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 Six Months Ended June 30, 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 June 30, 1997, there were 1,512,678 shares issued of the
Corporation's $2.50 par value common stock and 1,483,055 shares
outstanding.
Total Pages - 21 Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statement of Condition
( Unaudited ) June 30 December 31 June 30
1997 1996 1996
Assets
<S> <C> <C> <C>
Cash and due from banks 4,121,145 8,245,398 4,837,874
Federal funds sold 0 0 1,125,000
Total cash and cash equivalents 4,121,145 8,245,398 5,962,874
Securities held-to-maturity (market value
$38,072,403 at 6/30/97, $37,915,448 at
12/31/96, and $49,231,423 at 6/30/96) 39,783,574 37,967,786 49,481,125
Securities available-for-sale 9,066,625 9,037,113 6,015,550
Loans 148,274,710 145,603,582 141,763,996
Allowance for loan losses (1,477,985) (1,401,042) (1,464,293)
Unearned net loan fees (878,980) (904,303) (895,923)
Net loans 145,917,745 143,298,237 139,403,780
Bank premises and equipment, net 3,363,139 3,421,359 3,296,472
Accrued interest receivable 1,640,389 1,538,637 1,777,622
Other real estate owned, net 862,321 662,544 841,467
Other assets 1,537,254 1,365,129 1,622,351
Total assets 206,292,192 205,536,203 208,401,241
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 18,578,559 18,098,323 17,934,874
NOW and money market accounts 36,632,260 40,026,689 42,742,879
Savings 32,449,124 31,879,729 32,576,703
Time deposits, $100,000 and over 16,733,224 17,878,261 18,158,112
Other time deposits 76,377,176 75,971,474 78,165,840
Total deposits 180,770,343 183,854,476 189,578,408
Short term borrowings 938,000 1,600,000 0
Borrowed funds 4,065,000 65,000 65,000
Accrued interest and other liabilities 551,701 735,372 368,250
Subordinated convertible debentures 118,000 170,000 208,000
Total liabilities 186,443,044 186,424,848 190,219,658
Stockholders' Equity
Common stock - $2.50 par value;
2,000,000 shares authorized and
1,512,678 shares issued at 6/30/97,
1,412,493 issued at 12/31/96 and
1,387,010 issued at 6/30/96 3,781,696 3,531,233 3,467,525
Additional paid-in capital 7,626,641 6,140,962 5,817,612
Retained Earnings 8,891,133 9,871,409 9,340,731
Unrealized gain on securities
available-for-sale, net of tax (5,287) 7,963 (4,179)
Less: treasury stock, at cost
(29,623 shares at 6/30/97, 29,365 shares
at 12/31/96 and 29,359 shares at 6/30/96) (445,035) (440,212) (440,106)
Total stockholders' equity 19,849,148 19,111,355 18,181,583
Total liabilities and stockholders' equity 206,292,192 205,536,203 208,401,241
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Income
( Unaudited )
For The Second Quarter Ended June 30 1997 1996 1995
<S> <C> <C> <C>
Interest income
Interest and fees on loans 3,454,297 3,331,846 3,055,752
Interest and dividends on investments
U.S. Treasury securities 524,065 516,227 416,398
U.S. Government agencies 20,839 20,660 22,341
States and political subdivisions 143,179 231,120 247,391
Other securities 17,625 16,597 16,608
Interest on federal funds sold 11,798 28,312 29,974
Total interest income 4,171,803 4,144,762 3,788,464
Interest expense
Interest on deposits 1,865,780 2,085,813 2,057,156
Interest on other borrowed funds 54,837 2,124 3,026
Interest on subordinated debentures 3,140 6,251 7,530
Total interest expense 1,923,757 2,094,188 2,067,712
Net interest income 2,248,046 2,050,574 1,720,752
Provision for loan losses (105,000) (122,500) (30,000)
Net interest income after provision 2,143,046 1,928,074 1,690,752
Other operating income
Trust department income 22,621 24,874 23,511
Service fees 176,173 163,395 143,511
Security gains (losses) 0 (1,928) 0
Other 421,904 177,556 148,023
Total other operating income 620,698 363,897 315,045
Other operating expenses
Salaries and wages 768,276 658,466 592,378
Pension and other employee benefits 183,159 169,909 144,569
Occupancy expenses, net 309,910 297,559 229,039
Other 670,777 504,515 528,792
