CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-16435
COMMUNITY BANCORP.
(Exact name of registrant as specified in its charter)
Vermont 03-0284070
(State of Incorporation) (IRS Employer Identification No.)
Derby Road, Derby, Vermont 05829
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (802) 334-7915
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $2.50 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
Required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES ( X ) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
As of March 4, 1998, the date of the latest known sale of the registrant's
stock, the aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the sale price of the stock on that date, was
$37,973,325.
There were 1,518,933 shares outstanding of the issuer's class of common stock
as of the close of business on March 4, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Report of Independent Public Accountants
Financial Statements:
Consolidated Statements of Condition as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Financial Position for the Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Condensed Financial Information (Parent Company Only)
Portions of the Annual Report to Shareholders for fiscal year 1997
incorporated by reference to Part II.
Portions of the Proxy Statement for the Annual Meeting to be held May 5,
1998 are incorporated by reference to Part III.
Total Number of Pages - 26
Exhibit Index Begins on Page 23
FORM 10-K ANNUAL REPORT
Table of Contents
PART I Page
Item I The Corporation 4
Organization and Operation 4
Distribution of Assets, Liabilities & Stockholders' Investment 7
Interest Income, Interest Expense and Interest Differential 8
Rate Volume Analysis 9
Investment Portfolio 10
Loan Portfolio 11
Summary of Loan Loss Experience 12
Non-Accrual, Past Due, and Restructured Loans 13
Deposits, Return on Equity and Assets 14
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7 Financial Statements and Supplementary Data 22
Item 8 Disagreements on Accounting and Financial Disclosures 22
PART III
Item 9 Directors and Executive Officers of the Registrant 22
Item 10 Executive Compensation 22
Item 11 Security Ownership of Certain Beneficial Owners and Management 22
Item 12 Certain Relationships and Related Transactions 22
PART IV
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
Signatures 25
PART I
Item 1. The Corporation
Organization and Operation
Community Bancorp. (the Corporation) was organized under the laws of the
State of Vermont in 1982 and became a registered bank holding company under
the Bank Holding Company Act of 1956, as amended, in October 1983 when it
acquired all of the voting shares of Community National Bank (the Bank).
The Bank is one of two subsidiaries of the Corporation and principally all
of the Corporation's business operations are presently conducted through it.
Liberty Savings Bank, a New Hampshire guaranty savings bank, is the other
subsidiary of Community Bancorp. On December 31, 1997, Community Bancorp.
acquired all of the outstanding stock of Liberty Savings Bank, as well as
the assets consisting of a U.S. Treasury Strip and a small amount of cash.
The intention in acquiring this bank is to operate it as a lending facility
serving northern New Hampshire. Currently, since no building was purchased
at the time of acquisition, the main office of Community National Bank serves
as the mailing address for this bank.
The Bank was organized in 1851 as the Peoples Bank, and was subsequently
reorganized as the National Bank of Derby Line in 1865. In 1975, after 110
continuous years of operation as the National Bank of Derby Line, the Bank
acquired the Island Pond National Bank and changed its name to "Community
National Bank."
Community National Bank provides a complete range of retail banking services
to the residents and businesses in northeastern Vermont. These services
include checking, savings and time deposit accounts, mortgage, consumer and
commercial loans, safe deposit and night deposit services, credit card
services, and a full line of personal fiduciary services.
Competition
The Bank has five offices located in Orleans County, one office in Essex
County, and one office in Caledonia County, all in northeastern Vermont. Its
primary service area is in the towns of Derby and Newport, Vermont, with
approximately 63% of its total deposits as of December 31, 1997 derived from
that area.
The Bank competes in all aspects of its business with other banks and credit
unions in northern Vermont, including two of the largest banks in the state,
which maintain branch offices throughout the Bank's service area. Historic-
ally, competition in Orleans and Essex Counties has come from The Chittenden
Trust Company and The Howard Bank, N.A., a subsidiary of Banknorth Group,
Inc., based in Burlington, Vermont. The Chittenden Trust Company maintains
a branch office in Newport, and The Howard Bank maintains one office in
Barton, one office in Orleans, and one office in St. Johnsbury. Competition
in Caledonia County comprises of the Passumpsic Savings Bank and Citizens
Savings Bank, both based in St. Johnsbury, Lyndonville Savings Bank and
Trust Company, based in Lyndonville, The Merchants Bank based in Burlington,
and with two local credit unions for deposits and consumer loans.
With recent changes in the regulatory framework of the banking industry, the
competition for deposits and loans has broadened to include not only
traditional rivals such as the mutual savings banks and stock savings banks,
but also several non-traditional rivals such as Sears Roebuck and Company and
American Express.
Employees
As of December 31, 1997, the Bank employed 98 full-time employees and 31 part-
time employees. Management of the Bank considers its employee relations to
be good.
Regulation and Supervision
As a registered bank holding company, the Corporation is subject to on-going
regulation supervision and examination by the Board of Governors of the
Federal Reserve System, under the Bank Holding Company Act of 1956, as amended
(the "Act"). A bank holding company for example, must obtain the prior
approval of the Board before it acquires all or substantially all of the
assets of any bank, or acquires ownership or control of more than 5% of the
voting shares of a bank. The Federal Reserve Board may not approve the
acquisition by the Corporation, or any subsidiary, of any voting shares of,
or any interest in all or substantially all of the assets of, any bank located
outside the State of Vermont unless such acquisition is specifically
authorized by the laws of the state in which such bank is located. Prior
Federal Reserve Board approval is also required before a bank holding company
may acquire more than 5% of any outstanding class of voting securities of a
company other than a bank or a more than 5% interest in its property.
The Act limits the activity in which the Corporation and its subsidiaries may
engage to certain specified activities, including those activities which the
Federal Reserve Board may find, by order or regulation, to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve Board has determined
by regulation to be closely related to banking are: (1) making, and servicing
loans that could be made by mortgage, finance, credit card or factoring
companies; (2) performing the functions of a trust company; (3) certain
leasing of real or personal property; (4) providing certain financial, banking
or economic data processing services; (5) except as otherwise prohibited by
law, acting as an insurance agent or broker with respect to insurance that is
directly related to the extension of credit or the provision of other
financial services or, under certain circumstances, with respect to insurance
that is sold in certain small communities in which the bank holding company
system maintains banking offices; (6) acting as an underwriter for credit
life insurance and credit health and accident insurance directly related to
extensions of credit by the holding company system; (7) providing certain kinds
of management consulting advice to unaffiliated banks and non-bank depository
institutions; (8) performing real estate appraisals; (9) issuing and selling
money order and similar instruments and travelers checks and selling U.S.
Savings Bonds; (10) providing certain securities brokerage and related services
for the account of bank customers; (11) underwriting and dealing in certain
government obligations and other obligations such as bankers' acceptances and
certificates of deposit; (12) providing consumer financial counseling; (13)
providing tax planning and preparation services; (14) providing check
guarantee services to merchants; (15) Operating a collection agency; and (16)
operating a credit bureau.
The Corporation does not presently engage, directly or indirectly, in any non-
banking activities, nor can any prediction be made as to which such activities,
if any, the Corporation may subsequently engage in or when any such activities
will be undertaken.
A bank holding company must also obtain prior Federal Reserve approval in
order to purchase or redeem its own stock if the gross consideration to be
paid, when added to the net consideration paid by the company for all
purchases or redemptions by the company of its equity securities within the
preceding 12 months, will equal 10% or more of the company's consolidated
net worth.
The Corporation is required to file with the Federal Reserve Board an annual
report and such additional information as the Board may require pursuant to
the Act. The Board may also make examinations of the Corporation and any
direct or indirect subsidiary of the Corporation.
The Corporation has registered its Common Stock under Section 12(g) of the
Securities Exchange Act of 1934 and is required to file annual and periodic
reports and proxy statements and other information with the Securities and
Exchange Commission.
Community Bancorp. and its subsidiaries, Community National Bank and Liberty
Savings Bank are considered "affiliates" for the purposes of Section 18(j) of
the Federal Deposit Insurance Act, as amended, and Section 23A of the Federal
Reserve Act, as amended. Accordingly, they are subject to limitations with
respect to the Bank's ability to make loans and other extensions of credit to
or investments in the Corporation or in any other subsidiaries that the
Corporation may acquire. The Corporation and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or lease or sale of any property of the furnishing of services.
The Bank is a national banking association and subject to the provisions of
the National Bank Act and federal and state statutes and rules and regulations
applicable to national banks. The primary supervisory authority for the Bank
is the Comptroller of the Currency. The Comptroller's examinations are
designed for the protection of the Bank's depositors and not for its
shareholders. The Bank is subject to periodic examination by the Comptroller
and must file periodic reports with the Comptroller containing a full and
accurate statement of its affairs. The deposits of the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank
is also subject to regulation by the FDIC.
The Corporation is also subject to the same regulations and provisions in the
state of New Hampshire since the acquisition of Liberty Savings Bank.
Effects of Government Monetary Policy
The earnings of the Bank are affected by general and local economic conditions
and by the policies of various governmental regulatory authorities. In
particular, the Federal Reserve Board regulates money and credit conditions
and interest rates in order to influence general economic conditions,
primarily through open market operations and United States Government
Securities, varying the discount rate on member bank borrowings, setting
reserve requirements against member and nonmember bank deposits, and
regulating interest rates payable by member banks on time and savings
deposits. Federal Reserve Board monetary policies have had a significant
effect on the operating results of commercial banks, including the Bank, in
the past and are expected to continue to do so in the future.
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
The following tables summarize various consolidated information and provides
a three year comparison relating to the average assets, liabilities, and
stockholders equity.
<CAPTION>
Year ended December 31, 1997 1996 1995
(Dollars in Thousands) Balance % Balance % Balance %
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and Due from Banks 4,979 2.37% 4,765 2.31% 4,320 2.21%
Taxable Investment
Securities(1) 35,649 17.00% 35,754 17.31% 30,667 15.68%
Tax-exempt Investment
Securities(1) 12,140 5.79% 14,179 6.87% 17,383 8.89%
Other Securities(1) 1,168 0.56% 1,168 0.57% 1,168 0.60%
Total Investment
Securities 48,957 23.35% 51,101 24.74% 49,218 25.16%
Federal Funds Sold 2,583 1.23% 4,711 2.28% 3,186 1.63%
Loans, Net 145,778 69.53% 138,635 67.13% 131,878 67.41%
Premises and Equipment 3,328 1.59% 3,431 1.66% 3,148 1.61%
Other Real Estate Owned 997 0.48% 767 0.37% 964 0.49%
Other Assets 3,026 1.45% 3,107 1.50% 2,921 1.49%
Total Assets 209,648 100% 206,517 100% 195,635 100%
<CAPTION>
LIABILITIES
Demand Deposits 18,694 8.92% 17,493 8.47% 16,082 8.22%
Now and Money Market
Accounts 39,337 18.76% 41,383 20.04% 35,474 18.13%
Savings Accounts 31,907 15.22% 32,320 15.65% 33,535 17.14%
Time Deposits 94,751 45.19% 96,227 46.60% 93,314 47.70%
Total Deposits 184,689 88.09% 187,423 90.75% 178,405 91.19%
Other Borrowed Funds 4,061 1.94% 99 0.05% 117 0.06%
Other Liabilities 734 0.35% 522 0.25% 693 0.35%
Subordinated Debentures 107 0.05% 216 0.10% 328 0.17%
Total Liabilities 189,591 90.43% 188,260 91.16% 179,543 91.77%
<CAPTION>
STOCKHOLDERS EQUITY
Common Stock 3,814 1.82% 3,466 1.68% 3,247 1.66%
Surplus 7,769 3.71% 5,948 2.88% 4,561 2.33%
Retained Earnings 8,916 4.25% 9,273 4.49% 8,805 4.50%
Less: Treasury Stock (445) -0.21% (440) -0.21% (440) -0.22%
Valuation Allowance for
Securities(1) 3 0.00% 10 0.00% (81) -0.04%
Total Stockholders
Equity 20,057 9.57% 18,257 8.84% 16,092 8.23%
Total Liabilities and
Stockholders Equity 209,648 100% 206,517 100% 195,635 100%
<FN>
<F1> FASB No. 115, an accounting method in which securities classified as
Held to Maturity are carried at book value and securities classified
as Available for Sale are carried at market value with the unrealized
gain (loss) reported as a separate component of equity net of taxes.
The bank does not carry, nor does it intend to carry, securities
classified as Trading Securities
</F>
</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. (Dollars in Thousands)
<CAPTION>
1997 1996 1995
AVE. INC. RATE/ AVE. INC. RATE/ AVE. INC. RATE/
BAL. EXP. YIELD BAL. EXP. YIELD BAL. EXP. YIELD
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (net)(5) 145,778 13,868 9.51% 138,635 13,376 9.65% 131,878 12,451 9.44%
Taxable Investment
Securities 35,649 2,117 5.94% 35,754 2,095 5.86% 30,667 1,758 5.73%
Tax-exempt Investment
Securities(1) 12,140 929 7.65% 14,179 1,114 7.86% 17,383 1,417 8.15%
Federal Funds
Sold 2,583 140 5.42% 4,711 246 5.22% 3,186 180 5.65%
Other Securities 1,168 79 6.76% 1,168 78 6.68% 1,168 82 7.02%
TOTAL 197,318 17,133 8.68% 194,447 16,909 8.70% 184,282 15,888 8.62%
INTEREST BEARING LIABILITIES
Savings
Deposits 31,907 877 2.75% 32,320 944 2.92% 33,535 1,003 2.99%
NOW & Money
Market Funds 39,337 1,397 3.55% 41,383 1,523 3.68% 35,474 1,348 3.80%
Time Deposits 94,751 5,304 5.60% 96,227 5,681 5.90% 93,314 5,858 6.28%
Other Borrowed
Funds 4,061 245 6.03% 99 7 7.07% 117 7 6.28%
Subordinated
Debentures 107 11 10.28% 216 21 9.72% 328 31 9.45%
TOTAL 170,163 7,834 4.60% 170,245 8,176 4.80% 162,768 8,247 5.07%
Net Interest Income 9,299 8,733 7,641
Net Interest Spread(3) 4.08% 3.90% 3.55%
Interest Differential(4) 4.71% 4.49% 4.15%
<FN>
<F1> Income on investment securities of state and political subdivisions
is stated on a tax equivalent basis ( assuming a 34% rate ). The
amount of adjustment was $315,855 in 1997, $378,873 in 1996, and
$481,863 in 1995.
<F2> Included in other securities are taxable industrial development
bonds (VIDA) , with income of $8,440 for 1997, $8,381 for 1996
and approximately $10,000 for 1995.
<F3> Net interest spread is the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities.
<F4> Interest differential is net interest income divided by average
earning assets.
<F5> Included in net loans are non-accrual loans with an average balance
of $1,750,037 for 1997, $1,655,907 for 1996 and $1,826,515 for 1995.
</F>
</TABLE>
<TABLE>
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income for the years 1997,
1996, 1995 and 1994 resulting from volume changes in assets and liabilities
and fluctuations in rates earned and paid.
