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 Nine Months Ended September 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 September 30, 1997, there were 1,526,218 shares of the Corporation's $2.50
par value common stock issued and 1,496,591 shares outstanding.
Total Pages - 21 Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statement of Condition
( Unaudited ) September 30 December 31 September 30
1997 1996 1996
<S> <C> <C> <C>
Assets
Cash and due from banks 4,049,679 8,245,398 5,033,780
Federal funds sold 3,150,000 0 7,875,000
Total cash and cash equivalents 7,199,679 8,245,398 12,908,780
Securities held-to-maturity (market value
$43,534,023 at 9/30/97, $37,915,448 at
12/31/96, and $41,541,002 at 9/30/96) 43,533,982 37,967,786 41,721,046
Securities available-for-sale, at
market value 9,124,125 9,037,113 5,023,675
Loans 150,457,019 145,603,582 143,880,667
Allowance for loan losses (1,503,866) (1,401,042) (1,397,299)
Unearned net loan fees (868,862) (904,303) (902,644)
Net loans 148,084,291 143,298,237 141,580,724
Bank premises and equipment, net 3,299,792 3,421,359 3,452,285
Accrued interest receivable 1,624,601 1,538,637 1,569,683
Other real estate owned, net 1,534,781 662,544 959,685
Other assets 1,714,468 1,365,129 1,543,419
Total assets 216,115,719 205,536,203 208,759,297
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 19,002,110 18,098,323 18,215,175
NOW and money market accounts 39,573,997 40,026,689 42,424,302
Savings 32,397,723 31,879,729 32,994,879
Time deposits, $100,000 and over 17,312,258 17,878,261 18,554,320
Other time deposits 78,886,185 75,971,474 77,173,500
Total deposits 187,172,273 183,854,476 189,362,176
Short term borrowings 0 1,600,000 0
Borrowed funds 8,065,000 65,000 65,000
Accrued interest and other liabilities 644,378 735,372 578,232
Subordinated convertible debentures 105,000 170,000 201,000
Total liabilities 195,986,651 186,424,848 190,206,408
Stockholders' Equity
Common stock - $2.50 par value;
2,000,000 shares authorized and
1,526,218 shares issued at 9/30/97,
1,412,493 issued at 12/31/96 and
1,398,638 issued at 9/30/96 3,815,546 3,531,233 3,496,596
Additional paid-in capital 7,803,294 6,140,962 5,968,568
Retained earnings 8,926,989 9,871,409 9,527,226
Unrealized gain on securities
available-for-sale, net of tax 28,339 7,963 681
Less: treasury stock, at cost
(29,627 shares at 9/30/97, 29,365 shares
at 12/31/96 and 29,364 shares at 9/30/96) (445,100) (440,212) (440,182)
Total stockholders' equity 20,129,068 19,111,355 18,552,889
Total liabilities and stockholders' equity 216,115,719 205,536,203 208,759,297
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARY
Statements of Income
( Unaudited )
For The Third Quarter Ended September 1997 1996 1995
<S> <C> <C> <C>
Interest income
Interest and fees on loans 3,504,235 3,387,327 3,186,035
Interest and dividends on investment
securities
U.S. Treasury securities 509,578 469,933 416,722
U.S. Government agencies 21,192 25,443 21,975
States and political subdivisions 173,647 185,496 250,205
Other securities 17,921 17,308 18,404
Interest on federal funds sold 26,250 77,315 35,148
Total interest income 4,252,823 4,162,822 3,928,489
Interest expense
Interest on deposits 1,894,888 2,035,788 2,090,354
Interest on other borrowed funds 101,016 410 2,574
Interest on subordinated debentures 2,584 4,847 7,260
Total interest expense 1,998,488 2,041,045 2,100,188
Net interest income 2,254,335 2,121,777 1,828,301
Provision for loan losses (215,000) (80,000) (30,000)
Net interest income after provision 2,039,335 2,041,777 1,798,301
Other operating income
Trust department income 17,985 27,110 23,104
Service fees 181,434 163,138 142,870
Security gains (losses) 0 0 0
Other 141,124 131,951 114,579
Total other operating income 340,543 322,199 280,553
Other operating expenses
Salaries and wages 728,382 681,742 562,241
Pension and other employee benefits 203,274 181,774 181,654
Occupancy expenses, net 332,987 300,210 287,717
Other 539,341 478,931 430,902
Total other operating expenses 1,803,984 1,642,657 1,462,514
Income before income taxes 575,894 721,319 616,340
Applicable income taxes (credit) 124,725 181,834 125,516
Net Income 451,169 539,485 490,824
Earnings per share on weighted average
Primary 0.30 0.38 0.36
Fully diluted 0.30 0.37 0.35
Weighted average number of common shares
Used in computing earnings per share
Primary 1,495,872 1,433,254 1,382,793
Fully diluted 1,510,040 1,460,730 1,420,873
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
Statements of Income
( Unaudited )
For the Nine Months Ended September 30, 1997 1996 1995
<S> <C> <C> <C>
Interest income
Interest and fees on loans 10,283,050 9,951,961 9,122,532
Interest and dividends on investment
securities
U.S. Treasury securities 1,568,142 1,477,896 1,230,716
U.S. Government agencies 62,758 56,926 50,183
States and political subdivisions 455,431 612,986 741,155
Other securities 52,724 51,723 54,942
Interest on federal funds sold 42,990 188,228 111,191
Total interest income 12,465,095 12,339,720 11,310,719
Interest expense
Interest on deposits 5,642,542 6,206,424 6,096,563
Interest on other borrowed funds 168,533 4,449 6,837
Interest on subordinated debentures 9,007 16,499 25,223
Total interest expense 5,820,082 6,227,372 6,128,623
Net interest income 6,645,013 6,112,348 5,182,096