Total other operating expenses 1,932,122 1,630,449 1,494,778
Income before income taxes 831,622 661,522 511,019
Applicable income taxes (credit) 219,983 148,667 93,396
Net Income 611,639 512,855 417,623
Earnings per share on weighted average
Primary 0.41 0.36 0.31
Fully diluted 0.41 0.36 0.30
Weighted average number of common shares
Used in computing earnings per share
Primary 1,482,283 1,425,025 1,366,863
Fully diluted 1,498,878 1,453,345 1,411,112
Dividends per share 0.28 0.26 0.24
All per share data restated to reflect a 5% stock dividend paid on
February 1, 1997
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Income
( Unaudited )
For the Six Months Ended June 30, 1997 1996 1995
<S> <C> <C> <C>
Interest income
Interest and fees on loans 6,778,815 6,564,634 5,936,497
Interest and dividends on investments
U.S. Treasury securities 1,058,564 1,007,963 813,994
U.S. Government agencies 41,566 31,483 28,208
States and political subdivisions 281,784 427,490 490,950
Other securities 34,803 34,415 36,538
Interest on federal funds sold 16,740 110,913 76,043
Total interest income 8,212,272 8,176,898 7,382,230
Interest expense
Interest on deposits 3,747,654 4,170,636 4,006,209
Interest on other borrowed funds 67,517 4,039 4,263
Interest on subordinated debentures 6,423 11,651 17,963
Total interest expense 3,821,594 4,186,326 4,028,435
Net interest income 4,390,678 3,990,572 3,353,795
Provision for loan losses (310,000) (160,000) (60,000)
Net interest income after provision 4,080,678 3,830,572 3,293,795
Other operating income
Trust department income 44,670 51,076 45,331
Service fees 338,559 274,464 277,605
Security gains (losses) 0 (1,928) 0
Other 518,142 291,219 242,318
Total other operating income 901,371 614,831 565,254
Other operating expenses
Salaries and wages 1,397,204 1,298,896 1,165,518
Pension and other employee benefits 316,490 320,776 288,283
Occupancy expenses, net 600,479 598,676 514,983
Other 1,141,338 958,164 1,034,359
Total other operating expenses 3,455,511 3,176,512 3,003,143
Income before income taxes 1,526,538 1,268,891 855,906
Applicable income taxes (credit) 394,811 288,817 135,744
Net Income 1,131,727 980,074 720,162
Earnings per share on weighted average
Primary 0.77 0.69 0.53
Fully diluted 0.76 0.68 0.52
Weighted average number of common shares
Used in computing earnings per share
Primary 1,474,631 1,418,390 1,355,712
Fully diluted 1,493,183 1,447,763 1,406,840
Book value per share on shares outstanding $13.38 $12.75 $12.06
All per share data restated to reflect a 5% stock dividend paid on
February 1, 1997
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Statement of Cash Flows
For the Six Months Ended June 30, 1997 1996 1995
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net Income 1,131,727 980,074 720,162
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 188,341 187,396 129,497
Provisions for possible loan losses 310,000 160,000 60,000
Provisions for deferred taxes 39,087 61,587 72,878
Securities (gains) losses 0 1,928 0
Loss (gain) on sales of OREO (7,729) (8,710) (12,201)
Subsequent writedowns on OREO 129,446 12,320 30,000
Amortization of bond premium 9,591 36,882 246,962
Increase (decrease) in taxes payable (102,041) (36,770) 33,866
(Increase) decrease in interest receivable (101,752) (253,447) (299,137)
(Increase) decrease in other assets (212,776) (249,992) (112,775)
Increase (decrease) in unamortized loan fees (25,323) (12,808) (24,337)
Interest (decrease) in interest payable 15,834 (35,495) (20,303)
Increase (decrease) in accrued expenses (70,879) (175,893) (77,749)
Increase (decrease) in other liabilities (18,195) 41,347 31,189
Net cash provided by operating activities 1,285,331 708,419 778,052
Cash Flows from investing activities:
Investments - held to maturity
Sales and maturities 2,599,612 4,206,448 4,467,137
Purchases (4,437,879)(21,093,137)(8,195,731)
Investments - available for sale
Sales and maturities 0 8,000,000 3,000,000
Purchases (36,700) (23,300)(4,078,200)
