased from $137.6 million for the first
quarter of 1996 to $145.6 million for the first quarter of 1997 or 5.87%. Of
this total portfolio of $145.6 million, $74.2 million are scheduled to reprice
within one year and $5.7 million are scheduled to mature within one year.
Both figures are increases compared to the first quarter for 1996 of $69.4
million and $5.7 million, respectively. Federal funds sold decreased just
over $2 million from $2.08 million for the first quarter of 1996 to $25,000
for the same period in 1997. At the end of the first quarter of 1997, the
Bank held in it's investment portfolio treasuries classified as "Available-
for-Sale" at a market price of $7.89 million, compared to almost $10 million
for the same period in 1996. In terms of liquidity, these securities are
considered short term, thereby increasing the portfolio of liquid assets.
The remaining portfolio of available for sale investments of almost $1.1
million are made up of equity securities the Bank is required to maintain in
the form of bank stock. The Bank also has access to a total of almost $130
million in liquid assets consisting of two credit lines with a total available
of $5.95 million, and approximately $101 million of borrowing capacity through
FHLB. Included in the $130 million are securities classified as "Held-to-
Maturity" with a book value of $27.1 million, of which $4 million are pledged,
netting a balance of $23.1 million, with a net market value of $22.9 million.
RESULTS OF OPERATIONS
Net Income for the first quarter ended March 31, 1997 was $520,088
representing an increase of 11.3% and 71.9% respectively, over the net income
figures of $467,218 for the first quarter ended March 31, 1996, and $302,539
for the same period ended in 1995. The results of this are primary earnings
per share of $0.35 for the first quarter of 1997 versus $0.33 for the first
quarter of 1996, and $0.23 for the first quarter of 1995, and fully diluted
earnings per share of $0.35, $0.33, and $0.22 respectively. The first quarter
of 1997 was more profitable compared to the same period in 1996 due in part to
a decrease in interest paid on deposit accounts, and a restructuring of the
fees charged on these accounts resulting in more non interest income. A new
computer system was purchased during the first quarter of 1995, which had a
negative effect on earnings for that time period. A cash dividend of $0.28
per share was declared on January 9, 1997, payable on February 1, 1997, to
shareholders of record as of January 16, 1997. This represents a 7.7%
increase over last years quarterly dividends of $0.26 per share. Additionally,
a 5% stock dividend was declared to shareholders of record as of January 15,
1997.
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, rate sensitivity of earning assets as well as interest bearing
liabilities, market interest rates and the amount of non-interest bearing
funds which support earning assets.
Net interest income for the first quarter comparison periods started at
$1.63 million for 1995 and increased to $1.94 million for 1996, and then
increased to almost $2.2 million for 1997, resulting in an increase of 10.4%
for 1997 versus 1996, and 18.8% for 1996 versus 1995. Total interest income
for the first quarter of 1997 reported a less than favorable increase for 1997
compared to 1996, with an increase of $8,333 or .2% while interest income
increased by $438,370 or 12.2% for the first quarter of 1996 compared to 1995.
Interest expense decreased for the first quarter of 1997 compared to the first
quarter of 1996 and 1995, with a decrease of $194,302 or 9.3% for 1997 versus
1996 and $62,887 or 3.2% for 1997 versus 1995. These decreases are also
contributing factors to the increase in net income for the comparison periods.
A review of the interest earned on loans, the major source of interest income,
reveals an increase of 2.84% for 1997 compared to 1996 and an increase of
12.22% for 1996 compared to 1995, while interest paid on deposits, the major
source of interest expense, shows a decrease of 9.73% and an increase of 6.97%,
respectively.
The following paragraphs are comparisons of average balances and the
respective average yield. Reference can be made to the tables labeled
"Average Balances and Interest Rates" and "Changes in Interest Income and
Interest Expense" for a more detailed look at these variances. Keep in mind
that income on tax exempt securities is stated at the tax equivalent yield,
therefore, for these two tables the interest figures presented for these
securities are higher than those presented on the consolidated statement of
income for the first quarters ended 1997, 1996, and 1995.
The average volume of loans increased by $8.8 million or 6.4%, while the
yield on those loans decreased from 9.52% for the first three months of 1996
to 9.27% for the first three months of 1997,a decrease of 25 basis points.
