CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Three Months Ended March 31, 1998
Commission File Number 0-16435
COMMUNITY BANCORP.
(Exact Name of Registrant as Specified in its Chapter)
Vermont 03-0284070
(State of Incorporation) (IRS Employer Identification Number)
Derby Road, Derby, Vermont 05829
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number: (802) 334-7915
Not Applicable
Former Name, Former Address and Formal Fiscal Year
(If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file for such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
At March 31, 1998, there were 1,548,868 shares issued of the Corporation's
$2.50 par value common stock, and 1,519,238 shares outstanding.
Total Pages - 19 Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARIES
Balance Sheet
(Unaudited) March 31 December 31 March 31
1998 1997 1997
Assets
<S> <C> <C> <C>
Cash and due from banks 8,389,764 10,657,610 3,961,514
Federal funds sold 3,475,000 3,650,000 25,000
Total cash and cash equivalents 11,864,764 14,307,610 3,986,514
Securities held-to-maturity (market value
$34,521,085 at 3/31/98, $34,125,823 at
12/31/97, and $40,565,495 at 3/31/97) 34,417,776 34,125,802 40,813,179
Securities available-for-sale 15,045,313 8,039,063 7,894,063
Restricted equity securities 1,099,750 1,099,750 1,099,750
Loans 149,398,013 150,115,852 145,624,180
Allowance for loan losses (1,553,433) (1,502,202) (1,491,326)
Unearned net loan fees (864,058) (866,589) (883,155)
Net loans 146,980,522 147,747,061 143,249,699
Bank premises and equipment, net 3,220,527 3,285,661 3,379,143
Accrued interest receivable 1,577,022 1,460,298 1,594,440
Other real estate owned, net 746,935 1,088,867 719,032
Other assets 1,876,996 1,847,292 1,665,580
Total assets 216,829,605 213,001,404 204,401,400
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 19,201,814 20,297,137 17,762,133
NOW and money market accounts 42,308,496 40,562,693 39,358,522
Savings 30,954,505 30,053,422 32,317,846
Time deposits, $100,000 and over 18,462,314 18,182,338 18,072,591
Other time deposits 80,277,987 78,484,811 76,394,885
Total deposits 191,205,116 187,580,401 183,905,977
Borrowed funds 4,060,000 4,060,000 65,000
Accrued interest and other liabilities 824,398 776,646 901,142
Subordinated convertible debentures 93,000 104,000 135,000
Total liabilities 196,182,514 192,521,047 185,007,119
Stockholders' Equity
Common stock - $2.50 par value;
2,000,000 shares authorized and 1,548,868 shares
issued at 3/31/98, 1,537,163 issued at 12/31/97,
and 1,498,296 issued at 3/31/97 3,872,172 3,842,907 3,745,981
Additional paid-in capital 8,177,074 7,978,435 7,451,478
Retained earnings 9,025,740 9,070,443 8,690,893
Unrealized gain on securities available-
for-sale, net of tax 17,270 33,709 (49,067)
Less: treasury stock, at cost
29,630 shares at 3/31/98, 29,629 shares
at 12/31/97, and 29,622 shares at 3/31/97 (445,165) (445,137) (445,004)
Total stockholders' equity 20,647,091 20,480,357 19,394,281
Total liabilities and stockholders' equity 216,829,605 213,001,404 204,401,400
</TABLE>
<TABLE>
COMMUNITY BANCORP. AND SUBSIDIARIES
Statements of Income
(Unaudited)
<CAPTION>
For The First Quarter Ended March 31, 1998 1997 1996
Interest income
<S> <C> <C> <C>
Interest and fees on loans 3,478,386 3,324,518 3,232,788
Interest and dividends on investment securities
U.S. Treasury securities 457,196 534,499 491,736
U.S. Government agencies 20,419 20,727 10,823
States and political subdivisions 143,183 138,605 196,370
Dividends 18,564 17,178 17,818
Interest on federal funds sold 106,702 4,942 82,601
Total interest income 4,224,450 4,040,469 4,032,136
Interest expense
Interest on deposits 1,941,022 1,881,874 2,084,823
Interest on other borrowed funds 46,800 12,680 1,915
Interest on subordinated debentures 2,227 3,282 5,400
Total interest expense 1,990,049 1,897,836 2,092,138
Net interest income 2,234,401 2,142,633 1,939,998
Provision for loan losses (200,000) (205,000) (37,500)
Net interest income after provision 2,034,401 1,937,633 1,902,498
Other operating income
Trust department income 22,682 22,049 26,202
Service fees 161,511 162,386 111,069
Security gains (losses) 0 0 0
Other 104,553 96,237 113,663
Total other operating income 288,746 280,672 250,934
Other operating expenses
Salaries and wages 707,951 628,928 640,430
Pension and other employee benefits 174,314 133,331 150,867
Occupancy expenses, net 321,633 290,569 301,117
Other 597,697 470,561 453,649
Total other operating expenses 1,801,595 1,523,389 1,546,063
Income before income taxes 521,552 694,916 607,369
Applicable income taxes (credit) 113,873 174,828 140,151
Net Income 407,679 520,088 467,218
Earnings per common share on weighted average 0.27 0.35 0.33
Weighted average number of common shares
Used in computing earnings per share 1,518,898 1,466,979 1,411,755
Dividends per share 0.30 0.28 0.26
Book value per share on shares outstanding $13.59 $13.21 $12.65
All 1996 per share data restated to reflect 5% stock dividend paid on
February 1, 1997.
