CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 000-16435
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. ( )
As of March 11, 1999, 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 per share sale price of the stock on that
date, was $36,244,513.
There were 3,289,067 shares outstanding of the issuer's class of common stock
as of the close of business on March 11, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Report of Independent Public Accountants
Financial Statements:
Consolidated Statements of Condition as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Financial Position for the Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Condensed Financial Information (Parent Company Only)
Portions of the Annual Report to Shareholders for fiscal year 1998
incorporated by reference to Part II.
Portions of the Proxy Statement for the Annual Meeting to be held May 4,
1999 are incorporated by reference to Part III.
Total Number of Pages - 31
Exhibit Index Begins on Page 25
FORM 10-K ANNUAL REPORT
Table of Contents
PART I Page
Item I The Business 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 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8 Financial Statements and Supplementary Data 24
Item 9 Disagreements on Accounting and Financial Disclosures 24
PART III
Item 10 Directors and Executive Officers of the Registrant 24
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners and Management 24
Item 13 Certain Relationships and Related Transactions 24
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 31
PART I
Item 1. The Business
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 (Liberty), a New Hampshire guaranty savings bank, is
the other subsidiary of Community Bancorp., and is presently inactive. 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. 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.
Community National 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, automatic teller
machine (ATM) facilities, credit card services, 24 hour telephone banking and
a full line of personal fiduciary services. The Bank is in the process of
testing internet banking. This service was first offered to employees in
order for them to become more familiar with it, test the different uses, and
work out any potential problems. The Bank plans to extend the service to
customers by the end of the first quarter of 1999.
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 61% of its total deposits as of December 31, 1998 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. Historically, 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 insurance companies, brokerage
firms, mutual funds and consumer finance companies.
Employees
As of December 31, 1998, the Bank employed 95 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. 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, with the exception of an onsite office occupied by
Linsco Private Ledgers, a financial investment company, offering a variety
of non-deposit investment and retirement options.
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 Company is
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.
Liberty is subject to similar regulations and provisions in the state of
New Hampshire.
Effects of Government Monetary Policy
The earnings of the Company 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 Company, 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.
(Dollars in Thousands)
<CAPTION>
Year ended December 31, 1998 1997 1996
ASSETS
Balance % Balance % Balance %
<S> <C> <C> <C> <C> <C> <C>
Cash and Due from Banks
Non-Interest Bearing 4,522 2.05% 4,979 2.37% 4,765 2.31%
Taxable Investment
Securities(1) 38,784 17.56% 35,649 17.00% 35,754 17.31%
Tax-exempt Investment
Securities(1) 13,060 5.91% 12,140 5.79% 14,179 6.87%
Other Securities(1) 1,270 0.57% 1,168 0.56% 1,168 0.57%
Total Investment
Securities 53,114 24.04% 48,957 23.35% 51,101 24.74%
Overnight Deposits(2) 3,339 1.51% 0 0.00% 0 0.00%
Federal Funds Sold 4,928 2.23% 2,583 1.23% 4,711 2.28%
Loans, Net 147,830 66.92% 145,778 69.53% 138,635 67.13%
Premises and Equipment 3,135 1.42% 3,328 1.59% 3,431 1.66%
Other Real Estate Owned 660 0.30% 997 0.48% 767 0.37%
Other Assets 3,368 1.53% 3,026 1.45% 3,107 1.50%
Total Assets 220,896 100% 209,648 100% 206,517 100%
LIABILITIES
Demand Deposits 20,857 9.44% 18,694 8.92% 17,493 8.47%
Now and Money Market
Accounts 44,916 20.33% 39,337 18.76% 41,383 20.04%
Savings Accounts 30,840 13.96% 31,907 15.22% 32,320 15.65%
Time Deposits 98,181 44.45% 94,751 45.20% 96,227 46.60%
Total Deposits 194,794 88.18% 184,689 88.10% 187,423 90.75%
Other Borrowed Funds 4,060 1.84% 4,061 1.94% 99 0.05%
Repurchase Agreements(3) 93 0.04% 0 0.00% 0 0.00%
Other Liabilities 1,020 0.46% 734 0.35% 522 0.25%
Subordinated Debentures 48 0.02% 107 0.05% 216 0.10%
Total Liabilities 200,015 90.55% 189,591 90.43% 188,260 91.16%
STOCKHOLDERS' EQUITY
Common Stock 6,174 2.79% 3,814 1.82% 3,466 1.68%
Surplus 8,293 3.75% 7,769 3.71% 5,948 2.88%
Retained Earnings 6,649 3.01% 8,916 4.25% 9,273 4.49%
Less: Treasury Stock (445) -0.20% (445) -0.21% (440) -0.21%
Accumulated Other
Comprehensive Income(1) 210 0.10% 3 0.00% 10 0.00%
Total Stockholders' Equity 20,881 9.45% 20,057 9.57% 18,257 8.84%
Total Liabilities and
Stockholders' Equity 220,896 100% 209,648 100% 206,517 100%
<FN>
<F01> 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 fair value with
the unrealized gain (loss), net of applicable income taxes, reported
as a net amount in accumulated other comprehensive income. The Company
does not carry, nor does it intend to carry, securities classified as
Trading Securities.
<F02> Overnight deposits refers to the Bank of Boston sweep account
established during the first half of 1998 as another means
of selling funds overnight.
<F03> Repurchase agreements were introduced during the second part of 1998
in an effort to attract new business customers.
</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>
1998 1997 1996
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)(1) 147,830 13,758 9.31% 145,778 13,868 9.51% 138,635 13,376 9.65%
Taxable Investment
Securities 38,784 2,196 5.66% 35,649 2,117 5.94% 35,754 2,095 5.86%
Tax-exempt Investment
Securities(2) 13,060 930 7.12% 12,140 929 7.65% 14,179 1,114 7.86%
Federal Funds
Sold 4,928 237 4.81% 2,583 140 5.42% 4,711 246 5.22%
Overnight
Deposits(3) 3,339 185 5.54% N/A N/A
Other
Securities(4) 1,270 82 6.46% 1,168 79 6.76% 1,168 78 6.68%
TOTA L 209,211 17,388 8.31% 197,318 17,133 8.68% 194,447 16,909 8.70%
INTEREST BEARING LIABILITIES
Savings
Deposits 30,840 807 2.62% 31,907 877 2.75% 32,320 944 2.92%
NOW & Money
Market Funds 44,916 1,565 3.48% 39,337 1,397 3.55% 41,383 1,523 3.68%
Time Deposits 98,181 5,496 5.60% 94,751 5,304 5.60% 96,227 5,681 5.90%
Other Borrowed
Funds 4,060 198 4.88% 4,061 245 6.03% 99 7 7.07%
Repurchase
Agreements(5 ) 93 4 4.30% N/A N/A
Subordinated
Debentures 48 5 10.42% 107 11 10.28% 216 21 9.72%
TOTAL 178,138 8,075 4.53% 170,163 7,834 4.60% 170,245 8,176 4.80%
Net Interest Income 9,313 9,299 8,733
Net Interest Spread(6) 3.78% 4.08% 3.90%
Interest Differential(7) 4.45% 4.71% 4.49%
<FN>
<F01> Included in net loans are non-accrual loans with an average balance
of $2,004,438 for 1998, $1,750,037 for 1997, and $1,655,907 for 1996.
<F02> 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 $316,232 in 1998, $315,855 in 1997, and
$378,873 in 1996.
<F03> Overnight deposits refers to the Bank of Boston sweep account
established during the first half of 1998 as another means of
selling funds overnight.
<F04> Included in other securities are taxable industrial development
bonds (VIDA), with income of $7,549 for 1998, $8,440 for 1997,
$8,381 for 1996.
<F05> Repurchase agreements were introduced during the second part of
1998 in an effort to attract new business customers.
<F06> Net interest spread is the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities.
<F07> 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 years 1998,
1997, 1996, and 1995 resulting from volume changes in assets and liabilities
and fluctuations in rates earned and paid.