Investment in limited partnership 0 0 564
Increase in Loans, Net of Payments (3,449,102) (5,131,819)(1,251,753)
Capital Expenditures (130,121) (220,702) (97,235)
Recoveries of loans charged off 73,585 48,088 98,540
Costs Incurred in Acquiring OREO 0 0 0
Proceeds from sales of OREO 149,838 261,264 116,365
Net Cash Used in Investing Activities (5,230,767)(13,953,158)(5,940,313)
Cash Flows from Financing Activities:
Net increase in demand deposits,
NOW, money market accounts (2,344,798) 11,630,808 (3,107,171)
Net increase in certificates of deposit (739,335) (935,922) 5,797,665
Net increase (decrease) in other
borrowed funds 3,338,000 0 1,914,000
Payments to acquire treasury stock (4,822) (82) (4,237)
Dividends paid (427,862) (381,146) (330,536)
Net cash provided by financing activities (178,817) 10,313,658 4,269,721
Net increase in cash and cash equivalents (4,124,253) (2,931,081) (892,540)
Cash and cash equivalents:
Beginning 8,245,398 8,893,955 7,392,717
Ending 4,121,145 5,962,874 6,500,177
Supplemental Schedule of Cash Paid During the Year
Interest paid 1,907,923 4,210,170 4,048,738
Income Taxes Paid 457,765 264,000 29,000
Supplemental schedule of noncash investing
and financing activities:
Net change in securities valuation ($20,076) ($82,849) $594,839
OREO acquired in settlements of loans $614,108 $384,779 $297,546
Debentures converted to common stock $52,000 $57,000 $235,000
5% Stock dividend at market value $1,294,006 $0 $1,019,716
Dividends paid
Dividends payable $817,997 $695,906 $611,952
Dividends reinvested ($390,135) ($314,760) ($281,416)
$427,862 $381,146 $330,536
</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 six 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) 146,254,287 6,778,815 9.35% 138,117,879 6,564,634 9.56%
Taxable Investment
Securities 37,211,050 1,100,130 5.96% 35,696,926 1,039,446 5.86%
Tax-Exempt Investment
Securities (1) 10,696,718 420,555 7.93% 16,249,828 641,445 7.94%
Federal Funds Sold 667,624 16,740 5.06% 4,118,544 110,913 5.42%
Other Securities (2) 1,232,345 39,021 6.39% 1,204,964 38,551 6.43%
TOTAL 196,062,024 8,355,261 8.60% 195,388,141 8,394,989 8.64%
INTEREST BEARING LIABILITIES
Savings Deposits 32,089,159 436,737 2.74% 31,990,661 478,024 3.00%
NOW & Money
Market Funds 38,988,639 690,185 3.57% 40,403,300 774,027 3.85%
Time Deposits 94,073,070 2,620,731 5.62% 97,097,086 2,918,585 6.04%
Other Borrowed Funds 2,371,452 67,517 5.74% 95,233 3,214 6.79%
Subordinated Debentures 133,000 6,423 9.74% 237,000 11,651 9.89%
TOTAL 167,655,320 3,821,593 4.60% 169,823,280 4,185,501 4.96%
Net Interest Income 4,533,668 4,209,488
Net Interest Spread(3) 4.00% 3.68%
Interest Differential(4) 4.66% 4.34%
<FN>
<F01> Income on investment securities of state and political subdivisions is
stated on a fully taxable basis (assuming a 34 percent tax rate).
<F02> Included in other securities are taxable industrial development bonds
(VIDA), with income of approximately $4,218 for 1997 and $4,136 for 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
six month of 1997 and 1996 resulting from volume changes in assets and
liabilities and fluctuations in rates earned and paid.
<CAPTION>
Variance Variance
RATE / VOLUME Due Due Total
Rate(1) Volume(1) Variance
INCOME EARNING ASSETS
<S> <C> <C> <C>
Loans (172,536) 386,717 214,181
Taxable Investment Securities 16,595 44,089 60,684
Tax-Exempt Investment Securities(2) (2,562) (218,328) (220,890)
Federal Funds Sold (7,645) (86,528) (94,173)
Other Securities (406) 876 470
Total Interest Earnings (166,554) 126,826 (39,728)
INTEREST BEARING LIABILITIES
Savings Deposits (42,759) 1,472 (41,287)
NOW & Money Market Funds (58,799) (25,043) (83,842)
Time Deposits (213,610) (84,244) (297,854)
Other Borrowed Funds (12,517) 76,820 64,303
Subordinated Debenture (206) (5,022) (5,228)
Total Interest Expense (327,891) (36,017) (363,908)
<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 taxable basis. The
assumed rate is 34%.