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP. AND SUBSIDIARIES
Statement of Cash Flows
For The First Quarter Ended March 31, 1998 1997 1996
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net Income 407,679 520,088 467,218
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation 101,258 87,352 91,978
Provisions for possible loan losses 200,000 205,000 37,500
Provisions for deferred taxes (22,606) (3,162) 21,123
Securities (gains) losses 0 0 0
Loss (gain) on sales of OREO 8,293 (7,729) (1,516)
Subsequent writedowns on OREO 6,300 0 0
Amortization of bond premium (37,498) 6,463 8,637
Increase (decrease) in taxes payable 136,478 183,225 79,028
(Increase) decrease in interest receivable (116,724) (55,803) (211,453)
(Increase) decrease in other assets (22,566) (277,453) (70,820)
Increase (decrease) in unamortized loan fees (2,531) (21,148) (10,114)
Interest (decrease) in interest payable (9,839) 340 (12,403)
Increase (decrease) in accrued expenses (58,372) 4,264 (176,954)
Increase (decrease) in other liabilities (18,265) (12,516) 50,805
Net cash provided by operating activities 571,607 628,921 273,029
Cash Flows from investing activities:
Investments - held to maturity
Maturities and paydowns 3,474,110 918,463 2,824,132
Purchases (3,759,745) (3,776,728)(16,503,650)
Investments - available for sale
Sales and maturities 0 0 3,000,000
Purchases (7,000,000) 0 0
Purchase of restricted equity securities 0 (36,700) (23,300)
Investment in limited partnership 21,688 0 0
Increase in loans, net of payments 496,327 (326,679) (477,832)
Capital expenditures (36,124) (45,136) (181,900)
Recoveries of loans charged off 29,143 36,274 21,702
Costs incurred in acquiring OREO 0 0 0
Proceeds from sales of OREO 370,939 106,332 210,000
Net cash used in investing activities (6,403,662) (3,124,174)(11,130,848)
Cash flows from financing activities:
Net increase in demand deposits,
NOW, Money Mkt. and savings 1,551,563 (566,240) 9,175,029
Net increase in certificates of deposit 2,073,152 617,741 (179,661)
Net (decrease) in other borrowed funds 0 (1,600,000) 0
Payments to acquire treasury stock (28) (4,792) (23)
Dividends paid (235,478) (210,340) (191,216)
Net cash provided by financing activities 3,389,209 (1,763,631) 8,804,129
Net increase in cash and cash equivalents (2,442,846) (4,258,884) (2,053,690)
Cash and cash equivalents:
Beginning 14,307,610 8,245,398 8,893,955
Ending 11,864,764 3,986,514 6,840,265
Supplemental schedule of cash paid during the year
Interest paid 1,997,504 1,897,496 2,104,541
Income taxes paid 0 (5,235) 40,000
Supplemental schedule of noncash investing
and financing activities:
Net change in securities valuation ($24,908) ($86,409) ($60,100)
OREO acquired in settlements of loans $84,466 $188,091 $58,047
Debentures converted to common stock $11,000 $35,000 $41,000
5% Stock dividend at market value $0 $1,294,006 $0
Dividends paid
Dividends payable $452,382 $406,598 $345,934
Dividends reinvested ($216,904) ($196,258) ($154,718)
$235,478 $210,340 $191,216
</TABLE>
<TABLE>
AVERAGE BALANCES AND INTEREST RATES
The table below presents the following information:
Average earning assets (including non-accrual loans)
Average interest bearing liabilities supporting earning assets
Interest income and interest expense as a rate/yield
<CAPTION>
For the First Three Months Ended:
1998 1997
Average Income Rate/ Average Income Rate/
Balance Expense Yield Balance Expense Yield
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans (gross) 149,575,993 3,478,386 9.43% 145,399,144 3,324,518 9.27%
Taxable Investment
Securities 33,362,113 477,615 5.81% 37,744,850 555,226 5.97%
Tax-exempt Investment
Securities(1) 11,701,072 213,821 7.41% 10,582,618 206,832 7.93%
Federal Funds
Sold 3,488,766 45,014 5.23% 331,667 4,942 6.04%
Bank of Boston
sweep account(2) 4,774,313 61,688 5.24% N/A N/A N/A
Other Securities(3) 1,249,985 20,625 6.69% 1,213,693 19,274 6.44%
TOTAL 204,152,242 4,297,149 8.47% 195,271,972 4,110,792 8.47%
INTEREST BEARING LIABILITIES
Savings Deposits 30,006,784 203,227 2.75% 32,038,143 216,936 2.75%
NOW & Money
Market Funds 41,925,226 373,573 3.61% 40,113,900 350,483 3.54%
Time Deposits 98,202,744 1,364,222 5.63% 94,361,737 1,314,455 5.65%
Other Borrowed
Funds 3,526,667 46,800 5.38% 820,964 12,680 6.26%
Subordinated
Debentures 95,000 2,228 9.51% 138,000 3,283 9.65%
TOTAL 173,756,421 1,990,050 4.61% 167,472,744 1,897,837 4.56%
Net Interest Income 2,307,099 2,212,955
Net Interest Spread(4) 3.86% 3.91%
Interest Differential(5) 4.58% 4.60%
<FN>
<F1> Income on investment securities of state and political subdivisions is
stated on a tax equivalent basis (assuming a 34% tax rate).