Provision for loan losses (525,000) (240,000) (90,000)
Net interest income after provision 6,120,013 5,872,348 5,092,096
Other operating income
Trust department income 62,655 78,186 68,435
Service fees 519,993 437,602 420,475
Security gains (losses) 0 (1,928) 0
Other 659,266 423,170 356,897
Total other operating income 1,241,914 937,030 845,807
Other operating expenses
Salaries and wages 2,125,586 1,980,638 1,727,759
Pension and other employee benefits 519,764 502,550 469,937
Occupancy expenses, net 933,466 898,886 802,700
Other 1,680,679 1,437,095 1,465,261
Total other operating expenses 5,259,495 4,819,169 4,465,657
Income before income taxes 2,102,432 1,990,209 1,472,246
Applicable income taxes (credit) 519,536 470,651 261,260
Net Income 1,582,896 1,519,558 1,210,986
Earnings per share on weighted average
Primary 1.07 1.07 0.89
Fully diluted 1.06 1.05 0.86
Weighted average number of common shares
Used in computing earnings per share
Primary 1,481,763 1,423,381 1,364,838
Fully diluted 1,498,843 1,452,116 1,411,569
Book value per share on shares outstanding $13.45 $12.90 $12.21
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 Nine Months Ended September 30 1997 1996 1995
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net Income 1,582,896 1,519,558 1,210,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 299,171 287,860 229,041
Provisions for possible loan losses 525,000 240,000 90,000
Provisions for deferred taxes 52,121 110,097 82,893
Securities (gains) losses 0 1,928 0
Loss (gain) on sales of OREO (7,920) (96,888) 2,921
Subsequent writedowns on OREO 129,446 12,320 15,000
Amortization of bond premium 11,111 49,279 341,244
Increase (decrease) in taxes payable (230,350) (46,446) 22,367
(Increase) decrease in interest receivable (85,964) (45,508) (207,661)
(Increase) decrease in other assets (415,755) (162,524) (112,619)
Increase (decrease) in unamortized loan fees (35,441) (6,087) (15,926)
Interest (decrease) in interest payable 77,213 (33,387) 15,179
Increase (decrease) in accrued expenses 78,718 23,802 49,284
Increase (decrease) in other liabilities (13,059) 53,814 13,087
Net cash provided by operating
activities 1,967,187 1,907,818 1,735,796
Cash Flows from investing activities:
Investments - held to maturity
Sales and maturities 8,675,068 14,137,829 14,553,071
Purchases (14,271,814)(23,277,597)(18,021,728)
Investments - available for sale
Sales and maturities 0 9,000,000 6,500,000
Purchases (36,700) (23,300) (4,078,200)
Investment in limited partnership 282 (54,161) (103,476)
Increase in loans, net of payments (6,613,086) (7,576,927) (3,017,541)
Capital expenditures (177,604) (476,979) (420,188)
Recoveries of loans charged off 108,837 73,484 130,211
Proceeds from sales of OREO 234,873 387,271 137,900
Net cash used in investing activities (12,080,144) (7,810,380) (4,319,951)
Cash Flows from Financing Activities:
Net increase in demand deposits,
NOW, money market accounts 969,089 12,010,708 (7,179,342)
Net increase in certificates of deposit 2,348,708 (1,532,054) 8,165,377
Net increase in other borrowed funds 6,400,000 0 0
Payments to acquire treasury stock (4,888) (159) (4,286)
Dividends paid (645,671) (561,108) (501,087)
Net cash provided by financing
activities 9,067,238 9,917,387 480,662
Net increase in cash and cash
equivalents (1,045,719) 4,014,825 (2,103,493)
Cash and cash equivalents:
Beginning 8,245,398 8,893,955 7,392,717
Ending 7,199,679 12,908,780 5,289,224
Supplemental Schedule of Cash Paid During
the Year
Interest paid 5,741,771 6,203,358 6,113,444
Income Taxes Paid 697,765 407,000 156,000
Supplemental schedule of noncash investing
and financing activities:
Net change in securities valuation $30,873 ($75,485) $627,285
OREO acquired in settlements of loans $1,438,812 $638,599 $431,138
Debentures converted to common stock $65,000 $64,000 $264,000
5% Stock dividend at market value $1,294,006 $0 $1,019,716
Dividends paid
Dividends payable $1,233,310 $1,048,895 $925,565
Dividends reinvested ($587,639) ($487,787) ($424,478)
$645,671 $561,108 $501,087
</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 nine 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) 147,412,851 10,283,050 9.33% 139,676,073 9,951,961 9.52%
Taxable Investment
Securities 36,611,742 1,630,900 5.96% 35,042,332 1,534,822 5.85%
Tax-Exempt Investment
Securities(1) 11,785,508 680,453 7.72% 15,581,548 919,282 7.88%
Federal Funds Sold 984,487 42,990 5.84% 4,896,752 188,228 5.13%
Other Securities (2) 1,238,290 59,056 6.38% 1,207,758 57,983 6.41%
TOTAL 198,032,878 12,696,449 8.56% 196,404,463 12,652,276 8.60%
INTEREST BEARING LIABILITIES
Savings Deposits 32,215,343 662,346 2.75% 32,342,513 720,731 2.98%
NOW & Money Market
Funds 38,601,066 1,026,536 3.56% 40,971,704 1,167,274 3.81%
Time Deposits 94,355,372 3,953,659 5.60% 96,601,732 4,318,418 5.97%
Other Borrowed Funds 3,722,916 168,533 6.05% 86,089 4,449 6.90%
Subordinated Debentures 127,000 10,10510.64% 224,000 16,499 9.84%
TOTAL 169,021,697 5,821,179 4.60% 170,226,038 6,227,371 4.89%
Net Interest Income 6,875,270 6,424,905
Net Interest Spread(3) 3.96% 3.71%
Interest Differential(4) 4.64% 4.37%
<FN>
<F01>Income on investment securities of state and political subdivisions is
stated on a fully tax equivalent basis (assuming a 34 percent tax rate).