</TABLE>
<TABLE>
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
<CAPTION>
For The Second Quarter Ended June 30 1997 1996 1995
<S> <C> <C> <C>
Net Income 611,639 512,855 417,623
Average Number of Common Shares Outstanding 1,482,283 1,425,025 1,366,863
Earnings Per Common Share 0.41 0.36 0.31
<CAPTION>
For The Six Months Ended June 30 1997 1996 1995
Net Income 1,131,727 980,074 720,162
Average Number of Common Shares Outstanding 1,474,631 1,418,390 1,355,712
Earnings Per Common Share 0.77 0.69 0.53
</TABLE>
<TABLE>
COMMUNITY BANCORP.
FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
For The Second Quarter Ended June 30 1997 1996 1995
<S> <C> <C> <C>
Net Income 611,639 512,855 417,623
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures) 2,072 4,126 4,969
Adjusted Net Income 613,711 516,981 422,592
Average Number of Common Shares Outstanding 1,482,283 1,425,025 1,366,863
Increase in Shares (Assuming Conversion of
Convertible Debentures) 16,596 28,320 44,249
Average Number of Common Shares Outstanding
(Fully Diluted) 1,498,879 1,453,345 1,411,112
Earnings Per Common Share Assuming
Full Dilution 0.41 0.36 0.30
<CAPTION>
For The Six Months Ended June 30 1997 1996 1995
Net Income 1,131,727 980,074 720,162
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures) 4,239 7,689 11,855
Adjusted Net Income 1,135,966 987,763 732,017
Average Number of Common Shares Outstanding 1,474,631 1,418,390 1,355,712
Increase in Shares (Assuming Conversion of
Convertible Debentures) 18,552 29,373 51,128
Average Number of Common Shares Outstanding
(Fully Diluted) 1,493,183 1,447,763 1,406,840
Earnings Per Common Share Assuming
Full Dilution 0.76 0.68 0.52
</TABLE>
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
For the Six Months Ended June 30, 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 $1.4 million or 7.9% for the first six months of 1997
compared to 1996 to a balance of $16.7 million. Other time deposits
decreased from $78.2 million at the end of the first six months of
1996 to $76.4 million at the end of the first six months of 1997, a
decrease of $1.8 million or 2.29%. 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 8.3% to end the
six month comparison period at $69.1 million for 1997 compared to
$75.3 million for 1996. Our gross loan portfolio increased from
$141.7 million for the first six months of 1996 to $148.3 million for
the first six months of 1997 or 4.6%. Of this total portfolio of
$148.3 million, $80.3 million are scheduled to reprice or mature
within one year, compared to $78.3 million a year ago. Federal funds
were purchased at the end of the first six months of 1997 totaling
$938 thousand compared to a sale of $1.1 million for the same time
period a year ago. At the end of the first six months of 1997, the
Bank held in it's investment portfolio treasuries classified as
"Available-for-Sale" at a market price of almost $8 million, compared
to $6.1 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 Federal
Home Loan Bank of Boston (FHLB) and Federal Reserve stock. The Bank
also has access to a total of almost $137 million in liquid assets
consisting of two credit lines with a total available of $6.1
million, and approximately $101 million of borrowing capacity through
FHLB. Of this total, approximately $4.9 million is currently advanced
against our credit lines at FHLB. Included in the $137 million are
securities classified as "Held-to-Maturity" with a book value of $29.8
million, of which $4 million are pledged, netting a balance of $24.8
million, with a net market value of $24.7 million.
RESULTS OF OPERATIONS
Net income for the second quarter ended June 30, 1997 was
$611,639, representing an increase of 19.3% and 46.5% respectively,
over the net income figures of $512,855 for the second quarter ended
June 30, 1996, and $417,623 for the same period ended in 1995. The
results of this are primary earnings per share of $0.41 for the second
quarter of 1997 versus $0.36 for the second quarter of 1996, and $0.31
for the second quarter of 1995, and fully diluted earnings per share
of $0.41, $0.36, and $0.30 respectively. The second 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 gain on the
sale of inventory associated with an OREO property. The Board of
Directors declared a cash dividend of $0.28 per share payable on May
1, 1997, to shareholders of record as of April 15, 1997. This
represents a 7.7% increase over last years quarterly dividends of
$0.26 per share. Net income for the first six months of 1997 was
$1.13 million compared to $980,074 for the first six months of 1996,
and $720,162 for the same period in 1995, representing an increase of
15.5% for 1997 versus 1996, and an increase of 36% for 1996 versus
1995. The 36% increase is due primarily to a decrease in the expense
for FDIC insurance from 1995 to 1996. Primary earnings per share for
the first six months were $0.77 for 1997, $0.69 for 1996, and $0.53
for 1995, and fully diluted earnings per share were reported at $0.76,
$0.68, and $0.52, respectively.