(Dollars in Thousands)
<CAPTION>
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
RATE VOLUME Variance(1) Variance(1) Variance(1)
Due to Total Due to Total Due to Total
Rate Volume Variance Rate VolumeVariance Rate Volume Variance
Income Earning Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(2) (197) 689 492 287 638 925 944 391 1,335
Taxable Investment
Securities 28 (6) 22 45 292 337 188 166 354
Tax-Exempt Investment
Securities (3) (29)(156) (185) (51)(252) (303) 203 (115) 88
Federal Funds
Sold 9 (115) (106) (20) 86 66 47 5 52
Other Securities 1 0 1 (4) 0 (4) 0 1 1
Total Interest
Earnings (188) 412 224 257 764 1,021 1,382 448 1,830
Interest Bearing Liabilities
Savings Deposits (56) (11) (67) (24) (35) (59) (2) (33) (35)
NOW & Money
Market Funds (53) (73) (126) (50) 225 175 163 (41) 122
Time Deposits (294) (83) (377) (360) 183 (177) 1,082 389 1,471
Other Borrowed
Funds (42) 280 238 1 (1) 0 (7) (91) (98)
Subordinated
Debentures 1 (11) (10) 1 (11) (10) 0 (21) (21)
Total Interest
Expense (444) 102 (342) (432) 361 (71) 1,236 203 1,439
<FN>
<F1> 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
Variance due to volume = Change in volume x new rate
<F2> Total loans are stated net of unearned discount. Interest on
non-accrual loans is excluded from income. The principal balances
of non-accrual loans are included in calculations of the yield
on loans.
<F3> Income on tax-exempt securities is stated on a tax equivalent
basis. The assumed rate is 34%.
</FN>
</TABLE>
<TABLE>
INVESTMENT PORTFOLIO
The following tables show the classification of the investment portfolio
by type of investment security based on book value for Held to Maturity
securities and market value for Available for Sale securities on December
31 for each of the last 3 years.
(Dollars in Thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury Obligations:
Available-for-Sale 8,039 7,974 13,066
Held-to-Maturity 22,491 28,097 20,867
U.S. Agency Obligations 1,631 1,679 0
Obligations of State &
Political Subdivisions 10,004 8,192 11,736
Other Securities 1,100 1,063 1,039
Total Investment Securities 43,265 47,005 46,708
</TABLE>
<TABLE>
The following is an analysis of the maturities and yields of investment
securities as defined: (Available for sale; Market Value, Held to
maturity; Book Value)
<CAPTION>
December 31, 1997 1996 1995
U.S. Treasury & Agency Obligations
Market Ave. Market Ave. Market Ave.
<S> <C> <C> <C> <C> <C> <C>
Available for Sale Value Yield Value Yield Value Yield
Due within 1 year 2,993 6.08% 0 0.00% 10,067 5.62%
Due after 1 year within 5 years 5,046 6.12% 7,974 5.79% 2,999 6.13%
Total 8,039 6.10% 7,974 5.79% 13,066 5.74%
Book Ave. Book Ave. Book Ave.
Held to Maturity Value Yield Value Yield Value Yield
Due within 1 year 8,965 5.78% 6,956 5.93% 0 0.00%
Due after 1 year within 5 years 15,157 5.69% 22,820 6.17% 20,867 5.97%
Total 24,122 5.72% 29,776 6.12% 20,867 5.97%
Obligations of State &
Political Subdivisions (1)
Book Ave. Book Ave. Book Ave.
Value Yield Value Yield Value Yield
Due within 1 year 6,624 7.94% 4,468 7.16% 7,468 8.01%
Due after 1 year within 5 years 1,543 7.91% 1,718 7.88% 1,470 8.46%
Due after 5 years within 10 year 363 8.03% 458 7.83% 950 9.02%
Due after 10 years 1,474 9.67% 1,548 9.61% 1,848 9.79%
Total 10,004 8.19% 8,192 7.81% 11,736 8.43%
Other Securities
Restricted Equity Securities 1,100 6.76% 1,063 6.60% 1,039 6.72%
Total 1,100 6.76% 1,063 6.60% 1,039 6.72%
<FN>
<F1> Income on Obligations of State and Political Subdivisions is
stated on a tax equivalent basis assuming a 34 percent tax rate.
Also included are taxable industrial development bonds (VIDA)
with a market value of $150,235, as of December 31, 1997, 1996,
and 1995 with respective yields of 5.55% and 5.60%, and 5.91%.
</FN>
</TABLE>
<TABLE>
LOAN PORTFOLIO
The following table reflects the composition of the Corporation's loan
portfolio for years ended December 31:
(Dollars in Thousands)
<CAPTION>
1997 1996 1995 1994
1993
TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF
TOTAL % OF
LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL
LOANS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
Construction & Land
Development 1,091 0.73% 1,432 0.98% 912 0.66% 587 0.44%
782 0.62%
Farm Land 2,093 1.39% 2,148 1.48% 1,814 1.32% 1,115 0.84%
1,007 0.80%
1-4 Family
Residential 98,743 65.78% 94,393 64.83% 91,104 66.38% 88,967 66.68%
81,573 64.54%
Commercial
Real Estate 19,992 13.32% 20,602 14.15% 18,646 13.59% 18,094 13.56%
18,063 14.29%
Loans to Finance
Agricultural
Production 1,354 0.90% 1,222 0.84% 1,127 0.82% 1,305 0.98%
1,552 1.23%
Commercial &
Industrial 7,759 5.17% 7,084 4.87% 6,749 4.92% 6,719 5.04%
6,692 5.29%
Loans to
Individuals 18,943 12.62% 18,556 12.74% 16,578 12.08% 16,380 12.28%
16,434 13.00%
All Other Loans 141 0.09% 166 0.11% 310 0.23% 259 0.19%
296 0.23%
Gross Loans 150,116 100% 145,603 100% 137,240 100% 133,426 100%
126,399 100%
Less:
Reserve for
Loan Losses (1,502)-1.00% (1,401)-0.96% (1,519)-1.11% (1,708)-1.28%
(1,872)-1.48%
Deferred Loan Fees (867)-0.58% (904)-0.62% (909)-0.66% (924)-0.69%
(841)-0.67%
Net Loans 147,747 98.42% 143,298 98.42% 134,812 98.23% 130,794 98.03%
123,686 97.85%
</TABLE>
<TABLE>
MATURITY OF LOANS
The following table shows the estimated maturity of loans (excluding
residential properties of 1-4 families, installment loans and other loans)
outstanding as of December 31, 1997.
<CAPTION>
Fixed Rate Loans Maturity Schedule
Within 1 - 5 After
1 Year Years 5 years Total
<S> <C> <C> <C> <C>
Real Estate
Construction & Land Development 1,091 0 0 1,091
Secured by Farm Land 5 27 95 127
Commercial Real Estate 185 302 2,499 2,986
Loans to Finance Agricultural Production 94 381 0 475
Commercial & Industrial Loans 412 2,236 393 3,041
Total 1,787 2,946 2,987 7,720
<CAPTION>
Variable Rate Loans
Within 1 - 5 After
1 Year Years 5 years Total
Real Estate
Construction & Land Development 0 0 0 0
Secured by Farm Land 1,210 756 0 1,966
Commercial Real Estate 12,342 4,664 0 17,006
Loans to Finance Agricultural Production 651 228 0 879
Commercial & Industrial Loans 3,726 992 0 4,718
Total 17,929 6,640 0 24,569
</TABLE>
<TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Corporation's loan loss experience for each
of the last five years.
(Thousands of Dollars)
<CAPTION>
December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans Outstanding
End of Period 150,116 145,603 137,240 133,426 126,399
Ave. Loans Outstanding
During Period 145,778 138,635 131,879 127,394 118,470
Loan Loss Reserve,
Beginning of Period 1,401 1,519 1,708 1,872 1,782
Loans Charged Off:
Real Estate 191 116 198 187 12
Commercial 104 86 17 24 19
Loans to Individuals 436 383 238 250 138
Total 731 585 453 461 169
Recoveries:
Real Estate 12 18 5 43 2
Commercial 27 16 20 12 37
Loans to Individuals 133 68 119 62 70
Total 172 102 144 117 109
Net Loans Charged Off 559 483 309 344 60
Provision Charged to Income 660 365 120 180 150
Loan Loss Reserve,
End of Period 1,502 1,401 1,519 1,708 1,872
Net Losses as a Percent
of Ave. Loans 0.38% 0.35% 0.23% 0.27% 0.05%
Provision Charged to
Income as a Percent
of Average Loans 0.45% 0.26% 0.09% 0.14% 0.13%
At End of Period:
Loan Loss Reserve as a
Percent of Outstanding
Loans 1.00% 0.96% 1.11% 1.28% 1.48%
Factors considered in the determination of the level of loan loss coverage
include, but are not limited to, historical loss ratios, composition of the
loan portfolio, overall economic condition as well as future potential losses.
The following table shows an allocation of the allowance for loan losses, as
well as the total allowance for the last five years (the corporation has no
foreign loans, therefore, allocations for this category are not necessary).
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 % 1996 % 1995 % 1994 % 1993 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Residential
Real Estate 362 24% 490 35% 265 17% 200 12% 175 9%
Commercial 645 43% 307 22% 631 42% 950 56% 900 48%
Loans to
Individuals 487 32% 395 28% 485 32% 400 23% 350 19%
Unallocated 8 1% 209 15% 138 9% 158 9% 447 24%
Total 1,502 100% 1,401 100% 1,519 100% 1,708 100% 1,872 100%
</TABLE>
<TABLE>
NON-ACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
The following table summarizes the bank's past due, non-accrual, and
restructured loans:
(Dollars in Thousands)
<CAPTION>
December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Accruing Loans Past Due
90 Days or More:
Consumer 121 36 28 54 64
Commercial 19 5 15 11 45
Real Estate 211 360 249 271 391
Total Past Due 90 Days or More 351 401 292 336 500
Non-accrual Loans 1,486 1,255 1,389 1,791 500
Restructured Loans
(incl. non-accrual) 136 506 359 347 717
Total Non-accrual, Past Due
and Restructured Loans 1,973 2,162 2,040 2,474 1,717
Other Real Estate Owned 1,089 663 761 918 910
Total Non Performing Loans 3,062 2,825 2,801 3,392 2,627
Percent of Gross Loans 2.04% 1.94% 2.04% 2.08% 2.86%
Reserve Coverage of Non
performing loans 49.05% 49.59% 54.23% 71.26% 54.11%
When a loan reaches non-accrual status, it is determined that future
collection of interest and principal is doubtful. At this point, the
Bank's policy is to reverse the accrued interest and to discontinue the
accrual of interest until the borrower clearly demonstrates the ability
to resume normal payments. Our portfolio of non-accrual loans for the
years ended 1997, 1996, 1995, 1994, and 1993 are made up primarily of
commercial real estate loans and residential real estate loans.
Management does not anticipate any substantial effect to future operations
if any of these loans are liquidated. Although interest is included in
income only to the extent received by the borrower, deferred taxes are
calculated monthly, based on the accrued interest of all non-accrual
loans. This accrued interest amounted to $216,770 in 1997, $309,388 in
1996, $256,754 in 1995, $181,930 in 1994, and $119,849 in 1993. The
corporation had total foreign loans of less than one percent in 1997,
and has no loan concentration in any industrial category.
</TABLE>
<TABLE>
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the last three years. (Dollars in Thousands)
<CAPTION>
December 31, 1997 1996 1995
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing
Demand Deposits 18,694 0.00% 17,493 0.00% 16,082 0.00%
NOW & Money Market Funds 39,337 3.55% 41,383 3.68% 35,474 3.80%
Savings Deposits 31,907 2.75% 32,320 2.92% 33,535 2.99%
Time Deposits 94,751 5.60% 96,227 5.90% 93,314 6.28%
Total Deposits 184,689 4.10% 187,423 4.35% 178,405 4.60%
</TABLE>
<TABLE>
Increments of Maturity of time certificates of deposit and other time
deposits of $100,000 or more issued by domestic offices outstanding on
December 31, 1997 are summarized as follows:
<CAPTION>
Time Certificates
Maturity Date of Deposit
<S> <C>
3 Months or Less 2,551
Over 3 through 6 Months 1,295
Over 6 through 12 Months 5,814
Over 12 Months 8,522
Total 18,182
</TABLE>
<TABLE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of
the Corporation for each of the last three years
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Return on Average Assets 1.02% 1.07% 1.00%
Return on Average Equity 10.69% 12.16% 12.13%
Dividend Payout Ratio 77.02% 63.29% 63.66%
Ave. Equity to Ave. Assets Ratio 9.57% 8.84% 8.23%
</TABLE>
Item 2. Properties
Community Bancorp. does not own or lease real property. The Corporation's
offices are located at the main offices of the Bank. All of the Bank's
offices are located in Vermont. In addition to the main office in Derby, the
Bank maintains facilities located in; City of Newport, Town of Barton and
St. Johnsbury, and Villages of Island Pond, Troy and Derby Line. As mentioned
earlier, the newly acquired Liberty Savings Bank shares the same address as
the main offices as it does not maintain a facility.
The Bank's main offices are located in a two-story brick building on U.S.
Route 5 in Derby, Vermont. The main banking lobby and adjacent offices were
constructed in 1972, expanded in 1978, and the most recent expansion was
completed in July 1993, providing us with a total of 15,000 square feet at
this location. The main office is equipped with a drive-up facility as well
as an Automated Teller Machine (ATM). Computer and similar support equipment
is also located in the main office building. The building previously housing
our computer equipment currently houses three offices for two different
departments associated with the Bank and also serves as a conference center
for the Bank as well as various non-profit organizations, free of charge,
upon request.
The Bank's Derby Line office, which the bank owns, is located on Main Street
in a renovated bank building. The facility consists of a small banking lobby
containing approximately 200 square feet and a walk-up window accessible to
pedestrians. Recent renovations to the walk-up window area and updated
signs have helped to give this office a fresh new appearance.
The Island Pond office is located in the renovated "Railroad Station" acquired
by the town of Brighton in 1993. The bank leases approximately two-thirds of
the downstairs including a banking lobby and a drive-up window. An ATM was
installed in May of 1997. The other portion of the downstairs is occupied by
an information center, and the upstairs section houses the Island Pond
Historical Society.
The Barton office is located on Church Street, in a renovated facility. This
office is equipped with a banking lobby, a drive-up window, and an ATM, making
most deposit and withdrawal transactions possible at this branch 24 hours a
day. The facility is leased from Dean M. Comstock, who is a member of the
Bank's Barton Advisory Committee. The lease, which was entered into in 1985,
provides for a fifteen-year term.
The Bank's Newport office is located in a facility leased from Twin Islands
Realty, adjacent to RJ's Friendly Market (formerly Fedele's Grocery). This
facility consists of approximately 974 square feet and includes a small
banking lobby. The lease on this facility has been extended to March 31,
1999, at which time the office will be moved into a condominium space in the
state office building on Main Street in Newport. The Bank will occupy
approximately 3,084 square feet on the first floor of the building for a full
service banking lobby equipped with a remote drive-up facility. In addition,
the Bank will own approximately 4,400 square feet on the second floor for
future expansion.
The Bank's Troy office is located in a new facility, which was leased for a
few years and then purchased in 1992 from Tom and Eleanor Watts. The bank
currently leases space to one tenant while maintaining approximately 2,200
square feet for their own use. An ATM was installed during 1994 to provide
the same type of limited 24-hour accessibility as our Derby, Barton, Island
Pond and St. Johnsbury offices.