<F02>Included in other securities are taxable industrial development bonds
(VIDA), with income of approximately $6,332 for 1997 and $6,260 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 nine
months of 1997 and 1996 resulting from volume changes in assets and
liabilities; and fluctuations in rates earned and paid.
<CAPTION>
1997 compared to 1996
RATE / VOLUME VARIANCE VARIANCE
DUE TO DUE TO TOTAL
RATE(1) VOLUME(1) VARIANCE
EARNING ASSETS
<S> <C> <C> <C>
Loans (220,159) 551,248 331,089
Taxable Investment Securities 27,339 68,739 96,078
Tax-Exempt Investment Securities(2) (19,659) (219,170) (238,829)
Federal Funds Sold 25,600 (170,838) (145,238)
Other Securities (393) 1,466 1,073
Total Interest Earnings (187,272) 231,445 44,173
INTEREST BEARING LIABILITIES
Savings Deposits (55,770) (2,615) (58,385)
NOW & Money Market Funds (77,695) (63,043) (140,738)
Time Deposits (270,632) (94,127) (364,759)
Other Borrowed Funds (23,864) 187,948 164,084
Subordinated Debentures 1,324 (7,718) (6,394)
Total Interest Expense (426,637) 20,445 (406,192)
<FN>
<F01>Items which have shown a year-to-year increase in volume have variances
allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have variances
allocated as follows:
Variance due to rate = Change in rate x old volume
Variances due to volume = Change in volume x new rate
<F02>Income on tax-exempt securities is stated on a fully tax equivalent basis.
The assumed rate is 34%.
</TABLE>
<TABLE>
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
<CAPTION>
For The Third Quarter Ended September 30, 1997 1996 1995
<S> <C> <C> <C>
Net Income 451,169 539,485 490,827
Average Number of Common Shares Outstanding. 1,495,872 1,433,254 1,382,793
Earnings Per Common Share 0.30 0.38 0.36
<CAPTION>
For The Nine Months Ended September 30, 1997 1996 1995
Net Income 1,582,896 1,519,558 1,210,986
Average Number of Common Shares Outstanding. 1,481,763 1,423,381 1,364,838
Earnings Per Common Share 1.07 1.07 0.89
</TABLE>
<TABLE>
COMMUNITY BANCORP.
FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
For The Third Quarter Ended September 30, 1997 1996 1995
<S> <C> <C> <C>
Net Income 451,169 539,485 490,827
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures). 1,705 3,199 4,792
Adjusted Net Income 452,874 542,684 495,619
Average Number of Common Shares Outstanding. 1,495,872 1,433,254 1,382,793
Increase in Shares (Assuming Conversion of
Convertible Debentures). 14,168 27,476 38,080
Average Number of Common Shares Outstanding
(Fully Diluted). 1,510,040 1,460,730 1,420,873
Earnings Per Common Share Assuming Full Dilution. 0.30 0.37 0.35
<CAPTION>
For The Nine Months Ended September 30, 1997 1996 1995
Net Income 1,582,896 1,519,558 1,210,986
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures). 5,610 10,889 16,647
Adjusted Net Income 1,588,506 1,530,447 1,227,633
Average Number of Common Shares Outstanding. 1,481,763 1,423,381 1,364,838
Increase in Shares (Assuming Conversion of
Convertible Debentures). 17,080 28,735 46,731
Average Number of Common Shares Outstanding
(Fully Diluted). 1,498,843 1,452,116 1,411,569
Earnings Per Common Share Assuming Full Dilution. 1.06 1.05 0.86
</TABLE>
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997
Community Bancorp. is a one-bank holding company whose only subsidiary is
Community National Bank. The Bank's main office is located in Derby, with
branch offices located in Newport, Troy, Derby Line, Barton, Island Pond, and
St. Johnsbury. All these offices are located in Orleans County with the
exception of the Island Pond and St. Johnsbury office, which are located in
Essex County and Caledonia County, respectively. Management felt that the
addition of the St. Johnsbury branch office, which opened for business in June
of 1995, would increase our servicing area to cover three counties in the
Northeast Kingdom. The new branch office has also helped to increase our
asset size favorably over the last two years. A more detailed discussion of
this growth follows in the section labeled "Financial Condition". The St.
Johnsbury office is the Bank's only branch office open seven days a week, all
other offices are open Monday through Saturday. Since this office is located
in the same building as a supermarket that is open 24 hours a day, seven days
a week, extended hours at the bank were deemed necessary to accommodate
shoppers.
While most of the financial statements preceding this narrative reflect
consolidated figures, the following discussion refers primarily to the Bank's
operations, as most of the Bancorp's business is conducted through the bank.
Many of the comparisons throughout the following paragraphs refer to the
preceding tables for a visual comparison of the figures and percentages
disclosed.