(Dollars in Thousands)
<CAPTION>
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
RATE VOLUME Variance(1) Variance(1) Variance(1)
Due to Total Due to Total Due to Total
Rate Volume Variance Rate Volume Variance Rate Volume Variance
Income Earning Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(2) (305) 195 (110) (197) 689 492 287 638 925
Taxable
Investment
Securities (107) 186 79 28 (6) 22 45 292 337
Tax-Exempt
Investment
Securities(3) (69) 70 1 (29)(156) (185) (51) (252) (303)
Federal
Funds Sold (30) 127 97 9 (115) (106) (20) 86 66
Overnight
Deposits 0 185 185 N/A N/A
Other
Securities (4) 7 3 1 0 1 (4) 0 (4)
Total Interest
Earnings (515) 770 255 (188) 412 224 257 764 1,021
Interest Bearing Liabilities
Savings
Deposits (42) (28) (70) (56) (11) (67) (24) (35) (59)
NOW & Money
Market Funds (30) 198 168 (53) (73) (126) (50) 225 175
Time Deposits 0 192 192 (294) (83) (377) (360) 183 (177)
Other Borrowed
Funds (47) 0 (47) (42) 280 238 1 (1) 0
Repurchase
Agreements 0 4 4 N/A N/A
Subordinated
Debentures 0 (6) (6) 1 (11) (10) 1 (11) (10)
Total Interest
Expense (119) 360 241 (444) 102 (342) (432) 361 (71)
<FN>
<F01> Items which have shown a year-to-year increase in volume have
variances allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have
variances allocated as follows:
Variance due to rate = Change in rate x old volume
Variance due to volume = Change in volume x new rate
<F02> Total loans are stated net of unearned discount and allowance
for loan losses. 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.
<F03> Income on tax-exempt securities is stated on a tax equivalent basis.
The assumed rate is 34%.
</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 fair value for Available for Sale securities on December
31 for each of the last 3 years.
(Dollars in Thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
U.S. Treasury Obligations:
Available-for-Sale 20,590 8,039 7,974
Held-to-Maturity 15,562 22,491 28,097
U.S. Agency Obligations 4,582 1,631 1,679
Obligations of State &
Political Subdivisions 9,734 10,004 8,192
Restricted Equity Securities 1,142 1,100 1,063
Total Investment Securities 51,610 43,265 47,005
The following is an analysis of the maturities and yields of investment
securities as defined:
(Available for Sale; fair value, Held to Maturity; book value)
<CAPTION>
December 31, 1998 1997 1996
U.S. Treasury & Agency Obligations
Fair Ave. Fair Ave. Fair Ave.
Available for Sale Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year 0 0.00% 2,993 6.08% 0 0.00%
Due after 1 year within 5 years 20,590 6.16% 5,046 6.12% 7,974 5.79%
Total 20,590 6.16% 8,039 6.10% 7,974 5.79%
<CAPTION>
Book Ave. Book Ave. Book Ave.
Held to Maturity Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year 14,634 6.51% 8,965 5.78% 6,956 5.93%
Due after 1 year within 5 years 5,510 5.78% 15,157 5.69% 22,820 6.17%
Total 20,144 6.31% 24,122 5.72% 29,776 6.12%
<CAPTION>
Obligations of State &
Political Subdivisions (1)
Book Ave. Book Ave. Book Ave.
Value Yield Value Yield Value Yield
<s > <C> <C> <C> <C> <C> <C>
Due within 1 year 6,473 6.58% 6,624 7.94% 4,468 7.16%
Due after 1 year within 5 years 1,522 7.58% 1,543 7.91% 1,718 7.88%
Due after 5 years within 10 years 392 8.03% 363 8.03% 458 7.83%
Due after 10 years 1,347 0.10% 1,474 9.67% 1,548 9.61%
Total 9,734 7.21% 10,004 8.19% 8,192 7.81%
Restricted Equity Securities
Total Restricted Equity Securities 1,142 6.00% 1,100 6.76% 1,063 6.60%
<FN>
<F01> 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 fair value of
$123,546 as of December 31, 1998, and $150,235 as of December 31, 1997,
and 1996 with respective yields of 4.76%, 5.55%, and 5.60%.
</TABLE>
<TABLE>
LOAN PORTFOLIO
The following table reflects the composition of the Company's loan portfolio
for years ended December 31:
(Dollars in Thousands)
<CAPTION>
1998 1997 1996 1995 1994
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> <C>
<C>
Real Estate Loans
Construction & Land
Development 2,025 1.37% 1,091 0.73% 1,432 0.98% 912 0.66% 587
0.44%
Farm Land 2,634 1.78% 2,093 1.39% 2,148 1.48% 1,814 1.32% 1,115
0.84%
1-4 Family
Residential 98,407 66.34% 98,743 65.78% 94,393 64.83% 91,104 66.38% 88,967
66.68%
Commercial
Real Estate 19,555 13.18% 19,992 13.32% 20,602 14.15% 18,646 13.59% 18,094
13.56%
Loans to Finance
Agricultural
Production 829 0.56% 1,354 0.90% 1,222 0.84% 1,127 0.82% 1,305
0.98%
Commercial &
Industrial 8,767 5.91% 7,759 5.17% 7,084 4.87% 6,749 4.92% 6,719
5.04%
Loans to
Individuals 16,008 10.79% 18,943 12.62% 18,556 12.74% 16,578 12.08% 16,380
12.28%
All Other
Loans 110 0.07% 141 0.09% 166 0.11% 310 0.23% 259
0.19%
Gross Loans 148,335 100% 150,116 100% 145,603 100% 137,240 100% 133,426
100%
Less:
Reserve for
Loan Losses (1,659)-1.12% (1,502)-1.00% (1,401)-0.96% (1,519)-1.11% (1,708)
- -1.28%
Deferred
Loan Fees (849)-0.57% (867)-0.58% (904)-0.62% (909)-0.66% (924)
- -0.69%
Net Loans 145,827 98.31% 147,747 98.42% 143,298 98.42% 134,812 98.23% 130,794
98.03%
</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, 1998.
<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 2,025 0 0 2,025
Secured by Farm Land 12 20 172 204
Commercial Real Estate 157 479 2,172 2,808
Loans to Finance
Agricultural Production 67 186 0 253
Commercial & Industrial Loan 298 3,994 453 4,745
Total 2,559 4,679 2,797 10,035
<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 1,695 735 0 2,430
Commercial Real Estate 10,298 6,449 0 16,747
Loans to Finance
Agricultural Production 371 205 0 576
Commercial & Industrial Loans 2,879 1,143 0 4,022
Total 15,243 8,532 0 23,775
</TABLE>
<TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for
each of the last five years.
(Thousands of Dollars)
<CAPTION>
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans Outstanding
End of Period 148,335 150,116 145,603 137,240 133,426
Ave. Loans Outstanding
During Period 147,830 145,778 138,635 131,879 127,394
Loan Loss Reserve,
Beginning of Period 1,502 1,401 1,519 1,708 1,872
Loans Charged Off:
Real Estate 177 191 116 198 187
Commercial 41 104 86 17 24
Loans to Individuals 487 436 383 238 250
Total 705 731 585 453 461
Recoveries:
Real Estate 65 12 18 5 43
Commercial 17 27 16 20 12
Loans to Individuals 120 133 68 119 62
Total 202 172 102 144 117
Net Loans Charged Off 503 559 483 309 344
Provision Charged to Income 660 660 365 120 180
Loan Loss Reserve, End of Period 1,659 1,502 1,401 1,519 1,708
Net Losses as a Percent
of Ave. Loans 0.34% 0.38% 0.35% 0.23% 0.27%
Provision Charged to Income as a
Percent of Average Loans 0.45% 0.45% 0.26% 0.09% 0.14%
At End of Period:
Loan Loss Reserve as a Percent
of Outstanding Loans 1.12% 1.00% 0.96% 1.11% 1.28%
</TABLE>
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 conditions
as well as future potential losses.
The following table shows an allocation of the allowance for loan
losses, as well as the percent to the total allowance for the last
five years (the corporation has no foreign loans, therefore,
allocations for this category are not necessary).