The St. Johnsbury office is located at the corner of the I-91 Access Road and
Route 5 in the town of St. Johnsbury. The Bank occupies approximately 2,250
square feet in the front of the Price Chopper building, and is leased from
Murphy Realty of St. Johnsbury. Peter Murphy is President of Murphy Realty,
and is a member of the Bank's St. Johnsbury Advisory Committee. Fully
equipped with an Automatic Teller Machine and a drive-up window, this office
operates as a full service banking facility.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Bank, to which the Bank is a
party or of which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Common Stock Performance by Quarter
The Company's stock is listed on the NASDAQ Exchange. Although there is no
established public trading market in the Company's common stock, several
brokerage firms follow the stock and maintain a minor market in it.
<TABLE>
<CAPTION>
1997
First Second Third Fourth
<S> <C> <C> <C> <C>
Trade price
High $19.50 $20.00 $22.00 $23.50
Low $18.75 $19.50 $20.00 $22.85
Cash Dividends
Declared $0.28 $0.28 $0.28 $0.28
<CAPTION>
1996
First Second Third Fourth
Trade price
High $17.25 $18.00 $19.00 $18.75
Low $16.50 $17.50 $17.50 $18.50
Cash Dividends
Declared $0.26 $0.26 $0.26 $0.26
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference to Pages 26-31 of the Annual Report to Shareholders
for the fiscal year 1997.
Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
(Dollars in thousands, except per share data)
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total Interest Income 16,817 16,532 15,406 13,605 13,127
Less:
Total Interest Expense 7,834 8,177 8,248 6,807 6,158
Net Interest Income 8,983 8,355 7,158 6,798 6,969
Less:
Provision for Loan Losses 660 365 120 180 150
Other Operating Income 1,589 1,281 1,181 1,057 1,260
Less:
Other Operating Expense 7,012 6,397 5,943 5,459 4,957
Income Before Income Taxes 2,900 2,874 2,276 2,216 3,122
Gain due to FASB 109 (1) N/A N/A N/A N/A 35
Less:
Applicable Income Taxes (3) 755 654 324 329 643
Net Income 2,145 2,220 1,952 1,887 2,514
Per Share Data: (2)
Earnings per Share
Primary 1.44 1.55 1.42 1.44 1.97
Fully Diluted 1.43 1.52 1.38 1.37 1.87
Cash Dividends Declared 1.12 1.04 0.96 0.88 0.80
Weighted Average Number of
Common Shares Outstanding
Primary 1,488,224 1,431,354 1,372,930 1,314,558 1,273,474
Fully Diluted 1,504,382 1,459,184 1,416,416 1,379,314 1,342,505
Number of Common Shares
Outstanding 1,507,534 1,452,284 1,397,040 1,328,102 1,292,083
Balance Sheet Data:
Net Loans 147,747 143,298 134,812 130,794 123,686
Total Assets 213,032 205,536 197,382 191,315 178,649
Total Deposits 187,580 183,854 178,884 174,676 162,927
Total Liabilities 192,552 186,425 179,801 175,796 164,007
Subordinated Debentures 104 170 265 551 571
Total Shareholder Equity 20,480 19,111 17,580 15,518 14,642
<FN>
<F1> FASB 109 was adopted in the first quarter of 1993 as required,
resulting in a one-time adjustment to income.
<F2> Per share data for prior years restated to reflect 5% stock dividend
in first quarter of 1997.
<F3> Applicable Income Taxes above includes the income tax effect, assuming
a 34% tax rate on securities gains (losses), which totaled $0 in 1997,
($656) in 1996, $6,272 in 1995, $7,021 in 1994, and ($7,128) in 1993.
</FN>
</TABLE>
<TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following is an unaudited summary of the quarterly results of
operations for the years ended December 31, 1997, 1996 and 1995.
(Dollars in thousands, except per share data)
<CAPTION>
1997 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
Interest Income 4,040 4,172 4,253 4,352
Interest Expense 1,897 1,924 1,999 2,014
Net Interest Income 2,143 2,248 2,254 2,338
Provisions For Loan Losses 205 105 215 135
Other Operating Expenses 1,523 1,932 1,804 1,752
Income Before Taxes 695 832 576 798
Applicable Income Taxes 175 220 125 236
Net Income 520 612 451 562
Net Income Per Share:
Primary 0.35 0.41 0.30 0.38
Fully Diluted 0.35 0.41 0.30 0.37
<CAPTION>
1996
Interest Income 4,032 4,145 4,163 4,192
Interest Expense 2,092 2,094 2,041 1,949
Net Interest Income 1,940 2,051 2,122 2,243
Provisions For Loan Losses 37 122 80 125
Other Operating Expenses 1,546 1,630 1,643 1,578
Income Before Taxes 607 662 721 884
Applicable Income Taxes 140 149 182 184
Net Income 467 513 539 700
Net Income Per Share(1):
Primary 0.33 0.36 0.38 0.48
Fully Diluted 0.32 0.36 0.37 0.47
<CAPTION>
1995
Interest Income 3,594 3,788 3,928 4,096
Interest Expense 1,961 2,067 2,100 2,120
Net Interest Income 1,633 1,721 1,828 1,976
Provisions For Loan Losses 30 30 30 30
Other Operating Expenses 1,508 1,495 1,463 1,477
Income Before Taxes 345 511 616 804
Applicable Income Taxes 42 93 125 63
Net Income 303 418 491 741
Net Income Per Share (1):
Primary 0.23 0.31 0.36 0.52
Fully Diluted 0.22 0.29 0.35 0.52
<FN>
<F1> Per share data restated to reflect 5% stock dividend in first
quarter of 1997.
</FN>
</TABLE>
<TABLE>
CAPITAL RATIOS
Community Bancorp. and Subsidiaries
(Dollars in Thousands)
<CAPTION>
ANNUAL
GROWTH RATE
At December 31, 1997 1996 1995 '97/'96 '96/'95
<S> <C> <C> <C> <C> <C>
Total Assets 213,001 205,536 197,382 3.63% 4.13%
Less Goodwill (3) (343) 0 0
Allowance for Possible Loan Losses 1,502 1,401 1,519 7.21% -7.77%
Total Adjusted Assets 214,160 206,937 198,901 3.66% 4.04%
Gross Risk-Adjusted Assets 106,298 102,922 97,860 3.28% 5.17%
Allowance for Loan Loss over
limit(2) 173 114 296 51.75% -61.49%
Total Risk-Adjusted Assets 106,125 102,808 97,564 3.23% 5.37%
Shareholders' Equity (Tier l) 20,480 19,111 17,580 7.16% 8.71%
LESS:
Valuation Allowance for Securities 34 8 51
Intangible Assets(3) 352 6 2
Total Adjusted Tier 1 Capital(1) 20,094 19,097 17,527 5.22% 8.96%
Eligible Discounted Subordinated
Debt 42 85 150 -50.59% -43.33%
Max. Allowance for Possible Loan
Losses 1,329 1,287 1,223 3.26% 5.23%
Total Capital (Tier II) 21,465 20,469 18,900 4.87% 8.30%
<CAPTION>
1997 1996 1995
Tier l Capital/Total Adjusted Assets 9.37% 9.23% 8.81%
Tier ll Capital/Total Adjusted Assets 10.01% 9.89% 9.50%
Tier l Capital/Total Risk-Adjusted Assets 18.93% 18.58% 17.96%
Tier ll Capital/Total Risk-Adjusted Assets 20.23% 19.91% 19.37%
<FN>
<F1> Net unrealized holding gains and losses on available-for-sale securities
are excluded from common stockholders' equity for regulatory capital
purposes. However, National Banks continue to deduct unrealized losses
on equity securities in their computation of Tier I Capital.
<F2> The maximum allowance for possible loan losses used in calculating
primary (Tier ll) capital is the lower of the period end allowance for
possible losses or 1.25% of gross risk-adjusted assets, as implemented
by regulatory capital guidelines in 1992.
<F3> Included in the 1997 balance of intangible assets is $342,662 in goodwill
associated with the acquisition of Liberty Savings Bank. Excess mortgage
servicing rights totaling $9,452, $5,808, and $1,955 for 1997, 1996, and
1995, respectively comprise the balance of intangible assets.
</FN>
</TABLE>
The following table shows the repricing opportunities of the various interest
earning assets and interest bearing liabilities of the bank. We assume that
all payments on loans will be made as agreed, and that all deposits will
mature on schedule. The most important factor in assuring liability
liquidity is maintenance of confidence in the Bank by depositors of funds.
Such confidence, in turn, is based on performance and reputation. The Company
believes that its reputation, its financial strength and numerous long-term
customer relationships, should enable it to raise funds as needed in many
markets. To that end, the Bank does not place all of it's "core" deposits in
the earliest time period presented as suggested, but places more emphasis on
the historical experience of the Bank. Funds are primarily generated locally
and regionally and the Bank has no brokered deposits.
<TABLE>
The following table shows the interest sensitivity gaps for four different
time intervals as of December 31, 1997. The figures shown are reported in
thousands.
<CAPTION>
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
Rate Sensitive Assets:
<S> <C> <C> <C> <C> <C>
Loans $ 29,920 $66,089 $46,126 $ 7,981 $150,116
Investments - taxable 4,024 9,080 19,207 0 32,311
Investments - tax-exempt 1,259 5,215 1,543 1,837 9,854
Other investments 0 0 0 1,100 1,100
Federal funds sold 3,650 0 0 0
Total $ 38,853 $80,384 $66,876 $ 10,918 $197,031
Rate Sensitive Liabilities:
NOW & super NOW
accounts $ 0 $ 0 $ 0 $ 17,893 $ 17,893
Savings deposits 0 2,053 0 28,000 30,053
Time deposits(1) 33,758 38,065 15,480 0 87,303
Variable rate
time deposits 20,459 11,193 382 0 32,034
Other borrowed funds 4,000 5 15 40 4,060
Total $ 58,217 $51,316 $15,877 $ 45,933 $171,343
Interest sensitivity
Gap $(19,364) $29,068 $50,999 $(35,015)
GAP Ratio -9.83% 14.75% 25.88% -17.77%
Cumulative interest
sensitivity gap $(19,364) $ 9,704 $60,703 $ 25,688
Cumulative GAP Ratio -9.83% 4.92% 30.80% 13.03%
<FN>
<F1> Included in the time deposits category of 0 - 3 months are money market
accounts totaling almost $21 million.
</FN>
</TABLE>
Item 7. Financial Statements and Supplementary Data
The financial statements and related notes of Community Bancorp. and
Subsidiaries are incorporated herein by reference from the Corporation annual
report to shareholders for the year ended December 31, 1997 Page 10 through
Note 22 on Page 26.
Item 8. Disagreements on Accounting and Financial Disclosures
Inapplicable.
PART III.
Item 9. Directors and Executive Officers of the Registrant
Incorporated by reference to Pages 4-5 of the Corporation's Proxy Statement
for the Annual Meeting of Shareholders on May 5, 1998.
<TABLE>
<CAPTION>
Position with Has Served As
Name, Age and Community Officer/Director
Principal Occupation Bancorp. Since
_________________________________________________________________
<S> <S> <C>
Stephen P. Marsh, 50 Vice President 07/01/73
Senior VP & Cashier & Treasurer
Community National Bank
Rosemary M. Rowe, 56 Secretary 09/08/80
Vice President,
Community National Bank
Alan A. Wing, 53 Vice President 09/01/71
Sr. Vice President
Community National Bank
</TABLE>
Item 10. Executive Compensation
Incorporated by reference to the Corporation's Proxy Statement filed
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Corporation's Proxy Statement filed
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Corporation's Proxy Statement filed
PART IV.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial Statements
Financial statements are incorporated by reference to the Annual Report to
the shareholders for the year ended December 31, 1997.
(a) (3) Exhibits
The following exhibits are incorporated by reference:
Exhibit 3 - Articles of Association and By-laws of Community Bancorp. are
incorporated by reference to Community Bancorp.'s Registration Statement
dated May 20, 1983 (Registration No.2-83166).
Exhibit 4 - Indenture dated August 1, 1984 between Community Bancorp. and
Community National Bank as trustee, relating to $750,000 in principal amount
of 11% Convertible Subordinated Debentures due 2004 is incorporated by
reference to Community Bancorp.'s Registration Statement dated July 11, 1984
(Registration No. 2-92147).
Exhibit 5 - Indenture dated August 1, 1986, relating to $500,000 in
principal amount of 9% Convertible Subordinated Debentures due 1998 is
incorporated by reference to Community Bancorp.'s Registration Statement
dated April 15, 1986 (Registration No. 33-4924).
Exhibit 13 - Portions of the Annual Report to Shareholders of Community
Bancorp. for Year Ended December 31, 1997, specifically mentioned in this
report, incorporated by reference.
(b) Reports on Form 8-K
Form 8-K dated December 31, 1997, announcing the acquisition of Liberty
Savings Bank, filed on January 26, 1998, is incorporated by reference.
Form 8-K dated March 10, 1998, announcing the two for one stock split for
Community Bancorp., filed on March 23, 1998, is incorporated by reference.
The following exhibits are filed as part of this report:
Exhibit 22 - Subsidiaries of Community Bancorp.
Consent from A.M. Peisch & Company
Exhibit 22
Community Bancorp.'s subsidiaries include Community National Bank, a banking
corporation incorporated under the Banking Laws of The United States, and
Liberty Savings Bank, a New Hampshire guaranty savings bank.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANCORP.
BY: /s/ Richard C. White Date: March 27, 1998
Richard C. White, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
BY: /s/ Stephen P. Marsh Date: March 27, 1998
Stephen P. Marsh, Treasurer
and Chief Financial and
Accounting Officer
COMMUNITY BANCORP. DIRECTORS
/s/ Thomas E. Adams Date: March 27, 1998
Thomas E. Adams
/s/ Francis Allard Date: March 27, 1998
Francis Allard
/s/ Jacques R. Couture Date: March 27, 1998
Jacques R. Couture
/s/ Elwood G. Duckless Date: March 27, 1998
Elwood G. Duckless
/s/ Rosemary M. Lalime Date: March 27, 1998
Rosemary M. Lalime
/s/ Marcel Locke Date: March 27, 1998
Marcel Locke
/s/ Anne T. Moore Date: March 27, 1998
Anne T. Moore
/s/ Dale Wells Date: March 27, 1998
Dale Wells
/s/ Richard C. White Date: March 27, 1998
Richard C. White
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report (Form
10-KSB) of Community Bancorp. of our report dated January 7, 1998, included
in the 1997 Annual Report to Shareholders of Community Bancorp.
We also consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-18535) pertaining to the Community Bancorp.
Dividend Reinvestment Plan and in the Registration Statement (Form S-8 No.
33-44713) pertaining to the Community Bancorp. Retirement Savings Plan of
our report dated January 7, 1998, with respect to the consolidated financial
statements incorporated herein by reference of Community Bancorp. included
in the Annual Report (Form 10-KSB) for the year ended December 31, 1997.
/s/A.M. Peisch & Company
March 27, 1998
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
Independent Auditor's Report
To the Board of Directors and Stockholders
Community Bancorp. and Subsidiaries
Derby, Vermont
We have audited the accompanying consolidated balance sheets of
Community Bancorp. and Subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity
and cash flows for the years ended December 31, 1997, 1996 and 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Community Bancorp. and Subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash
flows for the years ended December 31, 1997, 1996 and 1995 in conformity
with generally accepted accounting principles.