LIQUIDITY
Liquidity management refers to the ability of Community National Bank to
adequately cover fluctuations in assets and liabilities. Meeting loan demand
(assets) and covering the withdrawal of deposit funds (liabilities) are two
key components of the liquidity management process. The repayment of loans
and growth in deposits are two of the major sources of liquidity. Our time
deposits greater than $100,000 decreased from $18.55 million for the first
nine months of 1996 to $17.31 million for the first nine months of 1997, a
decrease of 6.7%. Other time deposits increased from $77.2 million at the
end of the first nine months of 1996 to $78.9 million at the end of the first
nine months of 1997, an increase of 2.2%. A review of these deposits,
primarily the time deposits over $100,000 indicates that any growth is notably
generated locally and regionally, and are established customers of the Bank.
The Bank has no brokered deposits. Now and money market accounts decreased
from $42.4 million for the first nine months of 1996 to $39.6 million at the
end of the first nine months of 1997, a decrease of almost $3 million or 6.7%.
Savings accounts decreased 1.8% to end the nine month comparison period at
$32.4 million for 1997 compared to $33 million for 1996. Our gross loan port-
folio increased $6.6 million from $143.9 at the end of the first nine months
of 1996 to $150.5 million for the same period in 1997 or by 4.6%. Of this
total portfolio of $150.5 million, $81.3 million are scheduled to reprice or
mature within one year compared to $78.7 million a year ago. At the end of
the first nine months of 1997, the Bank reported investments of "Available
for Sale" securities at a market price of just over $9 million, compared to
just over $5 million for the same period in 1996. The book value of securities
classified as "Held to Maturity" increased to $43.5 million for the first nine
months of 1997 from $41.7 million for the same comparison period in 1996, an
increase of $1.8 million or 4.4%.
RESULTS OF OPERATION
Net income for the third quarter ended September 30, 1997 was $451 thousand,
representing a decrease of 16.4% compared to a net income of $539 thousand for
the third quarter ended September 30, 1996. The results of this are primary
earnings per share of $0.30 for the third quarter of 1997 compared to $0.38
for the third quarter of 1996, and fully diluted earnings per share of $0.30
and $0.37, respectively. Net income for the first nine months of 1997 was
$1.58 million compared to $1.52 million a year ago, an increase of 4.2%. As
a result, primary earnings per share of $1.07 were reported for 1997 and 1996,
and fully diluted earnings per share ended the nine month period at $1.06
for 1997 and $1.05 for 1996.
A 5% stock dividend was declared on January 10, 1997, payable February 1,
1997 to shareholders of record on January 15, 1997. As a result of this,
all 1996 and 1995 per share data has been restated to reflect the 5% stock
dividend. A cash dividend of $0.28 per share was declared in each of the
first three quarters of 1997, compared to cash dividends for the same
comparison periods last year of $0.26 per share, per quarter. The most recent
1997 cash dividend reported was payable on August 1, 1997 to shareholders of
record as of July 15, 1997.
Net interest income, the difference between interest income and interest
expense, represents the largest portion of the Bank's earnings, and is
affected by the volume, mix and interest rate sensitivity of earning assets
versus interest bearing liabilities.
Net interest income for the third quarter of 1997 increased to $2.3 million
from $2.1 million in 1996, and $1.8 million in 1995 resulting in increases of
6.3% for 1997 versus 1996, and 16% for 1996 versus 1995. Net interest income
for the first nine months increased from $5.2 million for 1995 to $6.1 million
for 1996, and ended the first nine months of 1997 at $6.6 million, tallying
increases of 18% and 8.7%, respectively, for 1995 versus 1996, and 1996 versus
1997. Interest income increased by $234 thousand or 6% for the third quarter
of 1996 versus 1995 and by $90 thousand or 2.2% for the third quarter of 1997
versus 1996, from $3.93 million in 1995 to $4.16 million in 1996 to $4.25
million in 1997. Interest income for the first nine months of 1997 increased
to $12.47 million compared to $12.34 million in 1996 and $11.31 million for
the first nine months of 1995, an increase of $125 thousand or just over 1%
for 1997 versus 1996, and an increase of just over $1 million or 9.1% for 1996
versus 1995. Interest expense decreased $43 thousand or 2.09% for the third
quarter of 1997 versus 1996 and decreased $59 thousand or 2.8% for the third
quarter of 1996 versus 1995. A decrease in interest expense of $407 thousand
or 6.5% is noted in the first nine months of 1997 compared to interest expense
for the same period a year ago, while an increase of 1.6% is noted for the
nine month periods of 1996 versus 1995. A supporting factor for the increase
in net interest income in all comparison periods is supplied through a review
of the interest earned on loans, the major source of interest income, and the
interest paid on deposits, the major source of interest expense. The figures
for 1997 versus 1996 show an increase in interest on loans of 3.3% and a
decrease in interest paid on deposits of 9.1%, while the figures for 1996
versus 1995 reveal an increase of 9.1% in interest earned on loans versus a
1.8% increase in interest paid on deposits.
The following paragraphs are comparisons of average balances and the
respective average yield for interest earning assets and interest bearing
liabilities. Figures for these comparisons were obtained from the table
labeled "Average Balances and Interest Rates", which can be found in the
preceding section. Income on tax-exempt securities is stated on a fully tax
equivalent basis on this table, therefore, figures presented are higher than
those presented in the Statement of Income included with the financial
statements.
Income from loans for the first nine months of 1997 increased to $10.3
million or by 3.3% compared to $9.9 million for the same period in 1996. The
average volume of loans increased 5.5% or by $7.7 million, while the yield on
those loans decreased from 9.52% for the first nine months of 1996 to 9.33%
for the first nine months of 1997, a decrease of 19 basis points.