<F2> Bank of Boston sweep account is a new interest bearing account effective
for the 1998 calendar year.
<F3> Included in other securities are taxable industrial development bonds
(VIDA), with income of approximately $2,100 for 1998 and 1997.
<F4> Net interest spread is the difference between the yield on earning assets
and the rate paid on interest bearing liabilities.
<F5> Interest differential is net interest income divided by average earning
Assets.
</TABLE>
<TABLE>
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income
for the first three months of 1998 and 1997 resulting from
volume changes in assets and liabilities and fluctuations
in rates earned and paid.
<CAPTION>
RATE VOLUME Variance Variance
Due to Due to Total
Rate(1) Volume(1) Variance
EARNING ASSETS
<S> <C> <C> <C>
Loans (gross) 58,365 95,503 153,868
Taxable Investment Securities (14,867) (62,744) (77,611)
Tax-Exempt Investment Securities(2) (14,871) 21,860 6,989
Federal Funds Sold (6,970) 47,042 40,072
Bank of Boston sweep account (3) N/A N/A N/A
Other Securities 775 576 1,351
Total Interest Earnings 22,432 102,237 124,669
INTEREST BEARING LIABILITIES
Savings Deposits 49 (13,758) (13,709)
NOW & Money Market Funds 7,264 15,826 23,090
Time Deposits (3,738) 53,505 49,767
Other Borrowed Funds (7,670) 41,790 34,120
Subordinated Debentures (47) (1,008) (1,055)
Total Interest Expense (4,142) 96,355 92,213
<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
Variances due to volume = Change in volume x new rate
<F2> Income on tax-exempt securities is stated on a tax equivalent basis.
The assumed rate is 34%.
<F3> Bank of Boston sweep account is a new interest bearing account
effective for the 1998 calendar year, therefore, no variances are
available.
</TABLE>
<TABLE>
COMMUNITY BANCORP.
EARNINGS PER SHARE
<CAPTION>
For The First Quarter Ended March 31, 1998 1997 1996
<S> <C> <C> <C>
Net Income 407,679 520,088 467,218
Average Number Of Common
Shares Outstanding 1,518,898 1,466,979 1,411,755
Earnings Per Common Share 0.27 0.35 0.33
</TABLE>
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
Quarter Ended March 31, 1998
Community Bancorp. is a bank holding company whose subsidiaries
include Community National Bank and Liberty Savings Bank. On December
31, 1997, Community Bancorp. acquired all of the outstanding stock and
assets of Liberty Savings Bank, a New Hampshire guaranty savings bank.
Currently this bank does not have any offices or deposit taking authority,
and shares the mailing address of Community Bancorp. It is the intention
of management to operate this bank initially as a lending facility in the
northern part of New Hampshire, with the intent to take deposits and operate
as a full service bank sometime in the future. Management is working with
the board of directors to find a suitable location for this endeavor.
Community National Bank has a small customer base in the state of New
Hampshire and hopes to broaden its base through Liberty Savings Bank. Most
of the Bancorp's business is conducted through Community National Bank,
therefore, the following narrative is based primarily on this Bank's
operations. The Balance Sheet and Statements of Income preceding this
section are consolidated figures for Community Bancorp. and subsidiaries
("Company"), and can be used in conjunction with the other reports following
them to provide a more detailed comparison of the information disclosed in
the following narrative.
LIQUIDITY
Liquidity management refers to the ability of the Company 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 almost $280 thousand or 1.5% for
the first quarter of 1998 compared to year end 1997, and increased almost
$390 thousand or 2.2% compared to the first quarter of 1997. Other time
deposits increased from $76.39 million at the end of the first quarter of
1997 to $78.48 million at the end of the 1997 calendar year, and then
increased to $80.28 million as of the end of the first quarter of 1998,
an increase of $1.8 million or 2.3% compared to year end 1997, and an
increase of $3.9 million or 5% compared to the first quarter of 1997. A
review of these deposits, primarily the time deposits over $100,000
indicates that they are primarily generated locally and regionally and
by established customers of the Company. The Company has no brokered
deposits. All other interest bearing deposit accounts in total increased
2.2% to end the three month comparison period at $73.3 million for 1998
compared to $71.7 million for 1997. Our gross loan portfolio increased
from $145.6 million for the first quarter of 1997 to $149.4 million for
the first quarter of 1998 or 2.67%. Of this total portfolio of $149.4
million, $81.7 million are scheduled to reprice or mature within one year
compared to almost $80 million a year ago. Federal funds sold increased
dramatically from $25 thousand for the first quarter of 1997 to $3.5
million for the same period in 1998. At the end of the first quarter of
1998, the Company held in it's investment portfolio treasuries classified
as "Available-for-Sale" at a market price of just over $15 million,
compared to almost $7.89 million for the same period in 1997. In terms
of liquidity, these securities are considered short term, thereby increasing
the portfolio of liquid assets. The remaining portfolio of available for
sale investments of almost $1.1 million are made up of equity securities the
Company is required to maintain in the form of bank stock. The Company also
has access to a total of almost $130 million in liquid assets consisting of
two credit lines with a total available of $6.1 million, and approximately
$92 million of borrowing capacity through FHLB. Included in the $130 million
are securities classified as "Held-to-Maturity" with a book value of $34.4
million, of which $4 million are pledged, netting a balance of $30.4 million,
with a net market value of $30.5 million.