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 second quarter comparison periods
started at $1.72 million for 1995 and increased to $2.05 million for
1996, and then increased to almost $2.25 million for 1997, resulting
in an increase of 19.17% for 1996 versus 1995, and 9.63% for 1997
versus 1996. Total interest income for the second quarter of 1997
increased slightly compared to 1996, with an increase of $27,041 or
.65% while interest income increased by $356,298 or 9.4% for the
second quarter of 1996 compared to 1995. Interest expense decreased
for the second quarter of 1997 compared to the second quarter of 1996
by $170,431 or 8.14% while an increase of $26,476 or 1.28% was
recognized for 1996 versus 1995. Net interest income for the first
six months started at $3.4 million for 1995 and increased 19% to just
under $4 million for 1996, and ended the first six months of 1997 at
$4.4 million, an increase of $400,106 or 10%. Total interest income
for the first six months increased $794,668 or 10.7% for 1996 versus
1995, while only a modest increase of $35,374 or .43% is noted for
1997 versus 1996. Total interest expense increased $157,891 or 3.9%
for the first six months of 1996 compared to 1995 while a decrease of
$364,732 or 8.7% is noted for the first six months of 1997 versus
1996. This decrease for 1997 versus 1996 was a contributing factor to
the favorable increase in net income. A review of the six month
figures for interest earned on loans, the major source of interest
income, reveals an increase of 3.3% for 1997 compared to 1996 and an
increase of 10.6% for 1996 compared to 1995, while interest paid on
deposits, the major source of interest expense, shows a decrease of
10.2% and an increase of 4.1%, respectively. The result is a tax
equivalent spread for the first six months equaling 4% for 1997,
versus 3.7% for 1996 and 3.3% for 1995.
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 six
months ended 1997, 1996, and 1995.
The average volume of loans increased by $8.1 million or 5.9%,
while the yield on those loans decreased from 9.56% for the first six
months of 1996 to 9.35% for the first six months of 1997, a decrease
of 21 basis points. Income from loans for the first six months of
1997 increased to $6.78 million or by 3.26% compared to $6.56 million
for the same period in 1996.
The average volume of taxable investments increased to $37.2
million or by 4.24%, and the yield on these investments for the first
six months of 1997 rose by 10 basis points to end the six month
comparison period at 5.96% versus 5.86% a year ago. Of this total
taxable investment of $37.2 million, approximately $8 million are
investments classified as available-for-sale, with the remaining $29.2
million classified as held-to-maturity. Income for the first six
months increased in 1997 compared to 1996 by $60,684 to a reported
income figure of $1.1 million versus $1.04 million a year ago.
A decrease is noted in the average volume of tax-exempt investments
reported at $16.2 million for the first six months of 1996 versus $10.7
million for the same period in 1997, a decrease of 34.2%. All of these
investments are classified as held-to-maturity. Income on these
investments decreased as well from $641,445 to $420,555 for the first
six months of 1996 and 1997 respectively. The tax equivalent yield
for the first six months of 1997 decreased 1 basis point to a
reported 7.93% compared to 7.94% for the same period in 1996.
Other securities ended the six month period in 1997 at an average
volume of $1.23 million, resulting in a 2.27% 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 increased slightly for 1997 compared to 1996, with reported
figures of $39,021 and $38,551, 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 $4.1
million to $667,624 for the comparison periods, a decrease of 84%.
Interest income on federal funds sold followed suit decreasing to
$16,740 with an average yield of 5.06% for the first six months of
1997, compared to income of $110,913 with an average yield of 5.42%
for the first six months of 1996, a decrease in income of 85%, with a
decrease in yield of 36 basis points.
In total, our average earning assets increased to $196 million or
by .34% during the first six months of 1997, compared to the same
period in 1996, while the average yield on those earning assets
decreased by 7 basis points to end the six month period in 1997 at
8.59% compared to 8.66% for the same period last year.