/s/ A.M. Peisch & Company
January 7, 1998
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
<TABLE>
<CAPTION>
Consolidated Statements of Condition
Community Bancorp. and Subsidiaries
December 31, 1997 1996
<S> <C> <C>
Assets
Cash and due from banks (Note 16) $ 10,657,610 $ 8,245,398
Federal funds sold 3,650,000 -0-
Cash and cash equivalents 14,307,610 8,245,398
Securities held-to-maturity (approximate market
value $34,125,823 and $37,915,448 at December
31, 1997 and 1996) (Note 2) 34,125,802 37,967,786
Securities available-for-sale (Note 2) 8,039,063 7,974,063
Restricted equity securities (Note 2) 1,099,750 1,063,050
Loans (Note 3) 150,115,852 145,603,582
Allowance for loan losses (Note 4) (1,502,202) (1,401,042)
Unearned net loan fees (866,589) (904,303)
Net loans 147,747,061 143,298,237
Bank premises and equipment, net (Note 5) 3,285,661 3,421,359
Accrued interest receivable 1,460,298 1,538,637
Other real estate owned, net (Note 6) 1,088,867 662,544
Other assets (Notes 7 and 11) 1,847,292 1,365,129
Total assets $213,001,404 $205,536,203
Liabilities and stockholders' equity
Liabilities
Deposits:
Demand, non-interest bearing $ 20,297,137 $ 18,098,323
NOW and money market accounts 40,562,693 40,026,689
Savings 30,053,422 31,879,729
Time, $100,000 and over (Note 8) 18,182,338 17,878,261
Other time (Note 8) 78,484,811 75,971,474
187,580,401 183,854,476
Short-term borrowings (Note 9) -0- 1,600,000
Borrowed funds (Note 9) 4,060,000 65,000
Accrued interest and other liabilities 776,646 735,372
Subordinated debentures (Note 10) 104,000 170,000
192,521,047 186,424,848
Commitments and contingent liabilities (Notes 5, 12, 13 and 14)
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value;
2,000,000 shares authorized 1,537,163 shares
issued at 12/31/97 and 1,412,493 shares
issued at 12/31/96 3,842,907 3,531,233
Additional paid-in capital 7,978,435 6,140,962
Retained earnings (Note 17) 9,070,443 9,871,409
Unrealized gain on securities
available-for-sale, net of tax 33,709 7,963
Less treasury stock, at cost
(1997: 29,629 shares; 1996: 29,365 shares) (445,137) (440,212)
20,480,357 19,111,355
Total liabilities and stockholders' equity $213,001,404 $205,536,203
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Consolidated Statements of Income
Community Bancorp. and Subsidiaries
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Interest income
Interest and fees on loans $13,867,588 $13,376,352 $12,451,251
Interest and dividends on
investment securities
U.S. Treasury securities 2,033,179 2,016,787 1,691,913
U.S. Government agencies 84,194 78,177 66,674
States and political subdivisions 621,571 743,847 944,911
Dividends 70,899 70,229 72,080
Interest on federal funds sold 140,163 246,405 179,708
16,817,594 16,531,797 15,406,537
Interest expense
Interest on deposits 7,577,571 8,148,012 8,209,547
Interest on short-term borrowings 245,103 7,586 7,353
Interest on subordinated debentures 11,489 20,828 31,555
7,834,163 8,176,426 8,248,455
Net interest income 8,983,431 8,355,371 7,158,082
Provision for possible loan
losses (Note 4) (660,000) (365,000) (120,000)
Net interest income after provision for
possible loan losses 8,323,431 7,990,371 7,038,082
Other income
Trust department income 87,412 113,187 107,463
Service fees 695,260 604,449 539,851
Security (losses) gains (Note 2) -0- ( 1,928) 18,449
Other (Note 22) 553,027 564,894 514,889
1,335,699 1,280,602 1,180,652
Other expenses
Salaries and wages 2,795,732 2,618,632 2,407,968
Pension and other employee
benefits (Note 12) 681,030 653,690 616,388
Occupancy expenses 1,240,165 1,221,080 1,098,731
Other operating expenses (Note 22) 2,041,704 1,903,675 1,819,391
6,758,631 6,397,077 5,942,478
Income before income taxes 2,900,499 2,873,896 2,276,256
Income taxes (Note 11) 755,104 654,092 324,307
Net income $ 2,145,395 $ 2,219,804 $ 1,951,949
Earnings per common share on
weighted average $1.44 $1.55 $1.42
Weighted average number of common shares
used in computing earnings per share 1,488,224 1,431,354 1,372,930
Book value per share on shares
outstanding at December 31 $13.59 $13.16 $12.58
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Community Bancorp. and Subsidiaries
Years Ended December 31, 1997, 1996 and 1995
Unrealized
Gain (loss)
Additional on securities
--Common Stock-- paid-in Retained available-
for-sale,
Treasury
Shares Amount capital earnings net of tax
stock
<S> <C> <C> <C> <C> <C>
<C>
Balance,
December 31, 1994 1,204,627 $3,084,315 $3,954,284 $ 9,366,926 $(451,323)
$(435,688)
Net income -0- -0- -0- 1,951,949 -0-
-0-
Dividends paid -0- -0- -0- (1,242,597) -0-
-0-
5% stock dividend 60,231 150,578 869,138 (1,019,716) -0-
-0-
Issuance of stock 65,912 164,781 690,281 -0- -0-
-0-
Purchase of
treasury stock (256) -0- -0- -0- -0-
(4,335)
Net increase in unrealized
gain on securities
available-for-sale,
net of tax -0- -0- -0- -0- 501,824
-0-
Balance,
December 31, 1995 1,330,514 3,399,674 5,513,703 9,056,562 50,501
(440,023)
Net income -0- -0- -0- 2,219,804 -0-
-0-
Dividends paid -0- -0- -0- (1,404,957) -0-
-0-
Issuance of stock 52,624 131,559 627,259 -0- -0-
-0-
Purchase of
treasury stock (10) -0- -0- -0- -0-
(189)
Net decrease in unrealized
loss on securities
available-for-sale,
net of tax -0- -0- -0- -0- (42,538)
-0-
Balance,
December 31, 1996 1,383,128 3,531,233 6,140,962 9,871,409 7,963
(440,212)
Net income -0- -0- -0- 2,145,395 -0-
-0-
Dividends paid -0- -0- -0- (1,652,355) -0-
-0-
5% stock dividend 69,161 172,903 1,121,103 (1,294,006) -0-
-0-
Issuance of stock 55,509 138,771 716,370 -0- -0-
-0-
Purchase of
treasury stock (264) -0- -0- -0- -0-
(4,925)
Net increase in unrealized
gain on securities
available-for-sale,
net of tax -0- -0- -0- -0- 25,746
-0-
Balance,
December 31, 1997 1,507,534 $3,842,907 $7,978,435 $9,070,443 $ 33,709
$(445,137)
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Community Bancorp. and Subsidiaries
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,145,395 $ 2,219,804 $ 1,951,949
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 407,238 392,775 326,702
Provision for possible loan losses 660,000 365,000 120,000
Provision for deferred income taxes 69,222 110,709 135,655
Securities losses(gains) -0- 1,928 (18,449)
(Gains) losses on sales of OREO (225,343) (41,297) 53,920
OREO writedowns 173,496 38,712 15,000
Amortization of bond premium, net 19,962 53,626 116,629
Decrease (increase) in interest receivable 78,339 (14,462) (137,175)
(Increase) decrease in other assets (195,552) 28,571 (75,263)
Decrease in unamortized loan fees (37,714) (4,428) (16,079)
(Decrease) increase in taxes payable (11,883) 65,337 (83,790)
Increase (decrease) in interest payable 41,597 (29,119) 57,401
Increase (decrease) in accrued expenses 17,080 (2,858) 78,790
(Decrease) increase in other liabilities (2,849) 119,956 39,281
Net cash provided by operating
Activities 3,138,988 3,304,254 2,564,571
Cash flows from investing activities
Securities held-to-maturity
Maturities and paydowns 22,663,019 20,893,071 21,582,512
Purchases (18,866,987) (26,292,738) (34,727,953)
Securities available-for-sale
Sales and maturities -0- 10,004,844 17,084,687
Purchases -0- (4,998,437) (3,879,844)
Purchase of restricted equity securities 36,700) (23,300) (78,200)
Increase in loans, net (6,084,959) (9,355,980) (4,467,509)
Capital expenditures, net (271,540) (550,968) (452,421)
Investments in limited partnership (29,106) (69,723) (87,295)
Premium paid on purchase of subsidiary (342,662) -0- -0-
Proceeds from sales of other real
estate owned 466,850 508,880 288,422
Recoveries of loans charged off 172,523 101,914 144,625
Net cash used in investing
activities (2,329,562) (9,782,437) (4,592,976)
<CAPTION>
(continued)
1997 1996 1995
Cash flows from financing activities
Net increase (decrease) in demand,
NOW, savings and money market accounts 908,511 8,381,093 (5,368,703)
Net increase (decrease) in certificates
of deposit 2,817,414 (3,410,139) 9,576,216
Net increase (decrease) in short-term
borrowings (1,600,000) 1,600,000 -0-
Net increase in borrowed funds 3,995,000 -0- -0-
Payments to acquire treasury stock (4,925) (189) (4,335)
Dividends paid (863,214) (741,139) (673,535)
Net cash provided by financing
activities 5,252,786 5,829,626 3,529,643
Net increase (decrease) in cash
and cash equivalents 6,062,212 (648,557) 1,501,238
Cash and cash equivalents
Beginning 8,245,398 8,893,955 7,392,717
Ending $14,307,610 $ 8,245,398 $ 8,893,955
Supplemental schedule of cash
paid during the year
Interest $ 7,792,566 $ 8,205,545 $ 8,191,054
Income taxes $ 697,765 $ 444,351 $ 301,000
Supplemental schedule of noncash
investing and financing activities:
Unrealized gain (loss) on securities
available-for-sale $ 39,009 $ (64,452) $ 760,340
Other real estate owned acquired
in settlement of loans $ 1,592,401 $ 723,596 $ 451,138
Debentures converted to common stock $ 66,000 $ 95,000 $ 286,000
5% stock dividend at market value $ 1,294,006 $ -0- $ 1,019,716
Dividends paid:
Dividends payable $ 1,652,355 $ 1,404,957 $ 1,242,597
Dividends reinvested (789,141) (663,818) (569,062)
$ 863,214 $ 741,139 $ 673,535
</TABLE>
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Community Bancorp. and Subsidiaries
Note 1. Significant Accounting Policies
The accounting policies of Community Bancorp. and Subsidiaries
("Company") are in conformity with generally accepted accounting
principles and general practices within the banking industry.
The following is a description of the more significant policies.
Basis of consolidation-The consolidated financial statements
include the accounts of Community Bancorp. and its wholly-owned
subsidiaries, Community National Bank and Liberty Savings Bank. All
significant intercompany accounts and transactions have been eliminated.
Nature of operations-The Company provides a variety of financial
services to individuals and corporate customers through its branches
in northeastern Vermont, which is primarily a small business and
agricultural area. The Company's primary deposit products are checking
and savings accounts and certificates of deposit. Its primary lending
products are commercial, real estate and consumer loans.
Concentration of risk-The Company's operations are affected
by various risk factors, including interest-rate risk, credit risk
and risk from geographic concentration of lending activities.
Management attempts to manage interest rate risk through various
asset/liability management techniques designed to match maturities
of assets and liabilities. Loan policies and administration are
designed to provide assurance that loans will only be granted to
creditworthy borrowers, although credit losses are expected to occur
because of subjective factors and factors beyond the control of the
Company. Although the Company has a diversified loan portfolio and
economic conditions are stable, most of its lending activities are
conducted within the geographic area where it is located. As a
result, the Company and its borrowers may be especially vulnerable
to the consequences of changes in the local economy. In addition,
a substantial portion of the Company's loans are secured by real estate.
Use of estimates-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
losses on loans and the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed
real estate, management obtains independent appraisals for significant
properties. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recovery
of a substantial portion of the carrying amount of foreclosed real
estate are susceptible to changes in local market conditions.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Company's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
Presentation of cash flows-For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand, amounts due from
banks (including cash items in process of clearing), federal funds
sold (generally purchased and sold for one day periods) and overnight
deposits.
Trust assets-Assets of the Trust Department, other than
trust cash on deposit at the Company, are not included in these
consolidated financial statements because they are not assets of
the Company.
Investment securities-Debt securities the Company has the positive
intent and ability to hold to maturity are classified as held-to-
maturity and reported at amortized cost. Debt and equity securities
purchased and held primarily for resale in the near future are
classified as trading. Trading securities are carried at fair value
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity or trading are
classified as available-for-sale. Investments classified as available-
for-sale are carried at market value with unrealized gains and losses
reported as a separate component of equity net of applicable income
taxes. The specific identification method is used to determine
realized gains and losses on sales of securities available-for-sale.
Restricted equity securities-Restricted equity securities are
comprised of Federal Reserve Bank stock and Federal Home Loan Bank
stock. These securities are carried at cost. As a member of the Federal
Reserve Bank (FRB), the Company is required to invest in FRB
stock in an amount equal to 3% of the Company's capital stock and
surplus.
As a member of the Federal Home Loan Bank, the Company is
required to invest in $100 par value stock of the Federal Home
Loan Bank. The stock is nonmarketable, and when redeemed, the
Company would receive from the Federal Home Loan Bank an amount
equal to the par value of the stock.
Loans-The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 114 (as amended by FASB No. 118), "Accounting by
Creditors for Impairment of a Loan," effective January 1, 1995.
This statement is considered the primary source of authoritative
guidance for determining allowances relating to specific loans. The
effect of adoption of this statement was immaterial to the Company's
financial statements.
Loans are stated at the amount of unpaid principal, reduced by
unearned fees and an allowance for possible loan losses.
Loan interest income is accrued daily on the outstanding
balances. Accrual of interest is discontinued when a loan is
specifically determined to be impaired or management believes,
after considering collection efforts and other factors, that the
borrower's financial condition is such that collection of interest
is doubtful. Any unpaid interest previously accrued on those loans
is reversed from income. Interest income is generally not recognized
on specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are generally applied
as a reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and amortized as an adjustment of
the related loan's yield. The Company is generally amortizing these
amounts over the contractual life.
Allowance for loan losses-The allowance for loan losses is
maintained at a level which, in management's judgment, is adequate to
absorb credit losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the collectibility of
the loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired
loans and economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value
of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs,
net of recoveries.
Bank premises and equipment-Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed principally by the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION
Years
<S> <C>
Buildings and improvements 8-40
Furniture and equipment 3-10
</TABLE>
The cost of assets sold or otherwise disposed of, and the
related allowance for depreciation, is eliminated from the
accounts and the resulting gains or losses are reflected in
the income statement. Maintenance and repairs are charged to
current expense as incurred and the cost of major renewals
and betterments are capitalized.