Income from loans for the first quarter of 1997 increased to $3.33 million or
by 2.84% compared to $3.23 million for the same period in 1996.
The average volume of taxable investments increased to $37.74 million or
by 9.68%, and the yield on these investments for the first three months of
1997 rose by 10 basis points to end the three month comparison period at
5.97% versus 5.87% a year ago. Of this total taxable investments of $37.74
million, $7.89 million are investments classified as available-for-sale, with
the remaining $29.85 million classified as held-to-maturity. Income for the
first three months increased in 1997 compared to 1996 by $52,667 to a reported
income figure of $555,226 versus $502,559 a year ago.
A decrease is noted in the average volume of tax-exempt investments
reported at $14.66 million for the first three months of 1996 versus $10.58
million for the same period in 1997, a decrease of 27.8%, all of these
investments are classified as held-to-maturity. Income on these investments
followed the average volume pattern decreasing to $206,832 from $294,386 for
the first three months of 1997 and 1996 respectively. The tax equivalent
yield for the first three months of 1997 decreased 15 basis points to a
reported 7.93% compared to 8.08% for the same period in 1996.
Other securities ended the three month period in 1997 at an average volume
of $1.21 million, resulting in a 1.43% increase compared to the same period
last year. Of this total almost $1.1 million are equity securities and, under
the guidelines, are classified as available-for-sale with the remaining $150
thousand classified as held-to-maturity. Income decreased slightly for 1997
compared to 1996, with reported figures of $19,274 and $19,893, respectively.
The Bank currently has no investments classified as trading securities,
and due to the guidelines of its investment policy, 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 treasuries.
The average volume of federal funds sold decreased from $6.1 million to
$331,667 for the comparison periods, a decrease of 95%. Interest income on
federal funds sold decreased to $4,942 with an average yield of 6.04% for the
first quarter of 1997, compared to income of $82,601 with an average yield of
5.48% for the first quarter of 1996, a decrease in income of 94%, with an
increase in yield of 56 basis points.
In total, our average earning assets increased to $195.3 million or by
1.2% during the first three months of 1997, compared to the same period in
1996, while the average yield on those earning assets decreased by 22 basis
points to end the three month period in 1997 at 8.47% compared to 8.69% for
the same period last year.
The average volume of time deposits decreased from $97.2 million for the
first three months of 1996 to $94.4 million for the same time period in 1997,
a decrease of $2.8 million or just under 3%. Interest expense on time
deposits decreased to $1.3 million with an average yield of 5.65% for the
first three months of 1997, compared to almost $1.5 million with an average
yield of 6.13% for the same time period in 1996.
An increase of $1.2 million is reported in the average volume of NOW &
money market funds, which ended the first three months of 1996 at an average
volume of $38.9 million compared to an average volume as of March 31, 1997
of $40.1 million. Interest expense on these funds decreased to $350,483 with
an average yield of 3.54% for the first three months of 1997 compared to
$367,975 with an average yield of 3.80% for the first three months of 1996.
An increase of just over 1/2 million is noted in the average volume of
savings deposits with reported first quarter ending figures of $32.04 million
for 1997 versus $31.4 million for 1996. Interest expense associated with
savings accounts decreased from $234,418 for the first three months of 1996
to $216,936 for the same period in 1997, a decrease of $17,482 or 7.5%.
Other borrowed funds increased to an average volume of $820,964 with an
average yield of 6.26%, resulting in an increase in volume of $755,964 and a
decrease in yield of 144 basis points.
Subordinated debentures continued to decrease in the first quarter of 1997
to end the three month period at an average volume of $138,000 with a yield of
9.68%. Redemption activity was more frequent for the 9% debentures compared
to the 11% debentures for the calendar years 1994 - 1996, but because the
redemption period for the 11% debentures has now begun, an increase in
redemption activity is noted for these debentures as well. The redemption
period refers to the period of time prior to maturity in which the redemption
price is greater. The redemption period for the 9% debentures is now in its
final phase. The redemption prices and time periods for the respective
debentures are as follows:
<TABLE>
<CAPTION>
11% Debentures
<S> <C>
August 1, 1996 - July 31, 1998 104%
August 1, 1998 - July 31, 2000 103%
August 1, 2000 - July 31, 2002 102%
August 1, 2002 - July 31, 2004 101%
<CAPTION>
9% Debentures
<S> <C>
August 1, 1996 - July 31, 1998 101%
</TABLE>
In summary, the tax equivalent net interest income increased from $2.04
million for the first three months of 1996 to $2.21 million for the first
three months of 1997, an increase of 8.4%. The net interest spread as
defined on the "Average Balances and Interest Rates" report, was 3.91% for
the first three months of 1997, compared to 3.63% for the same period in 1996.