An increase of $98,498 is noted in the average volume of savings
deposits with reported first six months ending figures of $32.1
million for 1997 versus just under $32 million for 1996. Interest
expense associated with savings accounts decreased from $478,024 for
the first six months of 1996 to $436,737 for the same period in 1997
due to a 25 basis points decrease in the rate paid on these deposits.
A decrease of $1.5 million is reported in the average volume of
NOW & money market funds, which ended the first six months of 1996 at
an average volume of $40.4 million compared to an average volume as of
June 30, 1997 of $38.9 million. Interest expense on these funds
decreased to $690,185 with an average yield of 3.57% for the first six
months of 1997 compared to $774,027 with an average yield of 3.85% for
the first six months of 1996.
The average volume of time deposits decreased from $97.1 million
for the first six months of 1996 to $94.07 million for the same time
period in 1997, a decrease of $3.03 million or 3.11%. Interest
expense on time deposits decreased to $2.6 million with an average
yield of 5.62% for the first six months of 1997, compared to $2.9
million with an average yield of 6.04% for the same time period in
1996, a decrease of $297,854 or 10.2%.
Other borrowed funds increased to an average volume of $2.4
million with an average yield of 5.74%, resulting in an increase in
volume of $2.3 million with a decrease in yield of 105 basis points.
Subordinated debentures continued to decrease in the first half
of 1997 to end the six month period at an average volume of $133,000
with a yield of 9.74%. 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
August 1, 1996 - July 31, 1998 101%
</TABLE>
In summary, the tax equivalent net interest income increased from
$4.2 million for the first six months of 1996 to $4.5 million for the
first six months of 1997, an increase of 7.7%. The net interest
spread as defined on the "Average Balances and Interest Rates" report,
was 4.0% for the first six months of 1997, compared to 3.69% for the
same period in 1996. Although the yield on total interest bearing
assets and interest bearing liabilities decreased from 1996 to 1997,
the 4 basis point decrease in yield on assets is less compared to the
36 basis point decrease in the average rate paid on interest earning
liabilities, thereby creating the 32 basis points increase in net
interest spread.
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
Management follows strict underwriting guidelines, and has
established a 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 $1.48 million as of
June 30, 1997 constitutes 1% of the total gross loan portfolio,
compared to $1.46 million or 1.03% for the same period in 1996. In
management's opinion, this is adequate and reasonable, particularly in
view of the fact that as of June 30, 1997, $120.1 million of the total
loan portfolio, or 81% consists of real estate mortgage loans; and of
this total, $96.3 million or 65% constitute one to four family
residential mortgage loans. Figures for the same period a year ago
are $114.9 million in real estate mortgage loans, or 81.04%, with a
one to four family mortgage loan portfolio of $91.6 million or 65%.
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 $1.48 million would
constitute 2.84% of the eligible loans, compared to 2.92% a year ago.
In management's opinion, a loan portfolio consisting of 81% 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". Although an overall decrease of
$148,401 or 21.7% is noted, a comparison of these non-performing
assets for 1997 and 1996 reveals a decrease in non-accruing loans of
$350,109 or 21.7%, and an increase of $20,854 or 24.8% in our OREO
portfolio as well as an increase in loans 90 days or more past due of
$180,854 or 67.9%. The portfolio of non-accruing loans which make up
the biggest portion of the non-performing assets, consists of $1.12
million or 89.1% of real estate secured mortgage loans for the first
six months of 1997 .
<TABLE>
Non-performing assets as of June 30, 1997 and 1996 were made
up of the following:
<CAPTION>
1997 1996
<S> <C> <C>
Non-Accruing loans $1,261,634 $1,611,743
Loans past due 90 day or more and still accruing 447,088 266,234
Other real estate owned 862,321 841,467
Total $2,571,043 $2,719,444
</TABLE>
These totals of $2.6 million for 1997 and $2.7 million for 1996 equal
1.73% and 1.92%, respectively, of total gross loans, as well as 1.25% and
1.30%, respectively of total assets. As of June 30, 1997, our reserve
coverage of non-performance loans was 58% versus 54% 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 totals $862,321.
Nine properties were obtained through the normal foreclosure process,
and five 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; a mobile home with land in Newport Center;
two commercial buildings in Newport; and a vacation home in Jay and one in
Morgan. The Bank is actively attempting to sell all of the other real
estate owned, and expects no material loss on any of these properties.