<TABLE>
<CAPTION>
December 31, 1998 % 1997 % 1996 % 1995 % 1994 %
<s <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Residential
Real Estate 559 33% 362 24% 490 35% 265 17% 200 12%
Commercial 475 29% 645 43% 307 22% 631 42% 950 56%
Loans to
Individuals 448 27% 487 32% 395 28% 485 32% 400 23%
Unallocated 177 11% 8 1% 209 15% 138 9% 158 9%
Total 1,659 100% 1,502 100% 1,401 100% 1,519 100% 1,708 100%
</TABLE>
<TABLE>
NON-ACCURAL, 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, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Accruing Loans Past Due 90 Days or More:
Consumer 53 121 36 28 54
Commercial 119 19 5 15 11
Real Estate 246 211 360 249 271
Total Past Due 90 Days or More 418 351 401 292 336
Non-accrual Loans 2,228 1,486 1,255 1,389 1,791
Restructured Loans (incl. non-accrual) 126 136 506 359 347
Total Non-accrual, Past Due
and Restructured Loans 2,772 1,973 2,162 2,040 2,474
Other Real Estate Owned 542 1,089 663 761 918
Total Non Performing Loans 3,314 3,062 2,825 2,801 3,392
Percent of Gross Loans 2.23% 2.04% 1.94% 2.04% 2.08%
Reserve Coverage of Non performing Loans 50.06% 49.05% 49.59% 54.23% 71.26%
When a loan reaches non-accrual status, it is determined that future
collection of interest and principal is doubtful. At this point, the
Company'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 1998, 1997, 1996, 1995, and 1994 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 $363,713 in 1998,
$216,770 in 1997, $309,388 in 1996, $256,754 in 1995, and $181,930 in
1994. The Company had total foreign loans of less than one percent in
1998, and has no 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,
1998 1997 1996
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing
Demand Deposits 20,857 0.00% 18,694 0.00% 17,493 0.00%
NOW & Money Market Funds 44,916 3.48% 39,337 3.55% 41,383 3.68%
Savings Deposits 30,840 2.62% 31,907 2.75% 32,320 2.92%
Time Deposits 98,181 5.60% 94,751 5.60% 96,227 5.90%
Total Deposits 194,794 4.04% 184,689 4.10% 187,423 4.35%
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, 1998 are summarized as follows:
<CAPTION>
Time Certificates
Maturity Date of Deposit
3 Months or Less 3,452
Over 3 through 6 Months 4,118
Over 6 through 12 Months 5,192
Over 12 Months 5,112
Total 17,874
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,
1998 1997 1996
Return on Average Assets 0.99% 1.02% 1.07%
Return on Average Equity 10.49% 10.69% 12.16%
Dividend Payout Ratio 83.69% 77.02% 63.29%
Ave. Equity to Ave. Assets Ratio 9.45% 9.57% 8.84%
</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, Towns 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
an office for the Bank's "Special Assets" department, and also serves
as a conference center for the Bank as well as various non-profit
organizations, free of charge, upon request.
The Bank owns the Derby Line office 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, a drive-up
window, and an ATM. 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 was
entered into in 1985 and provides a fifteen-year term.
The Bank's Newport office was located in a facility leased from Twin
Islands Realty, adjacent to RJ's Friendly Market until mid January 1999.
This facility consists of approximately 974 square feet and includes a
small banking lobby. This office moved into a condominium space in
the state office building on Main Street in Newport during the third
week of January. The Bank occupies approximately 3,084 square feet on
the first floor of the building for a full service banking facility
equipped with a remote drive-up facility and an ATM. In addition, the
Bank will own approximately 4,400 square feet on the second floor with
immediate plans to house our trust department, marketing department, and
an office for our public relations coordinator, with room 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 is available in this office
to provide the same type of limited 24-hour accessibility as our Derby,
Barton, Island Pond, Newport 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 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
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. There
are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Bank, and the aforementioned
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
Incorporated by reference to Page 40 of the Annual Report to Shareholders
for fiscal year 1998.
Item 6. Selected Financial Data
Following pages
<TABLE>
SELECTED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
(Dollars in thousands, except per share data)
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total Interest Income 17,072 16,817 16,532 15,406 13,605
Less:
Total Interest Expense 8,077 7,834 8,177 8,248 6,807
Net Interest Income 8,995 8,983 8,355 7,158 6,798
Less:
Provision for Loan Losses 660 660 365 120 180
Other Operating Income 1,586 1,336 1,281 1,181 1,057
Less:
Other Operating Expense 7,021 6,759 6,397 5,943 5,459
Income Before Income Taxes 2,900 2,900 2,874 2,276 2,216
Less:
Applicable Income Taxes (1) 710 755 654 324 329
Net Income 2,190 2,145 2,220 1,952 1,887
Per Share Data: (2)
Earnings per Share 0.71 0.72 0.78 0.71 0.72
Cash Dividends Declared 0.60 0.56 0.52 0.48 0.44
Weighted Average Number of
Common Shares Outstanding 3,075,906 2,976,448 2,862,708 2,744,213 2,629,116
Number of Common Shares
Outstanding 3,110,960 3,015,068 2,904,569 2,794,080 2,656,205
Balance Sheet Data:
Net Loans 145,827 147,747 143,298 134,812 130,794
Total Assets 225,051 213,001 205,536 197,382 191,315
Total Deposits 197,797 187,580 183,854 178,884 174,676
Total Liabilities 203,049 192,521 186,425 179,801 175,796
Subordinated Debentures 20 104 170 265 551
Total Shareholders' Equity 22,002 20,480 19,111 17,580 15,518
<FN>
<F01> Applicable Income Taxes above includes the income tax effect, assuming
a 34% tax rate on securities gains (losses), which totaled $0 in 1998,
$0 in 1997, ($656) in 1996, $6,272 in 1995, and $7,021 in 1994.
<F02> Per share data for the calendar years 1996, 1995, and 1994 restated to
reflect 5% stock dividend in first quarter of 1997.
Per share data for all calendar years restated to reflect a 100% stock
dividend paid on June 1, 1998.
</TABLE>
<TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following is an unaudited summary of the quarterly results of
Operations for the years ended December 31, 1998, 1997 and 1996.
(Dollars in thousands, except per share data)
<CAPTION>
1998 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
Interest Income 4,225 4,207 4,325 4,315
Interest Expense 1,990 2,053 2,045 1,989
Net Interest Income 2,235 2,154 2,280 2,326
Provisions For Loan Losses 200 160 150 150
Other Operating Expenses 1,802 1,742 1,758 1,719
Income Before Taxes 522 747 744 888
Applicable Income Taxes 114 189 182 226
Net Income 408 558 562 662
Net Income Per Share(1): 0.14 0.18 0.18 0.21
<CAPTION>
1997
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 1,679 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(1): 0.18 0.21 0.15 0.18
<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 38 122 80 125
Securities Gains(Losses) 0 (2) 0 0
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): 0.17 0.18 0.19 0.24
<FN>
<F01> Per share data for 1996 restated to reflect 5% stock dividend
in first quarter of 1997. Per share data for all quarters
restated to reflect 100% stock dividend paid on June 1, 1998.
</TABLE>
<TABLE>
CAPITAL RATIOS
Community Bancorp. and Subsidiaries
(Dollars in Thousands)
<CAPTION>
ANNUAL
GROWTH RATE
At December 31, 1998 1997 1996 '98/'97 '97/'96
<S> <C> <C> <C> <C> <C>
Total Assets 225,051 213,001 205,536 5.66% 3.63%
LESS: Goodwill(3) 320 343 0
Allowance for Possible Loan Losses 1,659 1,502 1,401 10.45% 7.21%
Total Adjusted Assets 226,390 214,160 206,937 5.71% 3.49%
Gross Risk-Adjusted Assets 107,450 106,298 102,922 1.08% 3.28%
Allowance for Loan Loss over limit(2) 316 173 114 82.66% 51.75%
Total Risk-Adjusted Assets 107,134 106,125 102,808 0.95% 3.23%
Shareholders' Equity 22,002 20,480 19,111 7.43% 7.16%
LESS:
Valuation Allowance for Securities 236 34 8
Intangible Assets(3) 339 352 6
Total Adjusted Tier 1 Capital (1) 21,427 20,094 19,097 6.63% 5.22%
Eligible Discounted Subordinated Debt 16 42 85-61.90% -50.59%
Max. Allowance for Possible
Loan Losses (2) 1,343 1,329 1,287 1.05% 3.26%
Total Capital (Tier II) 22,786 21,465 20,469 6.15% 4.87%
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Tier l Capital/Total Adjusted Assets 9.46% 9.38% 9.23%
Tier ll Capital/Total Adjusted Assets 10.06% 10.02% 9.89%
Tier l Capital/Total Risk-Adjusted Assets 20.00% 18.93% 18.58%
Tier ll Capital/Total Risk-Adjusted Assets 21.27% 20.23% 19.91%
<FN>
<F01> 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.