Other real estate owned-Real estate properties acquired
through or in lieu of loan foreclosure are initially recorded
at the lower of the Company's carrying amount or fair value less
estimated selling cost at the date of foreclosure. Any write-downs
based on the asset's fair value at the date of acquisition are
charged to the allowance for loan losses. After foreclosure, these
assets are carried at the lower of their new cost basis or fair
value less cost to sell. Costs of significant property improvements
are capitalized, whereas costs relating to holding property are
expensed. Valuations are periodically performed by management,
and any subsequent write-downs are recorded as a charge to
operations, if necessary, to reduce the carrying value of a
property to the lower of its cost or fair value less cost to sell.
Income taxes-The Company recognizes income taxes under the
asset and liability method. Under this method, deferred tax
assets and liabilities are established for the temporary differences
between the accounting basis and the tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are
realized or settled. Adjustments to the Company's deferred tax
assets are recognized as deferred income tax expense or benefit
based on management's judgments relating to the realizability of such
asset.
Foreign currency transactions-Foreign currency (principally Canadian)
amounts are translated to U.S. dollars in accordance with FASB
Statement No. 52, "Foreign Currency Translation." The U.S. dollar
is the functional currency and therefore translation adjustments are
recognized in income. Total translation adjustments, including
adjustments on foreign currency transactions, are immaterial.
Mortgage servicing-In May 1995, the FASB issued Statement
No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment of FASB Statement No. 65." The Company adopted this
statement effective October 1, 1995. This statement requires
the Company to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are
acquired. When the Company acquires mortgage servicing rights
through either the purchase or origination of mortgage loans
(originated mortgage loan servicing rights) and sells or securitizes
those loans with servicing rights retained, it 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 values. To determine the fair value of the servicing
rights created, the Company uses the market prices under comparable
servicing sales contracts. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. Fair values are estimated using
discounted cash flows based on a current market interest rate. The
effect of adoption of this statement was immaterial to the Company's
financial statements.
Pension costs-Pension costs are charged to salaries and employee
benefits expense and are funded as accrued.
Advertising costs-The Company expenses advertising costs as incurred.
Earnings per common share-The FASB issued Statement No. 128, "Earnings
Per Share," which became effective for the Company during December 1997.
The statement applies prospectively; earlier application is not
permitted. The adoption of this statement did not have a material effect
on the Company's financial statements.
Earnings per common share amounts are computed based on the
weighted average number of shares of common stock outstanding during
the period (retroactively adjusted for stock splits and stock dividends)
and reduced for shares held in treasury. The assumed conversion of
subordinated debentures does not result in material dilution.
Off-balance-sheet financial instruments-In the ordinary course
of business, the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.
Fair values of financial instruments-Statement of Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance
sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets'
fair values.
Investment securities: fair values for investment securities
are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices
of comparable instruments.
Restricted equity securities: The carrying amounts of these
securities approximate their fair values.
Loans: for variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and
commercial and industrial loans) are estimated using discounted cash
flow analysis, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics.
Deposits and long-term debt: The fair values disclosed for demand
deposits (for example, checking and savings accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is,
their carrying amounts). The fair values for certificates of deposit
and the long-term debt are estimated using a discounted cash
flow calculation that applies interest rates currently being offered
on certificates and debt to a schedule of aggregated contractual
maturities on such time deposits and debt.
Short-term borrowings: The carrying amounts reported in the
balance sheets for federal funds purchased approximate their fair
values. These borrowings are short-term and due on demand.
Other liabilities: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
Accrued interest: The carrying amounts of accrued interest
approximates their fair values.
Transfer and servicing of financial assets and extinguishment
of liabilities-In June 1996, the FASB issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which became effective for such
transactions occurring after December 31, 1996, and will
supersede FASB No. 122, which is discussed above. (The effective
date of certain provisions of the statement was delayed one year
until January 1, 1998, by the subsequent issuance of FASB
Statement No. 127). The statement applies prospectively; earlier
or retroactive application is not permitted.
Under this statement, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings and includes standards for
measuring and amortizing servicing assets and liabilities.
The adoption of Statement No. 125 (as amended by Statement No.
127) did not have a material effect on the Company's financial
statements.
Reclassification-Certain amounts in the 1996 and 1995
financial statements have been reclassified to conform to the
current year presentation.
Note 2. Investment Securities
Securities available-for-sale (AFS), held-to-maturity (HTM), and
Restricted equity securities consist of the following at December 31,
1997 and 1996:
<TABLE>
CAPTION>
Securities AFS,
December 31, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Government and
agency securities $ 7,987,988 $ 51,075 $ -0- $ 8,039,063
Securities AFS,
December 31, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S. Government and
agency securities $ 7,961,998 $ 19,251 $ 7,186 $ 7,974,063
Securities HTM,
December 31, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S. Government and
agency securities $24,121,910 $ 38,282 $ 38,261 $24,121,931
States and political
Subdivisions 10,003,892 -0- -0- 10,003,892
$34,125,802 $ 38,282 $ 38,261 $34,125,823
Securities HTM,
December 31, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S. Government and
agency securities $29,775,526 $ 79,118 $131,456 $29,723,188
States and political
Subdivisions 8,192,260 -0- -0- 8,192,260
$37,967,786 $ 79,118 $131,456 $37,915,448
Restricted equity securities,
December 31, 1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Federal Home Loan Bank stock $ 961,600 $ -0- $ -0- $ 961,600
Federal Reserve Bank stock 138,150 -0- -0- 138,150
$ 1,099,750 $ -0- $ -0- $ 1,099,750
Restricted equity securities,
December 31, 1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Federal Home Loan Bank stock $ 924,900 $ -0- $ -0- $ 924,900
Federal Reserve Bank stock 138,150 -0- -0- 138,150
$ 1,063,050 $ -0- $ -0- $ 1,063,050
</TABLE>
Investment securities with a carrying amount of $5,046,607 and $4,010,794
and a market value of $5,076,875 and $4,047,188 at December 31, 1997 and
1996, respectively, were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
Proceeds from the sale of securities available-for-sale amounted
to $-0-, $2,004,844 and $6,584,687 in 1997, 1996 and 1995, respectively.
Realized gains from sales of investments available-for-sale were $-0-,
$909 and $58,762, with realized losses of $-0-, $2,837, and $40,313 for
the years 1997, 1996 and 1995, respectively.
The carrying amount and estimated market value of securities by
contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
The maturities of securities available-for-sale at December 31, 1997,
were as follows:
<CAPTION>
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 2,989,132 $ 2,992,813
Due from one to five years 4,998,856 5,046,250
$ 7,987,988 $ 8,039,063
The maturities of securities held-to-maturity at December 31, 1997,
were as follows:
<CAPTION>
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $15,588,686 $15,591,772
Due from one to five years 16,699,933 16,696,868
Due from five to ten years 362,842 362,842
Due after ten years 1,474,341 1,474,341
$34,125,802 $34,125,823
</TABLE>
Included in the caption "States and Political Subdivisions" are
securities of local municipalities carried at $10,003,892 and
$8,192,260 at December 31, 1997 and 1996, respectively, which
are attributable to private financing transactions arranged by
the Company. There is no established trading market for these
securities and, accordingly, the carrying amount of these
securities has been reflected as their market value. The
Company anticipates no losses on these securities and expects
to hold them until their maturity.
Note 3. Loans
<TABLE>
The composition of net loans at December 31 is as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Commercial $ 9,021,928 $ 8,306,095
Real estate - Construction 1,090,612 1,431,727
Real estate - Mortgage 120,816,761 117,143,767
Installment and other 19,186,551 18,721,993
150,115,852 145,603,582
Deduct:
Allowance for possible loan losses 1,502,202 1,401,042
Unearned net loan fees 866,589 904,303
2,368,791 2,305,345
$147,747,061 $143,298,237
</TABLE>
The total recorded investment in impaired loans as determined in
accordance with FASB Statements No. 114 and No. 118 approximated
$1,000,973 and $1,096,208 at December 31, 1997 and 1996,
respectively. These loans were subject to allowances for loan
losses of approximately $58,019 and $70,017 which represented
the total allowance for loan losses related to impaired loans at
December 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans amounted to approximately
$1,078,509 and $1,281,550 for the years ended December 31, 1997
and 1996, respectively. Cash receipts on impaired loans amounted
to $621,293 and $160,755 in 1997 and 1996, respectively, of
which $592,379 and $98,000 were applied to the principal
balances of the loans.
In addition, the Company had other nonaccrual loans of
approximately $485,100 and $665,056 at December 31, 1997 and
1996, respectively, for which impairment had not been recognized.
If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately
$77,724 and $91,986 for the years ended December 31, 1997 and 1996,
respectively.
The Company is not committed to lend additional funds to
debtors with impaired, nonaccrual or modified loans.
Residential real estate loans aggregating $1,882,450 and
$2,273,991 At December 31, 1997 and 1996, respectively, were
pledged as collateral on deposits of municipalities.
Note 4. Allowance for loan Losses
Changes in the allowance for loan losses at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning $1,401,042 $1,519,247 $1,707,555
Provision charged to operating expense 660,000 365,000 120,000
Recoveries of amounts charged off 172,523 101,914 144,625
2,233,565 1,986,161 1,972,180
Amounts charged off (731,363) (585,119) (452,933)
Balance, ending $1,502,202 $1,401,042 $1,519,247
</TABLE>
Note 5. Bank Premises and Equipment
<TABLE>
The major classes of bank premises and equipment and the total
accumulated depreciation at December 31 are as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 80,747 $ 80,747
Buildings and improvements 2,452,267 2,408,306
Furniture and equipment 3,984,544 3,804,909
Leasehold improvements 408,187 376,620
6,925,745 6,670,582
Less accumulated depreciation (3,640,084) (3,249,223)
$3,285,661 $3,421,359
</TABLE>
Depreciation included in occupancy and equipment expense amounted
to $407,238, $392,775 and $326,702 for the years ended December
31, 1997, 1996 and 1995, respectively.
The Company occupies leased quarters at four branch office
locations under operating leases expiring in various years through
2013 with options to renew. In addition, the Company leases certain
computer hardware under an operating lease which expires in 1999.
Minimum future rental payments under non-cancelable operating
leases having original terms in excess of one year as of December
31, 1997, for each of the next five years and in aggregate are:
<TABLE>
<S> <C>
1998 $282,693
1999 98,425
2000 79,575
2001 66,110
2002 66,110
Subsequent to 2002 318,280
911,193
</TABLE>
Total rental expense amounted to $293,560, $307,885 and $323,372 for
The years ended December 31, 1997, 1996 and 1995, respectively.
Note 6. Other Real Estate Owned
<TABLE>
A summary of foreclosed real estate at December 31 is as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Other real estate owned $1,391,593 $814,642
Less allowance for losses on OREO (302,726) (152,098)
Other real estate owned, net $1,088,867 $662,544
</TABLE>
<TABLE>
Changes in the allowance for losses on OREO for the years ended
December 31 were as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning $152,098 $113,386 $113,386
Provision for losses 173,496 38,712 -0-
Charge-offs, net (22,868) -0- -0-
Balance, ending $302,726 $152,098 $113,386
</TABLE>
Note 7. Investments Carried at Equity
The Company purchased various partnership interests in limited
partnerships. These partnerships were established to acquire,
own and rent residential housing for low- and moderate-income
Vermonters located in northeastern Vermont. The investments are
accounted for under the equity method of accounting. These
equity investments, which are included in other assets, are
recorded at cost and adjusted for the Company's proportionate
share of the partnership's undistributed earnings or losses.
The carrying values of these investments were $314,715 and
$285,609 at December 31, 1997 and 1996, respectively. The
provision for undistributed net (gains) and losses of the
partnerships charged to earnings were $24,000, ($16,126) and
$35,000 for 1997, 1996 and 1995, respectively.
Note 8. Deposits
<TABLE>
The following is a maturity distribution of time certificates
of deposit at December 31:
<S> <C>
Maturing in 1998 $61,158,190
Maturing in 1999 26,334,686
Maturing in 2000 8,421,699
Maturing in 2001 524,359
Maturing in 2002 and after 228,215
$96,667,149
</TABLE>
Note 9. Borrowed Funds
<TABLE>
FHLB borrowings for the years ended December 31 were as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Community Investment Program borrowings,
fixed rate (vary 6.27% to 7.67%), payable at maturities $ 60,000 $65,000
FHLB term borrowing, 5.71% fixed rate,
payable February 13, 1998 4,000,000 -0-
$4,060,000 $65,000
</TABLE>
<TABLE>
Principal maturities of borrowed funds as of December 31, 1997, are as
follows:
<S> <C>
1998 $4,000,000
1999 5,000
2000 -0-
2001 -0-
2002 15,000
Thereafter 40,000
$4,060,000
</TABLE>
The Company also maintains a $4,110,000 IDEAL Way Line of Credit with the
Federal Home Loan Bank of Boston. Outstanding advances under this line
were $-0- and $1,600,000 at December 31, 1997 and 1996, respectively.
Interest on these borrowings is chargeable at a rate determined daily by
the Federal Home Loan Bank and payable monthly.
Collateral on these borrowings consists of Federal Home Loan Bank
stock purchased by the Company, all funds placed in deposit with the
Federal Home Loan Bank, qualified first mortgages held by the Company
and any additional holdings which may be pledged as security.
Note 10. Subordinated Debentures
On September 1, 1984, the Company issued $750,000 of 11% convertible
debentures due August 1, 2004. The notes are subordinated to all other
indebtedness of the Corporation. At December 31, 1997 and 1996, $27,000
and $64,000, respectively, remained outstanding.
These debentures are convertible prior to maturity in whole or in
part, at the option of the holder, into common stock of the Company at
a conversion price of $4.91 per share.
The debentures are redeemable, in whole or in any part, at the
option of the Company at any time after July 31, 1996, and prior to
maturity, on not less than 30 days prior notice to holders. The
redemption price shall be equal to the percentage set forth below:
<TABLE>
<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%
</TABLE>
On August 1, 1986, the Company issued $500,000 of 9% convertible
debentures due August 1, 1998. The notes are subordinated to all
other indebtedness of the Company. At December 31, 1997 and 1996,
$77,000 and $106,000, respectively, remained outstanding. These
debentures are convertible prior to maturity in whole or in part, at
the option of the holder, into common stock of the Company at a
conversion price of $9.82 per share.