The average volume of taxable investments increased to $36.6 million or by
4.5%, and the yield on these investments for the first nine months of 1997
rose by 11 basis points, from a yield of 5.85% in 1996 to 5.96% in 1997. Of
the total taxable investments, approximately $8 million are investments
classified as available for sale, with the remaining $28.6 million classified
as held to maturity. A decrease is noted in the average volume of tax exempt
investments from $15.6 million for the first nine months of 1996 to $11.8
million for the same period in 1997, a decrease of 24.4%. The tax equivalent
yield decreased accordingly from 7.88% to 7.72%, or by 16 basis points for
the comparison period. All of these investments are classified as held to
maturity.
Other securities ended the nine month period in 1997 at an average volume of
$1.24 million, resulting in an increase of 2.5% compared to the same period
last year while the yield decreased by 3 basis points from 6.41% for the first
nine months of 1996 to 6.38% for the same period in 1997. 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.
The Bank currently has no investments classified as trading securities, nor
does it intend to carry any of these securities. The yield on treasuries
remains above the yield on other short term investments such as federal funds,
therefore, the Bank continues to invest more in these higher yielding
securities.
The average volume of federal funds sold decreased for the first nine months
of 1997 to $984 thousand from $4.9 million for the first nine months of 1996,
with income reported of $42,990 for the first nine months of 1997, compared
to $188,228 for the same period in 1996.
In total, the volume of average earning assets increased to $198 million or
just under 1% during the first nine months of 1997 compared to the same period
in 1996, and the average yield on these earning assets decreased by 4 basis
points to end the nine month period in 1997 at 8.56% compared to 8.60% last
year. Our net yield, or net interest spread as defined in footnote #3 of the
table mentioned, was 3.96% for the first nine months of 1997, compared to
3.71% for 1996.
Savings deposits decreased slightly from an average volume of $32.3 million
in 1996 to an average volume of $32.2 million, or .4%, for the same period in
1997. Interest expense decreased as well from $721 thousand to $662 thousand
for the comparison period, a decrease of 8.2%.
Now and money market funds decreased to $38.6 million or by 5.8% in volume
in 1997 and interest expense on these funds decreased as well by $141
thousand, or by 12.1% to a nine month expense figure for 1997 of just over $1
million. This resulted in a decrease in the average rate paid of 25 basis
points to a rate of 3.56% compared to 3.81% a year ago.
A decrease of 2.3% in volume for average time deposits was reported at the
end of the first nine months of 1997, compared to the same period in 1996,
ending the period at $94.4 million. Interest paid on time deposits decreased
from $4.32 million in 1996 to $3.95 million for the first nine months of 1997,
resulting in a decrease of 37 basis points on the average yield paid of 5.97%
for 1996 to 5.6% for 1997.
Other borrowed funds increased to an average volume of $3.7 million with
an average yield of 6.05% for the first nine months of 1997, compared to an
average volume of $86 thousand yielding 6.90% last year. Accordingly,
interest expense increased from $4,449 for the first nine months of 1996 to
$168,533 for the same time period in 1997.
Subordinated debentures have been decreasing steadily over the last two
years. The rate of redemption for 9% debentures is lower in the third quarter
of 1997 compared to the first half of 1997, and year to date redemption in
1997 is almost 50% lower than a year ago. The redemption period is in it's
final phase, with a maturity of August 1, 1998 and a redemption price of 101%.
As of September 30, 1997, there are actual debentures outstanding totaling
$78,000. The rate of redemption for the 11% debentures has tripled for the
first nine months of 1997 compared the first nine months of 1996. The
redemption period is in the first phase with a price of 104% until August of
'98. The maturity for these debentures is July 31, 2004, and the redemption
price decreases 1% every two years beginning July 31, 1998. As of September
30, 1997, there are actual debentures outstanding totaling $27,000.
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
In the opinion of management, adequate loan loss coverage is considered to
be one of the most crucial areas of financial safety and profitability of the
Bank. As a result, loans are typically reviewed on a loan-by-loan basis,
focusing more intently on potential problem loans. A review of the overall
level of risk within the portfolio helps to insure adequate coverage in the
event of future chargeoffs. Emphasis is placed on each borrower's financial
condition, the industry or sector for the economy in which the borrower
operates, and overall economic conditions. The Executive Officers and Board
of Directors review the loan portfolio on a monthly basis noting existing and
potential problems in the portfolio. The Bank also employs a Loan Review and
Compliance Officer whose duties, among others, include an ongoing review of
delinquent and non-performing loans. All findings and recommendations are
then brought to senior management for further assessment and final judgment
as to the appropriate action to follow.
Specific Allocations are made in situations management feels are at a
greater risk for loss. A quarterly review of the Qualitative Factors, which,
among others, are "Levels of, and Trends in, Delinquencies and Non-Accruals"
and "National and Local Economic Trends and Conditions" helps to ensure that
areas with potential risk are noted and coverage increased or decreased to
reflect historical 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 $1.5 million as of September 30,
1997 constitutes 1% of the total loan portfolio, compared to $1.4 million or
just under 1% for the same period in 1996. This allowance figure is
sufficient in light of the fact that, of the total loan portfolio of $150.5
million, $121.9 million or 81% are real estate mortgage loans; and of this
total, $98.2 million or 80.6% constitute one to four family residential
mortgage loans. Increases are noted in all volumes compared to last years
figures of $143.9 million in total loans, $116.8 million in real estate
mortgage loans, representing 81.2% of the total portfolio; and a further
breakdown shows $93 million in one to four family residential mortgage loans,
representing 80% of the total real estate loan portfolio. Historically, the
Bank has experienced minimal loan loss with this particular portfolio of loans
which further help to support the basis for management's opinion of adequate
loan loss coverage. Furthermore, a loan portfolio consisting of 81% in resi-
dential and commercial real estate secured mortgage loans is by far more
stable and less vulnerable than a portfolio with a higher concentration of
unsecured commercial and industrial loans or personal loans.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". The Bank was required to adopt this new rule effective
as of the beginning of the 1995 calendar year. This statement allows the Bank
to classify its in-substance foreclosures as loans and disclose them as
impaired loans, as long as regulatory guidelines are followed. Loans will
generally be valued at the lower of either the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Since it's adoption in 1995, the effect of this
rule has been insignificant to the financial position and results of operation
of the Bank.