<F02> The maximum allowance for possible loan losses used in calculating
primary (Tier ll)capital is the lower of the period end allowance
for possible loan losses or 1.25% of gross risk-adjusted assets,
as implemented by regulatory capital guidelines in 1992.
<F03> Included in the 1998 and 1997 balance of intangible assets is
$319,818 and $342,662, respectively, in goodwill associated with
the acquisition of Liberty Savings Bank. Excess mortgage servicing
rights totaling $18,706, $9,452, and $5,808 for 1998, 1997, and
1996, respectively, comprise the balance of intangible assets.
</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 believe 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.
The following table shows the interest sensitivity gaps for four different
time intervals as of December 31, 1998. The figures shown are reported in
thousands.
<TABLE>
<CAPTION>
0 - 3 Months 4 - 12 Months 1 - 5 Years Over 5 Years Total
Rate Sensitive Assets:
<S> <C> <C> <C> <C> <C>
Loans $31,750 $62,715 $46,773 $7,097 $148,335
Investments -
Taxable 3,000 11,634 26,224 0 40,858
Investments -
Tax-exempt 2,822 3,651 1,407 1,730 9,610
Other
Investments 0 0 0 1,142 1,142
Federal funds
Sold 15,527 0 0 0 15,527
Total $42,684 $73,605 $74,404 $9,969 $199,705
Rate Sensitive Liabilities:
NOW & super
NOW accounts $ 0 $ 0 $ 0 $19,122 $ 19,122
Savings deposits 0 2,512 0 28,000 30,512
Time
deposits(1) 40,471 42,822 18,042 0 101,335
Variable rate
time deposits 12,758 12,308 19 0 25,085
Repurchase
agreements 288 0 0 0 288
Other borrowed
Funds 4,000 5 15 40 4,060
Total $57,517 $57,647 $18,076 $47,162 $180,402
Interest sensitivity
Gap $(4,418) $20,353 $56,328 $(37,193)
GAP Ratio -2.05% 9.44% 26.14% -17.26%
Cumulative interest
sensitivity
gap $(4,418) $15,935 $72,263 $35,070
Cumulative
GAP Ratio -2.05% 7.39% 33.54% 16.27%
<FN>
<F01> Included in the time deposits category of 0 - 3 months are money
market accounts totaling almost $31 million.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference to Pages 28-35 of the Annual Report to
Shareholders for fiscal year 1998.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 (Y2K) on the processing of date-sensitive information by the
Company's computerized information systems. The Y2K 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 systems that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000 which could result in miscalculations or systems
failures. The Federal Reserve Board and other federal banking regulators
(together known as the Federal Financial Institutions Examination Council,
or "FFEIC") have developed joint guidelines and benchmarks for assessing
Y2K risk, remediation of non-compliant systems and components and post-
remediation testing and implementation.
In an effort to correctly assess the effect of Y2K on the financial
position of the Company and assess our readiness for Y2K, a Y2K committee
was organized which meets on a regular basis to keep executive management
and the Board of Directors informed of our progress towards Y2K compliance.
The committee has developed strategic, customer awareness, customer risk
assessment, test and contingency plans. In accordance with FFEIC guide-
lines, the Y2K committee has defined five phases in the Y2K project
management:
Phase I - Awareness Phase
In this phase we defined the problem and gained executive level commitment.
The Y2K committee developed an overall strategy.
This phase has been completed.
Phase II - Assessment Phase
During this phase, we assessed the size and complexity of the Y2K issues
and identified both information technology (IT) and non-IT systems that
could be affected by the change. At this time, we also identified systems
which were mission-critical and non-mission-critical.
We define mission-critical systems as vital to the successful continuation
of our core business activities. Our core business activities include
servicing deposits, servicing loans, item processing and accounting,
originating deposits, originating loans, investments, and trust. The
mission-critical systems that support our core business activities include
our AS/400 (mainframe computer) and operating system; check processing
software; check sorters; loan, deposit and account origination software;
Fedline (interface to the Federal Reserve Bank); and trust accounting
software. Other systems not deemed mission-critical, but important,
include human resources; payroll; ATM networks; voice banking system;
heating and faxes.
We also evaluated the Y2K effect on strategic business initiatives. We
assessed the risk exposure of our customers as funds providers, funds
takers, and capital market/asset counter-parties.
This phase has been completed, however, we continue to monitor our
exposure on an on-going basis.
Phase III - Renovation Phase
This phase includes hardware and software upgrades or replacements and
other changes.
No mission-critical hardware or software needed to be replaced. All
our software applications are provided by vendors and these applications
were already Y2K compliant when we began the renovation phase. We are
however replacing several PCs which support non-mission critical
applications. This will be complete by 6/30/99.
Phase IV - Validation Phase
This is the testing phase. During this phase, the systems identified in
Phase II (Assessment) are tested for Y2K compliance. Systems that were
deemed mission-critical were tested first. We have now started testing
the remaining systems.
All mission-critical systems were tested by 12/31/98 and were in
compliance. Non-mission-critical systems will be tested by 6/30/99.
Phase V - Implementation Phase
January 1, 2000 will be a processing day. If we detect any failures of
our mission-critical systems, we will implement our contingency plans as
appropriate.
The Company does not write any source programming code and is therefore
dependent upon external vendors and service providers to alter their
programs to become Y2K compliant. We have received certification from our
vendors as to their product compliance, however, we will still test all
mission-critical and non-mission-critical systems identified in Phase II.
<TABLE>
We have identified the following timetable for the testing phase:
<C> <S>
12/31/98 testing of internal mission-critical systems was completed
03/31/99 testing with service providers for mission-critical systems
should be complete
06/30/99 testing of non-mission-critical systems should be complete.
</TABLE>
As of 12/31/98, we had completed the testing of all mission-critical
systems and noted only a few minor date formatting errors in loan
documentation for which we have received corrections, which will be
installed during the first quarter of 1999. These minor errors do not
affect any calculations and do not affect our ability to process loans.
We will begin testing of the non-mission-critical systems during the first
quarter of 1999 and anticipate testing to be completed by 3/31/99. At
this time, we expect to have all our mission-critical and non-mission-
critical systems Y2K compliant by 6/30/99. We do not anticipate any major
upgrades to existing systems before year 2000.
The costs involved in addressing potential problems are not currently
expected to have a material impact on the Company's financial position,
results of operations, or cash flows in future periods. During 1998, we
budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades.
The costs included testing of our contingency site, replacement of 10 PCs
which were not Y2K compliant, and proxy testing of some of our mission-
critical systems. We have not calculated the personnel costs relating to
Y2K, however, we did not have to hire additional personnel in our Y2K
efforts.
For 1999, we have budgeted $77,000. Projected expenses include the
replacement of additional PCs, PC software upgrades, consulting services,
testing, travel and education. Y2K costs are expensed from current earnings.
No new projects have been deferred due to the Y2K effort. The yearly
software update to our core system provided by one of our vendors has been
postponed by the vendor until 2000 in an effort to minimize changes to an
already compliant system. This will not have an effect on our operations.
We have reviewed the credit risk our commercial borrowers may pose to
us if they are not Y2K compliant. At this time, we have identified only
a small number of customers deemed as high risk customers, and their
inability or failure to repay their loans as scheduled would not have a
material impact on the Company.