RESULTS OF OPERATIONS
Net Income for the first quarter ended March 31, 1998 was $407,679
representing a decrease of 21.6% and 12.7% respectively, over the net income
figures of $520,088 for the first quarter ended March 31, 1997, and $467,218
for the same period ended in 1996. The results of this are earnings per
share of $0.27 for the first quarter of 1998 versus $0.35 for the first
quarter of 1997, and $0.33 for the first quarter of 1996. The first quarter
of 1998 was not as profitable compared to the same period in 1997 due in part
to three considerable increases. State deposit tax almost tripled for the
first quarter of 1998 with a reported figure of $52,352 compared to $19,905
for the first quarter of 1997. Expense associated with OREO properties went
from $10,714 for the first quarter of 1997 to just under $40,000 for the
same period in 1998, resulting in almost a quadruple increase. Loss on
limited partnerships of $26,988 was reported for the first quarter of 1998,
with no reported loss for the same period last year. The first quarter of
1997 was more profitable compared to the same period in 1996 due in part to
a decrease in interest paid on deposit accounts, and a restructuring of the
fees charged on these accounts, resulting in more non interest income.
A cash dividend of $0.30 per share was declared payable on February 1,
1998, to shareholders of record as of January 15, 1998. This represents a
7.1% increase over the quarterly dividends last year of $0.28 per share.
Additionally, a two for one stock split to be accomplished by a 100% stock
dividend was declared in a press release dated March 13, 1998, to shareholders
of record as of May 15, 1998, payable June 1, 1998. This stock split is
contingent upon the approval by the company's shareholders of a proposal to
increase the number of shares the Company may issue. This proposal is
contained in an amendment to the Company's Articles of Association, and will
be voted on at the annual shareholder's meeting to be held on May 5, 1998.
Net interest income, the difference between interest income and expense,
represents the largest portion of the Company's earnings, and is affected by
the volume, mix, rate sensitivity of earning assets as well as interest
bearing liabilities, market interest rates and the amount of non-interest
bearing funds which support earning assets.
Net interest income for the first quarter comparison periods started at
$1.94 million for 1996 and increased to $2.14 million for 1997, and then
increased to $2.23 million for 1998, resulting in an increase of 4.3% for
1998 versus 1997, and 10.4% for 1997 versus 1996. Total interest income for
the first quarter of 1998 reported a favorable increase for 1998 compared
to 1997, with an increase of $183,981 or 4.6% while a less than favorable
increase of $8,333 or .2% was reported for the first quarter of 1997
compared to 1996. Interest expense increased for the first quarter of 1998
compared to the first quarter of 1997 with an increase of $92,213 or 4.86%
while a decrease of $102,089 or 4.88% for 1997 versus 1996. In view of the
moderate increase in interest expense for 1998 versus 1997 and the decrease
compared to 1996, an increase in net interest income was in line. A review
of the interest earned on loans, the major source of interest income, reveals
an increase of 4.6% for 1998 compared to 1997 and an increase of 2.84% for
1997 compared to 1996. Interest paid on deposits, the major source of
interest expense, shows an increase of 3.14% and a decrease of 9.73%,
respectively.
The following paragraphs are comparisons of average balances and the
respective average yield. Reference can be made to the tables labeled
"Average Balances and Interest Rates" and "Changes in Interest Income and
Interest Expense" for a more detailed look at these variances. Keeping in
mind that income on tax exempt securities is stated at the tax equivalent
yield, the interest figures presented for these securities on these two
tables are higher than those presented on the consolidated statement of
income for the first quarters ended 1998, 1997, and 1996.
The average volume of loans increased by $4.2 million or 2.87%, and the
yield on these loans increased from 9.27% for the first three months of 1997
to 9.43% for the first three months of 1998, an increase of 16 basis points.
Income from loans for the first quarter of 1998 increased to $3.5 million or
by 4.6% compared to $3.3 million for the same period in 1997.
The average volume of taxable investments decreased to $33.4 million or
by 11.6%, and the yield on these investments for the first three months of
1998 fell by 16 basis points to end the three month comparison period at
5.81% versus 5.97% a year ago. Of this total taxable investment of $33.4
million, $15 million are investments classified as available-for-sale, with
the remaining $18.4 million classified as held-to-maturity. Income for the
first three months decreased in 1998 compared to 1997 by $77,611 to a
reported income figure of $477,615 versus $555,226 a year ago. Included in
these figures for 1998 is the Treasury Strip for Liberty Savings Bank with
an average balance of $1,400,651 and income for the first three months of
1998 of $24,941.