The debentures are redeemable, in whole or in any part, at the
option of the Company at any time after July 31, 1993, and prior to
maturity, on not less than 30 days prior notice to holders. The
redemption price shall be equal to the percentage set forth below:
<TABLE>
<S> <C>
August 1, 1996 - July 31, 1998 101%
</TABLE>
Note 11. Income Taxes
The Company prepares its federal income tax return on a consolidated
Basis (see Note 1). Federal income taxes are allocated to members of
the consolidated group based on taxable income. Federal income tax
expense for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Currently paid or payable $717,712 $543,383 $188,652
Deferred 37,392 110,709 135,655
$755,104 $654,092 $324,307
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U.S. federal income tax rates of 34% to income
before income taxes as a result of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax expense $ 986,170 $ 977,125 $ 773,927
Tax exempt interest (208,465) (250,140) (318,112)
Disallowed interest 30,893 38,412 49,613
Partnership tax credits (66,300) (69,000) (114,000)
Other 12,806 (42,305) (67,121)
$ 755,104 $ 654,092 $ 324,307
</TABLE>
<TABLE>
The deferred income tax provision consisted of the following items at
December 31:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Depreciation ($9,040) $ 14,515 $ 31,281
Loan fees 28,523 37,180 33,493
Mortgage servicing 12,389 13,100 6,646
Deferred compensation (22,542) (19,429) (8,777)
Bad debts (34,394) 40,190 64,025
Limited partnerships 16,248 21,000 44,000
Nonaccrual loan interest 31,490 17,135 (38,646)
OREO (51,214) (13,162) -0-
Other 65,932 180 3,633
$37,392 $110,709 $135,655
</TABLE>
Listed below are the significant components of the net deferred
tax asset at December 31:
[CAPTION]
Components of the deferred tax asset: 1997 1996
[S] [C] [C]
Bad debts $373,582 $339,188
Unearned loan fees 133,143 161,666
Nonaccrual loan interest 73,702 105,192
OREO writedowns 102,927 51,713
Deferred compensation 50,748 28,206
Capital loss carryover -0- 55,556
Other 561 9,908
Total deferred tax asset 734,663 751,429
Valuation allowance -0- (55,556)
Total deferred tax asset,
net of valuation allowance 734,663 695,873
Components of the deferred tax liability:
Depreciation 173,231 182,271
Limited partnerships 81,248 65,000
Mortgage servicing rights 32,135 19,746
Other 14,743 -0-
Unrealized gain on securities available-for-sale 17,365 4,103
Total deferred tax liability 318,722 271,120
Net deferred tax asset $415,941 $424,753
</TABLE
FASB Statement No. 109 allows for recognition and measurement of
deductible temporary differences (including general valuation
allowances) to the extent that it is more likely than not that the
deferred tax asset will be realized.
Note 12. Pension Plan
The Company has a discretionary defined contribution plan covering
all employees who meet certain age and service requirements. Due
to the nature of the plan, defined contribution, there is no
unfunded past service liability. The provisions for pension expense
were $240,000, $188,000 and $175,000 for 1997, 1996 and 1995,
respectively.
Note 13. Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit, standby letters of credit and
financial guarantees, interest rate caps and floors written on
adjustable rate loans and commitments to sell loans. Such
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit and
financial guarantees written is represented by the contractual
notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. For interest rate
caps and floors written on adjustable rate loans, the contract
or notional amounts do not represent exposure to credit loss.
The Company controls the credit risk of their interest rate cap
agreements through credit approvals, limits and monitoring
procedures.
The Company generally requires collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
Contract or
-Notional Amount-
1997 1996
Financial instruments whose contract
amounts represent credit risk:
<S> <C> <C>
Commitments to extend credit $7,519,854 $8,507,320
Standby letters of credit and
commercial letters of credit $ 538,629 $ 939,783
Credit card arrangements $3,802,931 $3,572,831
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
Long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The Company enters into a variety of interest rate contracts,
including interest rate caps and floors written on adjustable rate loans in
managing its interest rate exposure. Interest rate caps and
floors on loans written by the Company enables customers to transfer,
modify or reduce their interest rate risk.
Note 14. Commitments and Contingencies
In the normal course of business, the Company is involved in various
claims and legal proceedings. In the opinion of the Company's
management, after consulting with the Company's legal counsel,
any liabilities resulting from such proceedings would not have
a material adverse effect on the Company's financial statements.
Note 15. Transactions with Related Parties
The Company has had, and may be expected to have in the future,
banking transactions in the ordinary course of business with
directors, principal officers, their immediate families and
affiliated companies in which they are principal stockholders
(commonly referred to as related parties), all of which have
been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with others.
<TABLE>
Aggregate loan transactions with related parties as of December
31 were as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Balance, beginning $1,044,294 $1,069,730
New loans 302,579 454,720
Repayments (440,062) (480,156)
Balance, ending $ 906,811 $1,044,294
</TABLE>
Total deposits with related parties approximated $556,814 and
$600,653 at December 31, 1997 and 1996, respectively.
Note 16. Restrictions on Cash and Due From Banks
The Company is required to maintain reserve balances in cash
with Federal Reserve Banks. The totals of those reserve
balances were approximately $825,000 and $793,000 at December
31, 1997 and 1996, respectively. In addition, the Company was
required to maintain contracted clearing balances of $275,000
at December 31, 1997 and 1996.
Note 17. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31,
1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from
the OCC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events
since that notification that management believes have changed
the Bank's category.
<TABLE>
The Bank's actual capital amounts and ratios (000's omitted)
are also presented in the table.
<CAPTION>
Minimum to be
Well Capitalized
Under Prompt
Minimum For Capital Corrective Action
Actual Adequacy Purposes: Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $19,727 18.59% $8,490 8.0% $10,612 10.0%
Tier I capital
(to risk-weighted assets) $18,398 17.34% $4,245 4.0% $ 6,367 6.0%
Tier I capital
(to average assets) $18,398 8.58% $8,575 4.0% $10,719 5.0%
<CAPTION>
As of December 31, 1996:
Total capital
(to risk-weighted assets) $20,432 19.88% $8,224 8.0% $10,280 10.0%
Tier I capital
(to risk-weighted assets) $19,146 18.62% $4,112 4.0% $ 6,168 6.0%
Tier I capital
(to average assets) $19,146 9.20% $8,329 4.0% $10,411 5.0%
</TABLE>
The Bank is restricted as to the amount of dividends which can be paid.
Dividends declared by national banks that exceed net income for the
preceding two years must be approved by the OCC. Regardless of formal
regulatory restrictions, the Bank may not pay dividends that would
result in its capital levels being reduced below the minimum requirements
shown above.
Note 18. Fair Value of Financial Instruments
<TABLE>
The estimated fair values of the Company's financial instruments are
as follows:
<CAPTION>
December 31, 1997
Carrying Fair
Amount Value
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 14,307,610 $ 14,307,610
Securities held-to-maturity 34,125,802 34,125,823
Securities available-for-sale 8,039,063 8,039,063
Restricted equity securities 1,099,750 1,099,750
Loans, net of allowance 147,747,061 147,781,745
Accrued interest receivable 1,460,298 1,460,298
Financial liabilities:
Deposits 187,580,401 187,698,307
Borrowed funds 4,164,000 4,166,660
Accrued interest payable 334,167 334,167
<CAPTION>
December 31, 1996
Carrying Fair
Amount Value
Financial assets:
Cash and cash equivalents $ 8,245,398 $ 8,245,398
Securities held-to-maturity 37,967,786 37,915,448
Securities available-for-sale 7,974,063 7,974,063
Restricted equity securities 1,063,050 1,063,050
Loans, net of allowance 143,298,237 143,093,232
Accrued interest receivable 1,538,637 1,538,637
Financial liabilities:
Short-term borrowings 1,600,000 1,600,000
Deposits 183,854,476 184,135,696
Borrowed funds 235,000 242,720
Accrued interest payable 291,458 291,458
</TABLE>
The estimated fair values of deferred fees on commitments to extend
Credit and letters of credit were immaterial at December 31, 1997 and
1996.
The carrying amounts in the preceding table are included in
the balance sheet under the applicable captions, except for long-term
debt which consists of borrowed funds and subordinated debentures.
Note 19. Acquisition
On December 31, 1997, the Company purchased 100% of the stock of
Liberty Savings Bank, a New Hampshire guaranty savings bank, for
$1,746,538. The assets of the bank, principally a U. S. government
security, have been included in the 1997 consolidated financial
statements. The excess of the purchase price over the assets of
the bank will be amortized on a straight-line basis over 15 years
starting January 1, 1998. This good will amounted to $342,662
and is included in "Other Assets" on the balance sheet.
Liberty Savings Bank does not currently maintain any branches
and does not have authority to take bank deposits. The Company is
planning to acquire full deposit-taking capabilities for Liberty
Savings Bank.
Note 20. Condensed Financial Information (Parent Company Only)
The following financial statements are for Community Bancorp.
(Parent Company Only), and should be read in conjunction with
the consolidated financial statements of Community Bancorp. and
Subsidiaries.
<TABLE>
Community Bancorp. (Parent Company Only) Condensed Balance Sheet
<CAPTION>
December 31,
1997 1996
Assets
<S> <C> <C>
Cash $ 386,277 $ 109,018
Investment in subsidiary - Community National Bank 18,441,126 19,160,361
Investment in subsidiary - Liberty Savings Bank 1,746,538 -0-
Other assets 12,066 14,739
Total assets $20,586,007 $19,284,118
Liabilities and stockholders' equity
Liabilities
Other liabilities $ 1,650 $ 2,763
Subordinated convertible debentures 104,000 170,000
Total liabilities 105,650 172,763
Stockholders' equity
Common stock, $2.50 par value: 2,000,000 shares
authorized, 1,537,163 shares issued at 12/31/97
and 1,412,493 shares issued at 12/31/96 3,842,907 3,531,233
Additional paid-in capital 7,978,435 6,140,962
Retained earnings (Note 17) 9,070,443 9,871,409
Unrealized gain on securities available-for-sale,
net of tax 33,709 7,963
Less treasury stock, at cost
(1997: 29,629 shares; 1996: 29,365 shares) (445,137) (440,212)
Total stockholders' equity 20,480,357 19,111,355
Total liabilities and stockholders' equity $20,586,007 $19,284,118
</TABLE>
The investment in the subsidiary banks is carried under the equity method
of accounting. The investment and cash, which is on deposit with the Bank,
has been eliminated in consolidation.
<TABLE>
Community Bancorp. (Parent Company Only) Condensed Statements of Income
<CAPTION>
Years ended December 31
1997 1996 1995
Revenues
<S> <C> <C> <C>
Dividends
Bank subsidiary $2,913,800 $ 711,200 $ 832,000
Total revenues 2,913,800 711,200 832,000
Expenses
Interest on long-term debt 11,489 20,828 31,555
Administrative and other 24,000 22,522 28,866
Total expenses 35,489 43,350 60,421
Income before applicable income tax
and equity in undistributed net
income of subsidiary 2,878,311 667,850 771,579
Applicable income tax (benefit) (12,066) (14,739) (20,543)
Income before equity in undistributed
net income of subsidiary 2,890,377 682,589 792,122
Equity (deficit) in undistributed
net income - subsidiary bank (744,982) 1,537,215 1,159,827
Net income $2,145,395 $2,219,804 $1,951,949
</TABLE>
<TABLE>
Community Bancorp. (Parent Company Only) Condensed Statements of Cash Flows
<CAPTION>
Years ended December 31
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,145,395 $ 2,219,804 $ 1,951,949
Adjustments to reconcile net income to
net cash provided by operating activities
(equity) deficit in undistributed net
income of subsidiary 744,982 (1,537,215) (1,259,828)
Decrease in income taxes receivable 2,673 5,806 7,946
Decrease in other liabilities (1,114) (525) (5,243)
Net cash provided by
operating activities 2,891,936 687,870 694,824
Cash flows from investing activities
Purchase of stock in subsidiary -
Liberty Savings Bank (1,746,538) -0- -0-
Net cash used for investing
Activities (1,746,538) -0- -0-
Cash flows from financing activities
Purchase of treasury stock (4,925) (189) (4,335)
Dividends paid (863,214) (741,139) (673,535)
Net cash used for financing activities (868,139) (741,328) (677,870)
Net increase (decrease) in cash 277,259 (53,458) 16,954
Cash
Beginning 109,018 162,476 145,522
Ending $ 386,277 $ 109,018 $ 162,476
Supplemental schedule of cash paid
(received) during the year
Interest $ 12,602 $ 21,353 $ 36,798
Income taxes $ (14,739) $ (20,543) $ (28,488)
Supplemental schedule of noncash
investing and financing activities
Unrealized gain(loss) on securities
available-for-sale $ 39,009 $ (64,452) $ 760,340
Debentures converted to common stock $ 66,000 $ 95,000 $ 286,000
5% stock dividend at market value $1,294,006 $ -0- $1,019,706
Dividends paid
Dividends payable $1,652,355 $1,404,957 $1,242,597
Dividends reinvested (789,141) (663,818) (569,062)
$ 863,214 $ 741,139 $ 673,535
</TABLE>
Note 21. Quarterly Financial Data (Unaudited)
<TABLE>
A summary of financial data for the four quarters of 1997, 1996 and 1995 is
presented below:
<CAPTION>
Community Bancorp. and Subsidiaries Quarters in 1997 ended
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Interest income $4,040,469 $4,171,803 $4,252,823 $4,352,499
Interest expense 1,897,836 1,923,757 1,998,488 2,014,082
Provision for loan losses 205,000 105,000 215,000 135,000
Securities gains(loss) -0- -0- -0- -0-
Other operating expenses 1,523,389 1,932,122 1,803,984 1,752,261
Net income 520,088 611,639 451,169 562,499
Earnings per common share $ .35 $.41 $.30 $.38
<CAPTION>
Quarters in 1996 ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $4,032,136 $4,144,762 $4,162,822 $4,192,077
Interest expense 2,092,138 2,094,188 2,041,045 1,949,055
Provision for loan losses 37,500 122,500 80,000 125,000
Securities gains (loss) -0- ( 1,928) -0- -0-
Other operating expenses 1,546,063 1,630,449 1,642,657 1,577,908
Net income 467,218 512,855 539,485 700,246
Earnings per common share $.33 $.36 $.38 $.48
<CAPTION>
Quarters in 1995 ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $3,593,766 $3,788,464 $3,928,489 $4,095,818
Interest expense 1,960,723 2,067,712 2,100,188 2,119,832
Provision for loan losses 30,000 30,000 30,000 30,000
Securities gains (loss) -0- -0- -0- 18,449
Other operating expenses 1,508,365 1,494,778 1,462,514 1,476,821
Net income 302,539 417,623 490,824 740,963
Earnings per common share $.23 $.31 $.36 $.52
</TABLE>
Note 22. Other Income and Other Expenses
<TABLE>
The components of other income and other expenses which are in excess of 1%
of total revenues in any of the three years disclosed are as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income
Other $ 553,027 $ 564,894 $ 514,889
Expenses
Printing and supplies $ 195,193 $ 183,831 $ 142,546
FDIC insurance 22,561 2,000 201,474
Other 1,823,950 1,717,844 1,475,371
$2,041,704 $1,903,675 $1,819,391
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
For the Year Ended December 31, 1997
Community Bancorp. is a holding company whose subsidiaries include
Community National Bank and Liberty Savings Bank. Community National Bank is
a full service institution operating in the state of Vermont, with seven
branch offices located throughout three counties in northern Vermont. On
December 31, 1997, Community Bancorp. acquired all of the outstanding stock
of Liberty Savings Bank, a New Hampshire guaranty savings bank. Presently,
since no building was involved in the transaction, the mailing address for
Liberty Savings Bank is in care of Community Bancorp. in Derby, Vermont. It
is the intention of Community Bancorp. to operate this bank as a lending
facility primarily serving the north country of New Hampshire. This
acquisition fits perfectly into the strategic plans of Community Bancorp.,
whose intentions are to expand its operations to include a portion of the
state of New Hampshire. The major asset acquired was a U.S. Treasury Strip
with a market value of approximately $1.4 million with a value at maturity of
$1.7 million. As mentioned above, this transaction occurred on December 31,
1997, resulting in no business activity for the 1997 fiscal year. With that
in mind, the following discussion refers primarily to the operations of
Community National Bank, with consolidated balance sheet figures of Community
Bancorp., Community National Bank, and Liberty Savings Bank.