The worst case scenario relating to Y2K is that we would not have
electrical power. If this were the case, our contingency plan is to
operate in a manual mode. We have plans for hiring temporary help in
this situation.
The next worst case scenario is that telephones would be unavailable.
If this were the case, the Derby branch could be fully operational. Other
branches would need to service deposits in an off-line mode. Requests for
account and loan origination could be directed to the Derby branch.
Assuming we have electricity and telephones, we anticipate our core
systems to be functional.
Our Y2K contingency plan is based on our disaster recovery plan which
is written to respond to a complete core system outage. Our contingency
plan also outlines manual processes in the event of individual component
failures.
During the first quarter of 1999, outside consultants will review and
validate our contingency plans.
Item 8. Financial Statements and Supplementary Data
The financial statements and related notes of Community Bancorp. and
Subsidiaries are incorporated herein by reference from the Company's
annual report to shareholders for the year ended December 31, 1998,
Page 12 through Note 23 on Page 28.
Item 9. Disagreements on Accounting and Financial Disclosures
Inapplicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference to Pages 4-5 of the Company's Proxy Statement
for the Annual Meeting of Shareholders on May 4, 1999.
<TABLE>
<CAPTION>
Position with Has Served As
Name, Age and Community Officer/Director
Principal Occupation Bancorp. Since
<S> <S> <C>
Stephen P. Marsh, 51 Vice President 07/01/73
Senior VP & Cashier & Treasurer
Community National Bank
Rosemary M. Rowe, 57 Secretary 09/08/80
Vice President,
Community National Bank
Alan A. Wing, 54 Vice President 09/01/71
Sr. Vice President
Community National Bank
</TABLE>
Item 11. Executive Compensation
Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders on May 4, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders on May 4, 1999.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders on May 4, 1999, and incorporated by reference to the
Annual Report to the shareholders for the year ended December 31, 1998, Page
25, Note 16.
PART IV.
Item 14. Financial Statement Schedules, Exhibits 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, 1998.
(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, 1998, specifically mentioned in this
report, incorporated by reference.
The following exhibits are filed as part of this report:
Exhibit 10(i) - Directors Deferred Compensation Plan*
Exhibit 10(ii) - Description of Supplemental Retirement Plan*
Exhibit 11 - Computation of Per Share Earnings
Exhibit 21 - Subsidiaries of Community Bancorp.
Exhibit 23 - Consent from A.M. Peisch & Company
(b) Reports on Form 8-K
None
[FN]
<F*> Denotes compensatory plan or arrangement.
Exhibit 10(i)
Directors' Deferred Compensation Plan
Under the terms of the Corporation's Deferred Compensation Plan for
Directors, directors of the Corporation and/or the Bank may elect to defer
current receipt of some or all of their director fees. Deferrals are credited
to a cash account, which bears interest at the rate in effect for the Bank's
three-year certificate of deposit, as adjusted from time to time. Payments
are deferred until the participant's retirement, death or disability, or at an
earlier or later date elected by the participant. Amounts deferred and
accumulated interest represent a general unsecured obligation of the
Corporation and no assets of the Corporation or the Bank have been segregated
to satisfy the Corporation's obligations under the Plan.
Exhibit 10(ii)
Description of Supplemental Retirement Plan
In 1998 the Board of Directors authorized the adoption of a Supplemental
Retirement Plan for Mr. White and the other Executive Officers of the Bank to
replace estimated benefits lost as a result of the previous termination of
the Bank's defined benefit pension plan. The plan is intended to provide an
annual benefit at retirement approximating 75% of the average annual bonus
received by the officer. It is estimated that this benefit, combined with
the projected benefits under the Bank's 401(k) plan, will be approximately
equal to the benefit that would have been provided to the Executive Officers
under the terminated defined benefit pension plan. Benefit payments will be
funded by annual contributions to a rabbi trust.
<TABLE>
Exhibit 11
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
<CAPTION>
For the Fourth Quarter Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net Income $662,615 $562,499 $700,246
Average Number of Common Shares
Outstanding. 3,110,961 3,014,935 2,901,980
Earnings Per Common Share $0.21 $0.19 $0.24
<CAPTION>
For The Twelve Months Ended December 31, 1998 1997 1996
Net Income $2,190,374 $2,145,395 $2,219,804
Average Number of Common Shares
Outstanding. 3,075,906 2,976,448 2,862,708
Earnings Per Common Share $0.71 $0.72 $0.78
Per share data restated to reflect 100% stock dividend paid on June 1, 1998.
</TABLE>
<TABLE>
Exhibit 11 (Cont'd)
COMMUNITY BANCORP.
FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
For The Fourth Quarter Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net Income $662,615 $562,499 $700,246
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures). 363 1,639 2,857
Adjusted Net Income $662,978 $564,138 $703,103
Average Number of Common Shares
Outstanding. 3,110,961 3,014,935 2,901,980
Increase in Shares(Assuming Conversion
of Subordinated Convertible Debentures). 8,150 26,825 50,266
Average Number of Common Share Outstanding
(Fully Diluted). 3,119,111 3,041,760 2,952,246
Earnings Per Common Share Assuming Full
Dilution. $0.21 $0.19 $0.24
<CAPTION>
For The Twelve Months Ended December 31, 1998 1997 1996
Net Income $2,190,374 $2,145,395 $2,219,804
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures). 3,034 7,583 13,746
Adjusted Net Income $2,193,408 $2,152,978 $2,233,550
Average Number of Common Shares
Outstanding. 3,075,906 2,976,448 2,862,708
Increase in Shares(Assuming Conversion
of Subordinated Convertible Debentures). 15,896 32,317 55,659
Average Number of Common Share Outstanding
(Fully Diluted). 3,091,802 3,008,765 2,918,367
Earnings Per Common Share Assuming Full
Dilution. $0.71 $0.72 $0.77
Per share data restated to reflect 100% stock dividend paid on June 1, 1998.
</TABLE>
Exhibit 21
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.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Community Bancorp. of our report dated January 6, 1999, included
in the 1998 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 6, 1999, with respect to the consolidated financial
statements incorporated herein by reference of Community Bancorp. included
in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ A.M. Peisch & Company
March 25, 1999
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
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 25, 1999
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 25, 1999
Stephen P. Marsh, Treasurer
and Chief Financial and
Accounting Officer
COMMUNITY BANCORP. DIRECTORS
/s/ Thomas E. Adams Date: March 25, 1999
Thomas E. Adams
/s/ Jacques R. Couture Date: March 25, 1999
Jacques R. Couture
/s/ Elwood G. Duckless Date: March 25, 1999
Elwood G. Duckless
/s/ Michael H. Dunn Date: March 25, 1999
Michael H. Dunn
/s/ Rosemary M. Lalime Date: March 25, 1999
Rosemary M. Lalime
/s/ Marcel Locke Date: March 25, 1999
Marcel Locke
/s/ Stephen P. Marsh Date: March 25, 1999
Stephen P. Marsh
/s/ Anne T. Moore Date: March 25, 1999
Anne T. Moore
/s/ Dale Wells Date: March 25, 1999
Dale Wells
/s/ Richard C. White Date: March 25, 1999
Richard C. White
The power of community initiatives.
Full Circle
1998 Community Bancorp. Annual Report
If in a local community a citizen becomes aware of a human need which is
not being met,...
Community Bancorp.
Newport-Derby Road
PO Box 259
Derby, Vermont 05829
(802) 334-7915
...he thereupon discusses the situation with his neighbors...
Going back 150 years or so... Alexis de Tocqueville, the French observer of
our culture, described us so well: These Americans are peculiar people. If,
in a local community, a citizen becomes aware of a human need which is not
being met, he thereupon discusses the situation with his neighbors. Suddenly,
a committee comes into existence. The committee thereupon begins to operate
on behalf of the need and a new community function is established. It is like
watching a miracle, because these citizens perform this act without a single
reference to any bureaucracy, or any official agency.
There is not a bank in the country that does not, at least to some extent,
boast about its community service. For many it's merely a matter of making
the appropriate contributions to favored organizations and causes on an
annual basis. Some encourage their employees to become involved in community
organizations. Still others insist upon it. All of these are laudable
activities and speak well for the banking industry as a whole. The country
would be a better place if all corporate entities were so civic-minded.