An increase is noted in the average volume of tax-exempt investments
reported at $10.6 million for the first three months of 1997 versus $11.7
million for the same period in 1998, an increase of 10.6%, all of these
investments are classified as held-to-maturity. Income on these investments
followed the average volume pattern increasing to $213,821 from $206,832 for
the first three months of 1998 and 1997 respectively. The tax equivalent
yield for the first three months of 1998 decreased 52 basis points to a
reported 7.41% compared to 7.93% for the same period in 1997.
Other securities ended the first quarter in 1998 at an average volume of
$1.25 million, resulting in a 3% increase compared to the same quarter last
year. Of this total almost $1.1 million are equity securities and, under
the guidelines, are classified as available-for-sale with the remaining $150
thousand classified as held-to-maturity. Income increased slightly for 1998
compared to 1997, with reported figures of $20,625 and $19,274, respectively.
The Company currently has no investments classified as trading securities,
and due to the guidelines of its investment policy, does not intend to carry
any of these securities. The yield on treasuries remains above the yield on
other short term investments such as federal funds, therefore, the Company
continues to invest more in these higher yielding treasuries.
The average volume of federal funds sold increased from $331,667 to $3.5
million for the comparison periods. Interest income on federal funds sold
increased to $45,014, with an average yield of 5.23% for the first quarter
of 1998, compared to income of $4,942, with an average yield of 6.04% for
the first quarter of 1997, an increase in income of $40,072, with a decrease
in yield of 81 basis points.
A sweep account was opened at the Bank of Boston during the first month
of 1998. An average volume of $4.8 million, with an average yield of 5.24%
was reported for the first quarter of 1998.
In total, our average earning assets increased to $204.2 million or by
4.6% during the first three months of 1998, compared to the same period in
1997, while the average yield on those earning assets remained at 8.47%.
A decrease of $2 million is noted in the average volume of savings
Deposits with reported first quarter ending figures of just over $32 million
for 1997 versus $30 million for 1998. Interest expense associated with
savings accounts decreased as well from $216,418 for the first three months
of 1997 to $203,227 for the same period in 1998, a decrease of $13,709 or
6.3%.
An increase of $1.8 million is reported in the average volume of NOW &
money market funds, which ended the first three months of 1997 at an average
volume of $40.1 million compared to an average volume as of March 31, 1998
of $41.9 million. Interest expense on these funds increased to $373,573
with an average yield of 3.61% for the first three months of 1998 compared
to $350,483 with an average yield of 3.54% for the first three months of 1997.
The average volume of time deposits increased from $94.4 million for the
first three months of 1997 to $98.2 million for the same time period in 1998,
an increase of $3.8 million or just over 4%. Interest expense on time
deposits increased to $1.4 million with an average yield of 5.63% for the
first three months of 1998, compared to $1.3 million with an average yield
of 5.65% for the same time period in 1997.
Other borrowed funds increased to an average volume of $3.5 million with
an average yield of 5.38%, resulting in an increase in volume of $2.7 million,
and a decrease in yield of 88 basis points.
Subordinated debentures continued to decrease in the first quarter of 1998
to end the three month period at an average volume of $95,000 with a yield of
9.51%. Redemption activity was more frequent for the 9% debentures compared
to the 11% debentures for the calendar years 1994 - 1997, but, because the
redemption period for the 11% debentures has now begun, an increase in
redemption activity is noted for these debentures as well. The redemption
period refers to the period of time prior to maturity in which the redemption
price is greater. The redemption period for the 9% debentures is now in its
final phase. The redemption prices and time periods for the respective
debentures are as follows:
<TABLE>
<CAPTION>
11% Debentures
<S> <C>
August 1, 1997 - July 31, 1998 104%
August 1, 1998 - July 31, 2000 103%
August 1, 2000 - July 31, 2002 102%
August 1, 2002 - July 31, 2004 101%
<CAPTION>
9% Debentures
August 1, 1997 - July 31, 1998 101%
</TABLE>
In summary, the tax equivalent net interest income increased from $2.21
million for the first three months of 1997 to $2.28 million for the first
three months of 1998, an increase of 3%. The net interest spread as defined
on the "Average Balances and Interest Rates" report, was 3.87% for the first
three months of 1998, compared to 3.91% for the same period in 1997. The
yield on total interest bearing assets remained the same while the yield on
interest bearing liabilities increased from 1997 to 1998 creating a decrease
of four basis points in the net interest spread reported at 4.60% as of March
31, 1997 and 4.56% for March 21, 1998.
ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
Management not only follows very structured underwriting guidelines, but
also has in place a very thorough loan review policy. These measures help to
insure the adequacy of the loan loss coverage. An ongoing review of the loan
portfolio is conducted by the Executive Officers and the Board of Directors,
who meet to discuss, among other matters, potential exposures. Factors
considered are each borrower's financial condition, the industry or sector
for the economy in which the borrower operates, and overall economic
conditions. Existing or potential problems are noted and addressed by
senior management in order to assess the risk of probable loss or delinquency.