At the end of this narrative there are several financial tables relating
to the information disclosed throughout this discussion. These tables, when
used in conjunction with the following facts and figures, should give a better
understanding of the overall performance and condition of Community National
Bank and Community Bancorp.
LIQUIDITY
Liquidity refers to the ability of Community National Bank to adequately
cover fluctuations in assets and liabilities. Meeting loan demand (assets)
and covering the withdrawal of deposit funds (liabilities) are two key
components of the liquidity management process. The repayment of loans and
growth in deposits are two of the major sources of liquidity.
Our time deposits greater than $100,000 increased from $17.9 million at
the end of 1996 to $18.2 million at year end 1997, an increase of $304,077 or
1.7%. Other time deposits increased to $78.5 million from $76 million for the
same time period, an increase of 3.3%. A review of these deposits indicates
that the growth is primarily generated locally and regionally by
established customers of the Company. The Company has no brokered deposits.
Our gross loan portfolio increased $4.5 million or by 3.1% to end the
1997 year at $150 million. Of this total loan portfolio of $150 million,
$81.7 million, or 54.4% is scheduled to reprice or mature within one year.
The Company has two credit lines with available balances totaling $6.1
million and additional borrowing capacity of approximately $105 million
through the Federal Home Loan Bank of Boston, which is secured by the
Company's qualifying 1-4 family residential loan portfolio. As of December
31, 1997, the Company had borrowed $4 million against the $105 million
at FHLB.
As of year end 1997, the Company maintained short-term investments of
$15.2 million, and of this total, approximately $8 million or 33% are
treasuries classified as "available-for-sale". As of December 31, 1997, the
Company had $24.1 million in "held-to-maturity" treasuries, less $5 million
pledged, netting $19.1 million compared to $29.8 million, less $4 million
pledged, netting $25.8 million a year ago. These treasuries are not
considered short-term investments under new regulations governing the
classification of securities.
All other interest bearing accounts in total decreased by $1.3 million,
or 1.8% in 1997, while demand deposit accounts increased to $20.3 million
from $18 million for the same time period, an increase of 12.2%
INVESTMENT SECURITIES
The adoption of FASB No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", has had an impact on our investment portfolio. This
new accounting standard, effective for 1994 statements, requires banks to
recognize all appreciation or depreciation of the investment portfolio either
on the balance sheet or through the income statement even though a gain or
loss had not been realized. These changes require securities classified as
"trading securities" to be marked to market with any gain or loss charged to
income. Securities classified as "available-for-sale" are to be marked to
market with any gain or loss after taxes charged to the equity portion of
the balance sheet. Securities classified as "held-to-maturity" are to be
held at book value.
The Company does not own any trading securities as our investment policy
prohibits active trading in our investment account. At the end of 1997 the
Company had $1.1 million in equity securities classified as available-for-sale
compared to $1.06 million at the end of 1996. In addition, at December 31,
1997, the Company had $8.04 million in U.S. Government securities available-
for-sale, compared to $7.97 million at December 31, 1996. These securities
have been marked to market, with a resulting gain after taxes of $33,709 for
1997 compared to $7,963 for 1996. These figures are presented in the equity
section of our financial statement as "Unrealized gain on securities
available-for-sale, net of tax". As adjusted for this unrealized gain or
loss, our investment portfolios at the respective years' ends were as follows:
<TABLE>
<CAPTION>
December 31, 1997: Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government & agency securities
Available-for-sale $ 7,987,988 $51,075 $ 0 $ 8,039,063
Held-to-maturity(1) 24,121,910 38,282 38,261 24,121,931
States & political subdivisions
Held-to-Maturity 10,003,892 0 0 10,003,892
Other securities
Available-for-Sale 1,099,750 0 0 1,099,750
$43,213,540 $89,357 $ 38,261 $43,264,636
<FN>
<F1>Included in this portfolio is the U.S. Treasury Strip for Liberty Savings
bank with an amortized cost and market value of $1,392,338.
<CAPTION>
December 31, 1996: Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government & agency securities
Available-for-sale $ 7,961,998 $19,251 $ 7,186 $ 7,974,063
Held-to-maturity 29,775,526 79,118 131,456 29,723,188
States & political subdivisions
Held-to-maturity 8,192,260 0 0 8,192,260
Other Securities
Available-for-sale 1,063,050 0 0 1,063,050
$46,992,834 $98,369 $138,642 $46,952,561
</TABLE>
<TABLE>
Gross realized gains and gross realized losses on actual sales of securities
were:
<CAPTION>
Gross realized gains: 1997 1996 1995
<S> <C> <C> <C>
U.S. Government & agency securities $ 0 $ 909 $58,762
Other Securities 0 0 0
$ 0 $ 909 $58,762
<CAPTION>
Gross realized losses: 1997 1996 1995
U.S. Government & agency securities $ 0 $2,837 $40,313
Other Securities 0 0 0
$ 0 $2,837 $40,313
</TABLE>
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
Management believes that the policies and procedures established for the
underwriting of its loan portfolio are accurate and up-to-date helping to
alleviate many of the problems that could exist within the portfolio in a
changing environment. Loans are typically reviewed on a loan-by-loan basis
with more emphasis placed on larger loans and loans that have the potential
for a higher level of risk. These measures help to insure the adequacy of
the allowance. An ongoing review of the loan portfolio is performed by the
Executive Officers and the Board of Directors, which meets to discuss, among
other matters, potential exposures. Factors considered include, but are not
limited to, historical loss ratios, each borrower's financial condition, the
industry or sector of the economy in which the borrower operates, if
applicable, and overall economic conditions. Existing or potential problems
are noted and reviewed by senior management to ensure that adequate loan-to-
value ratios exist to help cover any cost associated with these loans. The
Company also employs a full-time loan review and compliance officer whose
duties include, but are not limited to, a review of the loan portfolio
including delinquent and non-accrual loans. Results are reported to senior
management for further review and additional action if necessary.
Specific allocations are made in situations management feels are at a
greater risk for loss. A quarterly review of certain qualitative factors,
which include "Levels of, and Trends in, Delinquencies and Non-Accruals" and
"National and Local Economic Trends and Conditions", helps to insure that
areas with potential risk are noted and coverage adjusted to reflect current
trends in delinquencies and non-accruals. First mortgage loans make up the
largest part of the loan portfolio and have the lowest historical loss ratio
that helps to alleviate overall risk.
The valuation allowance for loan losses as of December 31, 1997 of $1.5
million constitutes approximately one percent of the total loan portfolio
that compares to almost $1.4 million or almost 1% a year ago. In management's
opinion, this is both adequate and reasonable in light of the fact that $121.9
million of the total loan portfolio or 81.2%, consists of real estate mortgage
loans. This figure is higher than the year-end figure for last year of $118.6
million. Included in the 1997 total are $98.7 million or 65.7% of loans
secured by 1-4 family residences, an increase of $4.3 million or 5% over last
year's figure of $94.4 million or 64.8%. This volume of home loans, together
with the low historic loan loss experience, helps to support our basis for
loan loss coverage. If the Company were to reduce its loan portfolio by the
residential mortgage loan portfolio, the valuation allowance of $1.5 million
would comprise 2.9% of eligible loans, compared to 2.7% a year ago. In
management's opinion, a loan portfolio consisting of 81.2% in residential
and commercial real estate secured mortgage loan is more stable and less
vulnerable than a portfolio with a higher concentration of unsecured
commercial and industrial loans or personal loans.
A comparison of non-performing assets for 1997 and 1996 shows a decrease
of 8.3% in loans classified as non-accrual and a decrease of 26% in loans 90
days or more past due and still accruing. Included in the non-accrual
portfolio of $1.5 million are $287,896 in loans that carry a 90% FmHA
guarantee. If the portfolio was reduced by the guaranteed portion of
$259,107, it would reduce our loss exposure by 17.4%. Additionally, the
remaining portfolio $1.2 million consists of $1.18 million, or 97% of real
estate secured mortgage loans on which the Company historically suffers
relatively few losses. The portfolio of Other Real Estate Owned (OREO) notes
the only increase, ending 1997 at a figure of $1.09 million compared to
$662,544 for the same period in 1996, an increase of 64.3%.
<TABLE>
Non-performing assets as of December 31, 1997 and 1996 were made up of
the following:
<CAPTION>
1997 1996
<S> <C> <C>
Non-Accruing loans $1,486,073 $1,621,132
Loans past due 90 day or more and still accruing 291,931 394,446
Other real estate owned 1,088,867 662,544
Total $2,866,871 $2,678,122
In summary, non-performing assets increased 7% from last year's figure at
year end of $2.7 million. In light of this increase, management continues to
monitor the allowance for loan and lease losses very carefully and maintain
the reserve at a level of approximately 1% of total eligible loans. The
Northeast Kingdom is known for being on the lower end of the economic scale,
and as such suffers greatly in times of economic uncertainty. In view of
this, the Company will always maintain its conservative approach to the review
process of our reserve requirements and adjust accordingly for any changes.
Other real estate owned consists of properties that the Company has
acquired in lieu of foreclosure or through normal foreclosure proceedings.
The policy of the Company is to value property in other real estate owned
at the lesser of appraised value or book value. An appraisal is necessary to
determine the value of the property. If the book value of the property is
less than the appraised value, the Company will "write-down" the loan balance
equal to the appraised value, subsequent to including it in OREO. Any such
write-down is charged to the reserve for loan losses. Once the property is
in OREO, any additional write-downs are charged to earnings.
Our current portfolio of other real estate owned consists of $139,355 in
properties deeded in lieu with the remaining $949,512 acquired through the
normal foreclosure process. All properties are located in Vermont, and are as
follows: a condominium project in Jay; four condominium units in Newport; one
building lot in Irasburg, a vacation home in Jay; two single family residences
in Orleans; a single family residence in Glover; a mobile home with land in
St. Johnsbury; a farm in Newport Center and a farm in Troy. The farms both
have a 90% FSA guarantee reducing our loss exposure by almost $300 thousand
or 27%. The Company is actively attempting to sell all of these properties,
and expects no material loss on any of them. Other real estate owned is by
definition a non-earning asset, and as such does have a negative impact on
the Company's earnings.
Financial Accounting Standards Board (FASB) has issued Statement #114,
"Accounting by Creditors for Impairment of a Loan". This accounting standard
was effective for fiscal years beginning after December 15, 1994, and is
considered the primary source of authoritative guidance for determining
allowances relating to specific loans. The Company adopted this standard as
required for calendar year 1995. In the opinion of the Board of Directors,
the impact of this accounting standard is immaterial to the Company's
performance.
BANK PREMISES AND EQUIPMENT
</TABLE>
<TABLE>
The major classes of bank premises and equipment and the total
accumulated depreciation is as follows:
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Land $ 80,747 $ 80,747
Buildings and improvements 2,452,267 2,408,306
Furniture and equipment 3,984,544 3,804,909
Leasehold improvements 408,187 376,620
6,925,745 6,670,582
Less accumulated depreciation (3,640,084) (3,249,223)
$ 3,285,661 $ 3,421,359
</TABLE>
Depreciation included in occupancy and equipment expense amounted to
$407,238, $392,775, and $326,702, for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company currently leases four of the seven offices it occupies.
These leased offices are in Island Pond, Newport, Barton, and St. Johnsbury,
Vermont. The lease for the Newport office was originally to expire December
31, 1997, but a fifteen month extension has extended the lease to March 31,
1999. This office will then move to a condominium space of approximately
3,084 square feet in the state office building. The site for this building
is at the opposite end of Main Street from the Company's current office.
The operating leases for the three other locations expire in various years
through 2013 with options to renew. In addition, the Company leases certain
computer hardware under an operating lease that expires in the first quarter
of 1999.
<TABLE>
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year, as of December 31, 1997, for
each of the next five years and in aggregate are:
<S> <C>
1998 $282,693
1999 98,425
2000 79,575
2001 66,110
2002 66,110
Subsequent to 2002 318,280
Total $911,193
</TABLE>
FINANCIAL CONDITION
The Financial Condition of the Corporation should be examined in light
of its 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.
The average volume of earning assets grew from $184.3 million at year end
1995, to $194.4 million at the end of 1996, to $197.3 million at December 31,
1997, an increase of $10.1 million for 1995 to 1996, and $2.9 million for 1996
to 1997. The average volume of loans grew from $131.9 million at year end
1995 to $138.6 million at year end 1996 to $145.8 million at year end 1997.
The results are increases of $6.7 million or 5% for 1995 versus 1996 and $7.2
million or 5.2% for 1996 versus 1997. Taxable investment securities increased
from $30.7 million at the end of 1995 to $35.8 million at the same period in
1996 and then decreased slightly to $35.6 million as of December 31, 1997,
resulting in an increase of $5.1 million or 16.6% and a decrease of just over
$200 thousand or .6%, respectively. Tax exempt securities decreased steadily
starting at $17.4 million for year end 1995 to $14.2 million at year end 1996
and then to $12.1 million as of December 31, 1997. These decreases of $3.2
million or 18.4% for 1995 versus 1996 and $2.1 million or 14.8% for 1996
versus 1997 are attributable in part to a decrease in non-arbitrage
borrowing. Federal funds sold started the comparison period at $3.2 million
as of December 31, 1995, and increased $1.5 million or 47.9% to $4.7 million
as of December 31, 1996, and then decreased $2.1 million or 45.2% to $2.6
million as of December 31, 1997. The average volume of other securities
remained the same throughout the three year comparison period with an average
volume of $1.2 million.
Loans make up most of the total earning assets at 73.8 % for 1997, an
increase from the 1996 portion of 71.3%, which was down slightly from the 1995
year end portion of 71.6%. Other securities count for the smallest percentage
at .59%, .60%, and .63%, respectively, for year end 1997, 1996, and 1995.
Average interest-bearing liabilities grew from $162.7 million in 1995, to
$170.3 million for 1996, and then decreased to $170.2 million for year end
1997. A review of the areas that comprise this total shows a steady decrease
in savings deposits. These funds started at $33.5 million as of year end 1995,
then decreased to $32.3 million or by 3.6% as of year end 1996, and closed
year end 1997 at an average volume of $31.9 million, a decrease of 1.24%.
Subordinated debentures also report a steady decrease starting at an average
volume of $328 thousand as of year end 1995, decreasing 34% to an average
volume of $216 thousand as of year end 1996 and then decreasing 51% to end the
1997 year at an average volume of $107 thousand. NOW and money market funds
set a different trend by starting year end 1995 at an average volume of $35.5
million, then increasing to $41.4 million or by 16.6% as of year end 1996,
then decreasing by 5% to $39.3 million as of year end 1997. Time deposits
followed the same trend beginning at an average volume of $93.3 million,
increasing to $96.2 million or by 3.1% and then decreasing to $94.7 million
or by 1.6% for the same comparison period. Other borrowed funds charted its
own course with an average volume reported for year end 1995 of $117 thousand,
decreasing 15.4% to an average volume of $99 thousand as of year end 1996,
and then increasing substantially to an average volume of $4.1 million as
of year end 1997.
Time deposits accounts for the biggest portion of interest bearing
liabilities with figures of 57.3%, 56.5%, and 55.7%, respectively as of
December 31, 1995, 1996, and 1997. Other borrowed funds accounted for the
least portion for year end 1995 and 1996 at .07% and .06%, respectively,
while subordinated debentures claims the least for December 31, 1997 at a
figure of .06%.