Currently, the bank has a purchase and sale contract on the vacation
home in Morgan and the mobile home with land in Newport Center. 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
Total other operating income for the second quarter of 1997 was
$620,698 compared to $363,897 for the second quarter of 1996, and
$315,045 for the second quarter of 1995, an increase of $256,801 or
70.6% for 1997 versus 1996, and $48,852 or 15.5% for 1996 versus 1995.
Other income reports the biggest increase for 1997 versus 1996 at a
reported $244,348 increase. As mentioned earlier, the gain from the
sale of inventory associated with an OREO property was recognized this
quarter, contributing immensely to this increase. Service fees
increased $12,778, or by 7.8% for 1997 versus 1996, and also increased
for 1996 versus 1995 by $19,884 or 13.8%. 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
9% for the second quarter of 1997 compared to 1996, with only a slight
increase of 5.8% for the second quarter of 1996 compared to 1995.
Total other operating income for the first six months of 1997 ended at
$901,371 compared to $614,831 for the same period in 1996, and
$565,254 for 1995. The results are an increase of $286,540 or 46.6%
for 1997 versus 1996, and an increase of $49,577 or 8.77% for 1996
versus 1995. Again, other income shows the biggest increase reported
at $226,923 or 77.9% for 1997 versus 1996 and an increase of $48,901
or 20.2% for 1996 versus 1995. Trust department reported a decrease
in the six month comparison figure for 1997 versus 1996 as well, with
a figure of $44,670 for the first six months of 1997 compared to
$51,076 for the same period a year ago. This decrease was the direct
result of the loss of a major trust customer during the beginning of
1997. An increase of $5,745, or 12.7% is noted for the first six
months of 1996 compared to 1995.
Total other operating expenses for the second quarter of 1997 was
$1.9 million compared to $1.6 million for 1996, and $1.5 million for
1995 resulting in an increase of 18.5% for 1997 versus 1996, and 9.1%
for 1996 versus 1995. Salaries, the largest portion of other operating
expenses, showed an increase of $109,810, or 16.7% for 1997 versus 1996,
and an increase of $66,088, or 11.2% for 1996 versus 1995. Other
expenses reported the biggest increase for 1997 versus 1996 totaling
$166,262 or 33%, while in the comparison of 1996 versus 1995, it reported
the only decrease of $24,277, or 4.6%. A major factor for the increase
for 1997 versus 1996 was a write-down of $119,000 on an OREO property.
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. Total
operating expense for the six month comparison periods increased from
just over $3 million for 1995 to $3.2 million for 1996 and then increased
to $3.5 million for 1997, resulting in increases of 5.8% for 1995 versus
1996 and 8.8% for 1996 versus 1997. Other expense again topped the list
of increases for 1997 versus 1996 because of the write-down mentioned above,
and again decreased for the 1996 versus 1995 by a reported $76,195 or 7.4%,
which again is a partial result from the reduction in expense for FDIC
insurance. For the first six months of 1995 the expense for this insurance
was $194,919, compared to a 1996 six month expense figure of $986, and a
1997 six month figure $12,303. Salaries reports the next biggest increase
of $98,308 or 7.6% for the first six months of 1997 versus 1996, while it
reported the biggest increase of $133,378 or 11.4% for the same comparison
period of 1996 versus 1995. The number of full time equivalent employees
increased from 110 at June 30, 1996 to 115 at June 30, 1997, supporting the
increase in expenses for the periods, while timing differences in the
payment of bonuses makes up part of the increase in expense for salaries
from 1995 to 1996.
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.
APPLICABLE INCOME TAXES
Income before taxes increased from $511,019 for the second quarter
of 1995 to $661,522 for the second quarter of 1996, and to $831,622 for
the second quarter of 1997, an increase of $150,503 or 29.5% for 1996
versus 1995, and an increase of $170,100 or 25.7% for 1997 versus 1996.
As a result of this increase, provisions for income taxes for the second
quarter of 1996 increased $55,271 compared to the same period for 1995,
and increased $71,316 for the second quarter of 1997 compared to the
second quarter of 1996, ending the second quarter period of 1997 at
$219,983. Income before taxes for the first six months increased from
$855,906 for 1995 to $1.3 million for 1996, and then increased to $1.5
million for the six months ended June 30, 1997, with income taxes
calculated at $135,744, $288,817, and $394,811, respectively.