A variety of loans are reviewed periodically by an independent firm in order
to assure accuracy and compliance with various policies and procedures set
by the regulatory authorities. The Company also employs a Loan Review
Officer whose duties include, among others, a review of the loan portfolio
including delinquent and non-performing loans.
Specific Allocations are made in situations management feels are at a
greater risk for loss. A quarterly review of the Qualitative Factors, which
among others are "Levels of, and Trends in, Delinquencies and Non-Accruals"
and "National and Local Economic Trends and Conditions" helps to ensure
that areas with potential risk are noted and coverage increased or decreased
to reflect the trends in delinquencies and non-accruals. Residential first
mortgage loans make up the largest part of the loan portfolio and have the
lowest historical loss ratio helping to alleviate the overall risk.
The valuation allowance for loan losses of $1.55 million as of March 31,
1998 constitutes 1.03% of the total gross loan portfolio, compared to $1.49
million or 1.02% for the same period in 1997. In management's opinion, this
is adequate and reasonable, particularly in view of the fact that as of March
31, 1998, $122.3 million of the total loan portfolio, or 81.87% consists of
real estate mortgage loans. Included in this total of $122.3 million are
$98.9 million, or 66.2%, of one to four family residential mortgage loans.
Figures for the same period a year ago are $118.8 million in real estate
mortgage loans, or 81.6%, with a one to four family mortgage loan portfolio
of $95 million or 65.3%. This large loan volume, together with the low
historical loan loss experience helps to support our basis for loan loss
coverage. Furthermore, if the eligible loan portfolio base were reduced
by the aggregate of the residential mortgage loan sector of the portfolio,
the valuation allowance for loan losses of $1.55 million would constitute
3.1% of the eligible loans, compared to 2.9% a year ago. In management's
opinion, a loan portfolio consisting of 81.87% in residential and commercial
real estate secured mortgage loans is by far more stable and less vulnerable
than a portfolio with a higher concentration of unsecured commercial and
industrial loans or personal loans.
In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." The Company adopted this new rule effective
for the 1995 calendar year as required. This statement allows the Company
to classify its in-substance foreclosures as loans and disclose them as
impaired loans, as long as regulatory guidelines are followed. Loans will
generally be valued at the lower of either the present value of expected
future cash flows discounted at the loan's effective interest rate or
at the loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. This new rule was immaterial upon
implementation, and continues to have no significant effect on the
financial position or results of operation of the Corporation as of the
date of this report.
Non-Performing assets for the Company are made up of three different
types of loans, "90 Days or More Past Due", "Other Real Estate Owned"
(OREO), and "Non-Accruing Loans". A comparison of these non-performing
assets for 1998 and 1997 reveals a combined increase in loans 90 days or
more past due and OREO of 26.17% and a decrease in non-accrual loans of
9.3%. The portfolio of non-accruing loans which make up the biggest
portion of the non-performing assets, consists of $1.7 million or 87.2%
of real estate secured mortgage loans for the first three months of 1998
compared to $2 million or 94.2% for the same period last year.
Non-performing assets as of March 31, 1998 and 1997 were made up of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Non-Accruing loans $1,931,563 $2,130,256
Loans past due 90 day or more and still accruing 268,837 86,741
Other real estate owned 746,935 719,032
Total $2,947,335 $2,936,029
</TABLE>
These totals of $2.95 million for 1998 and $2.94 million for 1997 equal
1.97% and 2.02% respectively, of total gross loans, as well as 1.36% and
1.44%, respectively of total assets. As of March 31, 1998, our reserve
coverage of non-performance loans was 53% versus 51% a year ago.
Other real estate owned is made up of property that the Company owns in
lieu of foreclosure or through normal foreclosure proceedings, and property
that the Company does not hold title to but is in actual control of, known
as in-substance foreclosure. It is the policy of the Company to value
property in other real estate owned at the appraised value or book value of
the loan, whichever is less. Our procedure is to appraise the property to
determine the value as well as to determine if a write-down is necessary to
bring the book value of the loan equal to the appraised value, prior to
including the property in other real estate owned. Appraisals are then done
periodically thereafter charging any additional write-downs to an expense
account for subsequent write-downs.
Our current portfolio of other real estate owned equals $746,935.
Eleven properties were obtained through the normal foreclosure process, and
two properties were deeded "In lieu of foreclosure". All of our properties
are located in Vermont and consist of the following; a condominium unit and
land in Jay; four commercial condominium units in Newport; a vacation home in
Jay; a single family residence in Barton; an apartment building in Orleans
and one in Newport Center; a commercial building in Newport, and a farm in
Newport Center. The farm carries a 90% FSA guarantee, thereby reducing our
burden significantly. The Company is actively attempting to sell all of the
other real estate owned, and expects no material loss on any of these
properties. Other real estate owned is by definition a non-earning asset,
and as such has a negative impact on the Company's earnings.
OTHER OPERATING INCOME AND EXPENSES
Other operating income for the first quarter of 1998 was $288,746,
compared to $280,672 for the first quarter of 1997, and $250,934 for the
first quarter of 1996, an increase of $8,074 or 2.9% for 1998 versus 1997,
and $29,738 or 11.85% for 1997 versus 1996. Service fees reports the only
decrease for 1998 versus 1997 decreasing $875 or just over 1/2 percent,
while it showed the only increase at $51,317, or 46.2% for 1997 versus 1996.