The average volume of subordinated debentures has been steadily
decreasing over the last two years. The redemption period for the 9%
debentures is in its final phase. These debentures currently carry a
redemption price of 101%, which translates into 101.87 shares of Community
Bancorp. stock for each debenture redeemed. The maturity date for these
debentures is August 1, 1998. As of December 31, 1997, the actual balance
of 9% debentures is $77,000. The redemption period for the 11% debentures
is in the first phase with a price of 104%, translating into 203.74 shares
of Community Bancorp. stock for each debenture redeemed. The redemption
price decreases 1% every two years beginning July 31, 1998, with a maturity
date of July 31, 2004. Actual debentures outstanding as of December 31,
1997 is $27,000.
EFFECTS OF INFLATION
Rates of inflation effect 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 because, as costs and prices rise, cash and credit demands of
individuals and businesses increase, and the purchasing power of net monetary
assets declines.
The Corporation's ability to preserve its purchasing power depends
primarily on its ability to manage net interest income. The Corporation's
net interest income improved during 1997, due to an increase in the spread
as loans repriced at slightly higher rates and the interest rates paid on
deposit accounts decreased.
INTEREST INCOME VERSUS INTEREST EXPENSE
(NET INTEREST INCOME)
Net interest income represents the difference between interest earned on
loans and investments versus the interest paid on deposits and other sources
of funds (i.e. other borrowings). Changes in net interest income result from
changes in the level and mix of earning assets and sources of funds (volume)
and from changes in the yield earned and costs paid (rate). The table labeled
"Average Balances and Interest Rates" provides the visual analysis for the
comparison of interest income versus interest expense. These figures, which
include earnings on tax-exempt investment securities, are stated on a tax
equivalent basis with an assumed rate of 34%.
Interest income rose from $15.88 million at the end 1995 to $16.91 million
for 1996, and then to $17.13 million for 1997, an increase of 6.4% and 1.3%,
respectively. Interest expense decreased from $8.25 million to $8.17 million
and then to $7.8 million as of year end 1997, or just under 1% for 1995 versus
1996, and 4.2% for 1996 versus 1997. The overall effect, or net interest
income, was $7.6 million for the year ended 1995 versus $8.7 million for the
year ended 1996 and a 1997 year end net interest income of $9.3 million.
Net interest spread, the difference between the yield on interest earning
assets versus interest bearing liabilities, at the end of 1997 was 4.08%
compared to 3.90% for 1996 and 3.55% for 1995. Interest differential, defined
as net interest income divided by average earning assets, for the years ended
1997, 1996 and 1995, was reported at 4.71%, 4.49% and 4.15% respectively.
Income from loans for the year was $13.8 million for 1997, $13.4 million
for 1996, and $12.5 million for 1995, resulting in yields of 9.51% for 1997,
9.65% for 1996, and 9.44% for 1995.
The income on taxable investment went from $1.76 million for 1995, to
$2.09 million for 1996 and increased slightly to $2.12 million for 1997. The
respective yields on these investments are 5.73% for 1995, 5.86% for 1996, and
5.94% for 1997. The income on tax-exempt securities took a different course
for the same comparison periods revealing an interest income figure for the 12
months of 1995 of $1.4 million, then decreasing by 21.4% to end at a 12 month
figure for 1996 of $1.1 million and further decreasing by 18.2% to end the
12 months of 1997 at an interest figure of $.9 million. The tax equivalent
yield for these investments followed suit starting at 8.15% at the end of
1995, and decreased 29 basis points to 7.86% for 1996, and then decreased
21 basis points to a 1997 year end yield of 7.65%. The income on other
securities decreased from $82 thousand for 1995, to $78 thousand for 1996,
and then increased to $79 thousand for 1997, with average yields reported
at 7.02%, 6.68% and 6.76%, respectively.
Interest income for federal funds sold was reported at $180 thousand
with a yield of 5.65% for the 12 month comparison period of 1995, compared to
income of $246 thousand with a yield of 5.22% for 1996, and income of $140
thousand yielding 5.42% for the same period of 1997.
Overall, interest generated by our average earning assets increased by
6.4% from 1995 to 1996 and 1.3% from 1996 to 1997 to end the 1997 year with
tax equivalent interest income of approximately $17.1 million. The average
yield on total average earning assets increased from 8.62% for 1995, to 8.70%
for 1996, and ended the 1997 calendar year at 8.68%, an increase of eight
basis points and a decrease of two basis points, respectively.
Interest expense associated with our savings accounts decreased for each
comparison year, starting at just over $1 million at year end 1995, decreasing
$59 thousand or 5.9% to $944 thousand as of year end 1996, and then decreasing
$67 thousand or 7.1% to a 1997 year end expense figure of $877 thousand. The
average yield also decreased throughout the three year comparison period to
end at 2.75% as of December 31, 1997. Interest expense on NOW and money
market funds began the year end comparison period at $1.35 million as of 1995,
then increased 13% to end 1996 at $1.52 million, then a decrease of 8.3% is
noted when comparing year end 1996 to year end 1997, to end at a reported
expense figure of $1.40 million. Interest expense on time deposits reported
the same trend as savings deposits beginning at year end 1995 with an expense
figure of $5.86 million, then decreasing $177 thousand or 3% to a year end
1996 expense figure of $5.68 million, then decreasing further by $377 thousand
or 6.6% to a reported expense figure of $5.3 million as of year end 1997.
Other borrowed funds followed the opposite pattern as it began the three year
end comparison periods at a figure of $7 thousand for year end 1995, remained
at $7 thousand for year end 1996, and then increased significantly to $245
thousand or by $238 thousand as of year end 1997. An $8 million borrowing
during the year, of which $4 million is still outstanding at year end 1997,
gives the reason for this dramatic increase.
As the volume of subordinated debentures decreases, so does the expense
associated with this liability. Interest expense of $31 thousand, $21
thousand and $11 thousand was noted for the 12 months ended 1995, 1996,
and 1997, respectively, which transforms into a decrease of 32.3% and 47.6%,
respectively.
In total, interest expense associated with total interest bearing
liabilities began the year-end comparison periods at $8.25 million for 1995,
decreased to $8.17 million for 1996, and ended 1997 at a figure of $7.83
million, with average yields of 5.07%, 4.80%, and 4.60%, respectively.
OTHER OPERATING INCOME AND EXPENSES
A strong fourth quarter in 1996 helped to boost earnings for the 1996
year while a decrease in earnings for the same period in 1997 resulted in
less earnings for the 1997 year. Other operating income for this quarter was
reported at $346,910 for 1997, $343,572 for 1996, and $334,845 for 1995.
Service fees reports the biggest increase for the fourth quarter of 1997
versus 1996, at 5%, with income of $175,267 versus $166,847, while it was
the only increase for the fourth quarter of 1996 compared to the same period
of 1995, an increase of almost 40% over the 1995 figure of $119,376. A
change in the structure of overdraft fees helped to create more income for
both the fourth quarter and the 12 month period of 1996. Trust department
income decreased for both fourth quarter comparisons, with a decrease of
$10,244 or 29.3% reported for 1997 versus 1996 and a decrease of $4,027 or
10.3% reported for 1996 versus 1995. The loss of a major trust customer in
1996 as well as expenses incurred for the set up and installation of new
equipment in 1997 for trust processing are key reasons for these decreases.
Other operating income for 1997 of $1.34 million is a 4% increase over the
1996 figure of $1.28 million, and 13% compared to the 1995 figure of $1.18
million. Service fees ended the year at $695,260, an increase of $90,811
or 15% over the 1996 year end figure, compared to an increase of $155,409,
or 28.8% over the 1995 year end figure. Other income was reported at
$553,027 at year end 1997 compared to $564,894 for year end 1996, and
$514,889 at year end 1995, a decrease of $11,867 or 2.1%, and an increase
of $38,138 or 7.4%, respectively. Exchange income, a component of other
income, increased 51.3% from $50,858 for the calendar year 1995 to $104,500
at year end 1996. The Company's servicing area is dependent on income
generated from Canadian traffic. In the past few years, this area has seen a
decline in such traffic. Although a decrease of 30% is noted when comparing
1997 to 1996, the fact that our exchange income increased 43.5% for 1997
versus 1995 is a positive step towards gaining back this traffic, and
ultimately the income it generates. Another component of other income is
Mortgage Servicing Rights. Through the implementation of FASB #122,
"Accounting for Mortgage Servicing Rights", the Company has reported income
of $43,211 for the 12 months ended December 31, 1997, compared to $38,531
for the same period in 1996 and $19,547 at year end 1995.
In May 1995, the FASB issued SFAF No. 122 "Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement #65". This standard was
effective for fiscal years beginning after December 15, 1995; however, early
adoption was permitted. This statement requires the Bank to recognize as
separate assets the rights to service mortgage loans for others however those
rights are acquired. The Company 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.
Total other operating expenses ended the 1997 year at $6.7 million, an
increase of $361,554 over the 1996 figure of $6.4 million, and an increase of
$816,153, or 13.7% over the 1995 figure of $5.9 million. Salaries reported the
biggest increase for the 12 month comparison periods with a figure of $2.8
million for 1997, an increase of $177,100 or 6.7% over the 1996 figure of $2.6
million, and an increase of $387,764 or 16.1% over the 1995 figure of $2.4
million. Other expenses follows with increases in both comparisons, with a
reported increase of $138,029 or 7.3% over the 1996 expense figure, and an
increase of $222,313 or 12.2% over the 1995 expense figure ending the year
at just over $2 million for 1997 compared to $1.9 million for 1996 and $1.8
million for 1995. Other expenses reported the biggest increase for the fourth
quarter ended 1997 versus the same period in 1996 and 1995, with an expense
figure of $614,150 for 1997 compared to $466,580 for 1996, and $354,129 for
1995, increases of 31.6% for 1997 versus 1996, and 73.4%, for 1997 versus
1995. OREO expenses, a component of other expenses, showed expenses totaling
$95,753 for the fourth quarter of 1997, $88,999 for the same period in 1996,
and a net recovery of $1,272 for the same period in 1995, resulting in
increases of $6,754 for 1997 versus 1996, and $97,025 for 1997 versus 1995.
An auction was held during the last quarter of both 1997 and 1996 in an
attempt to decrease our OREO portfolio. In both cases most of the properties
that sold, did so at a loss, increasing overall expenses associated with
these properties. Additionally, a substantial write-down was taken in 1997
on a property the Company has held for several years. In the fourth quarter
comparison, salaries increased $32,152 or by 5% for 1997 versus 1996, while
a decrease of $10,063 or 1.5% is noted for 1997 versus 1995, with figures
reported of $670,146 for 1997, $637,994 for 1996, and $680,209 for 1995.
The reason for the substantial decrease from 1995 to 1996 is a timing
difference in the payment of profit sharing.
Many of the components of other operating expenses are estimated on a
yearly basis and accrued in monthly installments. In order to accurately
present the statement of income for any interim period, these expenses are
reviewed quarterly by senior management to ensure that monthly accruals are
accurate, and any necessary adjustments are made at that time.
APPLICABLE INCOME TAXES
Figures presented at the end of 1997 for income before taxes show an
increase of just under one percent over 1996, with income figures of $2.9
million reported for 1997 and $2.87 million for 1996. These figures are
modest when compared to the 26% increase reported last year over the prior
1995 income figure of $2.27 million. Provisions for income taxes increased
by 15.4% from $654,092 for 1996 to $755,104 for 1997. Income before taxes
for the fourth quarter of 1997 was reported at $798,066, compared to $883,687
for the same period in 1996, a decrease of $85,621 or almost 10%, with an
increase in income taxes payable of $52,126. These increases in income tax
expense are due in part to the absence of an anticipated tax credit for 1997
as well as timing differences leading to a decrease in deferred tax assets
and an increase in the tax expense associated with them.
FINANCIAL SUMMARY
The calendar year of 1997 ended with a 3.4% decrease over the calendar
year of 1996, and a 9.9% increase for the same period in 1995. Total earnings
of $2.15 million were reported for 1997 compared to $2.22 million for 1996,
and $1.95 million for 1995. The results of these figures are primary earnings
per share of $1.44 and fully diluted earnings per share of $1.43 for 1997,
compared to $1.55 and $1.52 respectively for the year ended 1996, and $1.42
and $1.38 respectively for 1995.
Return on average assets (ROA), which measures how effectively a
corporation uses its assets to produce earnings, decreased to 1.02% for 1997,
versus 1.07% for 1996, and 1.00% for 1995. Return on average equity (ROE),
which is the ratio of income earned to average shareholders' equity was 10.69%
for 1997 compared to 12.16% for 1996 and 12.13% for 1995.
CAPITAL RESOURCES
Stockholders' equity, at December 31, 1996, was $19,111,355, with a book
value of $13.16 per share. It increased through earnings of $2,145,395, the
sale of common stock of $855,141, through our dividend reinvestment program
and debenture conversions mentioned earlier, and increased $25,746 through
adjustments for the valuation allowance of securities. It decreased through
purchases of treasury stock of $4,925 and dividends paid totaling $1,652,355.
At year end 1997, stockholders' equity was $20,480,357 with a book value of
$13.59 per share. All stockholders' equity is unrestricted. Additionally, it
is noted that as the maturity date on securities classified as available for
sale draws near, the market price on these securities becomes more favorable,
thereby greatly reducing the material loss associated with these investments
through the valuation allowance.
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank
may not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years.
The Bank is also required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. At December
31, 1997, the Bank is required to have minimum Tier I and Total Capital ratios
of 4.00% and 8.00%, respectively. The Bank's consolidated risk weighted
assets were reported at $106.3 million with reported ratios, at December 31,
1997, of approximately 18.9% for Tier I capital and 20.2% for Total capital.
The report labeled "Capital Ratios" provides a better understanding of the
components of each the Tier I and Tier II capital ratios as well as a three-
year comparison of the growth of these ratios.
The Corporation intends to continue the Company'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.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system failures. Based
on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
Form 10-KSB
A copy of the Form 10-KSB Report filed with the Securities and Exchange
Commission may be obtained without charge upon written request to:
Stephen P. Marsh, Vice President and Treasurer
Community Bancorp.
P.O. Box 259
Derby, Vermont 05829
The report for the year 1997 is expected to be available about April 1, 1998.
Shareholder Services
For shareholder services or information contact:
Chris Bumps,
Executive Secretary
Community National Bank
P.O. Box 259
Derby, Vermont 05829
(802) 334-7915
Annual Shareholders Meeting
The 1998 Annual Shareholders Meeting will be held at 5:30 p.m., May 5, 1998,
at the Elks Club in Derby. We hope to see many of our shareholders there.
Community Bancorp. Stock
As of January 16, 1998, the Corporation's common stock ($2.50 par value)
was owned by approximately 802 shareholders of record. Although there
is no established public trading market in the Corporation's common stock,
several brokerage firms follow the stock and maintain a minor market in it.
Trading in the Corporation's stock, however, is not active. You can
contact these firms at the following addresses:
First Albany Corp. A.G. Edwards
P.O. Box 387 P.O. Box 1690
Burlington, Vermont 05402 Burlington, Vermont 05402
(800) 451-3249 (800) 639-8000
Ryan Beck & Co. Smith Barney
202 South Orange Ave. P.O. Box 1095
Livingston, New Jersey 07039 Burlington, Vermont 05402
(800) 342-2325 (800) 446-0193
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