Our intent, however, is to assert the notion that Community National
Bank goes well beyond community service to something better defined as
"community initiative." De Tocqueville's description of how that works in
American society is more than apt, though even he would not suspect that
such initiatives might be generated within a community bank.
Jacques Couture
A dairy farmer, maple producer and member of our Board of Directors,
Jacques is also committee chairman for Troop 821 of Westfield, Troy and
Jay; Selectman for the town of Westfield; Treasurer of the Sacred Heart
School; and President of the Sacred Heart Educational Trust. This "Jacques
of all trades" also serves on the Northeast Dairy Compact Commission and
is President of the International Maple Syrup Institute.
......Suddenly, a committee comes into existence....
...The committee thereupon begins to operate on behalf of the need...
...and a new community function is established...
Seeing a need and filling it is also akin to what happens when a stone is
tossed into a pond. The rings extend outward almost to infinity. Take our
Community Circle program for example. Back in 1988 we saw the need for an
organization that would bring the senior citizens in our area together to
socialize and be involved in recreational activities, including travel. We
reasoned that many seniors remained lonely at home simply because there were
few alternatives. Fearful of traveling alone, lacking companionship for a
trip to the mall or a movie, they opted for inactivity.
The Community Circle program changed all that. Today some 2,800 area
citizens are members of Community Circle. Groups of them have traveled to
Australia; Branson, Missouri; Greece; England; and Hawaii, to name but a
handful of destinations.
Suzanne Cartee
Serving spaghetti at
community meals is only
part of what this energetic Derby
Credit Administration Clerk brings
to the table. As a leader of the Newport Baptist Church Youth Group,
Suzanne shows teens how they can work together to help themselves-and the
community as a whole. She also finds time to organize Newport Baptist's
weekly children's church program.
They get out to the movies each month under the auspices of the bank and
the local Hoyts and Star Cinemas. Perhaps most importantly, they have forged
a network of new friends within Community Circle which has resulted in
countless informal get-togethers apart from officially sponsored activities.
By initiating Community Circle we have obviously achieved a substantial
business benefit. The collective membership has over $75 million on deposit
with the bank. The point, however, is that the business resulted from taking
the community initiative and accepting responsibility for its full
implementation.
In the past couple of years, we have been made aware through our
connections in the schools that financial illiteracy was becoming a
significant problem. Many of today's youngsters have little concept of
credit, borrowing or even costs. They have not been taught how to balance
a checkbook, how to use credit and debit cards wisely, how to invest or
what is involved in arranging a loan.
To meet this problem head on, the bank again took the initiative. We
started our Totally Kids ClubTM, which gets us involved with area youngsters
at the earliest possible age. It also has helped us establish strong
relationships with the schools, and we are now able to send our people into
the classroom so that they can directly attack the problem. I am happy to
report that good progress is being made and that financial illiteracy in our
area is being addressed.
We will also be launching a financial education course for teens and
young adults in conjunction with America's Promise-the Alliance for Youth.
Working closely with high school teachers, CNB employees will make classroom
presentations on credit and financial responsibility and cover topics like
managing credit, budgeting wisely and understanding electronic banking.
Not only do we try to meet community needs ourselves, we also reward the
efforts of others. Our Community Service Award program salutes the unsung
efforts of community volunteers. Qualified candidates are nominated by the
community and selected by a committee comprised of CNB employees. A donation
of $250 is made in honor of each award recipient to the charitable organization
of his/her choice.
In this annual report you will meet a number of our employees who are not
only involved in community activities but also working with us as we take
initiatives to fill community needs before they become community problems.
It is a mission we find rewarding in every possible way.
...It is like watching a miracle."
Alexis de Tocqueville
Janet Cartee
The Newport-based Trust Officer is Secretary and President-elect of the
Newport Rotary Club which provides scholarships to local youth and
sponsors an annual basketball tournament and the Northeast Music
Festival. Janet has also served as Chairperson of the American Heart
Association's "Cardiac Arrest."
Dear Shareholders
and Friends
of Community Bancorp. and Community National Bank
Community Bancorp. ended the year with total assets of $225 million, up
5.6% from 12/31/97, a reasonable rate of growth in an economy that has been
growing at a somewhat slower rate. Earnings for the year were $2,190,374, or
$.71 per share, compared to $2,145,395, or $.72 per share for 1997. Our
return on average assets was 1.0%.
Deposit growth was quite strong this year, with the result that our market
share of deposits in Orleans County increased to 49.74% after a small dip in
1997. We believe this growth in market share is attributable to competitive
rates, friendly service, convenient hours and locations, our commitment to
our communities and the success of our special programs.
Our earnings were affected by two primary factors: loan losses and
declining spreads. We again experienced a high level of loan losses in the
consumer portfolio as many of our customers continue to have difficulty
making ends meet. We have found that the proliferation of "easy credit" from
many bank and non-bank lenders and a record number of consumer bankruptcies
have exacerbated the perennial problem of underemployment in the Northeast
Kingdom.
Although we originated more loans this year than last, our loan portfolio
actually went down because so many customers have been refinancing their loans
at the bank and elsewhere into fixed rate loans sold into the secondary market.
As a result, our loan portfolio decreased from $150 million to $148.3 million.
On the other hand, the number of loans originated and sold into the secondary
market went from $6.8 million in 1997 to $19.4 million in 1998. The result of
this is that we have a higher percentage of assets in our investment portfolio,
which affects our spreads because we earn less on investments than we do on
loans.
One of the highlights of 1998 was the tenth anniversary celebration of
Community Circle. On August 23, more than 1,200 Community Circle members
gathered at Jay Peak for an afternoon of good food, entertainment and good
fellowship. We continue to marvel at the success of this program which now
has over 2,800 members and more than $75 million in the bank. Clearly we
have identified and met a strong demand for this kind of program in the
Northeast Kingdom.
Community Service is an important part of community banking, which is
why it is the theme of this year's annual report. We are proud of the role
our directors, officers and employees play in the communities we serve and
of the role we play as an institution. We received some important recognition
for this work this year, as the bank was awarded the Vermont Council on the
Arts Chair's Business Award "for exemplary support of the arts in Vermont,"
and Steve Marsh was recognized as the Vermont Bankers Association Community
Service Banker of the Year, the second time a CNB officer has been so
honored.
Our regulators have recognized our efforts as well, as we again achieved
an "outstanding" rating under the Community Reinvestment Act.
As we look forward to 1999, there are several exciting developments to
report. First, we relocated our Newport office into the new state office
building in January, followed by our trust department in March.
Second, we are kicking off the new year with our third Community Booster
Loan program, with a loan pool of $5 million set aside at very attractive
rates to stimulate the local economy.
Third, we will be introducing PC banking so that our customers, businesses
and individuals alike will have access to their accounts via their computers
and the internet. It's one more way that we are trying to make banking even
more convenient for our customers.
Fourth, we have just joined America's Promise-the Alliance for Youth,
the first bank in the state to do so. America's Promise is a national not-
for-profit organization headed by General Colin Powell that is dedicated
to improving the lives of our nation's youth. America's Promise aims to
provide young people across the country with access to the following five
fundamental resources:
an ongoing relationship with a caring adult, like a mentor,
tutor or coach
safe places and structured activities during non-school hours
a healthy start
a marketable skill through effective education, and
an opportunity to give back to the community through
community service.
In 1998 America's Promise and the American Bankers' Association announced
a partnership to establish and promote a national volunteer campaign in the
banking industry to reach out to youth across the country. For Community
National Bank this effort is a logical extension of our award-winning
Totally Kids ClubTM, and something we are proud to be a part of. Because of
our early support for this important program, our bank was featured in a
promotional video with General Powell.
Finally, 1999 is the last year of the millennium. Look for regular Y2K
updates in the "Community Bank Notes" and on our website,
www.communitynationalbank.com. We want to make sure that our customers are
fully informed about Y2K issues and are prepared for the date change so
that they can avoid becoming victims of scare tactics and outright scams.