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 a modest .35% in the first six
months of 1997 as compared to the same period in 1996 to an average
volume of $196.1 million. Loans, which totaled $146.3 million in 1997
and $138.1 million in 1996, comprised 74.6% and 70.7% respectively, of
our earning assets with the average volume of loans increasing $8.1
million or 5.9% in the first six months of 1997, compared to the same
period in 1996. On June 30, 1997, residential real estate mortgages
made up 65% of our portfolio, commercial loans made up 22% and personal
loans made up 13%, compared to 65%, 23%, and 12% respectively, in 1996.
Taxable investments made up 19% of our average earning assets in
the first six months of 1997 compared to 18.3% in 1996 to end the
period at an average volume of $37.2 million.
Tax-exempt investments of $10.7 million made up 5.5% of our
average earning assets in the first six months of 1997, compared to
$16.2 million or 8.3% in 1996.
Federal funds sold, which had an average volume of $667,624,
made up .34% of our earning assets in the first six months of 1997,
compared to an average volume of $4.1 million or 2.1% of earning
assets for the same period in 1996. And ending the list of earning
assets, other securities increased to $1.23 million making up .63% in
1997 compared to .62% in 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 higher than they were last year
at this time, and the Bank is experiencing a shift into these
deposits. Time deposits decreased approximately 3% to an average
volume of $94.1 million, accounting for 56.1% of the total interest
bearing accounts for the first six months of 1997, compared to $97.1
million in average volume and 57.2% of total interest bearing accounts
for the first six months of 1996. Savings accounts increased less than
1/2 percent to an average volume of $32.1 million accounting for 19% of
the total interest bearing accounts for the first six months of 1997,
compared to an average volume of $32 million and 18.8% of total
interest bearing accounts for the first six months of 1996. A decrease
of $1.5 million is noted in NOW and money market funds with an average
volume of approximately $38.9 million reported at the end of the first
six months of 1997 compared to $40.4 million at the end of the first
six months of 1996 with these volumes accounting for 23.3% and 23.8%
respectively, of the total interest bearing liability accounts. Other
borrowed funds accounts for 1.4% of total interest bearing liabilities
for the first six months of 1997 with an average volume of $2.4
million, while subordinated debentures ends the list and makes the
least contribution with an average volume of $133,000 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 $1,131,727 and sales of
common stock of $442,135 through dividend reinvestment and debenture
conversions. It was decreased by dividends of $817,997, purchase of
treasury stock of $4,822 and adjustment of $13,250 for valuation of
allowance for securities to end the first six months of 1997 at
$19,849,148 with a book value of $13.38 per share. All stockholder's
equity is unrestricted. Additionally, it is noted that the net
unrealized gain on valuation allowance for securities has decreased
since the beginning of the year. 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 June 30, 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: July 28, 1997 By:/s/ Richard C. White
------------------------------
Richard C. White, President
DATED: July 28, 1997 By:/s/ Stephen P. Marsh
-------------------------------
Stephen P. Marsh,
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,121
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,067
<INVESTMENTS-CARRYING> 39,783
<INVESTMENTS-MARKET> 38,072
<LOANS> 148,275
<ALLOWANCE> 1,478
<TOTAL-ASSETS> 206,292
<DEPOSITS> 180,770
<SHORT-TERM> 938
<LIABILITIES-OTHER> 552
<LONG-TERM> 4,183
0
0
<COMMON> 3,782
<OTHER-SE> 16,067
<TOTAL-LIABILITIES-AND-EQUITY> 206,292
<INTEREST-LOAN> 6,779
<INTEREST-INVEST> 1,416
<INTEREST-OTHER> 17
<INTEREST-TOTAL> 8,212
<INTEREST-DEPOSIT> 3,748
<INTEREST-EXPENSE> 74
<INTEREST-INCOME-NET> 4,391
<LOAN-LOSSES> 310
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,456
<INCOME-PRETAX> 1,527
<INCOME-PRE-EXTRAORDINARY> 1,527
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,132
<EPS-PRIMARY> .77
<EPS-DILUTED> .76
<YIELD-ACTUAL> 8.45
<LOANS-NON> 1,262
<LOANS-PAST> 447
<LOANS-TROUBLED> 138
<LOANS-PROBLEM> 1,917
<ALLOWANCE-OPEN> 1,401
<CHARGE-OFFS> 307
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 1,478
<ALLOWANCE-DOMESTIC> 1,478
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 327
</TABLE>