Although the yield on total interest bearing assets and interest bearing
liabilities decreased from 1996 to 1997, the 22 basis point decrease in yield
on assets is less compared to the 50 basis point decrease in the average rate
paid on interest earning liabilities, thereby creating the 28 basis points
increase in net interest spread.
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
Management continues to follow the same structured underwriting guidelines
as well as the thorough loan-by-loan review policy. These measures help to
insure the adequacy of the loan loss coverage. A continuing review of the
loan portfolio is conducted by the Executive Officers and the Board of
Directors, which meets to discuss, among other matters, potential exposures.
Factors considered are each borrower's financial condition, the industry or
sector for the economy in which the borrower operates, and overall economic
conditions. Existing or potential problems are noted and addressed by senior
management in order to assess the risk of probable loss or delinquency. A
variety of loans are reviewed periodically by an independent firm in order to
assure accuracy and compliance with various policies and procedures set by
the regulatory authorities. The Bank also employs a Loan Review and Compliance
Officer whose duties include, among others, a review of the loan portfolio
including delinquent and non-performing loans.
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 or decreased to
reflect the 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 $1.49 million as of March 31,
1997 constitutes 1.02% of the total gross loan portfolio, compared to $1.47
million or 1.07% for the same period in 1996. In management's opinion, this
is adequate and reasonable, particularly in view of the fact that as of March
31, 1997 $118.8 million of the total loan portfolio, or 81.6% consists of real
estate mortgage loans; and of this total, $95 million or 65.3% constitute one
to four family residential mortgage loans. Figures for the same period a year
ago are $113.7 million in real estate mortgage loans, or 82.65%, with a one to
four family mortgage loan portfolio of $91.4 million or 66.4%. This large
loan volume together with the low historical loan loss experience help to
support our basis for loan loss coverage. Furthermore, if the eligible loan
portfolio base were reduced by the aggregate of the residential mortgage loan
sector of the portfolio, the valuation allowance for loan losses of $1.49
million would constitute 2.94% of the eligible loans, compared to 3.18% a
year ago. In management's opinion, a loan portfolio consisting of 81.6% 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 adopted this new rule effective for the 1995
calendar year as required. 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. This
new rule was immaterial upon implementation, and continues to have no
significant effect on the financial position or results of operation of the
Corporation as of the date of this report.
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 1997 and
1996 reveals a combined increase in non-accruing loans and OREO of 10.57% and
a decrease in loans 90 days or more past due of 64.6%. The portfolio of non-
accruing loans which make up the biggest portion of the non-performing assets,
consists of $2 million or 94.2% of real estate secured mortgage loans for the
first three months of 1997 compared to $1.8 million or 91.3% for the same
period last year.
Non-performing assets as of March 31, 1997 and 1996 were made up of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Non-Accruing loans $2,130,256 $1,965,928
Loans past due 90 day or more and still accruing 86,741 245,087
Other real estate owned 719,032 610,925
Total $2,936,029 $2,821,940
</TABLE>
These totals of $2.9 million for 1997 and $2.8 million for 1996 equal
2.02% and 2.05% respectively, of total gross loans, as well as 1.44% and 1.37%,
respectively of total assets. As of March 31, 1997, our reserve coverage of
non-performance loans was 51% versus 52% a year ago.
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 less. Our appraisal 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
periodically thereafter charging any additional write-downs to the appropriate
expense account at that time.