Trust department income increased $633 or by 2.9% for the first quarter of
1998 versus 1997, but decreased 16% the same period of 1997 compared to
1996. Other income increased $8,316 for the first quarter of 1998 compared
to 1997, while a decrease of $17,426 is noted in the comparison for 1997
versus 1996. In reviewing the components of other income, foreign exchange
notes favorable income for both the first quarter of 1998 and 1997, while
income from sold loans reports substantially less for the same comparison
periods, contributing overwhelmingly to the decrease in other income for
the first quarter of 1997 versus the same period in 1996, and the overall
decrease in net income for the first quarter of 1998 versus 1997.
Other operating expenses for the first quarter of 1998 was $1.8 million
compared to $1.52 million for 1997, and $1.55 million for 1996 resulting in
an increase of 18.3% for 1998 versus 1997, and a decrease of 1.5% for 1997
versus 1996. Salaries, the largest portion of other operating expenses,
reported an increase of $79,023 or 12.5% for the first quarter of 1998
versus 1997, but showed a decrease of $11,502, or 1.8% for 1997 versus
1996. Other expenses reported the biggest increase for 1998 versus 1997,
1997. and the only increase for 1997 versus 1996 totaling $127,136
or 27% and $16,912 or 3.73%, respectively. Expenses on non-accruing loans
increased from $6,099 for the first quarter of 1996 to $16,500 for the same
period in 1997, contributing $10,400 to the total increase in these periods,
while expenses associated with OREO properties increased from $10,714 for
the first quarter of 1997 to almost $40,000 for the first quarter of 1998.
As mentioned earlier, state deposit tax has increased substantially
over the last two years due to an increase in the percentage base.
All components of other operating expenses are monitored by management,
however, a quarterly review is performed on crucial components to assure
that the accruals for these expenses are accurate. This helps alleviate
the need to make drastic adjustments to these accounts that in turn effect
the net income of the Company. The 1998 accruals are in line with actual
expenses, however, a review during the first quarter of 1997 revealed over-
accruals in various expense accounts. Reversals to a few select accounts
helped to decrease the overall operating expenses and increase net income.
APPLICABLE INCOME TAXES
Income before taxes increased from $607,369 for the first quarter of 1996
to $694,916 for the first quarter of 1997, and then decreased to $521,552 for
the first quarter of 1998, an increase of $87,547 or 14.4% for 1997 versus
1996, and a decrease of $112,409 or 21.6% for 1998 versus 1997. As a result,
provisions for income taxes for the first quarter of 1997 increased $34,677
compared to the same period for 1996, and decreased $60,955 for the first
quarter of 1998 compared to the first quarter of 1997, ending the first
three months of 1998 at $113,873.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results of
operations of all industries, including the banking industry. The effect of
monetary inflation is generally magnified in bank financial and operating
statements. As costs and prices rise during periods of monetary inflation,
cash and credit demands of individuals and businesses increase, and the
purchasing power of net monetary assets declines. The Company depends
primarily on a strong net interest income to enable it's purchasing power
to remain aggressive.
FINANCIAL CONDITION
The Financial Condition of the Company should be examined in terms and
trends in sources and uses of funds. The table entitled "Average Balances
and Interest Rates" is a comparison of daily average balances and is
indicative of how sources and uses of funds have been managed. Reference
to this table can once again be made to follow the comparative figures in
the paragraphs below.
Average earning assets grew by 3.8% in the first three months of 1998 as
compared to the same period in 1997 to an average volume of $204.2 million.
Loans, which totaled $149.6 million in 1998 and $145.4 million in 1997,
comprised 73.3% and 74.5% respectively, of our earning assets with the
average volume of loans increasing $4.2 million or 2.87% in the first three
months of 1998, compared to the same period in 1997. On March 31, 1998,
residential real estate mortgages made up 66% of our portfolio, commercial
loans made up 22% and personal loans made up 12, compared to 65%, 22%, and
13%, respectively, in 1997.
Taxable investments made up 16.3% of our average earning assets in the
first three months of 1998 compared to 19.3% in 1997 to end the period at
an average volume of almost $32 million.
Tax-exempt investments of $11.7 million made up 5.7% of our average
earning assets in the first three months of 1998, compared to $10.6 million
or 5.4% in 1997.
Federal funds sold, which had an average volume of $3.5 million, made up
1.7% of our earning assets in the first three months of 1998 and .17% in 1997.
The Bank of Boston sweep account, established during the first quarter of
1998, ended the three months comparison period at an average volume of $4.8
million, accounting for 2.3% of earning assets. And ending the list of
earning assets, other securities increased 3% making up .61% for the first
quarter of 1998 and .62% for the first quarter of 1997.