Throughout the year we will be reminding our customers that the safest place
for their money is in the bank (and not in some speculative investment or
under the proverbial mattress) and offering tips on handling their own Y2K
preparedness.
This is an exciting time to be in the financial services industry. We
look forward to meeting the challenges ahead with the continued support of
our shareholders, customers and the communities we serve.
Richard C. White
President and CEO
Community Bancorp. and
Community National Bank
...an important part of community banking...
Craig Buchanan
As a Loan Review Officer, Craig knows a thing or two about crossing the i's
and dotting the t's. So it probably comes as no surprise that he takes that
same thorough approach to community service. As Secretary/Treasurer of the
Glover Trailwinders Snowmobile Club, Craig ensures that safe, well-maintained
trails are made available to area snowmobile enthusiasts of all ages.
Operating Principles
Community National Bank's success-both in terms of its own profitability
and the positive impact it makes on the communities it serves-comes from
its ability to stay true to its original mission as a community bank. In
order to ensure long-term adherence to this guiding mission, we have agreed
to be bound by the following general operating principles:
We will be fair, sensitive, honest, trusting and trustworthy in all our
dealings among ourselves, with customers, with vendors and with the community
at large.
We will obey all laws, in fact and in spirit, and we will always strive to
do the right thing, in every situation, to the best of our abilities. And if
we fail, we will do whatever is required to make amends.
Specifically, we will work together to ensure that we:
1. Affirm our obligation to our shareholders to provide them with a
reasonable return on their investment while honoring our obligation
to our depositors and the community to maintain the safety and
soundness of the bank.
2. Refuse to engage in practices that are discriminatory, unethical
or illegal.
3. Always conduct our business in good faith.
4. Think like a customer.
5. Work to earn our customers' loyalty every day.
6. Remember that our customers are doing us a favor by banking
with us; we are not doing them a favor by providing the service.
7. Treat our customers and fellow employees with dignity
and respect.
8. Support our local communities and recognize our special
role as the only bank with offices in all three counties of the
Northeast Kingdom.
9. Invest our resources substantially in the communities we serve.
10. Work cooperatively with our internal and external auditors
and examiners.
Joanne Guyette
It's not often you'll find a Loan Officer that also doubles as a biology
teacher, but that's not a big leap for Joanne. As an active volunteer at
Sacred Heart School, she has assisted with health screenings, provided
after school care-even organized the most recent Kindergarten graduation.
So whether she's lending money or a helping hand, you can always count on
Joanne.
Directors,Officers and Advisory Boards
Board of Directors
Community Bancorp. and Community National Bank
Thomas E. Adams, President, NPC Realty, Inc.
Jacques R. Couture, Dairy Farmer
Elwood G. Duckless, Past President, Newport Electric Co.
Michael H. Dunn, Book Dealer
Rosemary M. Lalime, Principal Broker and Owner, All Seasons Realty
Marcel M. Locke, Proprietor, Parkview Garage
Stephen P. Marsh, Vice President and Treasurer, Community Bancorp.;
Senior Vice President and Cashier, Community National Bank
Anne T. Moore, Principal Broker, The Taylor Moore Agency
Dale Wells, President, Dale Wells Building Contractor, Inc.
Richard C. White, President and Chief Executive Officer,
Community Bancorp. and Community National Bank
Executive Officers
Community Bancorp. and Community National Bank
Richard C. White, President and Chief Executive Officer,
Community Bancorp. and Community National Bank
Stephen P. Marsh, Vice President and Treasurer, Community Bancorp.;
Senior Vice President and Cashier, Community National Bank
Alan A. Wing, Vice President, Community Bancorp.;
Senior Vice President, Community National Bank
Rosemary M. Rowe, Secretary, Community Bancorp.;
Senior Vice President, Community National Bank
Other Officers
Community National Bank
Kathryn M. Austin, Vice President and Human Resources Officer
Mark C. Belanger, Assistant Cashier
Jeanne L. Bonnell, Community Circle Director
Louise M. Bonvechio, Loan Officer
Wanda J. Boomer, Assistant Vice President and Troy Office Manager
Beckie A. Bremseth, Island Pond Office Manager
Timothy B. Bronson, Vice President and Loan Officer
Craig D. Buchanan, Loan Review Officer
Theresa P. Carpenter, Loan Underwriting Officer
Janet H. Cartee, Trust Officer
Hope K. Colburn, Loan Officer
Bonnie J. Currier, Vice President and Barton Office Manager
Joanne M. Guyette, Loan Officer
Richard L. Isabelle, Vice President and St. Johnsbury Office Manager
Rosemary M. Lalime, Vice President
France B. Lambert, Assistant Operations Officer
Carmi M. Marsh, Vice President and Loan Officer
Theresa B. Morin, Special Asset Officer
Terrie L. Paul, Assistant Vice President and Credit Administration Officer
Deborah S. Tetreault, Vice President and Loan Officer
Michael H. Venuti, Senior Trust Officer
Joanne M. Williams, Loan Underwriting Officer
Thomas R. Zuppe, Vice President and E.D.P. Department Manager
Island Pond Advisory Board
Theodore J. Firestine, Craig Goulet, Dale R. Lamere
and Adrien R. Thibeault
Barton Advisory Board
John F. Brown, Rene Desmarais, Alicia Marcotte,
John C. Ruggles and Fernand J. Tanguay
Troy Advisory Board
Roland Denton, Roland Laliberty, Roger A. Morin and Gary R. Taylor
St. Johnsbury Advisory Board
Ernest Begin, Marty Feltus, Robert Ide,
Richard Lawrence, Bernier Mayo, Peter Murphy
and Allan Rodgers
The Officers
Stephen Marsh, Alan Wing,
Rosemary Rowe, Richard White
The Directors
Seated: Marcel Locke, Elwood Duckless, Richard White, Dale Wells.
Standing: Thomas Adams, Rosemary Lalime, Stephen Marsh, Michael Dunn.
Missing from photo: Jacques Couture, Anne T. Moore.
Meeting community needs.
It's one thing to say you care. It's quite another to actually do something
about it. To us, the Northeast Kingdom is a unique and special place. It's
where we all live and we're proud to call it our home.
So the next time you see a CNB employee or board member performing
community service, remember one thing: they don't have to do it.
They just want to. And we couldn't be prouder.
Paul Chandler
He may not be Michael Jordan, but aspiring hoop players in Glover think
Paul's an all-star. As a volunteer with the Glover Eaglets, an instructional
basketball clinic for children, the Mortgage Counselor teaches fundamentals
and emphasizes fair play, sportsmanship and teamwork-characteristics that are
essential both on and off the court.
Marcel Locke
As proprietor of Parkview Garage in Orleans and member of the CNB Board of
Directors, Marcel is more than just mechanically inclined. He's community
inclined. In addition to teaching auto mechanics to young people, Marcel is
a selectman in Albany; Director of the Coutts Moriarty 4-H camp; Director of
the Orleans County Fair; Chairman of the trustees at Albany United Church;
and a member of the Orleans County Farm Bureau.
Solving community problems.
Tracy Roberts
When this Newport Office Supervisor isn't serving her customers, she's
cooking up a lot of great ideas for the community. Like coordinating the
Newport Office's participation in the Newport Chili Festival. Throwing a
sugar on snow party for kids. Or organizing a caroling event for Troy
School parents and their children this past holiday season. She's also
actively involved in CNB's Totally Kids ClubTM.
Rick Isabelle
As our Vice President at CNB's four-year-old office in St. Johnsbury,
Rick's record of community involvement is a mile long. Whether it's
joining forces with the Vermont State Police at the Annual Safety Fair
or lending his time and support to cultural treasures like the St.
Johnsbury Athenaeum, Rick is sure to be involved in one way or another.
Holly Pepin
When it comes to community service, Holly runs circles around the
competition. And in some cases, marathons. Just ask the Derby Teller's
fellow road runners, who each agreed to run a grueling leg of the Vermont
City Marathon this past May in Burlington to raise money for local charity.