Our current portfolio of other real estate owned equals $719,032. Eight
properties were obtained through the normal foreclosure process, and six
properties were deeded "In lieu of foreclosure". All of our properties are
located in Vermont and consist of the following; a condominium project and
land in Jay; four commercial condominium units in Newport; three building
lots in Irasburg; a single family residence in Island Pond and one in East
Charleston; a mobile home with land in Newport Center; and one commercial
building in Newport. The Bank is actively attempting to sell all of the
other real estate owned, and expects no material loss on any of these
properties. 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 first quarter of 1997 was $280,672,
compared to $250,934 for the first quarter of 1996, and $250,209 for the first
quarter of 1995, an increase of $29,738 or 11.85% for 1997 versus 1996, and
$725 or .29% for 1996 versus 1995. Service fees increased $51,317, or by
46.2% for 1997 versus 1996 while a decrease of $23,025 or 17.17% was noted for
1996 versus 1995. The manner in which fees are assessed has been changed as
mentioned earlier in this discussion, creating more non-interest income.
Trust department income decreased 16% for the first quarter of 1997 compared
to 1996, but increased 20% for the first quarter of 1996 compared to 1995.
In reviewing the components of other income, foreign exchange notes favorable
income for the first quarter of 1997, while income from sold loans reports
substantially less than a year ago, contributing overwhelmingly to the
decrease in other income for the first quarter of 1997 versus the same period
in 1996. The same two components together tallied more favorable increases
for the comparison period of 1996 versus 1995. In summary, other income
decreased $15,426 or 13.6% for the first quarter of 1997 compared to the first
quarter of 1996, while an increase of $19,368 or 20.5% is calculated for the
first quarter of 1996 versus 1995.
Other operating expenses for the first quarter of 1997 was $1.52 million
compared to $1.55 million for 1996, and $1.51 million for 1995 resulting in a
decrease of 1.5% for 1997 versus 1996, and an increase of 3.5% for 1996 versus
1995. Salaries, the largest portion of other operating expenses, showed a
decrease of $11,502, or 1.8% for 1997 versus 1996, but showed the biggest
increase of $67,290, or 11.7% for 1996 versus 1995. Other expenses reported
the only increase for 1997 versus 1996 totaling $16,912 or 3.73%, while in the
comparison of 1996 versus 1995, it reported the only decrease of $36,918, or
7.5%. One of the major factors for the decrease in other expense for 1996
versus 1995 is the reduction in the premium charge for FDIC insurance. For
the first three months of 1995 the expense for this insurance was $99,207,
compared to a 1996 three month expense figure of $488, and $6,064 for the
first three months of 1997.
All components of other operating expenses are monitored by management,
however, a 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. A review during the first quarter of 1997 revealed
over-accruals in various expense accounts. Reversals to a few select accounts
helped to decrease the overall operating expenses and increase net income.
APPLICABLE INCOME TAXES
Income before taxes increased from $344,887 for the first quarter of 1995
to $607,369 for the first quarter of 1996, and to $694,916 for the first
quarter of 1997, an increase of $262,482 or 76% for 1996 versus 1995, and an
increase of $87,547 or 14.4% for 1997 versus 1996. As a result of this
increase, provisions for income taxes for the first quarter of 1996 increased
$97,803 compared to the same period for 1995, and increased $34,677 for the
first quarter of 1997 compared to the first quarter of 1996, ending the three
month period of 1997 at $174,828.
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. The Corporation depends
primarily on a strong net interest income to enable it's purchasing power to
remain aggressive.
FINANCIAL CONDITION
The Financial Condition of the Corporation should be examined in terms and
trends in sources and uses of funds. The table entitled "Average Balances and
Interest Rates" is a comparison of daily average balances and is indicative of
how sources and uses of funds have been managed. Reference to this table can
once again be made to follow the comparative figures in the paragraphs below.
Average earning assets grew by 1.2% in the first three months of 1997 as
compared to the same period in 1996 to an average volume of $195.3 million.
Loans, which totaled $145.4 million in 1997 and $136.6 million in 1996,
comprised 74.5% and 70.8% respectively, of our earning assets with the average
volume of loans increasing $8.8 million or 6.4% in the first three months of
1997, compared to the same period in 1996. On March 31, 1997, residential
real estate mortgages made up 65% of our portfolio, commercial loans made up
22% and personal loans made up 13, compared to 66%, 22%, and 12% respectively
in 1996.