Non-Performing assets for the Bank are made up of three different types of
loans; "90 Day or More Past Due", "Other Real Estate Owned (OREO", and "Non-
Accruing Loans". A comparison of these non-performing assets for 1997 and
1996 reveal a decrease of $150 thousand in loans 90 days or more past due,
while the others increased as follows; OREO increased from $960 thousand at
the end of the first nine months of 1996 to $1.54 million at the end of the
first nine months of 1997, an increase of $575 thousand or 60% and non-
accruing loans started at $1.5 million at the end of the first nine months of
1996 and increased 20% to end the same comparison period in 1997 at a volume
of $1.8 million. In total, non-performing assets increased $728 thousand or
by 26%, to end at a total balance of $3,509,766 as of September 30, 1997.
While this increase is not favorable, a fact to consider is that, of this
total portfolio of $3.5 million, $3.3 million or 94% are real estate secured
mortgages, thereby decreasing the potential for loss within the portfolio.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Non-Accruing loans $1,803,008 $1,500,135
Loans past due 90 days or more and still accruing 171,977 322,008
Other real estate owned 1,534,781 959,685
Total $3,509,766 $2,781,828
</TABLE>
These totals of $3.5 million for 1997 and $2.8 million for 1996 equal 2.3%
and 1.93%, respectively, of total gross loans, as well as 1.6% and 1.3%,
respectively, of total assets. As of September 30, 1997, reserve coverage of
non-performing loans was 42.8% compared to 50.2% a year ago.
As a result of these increases in non-performing loans, management continues
to maintain the reserve requirement at a level sufficient to cover total
eligible loans. The local economy is showing signs of recovery, however,
caution is still exercised, and our conservative approach remains foremost
in maintaining an adequate reserve coverage.
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 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 to the appraised value prior to including the property in
OREO. Appraisals are then done periodically thereafter, with any additional
write-downs being made at that time.
Our current portfolio of OREO equals $1.5 million, with $1.2 million
obtained through the normal foreclosure process, and almost $339 thousand
deeded in lieu of foreclosure. All of the properties are located in Vermont
and consist of the following; a condominium project and land development in
Jay, four condominium units in Newport, three commercial properties in New-
port, a primary residence in Island Pond, building lots in Irasburg, two
vacation homes in Jay, a farm in Newport Center and one in Troy, and a primary
residence in Newport Center. Again this October, an auction was held at
various properties, in an attempt to reduce the OREO portfolio. As a result,
our portfolio will be reduced to $1,306,045, or by 15%. Other real estate
owned is by definition a non-earning asset, and as such has a negative impact
on the Bank's earnings.
OTHER OPERATING INCOME AND EXPENSES
Other operating income for the third quarter of 1997 was $341 thousand versus
$322 thousand for 1996 and $281 thousand for the third quarter of 1995. The
results are increases of $18 thousand or 5.7% for 1997 versus 1996, and $41
thousand or 15% for 1996 versus 1995. Service fees reports the biggest
increase for both comparisons with an increase of $18,296 or 11.2% for 1997
versus 1996 and an increase of $20,268, or 14.2% for the third quarter of 1996
compared to the same period in 1995. A change in the method in which fees are
assessed for both deposit accounts and overdraft charges in 1996 has helped to
generate more income through service fees for 1996 and 1997. Other income
increased $9,173 or by 7% for the third quarter of 1997 versus 1996, and
$17,372 for the 1996 versus 1995 third quarter comparison period with reported
figures of $141 thousand, $132 thousand, and $115 thousand, respectively.
Other operating income for the first nine months increased from $846 thousand
in 1995 to $937 thousand in 1996, and then to $1.24 million in 1997, an
increase of $91 thousand or 10.8% for 1996 versus 1995, and an increase of
$305 thousand or 32.5% for 1997 versus 1996. Other income showed the biggest
increase for the nine month comparison, reporting $659 thousand for 1997, $423
thousand for 1996 and $357 thousand for 1995. Income was generated through
the sale of inventory associated with an OREO property during the first nine
months of 1997. This income alone was the supporting factor for the increase
of almost 33% for 1997 versus 1996. In 1996, foreign exchange, another
component of other income, increased $57 thousand from a nine month income
figure of $27 thousand for 1995, compared to $84 thousand for the same period
in 1996. Canadian traffic improved as the year progressed generating more
favorable income typical to this area of the Northeast Kingdom.
In May 1995, the FASB issued SFAF No. 122 "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement #65". This statement requires the Bank
to recognize as separate assets the rights to service mortgage loans for
others however those rights are acquired. The Bank allocates the total cost
of the mortgage loans to the mortgage servicing rights and the loans (without
the mortgage loan servicing rights, based on their relative fair value. This
value is determined through use of market prices under comparable servicing
sales contracts. Income from this statement is a component of other income
and amounted to $17,065 and $27,493, respectively, for the first nine months
of 1997 and 1996.