Historically, the Company has funded its growth by steady increases in
its core deposits. The Company has no brokered deposits as mentioned earlier,
nor does it rely on large certificates or other forms of volatile deposits to
fund its growth in earning assets. As interest rates decline, there is a
shift to savings and money market accounts, as customers await an opportunity
to reinvest at higher rates. Conversely as rates increase, funds shift from
savings and money market accounts to certificates of deposit to lock in higher
yields. Currently, rates on CD's are slightly lower than they were last year
at this time, but remain more favorable than savings and money market accounts
creating more of an increase in volume on these accounts. Time deposits
increased approximately 4% to an average volume of $98.2 million, accounting
for 56.5% of the total interest bearing accounts for the first quarter of
1998, compared to $94.4 million in average volume and 56.3% of total interest
bearing accounts for the first quarter of 1997.
Savings accounts decreased 6.3% to an average volume of $30 million
accounting for 17.3% of the total interest bearing accounts for the first
quarter of 1998, compared to an average volume of $32 million and 19% of
total interest bearing accounts for the first quarter of 1997.
An increase of 4.5% is noted in NOW and money market funds with an average
volume of $41.9 million reported at the end of the first quarter of 1998
compared to approximately $40 million at the end of the first quarter of 1997.
These volumes account for 24.1% and 24% respectively, of the total interest
bearing liability accounts.
Other borrowed funds accounts for 2% of total interest bearing liabilities
for the first three months of 1998 while subordinated debentures ends the
list and makes the least contribution with an average volume of $95,000
comprising .05% of total interest bearing liabilities.
CAPITAL RESOURCES
The Corporation's stockholders' equity, which started the year at
$20,480,357, was increased through earnings of $407,679 and sales of common
stock of $227,904 through dividend reinvestment and debenture conversions.
It was decreased by dividends of $452,382, purchase of treasury stock of $28
and adjustment of $16,439 for valuation of allowance for securities to end
the first quarter of 1998 at $20,647,091 with a book value of $13.59 per
share. All stockholder's equity is unrestricted. Additionally, it is noted
that the net unrealized gain on valuation allowance for securities has
decreased. A review of this activity shows that as the maturity date of the
investments gets closer, the market price becomes favorably better, there-
fore, material loss is greatly reduced.
The Company is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by the banking regulators. The minimum
requirements for Tier I and Total Capital are 4% and 8%, respectively. As
of March 31, 1998, the Company continued to maintain ratios far above the
minimum requirements with reported ratios of approximately 17% for Tier I
and 19% for Total Capital.
The Corporation intends to continue the Company's 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 Company's future capital needs.
From time to time the Corporation may make contributions to the capital
of its subsidiaries, Community National Bank and Liberty Savings Bank. At
present, regulatory authorities have made no demand on the Corporation to
make additional capital contributions to the Company'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.
PART II.
Item 1
Legal Proceedings
Community National Bank is currently involved in a lawsuit against the
State of Vermont. The issue involves OREO property that is on "filled land"
on the shores of Lake Memphremagog in the City of Newport. According to a
so-called "public trust doctrine", the State of Vermont might have ownership
of any lands created by filling any portion of the navigable waters of the
state. The result of this is that the Bank has been unable to sell these
properties because some attorneys will not clear title to the property.
The suit filed is an attempt to clear title to said properties by seeking
judicial clarification of the public trust doctrine. The outcome of the suit
is not likely to have a material impact on the financial statements of the
Bank, or consolidated Company.
Other than the lawsuit above, there are no pending legal proceedings to
which the Company is a party or of which any of its property is the subject,
other than routine litigation incidental to its banking business.
Item 6
Exhibits and Reports on Form 8-K
Exhibits - None
Reports on Form 8-K
Form 8-K dated December 31, 1997, announcing the acquisition of Liberty
Savings Bank, was filed on January 26, 1998.
Form 8-K dated March 10, 1998, announcing the two for one stock split for
Community Bancorp., was filed on March 23, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCORP.
DATED: May 8, 1998 By: /s/ Richard C. White
Richard C. White, President
DATED: May 8, 1998 By: /s/ Stephen P. Marsh
Stephen P. Marsh,
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,188
<INT-BEARING-DEPOSITS> 3,202
<FED-FUNDS-SOLD> 3,475
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,145
<INVESTMENTS-CARRYING> 34,418
<INVESTMENTS-MARKET> 34,521
<LOANS> 149,398
<ALLOWANCE> 1,553
<TOTAL-ASSETS> 216,830
<DEPOSITS> 191,205
<SHORT-TERM> 0
<LIABILITIES-OTHER> 824
<LONG-TERM> 4,153
0
0
<COMMON> 3,872
<OTHER-SE> 16,775
<TOTAL-LIABILITIES-AND-EQUITY> 216,830
<INTEREST-LOAN> 3,478
<INTEREST-INVEST> 639
<INTEREST-OTHER> 107
<INTEREST-TOTAL> 4224
<INTEREST-DEPOSIT> 1,941
<INTEREST-EXPENSE> 49
<INTEREST-INCOME-NET> 2,234
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,802
<INCOME-PRETAX> 522
<INCOME-PRE-EXTRAORDINARY> 522
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 408
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 8.29
<LOANS-NON> 1,932
<LOANS-PAST> 269
<LOANS-TROUBLED> 134
<LOANS-PROBLEM> 2,248
<ALLOWANCE-OPEN> 1,502
<CHARGE-OFFS> 178
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 1,553
<ALLOWANCE-DOMESTIC> 1,553
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