Taxable investments made up 19.3% of our average earning assets in the
first three months of 1997 compared to 17.8% in 1996 to end the period at an
average volume of $37.7 million.
Tax-exempt investments of $10.6 million made up 5.4% of our average
earning assets in the first three months of 1997, compared to $14.7 million or
7.6% in 1996.
Federal funds sold, which had an average volume of $331,667, made up .17%
of our earning assets in the first three months of 1997 and 3.14% in 1996.
And ending the list of earning assets, other securities increased $17,041
making up .62% in 1997 as well as 1996.
Historically, the Bank has funded its growth by steady increases in its
core deposits. The Bank has no brokered deposits as mentioned earlier, 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. Currently, rates on CD's are slightly lower than they were last year
at this time, and the Bank is experiencing a shift toward savings and money
market accounts. Time deposits decreased approximately 2.9% to an average
volume of $94.4 million, accounting for 56.3% of the total interest bearing
accounts for the first quarter of 1997, compared to $97 million in average
volume and 57.9% of total interest bearing accounts for the first quarter of
1996. Savings accounts increased 2.1% to an average volume of $32 million
accounting for 19% of the total interest bearing accounts for the first
quarter of 1997, compared to an average volume of $31.4 million and 22.3% of
total interest bearing accounts for the first quarter of 1996. An increase of
just over 3% is noted in NOW and money market funds with an average volume of
approximately $40 million reported at the end of the first quarter of 1997
compared to $38.9 million at the end of the first quarter of 1996 with these
volumes accounting for 24% and 23.2% respectively, of the total interest
bearing liability accounts. Other borrowed funds accounts for .49% of total
interest bearing liabilities for the first three months of 1997 while
subordinated debentures ends the list and makes the least contribution with an
average volume of $138,000 comprising .08% of total interest bearing
liabilities.
CAPITAL RESOURCES
The Corporation's stockholders' equity, which started the year at
$19,111,355, was increased through earnings of $520,088 and sales of common
stock of $231,258 through dividend reinvestment and debenture conversions.
It was decreased by dividends of $406,598, purchase of treasury stock of
$4,792 and adjustment of $57,030 for valuation of allowance for securities to
end the first quarter of 1997 at $19,394,281 with a book value of $13.21 per
share. All stockholder's equity is unrestricted. Additionally, it is noted
that the net unrealized gain on valuation allowance for securities has
decreased. 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
March 31, 1997, the Bank continued to maintain ratios far above the minimum
requirements with reported ratios of approximately 19% for Tier I and 20% 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.
From time to time the Corporation may make contributions to the capital of
its subsidiary, the Bank. At present, regulatory authorities have made no
demand on the Corporation to make additional capital contributions to the
Bank's capital.
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: May 13, 1997 By:/s/ Richard C. White
Richard C. White, President
DATED: May 13, 1997 By:/s/ Stephen P. Marsh
Stephen P. Marsh,
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,962
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,994
<INVESTMENTS-CARRYING> 40,813
<INVESTMENTS-MARKET> 40,565
<LOANS> 145,624
<ALLOWANCE> 1,491
<TOTAL-ASSETS> 204,401
<DEPOSITS> 183,906
<SHORT-TERM> 65
<LIABILITIES-OTHER> 901
<LONG-TERM> 135
0
0
<COMMON> 3,746
<OTHER-SE> 15,648
<TOTAL-LIABILITIES-AND-EQUITY> 204,401
<INTEREST-LOAN> 3,325
<INTEREST-INVEST> 710
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 4,040
<INTEREST-DEPOSIT> 1,882
<INTEREST-EXPENSE> 16
<INTEREST-INCOME-NET> 2,143
<LOAN-LOSSES> 205
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,523
<INCOME-PRETAX> 695
<INCOME-PRE-EXTRAORDINARY> 695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 520
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 8.29
<LOANS-NON> 2,130
<LOANS-PAST> 87
<LOANS-TROUBLED> 498
<LOANS-PROBLEM> 2,190
<ALLOWANCE-OPEN> 1,401
<CHARGE-OFFS> 151
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 1,491
<ALLOWANCE-DOMESTIC> 1,491
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