Other operating expense for the third quarter of 1997 was $1.8 million
compared to $1.64 million for 1996, and $1.46 million for 1995, an increase
of $161 thousand or 9.8% for 1997 versus 1996, and $180 thousand or 12.3% for
the third quarter of 1996 versus 1995. Other expense, a component of other
operating expense reports the biggest increase of almost $61 thousand for the
first quarter of 1997 versus 1996, followed closely by salaries with an
increase of $47 thousand or 6.8%. An increase in State Deposit Tax was a
contributing factor to the increase in other expense. Figures for the third
quarter of 1996 compared to the same quarter in 1995 show salaries with the
greatest increase of $119 thousand or 21.3%, followed by other expenses with
an increase of $48 thousand or 11.2%. Telephone expense, a component of other
expenses reports an increase of $23 thousand over last years figure primarily
due to the installation of more phone lines to better serve our customers,
and an 800 number used by customers to inquire about balances on deposit
accounts and to transfer money between different accounts, among other
services. Total other operating expense for the first nine months increased
by $440 thousand for 1997 versus 1996, and $354 thousand for 1996 versus
1995, increasing from $4.47 million in 1995 to $4.82 million in 1996 and then
to $5.26 million in 1997. In comparison, the biggest increases followed
similar patterns as the third quarter increases, with other expenses
increasing $244 thousand or 17% followed by salaries with an increase of $145
thousand or 7% for the first nine months of 1997 compared to 1996. The
expenses associated with OREO properties increased $193 thousand making up
just over 50% of the increase in other expense. A new Automatic Teller
Machine (ATM) was installed in the Island Pond office helping to contribute
to the $28 thousand increase in ATM fees, which is also a component of other
expenses. Topping the increase for the 1996 versus 1995 comparison period
was again salaries and wages with an increase of $253 thousand or 15%.
Although the number of full time equivalent employees decreased in 1996,
positions were created at a higher pay scale than some of the positions that
were eliminated. Overtime during the summer months is another contributing
factor to the increase in salary expense. During the the first part of 1996,
a consulting company was hired in an attempt to find more efficient and cost
ways of managing operating income and expenses of the bank. The fee for
their services was approximately $76 thousand, and is another component of
other expenses. Management feels this was money well spent as many of their
recommendations have been implemented and reductions in expenses, as well as
increases in income are noted, helping to offset the fee charged. To that
end, other expenses notes the only decrease, reporting $1.44 million for the
first nine months of 1996 compared to $1.47 million for the same period in
1995.
All components of other operating expenses are monitored by management,
however, a more diligent quarterly review is performed on crucial components
to assure that the accruals for these expenses are accurate. This helps
alleviate the need to make drastic adjustments to these accounts that in turn
effect the net income of the bank.
APPLICABLE INCOME TAXES
Income before taxes increased from $616 thousand for the third quarter of
1995 to $721 thousand for the third quarter of 1996, and then decreased to
$576 thousand for the same period in 1997, an increase of $105 thousand or
17%, and a decrease of $145 thousand or 20%, respectively. As a result of
these figures, provision for income taxes for the third quarter of 1996
increased 45% compared to the same period in 1995, while the third quarter of
1997 decreased almost 32% compared to 1996, ending the third quarter period
of 1997 at $125 thousand. Income before taxes for the first nine months
increased from $1.5 million for 1995 to just under $2 million for 1996, and
ended at $2.1 million for the first nine months of 1997, an increase of $518
thousand or 35% for 1996 versus 1995 and $112 thousand or 6% for 1997 versus
1996. This lead to an increase in provision for income taxes of $209 thousand
for 1996 versus 1995 and an increase of almost $49 thousand for 1997 versus
1996, to end the first nine months of 1997 at almost $520 thousand.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results of
operations of all industries, including the banking industry. The effect of
monetary inflation is generally magnified in bank financial and operating
statements as costs and prices rise during periods of monetary inflation, cash
and credit demands of individuals and businesses increase, and the purchasing
power of net monetary assets declines. While high rates of inflation have in
the past strained the capital structure of financial institutions, in recent
months this trend has been somewhat alleviated by declining rates of
inflation, with a resulting relaxation of the erosion of the purchasing power
of monetary assets.
The Corporation's ability to preserve its purchasing power depends
primarily on its ability to manage net interest income. Net interest income
for the third quarter of 1997 improved 6.3% over the 1996 third quarter figure
and 23.3% over the 1995 third quarter figure. Year to date net interest
income is reported at $6.6 million, improving 8.7% and 28.2% over the nine
months ended 1996 and 1995, respectively.
FINANCIAL CONDITION
Average earning assets grew just under one percent in the first nine months
of 1997 compared to the same period in 1996 to an average volume of $198
million. Loans, which totaled $147.4 million in 1997 and $139.7 million in
1996, comprised 74.4% and 71% respectively, of our earning assets with the
average volume of loans increasing $7.7 million or 5.5% in the first nine
months of 1997, compared to the same period in 1996. On September 30, 1997,
residential real estate mortgages made up 65% of our portfolio, commercial
loans made up 22%, and personal loans made up 13%, which mirrors the nine
month figures last year.
Taxable investments made up 18.5% of our average earning assets in the first
nine months of 1997, compared to 17.8% in 1996 to end the period at an average
volume of $36.6 million. Tax-exempt investments of $11.8 million made up 6%
of our average earning assets in the first nine months of 1997, compared to
$15.6 million or 7.9% in 1996.
Federal funds sold, which had an average volume of $984 thousand, made up
one half of one percent of our earning assets in the first nine months of
1997 and 2.5% for the same period in 1996, with an average volume of $4.9
million. And ending the list of earning assets, other securities with an
average volume of $1.24 million for 1997 made up .63% of total earning assets
compared to an average volume of $1.21 million or .62% for the same period
a year ago.
The St. Johnsbury office continues to report growth in both assets and
liabilities with total gross loans ending the first nine months of 1997 at an
average volume of $9.4 million compared to $4.8 million a year ago. Total
deposits ended the same period at an average volume of $6.9 million for 1997
versus $5.9 million for 1996. Residential real estate loans continue to
account for the greatest portion of the loan portfolio with an average balance
of approximately $5 million or 53%, and money market accounts with an average
balance of $3.2 million account for 46% of total liabilities.
Historically, the Bank has funded its growth by steady increases in its core
deposits. The Bank has no brokered deposits, nor does it rely on large
certificates or other forms of volatile deposits to fund its growth in earning
assets. As interest rates decline, there is a shift to savings and money
market accounts, as customers await an opportunity to reinvest at higher
rates. Conversely as rates increase, funds shift from savings and money
market accounts to certificates of deposit to lock in higher yields. Rates
on all deposit accounts have decreased as well as the average volume, with
NOW and money market accounts decreasing 5.8% to an average volume of $38.6
million accounting for 22.8% of interest bearing liabilities compared to last
year's volume of $41 million accounting for 24% of total interest bearing
liabilities.
CD's report the next biggest decrease of 2.3% to an average volume of $94.4
million, accounting for 55.8% of total interest bearing liabilities for the
first nine months of 1997 versus $96.6 million in volume and 56.7% of total
interest bearing liabilities as of September 30, 1996.
Savings accounts noted the smallest decrease of .40% ending the nine month
period in 1997 at an average volume of $32.2 million and making up just over
19% of total interest bearing liabilities, versus $32.3 million and 19%,
respectively, a year ago.
Other borrowed funds reported the only increase to end at an average volume
of $3.7 million comprising 2.2% of total interest bearing liabilities as of
September 30, 1997, compared to an average volume at the end of the first nine
months in 1996 of $86,089, comprising .05% of total interest bearing
liabilities.
Subordinated debentures, with an average volume of $127,000 made up .08% of
interest bearing liabilities for the comparison period, versus an average
volume of $224,000 or .13% for the same period in 1996, a decrease of
approximately 43%.
CAPITAL RESOURCES
The Corporation's stockholders' equity, which started the year at
$19,111,355, was increased through earnings of $1,582,896, sales of common
stock through dividend reinvestment and debenture conversions of $652,639,
and adjustments of $20,376 for valuation of allowance for securities. It
was decreased by dividends of $1,233,310, and purchase of treasury stock of
$4,888 to end the first nine months of 1997 at $20,129,068 with a book value
of $13.45 per share. All stockholder's equity is unrestricted. Additionally,
it is noted that the unrealized gain on valuation allowance for securities
has increased starting at the September 30, 1996 balance of $681 to the
December 31, 1996 balance of $7,963 to end the first nine months of 1997 at
$28,339. A review of this activity shows that as the maturity date of the
investments gets closer, the market price becomes favorably better, therefore,
material loss is greatly reduced.
The Bank is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by the banking regulators. The minimum
requirements for Tier I and Total Capital are 4% and 8%, respectively.
As of September 30, 1997, the Bank continued to maintain ratios far above
the minimum requirements with reported ratios of approximately 18.4% for
Tier I and 19.7% for Total Capital.
The Corporation intends to continue the Bank's past policy of maintaining a
strong capital resource position to support its asset size and level of
operations. Consistent with that policy, management will continue to
anticipate the Corporation's future capital needs.
PART II.
Item 1
Legal Proceedings
The Corporation is not a party to any pending legal proceedings before any
court, administrative agency or other tribunal.
There are no pending legal proceedings to which the Bank is a party or of
which any of its property is the subject, other than routine litigation
incidental to its banking business.
Item 6
Exhibits and Reports on Form 8-K
Exhibits - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCORP.
DATED: November 12, 1997 By:/s/ Richard C. White
--------------------------------------
Richard C. White, President
DATED: November 12, 1997 By:/s/Stephen P. Marsh
--------------------------------------
Stephen P. Marsh,
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,050
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,124
<INVESTMENTS-CARRYING> 43,534
<INVESTMENTS-MARKET> 43,534
<LOANS> 150,457
<ALLOWANCE> 1,504
<TOTAL-ASSETS> 216,116
<DEPOSITS> 187,172
<SHORT-TERM> 0
<LIABILITIES-OTHER> 644
<LONG-TERM> 8,170
0
0
<COMMON> 3,816
<OTHER-SE> 16,313
<TOTAL-LIABILITIES-AND-EQUITY> 216,116
<INTEREST-LOAN> 10,283
<INTEREST-INVEST> 2,139
<INTEREST-OTHER> 43
<INTEREST-TOTAL> 12,465
<INTEREST-DEPOSIT> 5,643
<INTEREST-EXPENSE> 177
<INTEREST-INCOME-NET> 6,645
<LOAN-LOSSES> 525
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,259
<INCOME-PRETAX> 2,102
<INCOME-PRE-EXTRAORDINARY> 2,102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,583
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 8.08
<LOANS-NON> 1,803
<LOANS-PAST> 172
<LOANS-TROUBLED> 137
<LOANS-PROBLEM> 1,836
<ALLOWANCE-OPEN> 1,401
<CHARGE-OFFS> 531
<RECOVERIES> 109
<ALLOWANCE-CLOSE> 1,504
<ALLOWANCE-DOMESTIC> 1,504
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18
</TABLE>