Norene Roberts
It's safe to say that you don't have to light a fire under Norene to get
her involved in community service. Because her first inclination would be
to put it out. A volunteer firefighter with the Newport Fire Department
since 1989, this Derby Loan Processor is well-versed at putting out fires.
And responding to a call for help from the community.
Community Bancorp. and Subsidiaries 1998 Financial
Statements Financial Reporting Responsibility
The management of Community Bancorp. acknowledges its responsibility for the
preparation of the consolidated financial statements and other financial
information contained in this annual report. The accompanying consolidated
financial statements have been prepared by the management of Community
Bancorp. in conformity with generally accepted accounting principles
appropriate in the circumstances. Where amounts must be based on estimates
and judgments, they represent the best estimates and judgments of management.
The financial information appearing throughout this annual report is
consistent with that in the consolidated financial statements.
The management of Community Bancorp. is also responsible for establishing
and maintaining a system of internal controls which we believe is adequate to
provide reasonable assurance that the financial records are reliable for
preparing financial statements and maintaining accountability for assets and
that assets are protected against loss from unauthorized use or disposition.
The system in use at Community Bancorp. provides such reasonable assurance,
supported by the careful selection and training of staff, the establishment
of organizational structures providing an appropriate and well-defined
division of responsibilities, and the communication of policies and standards
of business conduct throughout the institution.
The accounting policies and system of internal accounting controls are
under the general oversight of Community Bancorp. and Community National
Bank's Board of Directors, acting through the Risk Management and Audit
Committees. The Internal Auditor of Community National Bank, who reports
directly to the Risk Management and Audit Committees, conducts an extensive
program of audits and risk asset reviews. In addition, A.M. Peisch & Company,
independent auditors, are engaged to audit our consolidated financial
statements.
A.M. Peisch & Company obtain and maintain an understanding of our
accounting and financial controls and conduct such tests and other auditing
procedures as they consider necessary in the circumstances to express the
opinion in their report that follows. A.M. Peisch & Company have free
access to the Board of Directors, with no members of management present,
to discuss their audit and their findings as to the integrity of Community
Bancorp.'s financial reporting and the adequacy of the system of internal
accounting controls.
Community Bancorp.
/s/Richard C. White
Richard C. White
Chairman
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for
the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/A.M. Peisch & Company
January 6, 1999
St. Johnsbury, Vermont
VT Reg. No. 92-0000102
Joan Hamblett
It isn't always our employees and board members who make a difference in the
communities. Sometimes, it's our financial support along with friends of the
community. Friends like Joan, a retired teacher who volunteers her time in
the newly-created after school program at the United Church in Newport. CNB
donated $2,500 to this program in 1998 as part of its commitment to America's
Promise.
<TABLE>
Consolidated Balance Sheets
Community Bancorp. and Subsidiaries
<CAPTION>
December 31,
1998 1997
Assets
<S> <C> <C>
Cash and due from banks (Note 17) $ 4,896,947 $ 10,657,610
Federal funds sold and overnight deposits 15,527,141 3,650,000
Cash and cash equivalents 20,424,088 14,307,610
Securities held-to-maturity (approximate fair
value $30,038,323 and $34,125,823 at December
31, 1998 and 1997) (Note 2) 29,877,851 34,125,802
Securities available-for-sale (Note 2) 20,590,000 8,039,063
Restricted equity securities (Note 2) 1,141,650 1,099,750
Loans (Note 3) 148,335,346 150,115,852
Allowance for loan losses (Note 4) (1,658,967) (1,502,202)
Unearned net loan fees (848,963) (866,589)
Net loans 145,827,416 147,747,061
Bank premises and equipment, net (Note 5) 3,010,041 3,285,661
Accrued interest receivable 1,460,671 1,460,298
Other real estate owned, net (Note 6) 541,903 1,088,867
Other assets (Notes 7 and 12) 2,177,043 1,847,292
Total assets $225,050,663 $213,001,404
Liabilities and stockholders' equity
LIABILITIES
Deposits:
Demand, non-interest bearing $ 21,743,065 $ 20,297,137
NOW and money market accounts 49,939,162 40,562,693
Savings 30,512,230 30,053,422
Time, $100,000 and over (Note 8) 17,874,124 18,182,338
Other time (Note 8) 77,728,713 78,484,811
197,797,294 187,580,401
Repurchase agreements and other borrowings (Note 10) 288,241 -0-
Borrowed funds (Note 9) 4,060,000 4,060,000
Accrued interest and other liabilities 883,069 776,646
Subordinated debentures (Note 11) 20,000 104,000
203,048,604 192,521,047
Commitments and contingent liabilities (Notes 5, 13, 14 and 15)
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value; 6,000,000 shares
authorized 3,140,606 shares issued at 12/31/98
and 3,044,697 shares issued at 12/31/97 7,851,516 3,842,907
Additional paid-in capital 8,756,453 7,978,435
Retained earnings (Note 18) 5,604,096 9,070,443
Accumulated other comprehensive income 235,375 33,709
Less treasury stock, at cost (1998: 29,646 shares;
1997: 29,629 shares) (445,381) (445,137)
22,002,059 20,480,357
Total liabilities and stockholders' equity $225,050,663 $213,001,404
</TABLE>
See accompanying notes.
<TABLE>
Consolidated Statements of Income
Community Bancorp. and Subsidiaries
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest income
Interest and fees on loans $13,758,226 $13,867,588 $13,376,352
Interest and dividends on investment securities
U.S. Treasury securities 2,058,981 2,033,179 2,016,787
U.S. Government agencies 137,074 84,194 78,177
States and political subdivisions 621,411 621,571 743,847
Dividends 74,046 70,899 70,229
Interest on federal funds sold and
overnight deposits 421,972 140,163 246,405
17,071,710 16,817,594 16,531,797
Interest expense
Interest on deposits 7,868,323 7,577,571 8,148,012
Interest on borrowed funds and securities
sold under agreements to repurchase 203,702 245,103 7,586
Interest on subordinated debentures 4,597 11,489 20,828
8,076,622 7,834,163 8,176,426
Net interest income 8,995,088 8,983,431 8,355,371
Provision for possible loan losses (Note 4)(660,000) (660,000) (365,000)
Net interest income after provision
for possible loan losses 8,335,088 8,323,431 7,990,371
Other income
Trust Department income 137,678 87,412 113,187
Service fees 676,558 695,260 604,449
Security (losses) gains (Note 2) -0- -0- (1,928)
Other (Note 23) 771,947 553,027 564,894
1,586,183 1,335,699 1,280,602
Other expenses
Salaries and wages 2,795,987 2,795,732 2,618,632
Pension and other employee
benefits (Note 13) 744,715 681,030 653,690
Occupancy expenses 1,250,077 1,240,165 1,221,080
Other operating expenses (Note 23) 2,229,772 2,041,704 1,903,675
7,020,551 6,758,631 6,397,077
Income before income taxes 2,900,720 2,900,499 2,873,896
Income taxes (Note 12) 710,346 755,104 654,092
Net income $2,190,374 $2,145,395 $2,219,804
Earnings per common share on
weighted average $0.71 $0.72 $0.78
Weighted average number of common shares
used in computing earnings per share 3,075,906 2,976,448 2,862,708
Book value per share on shares
outstanding at December 31 $7.07 $6.79 $6.58
</TABLE>
See accompanying notes.
<TABLE>
Consolidated Statements of Stockholders' Equity
Community Bancorp. and Subsidiaries
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
Accumulated
Additional other
Total
-Common Stock- paid-in Retained comprehensive
Treasury stockholders'
Shares Amount capital earnings income
stock equity
<S> <C> <C> <C> <C> <C>
<C> <C>
Balances,
December 31, 1995 1,330,514 $3,399,674 $5,513,703 $9,056,562 $ 50,501
$(440,023) $17,580,417
Comprehensive income,
net of taxes
Net income -0- -0- -0- 2,219,804 -0-
-0- 2,219,804
Net unrealized holding
loss on securities
available-for-sale,
net of tax, $21,914 -0- -0- -0- -0- (42,538)
-0- (42,538)
Comprehensive income
2,177,266
Dividends paid -0- -0- -0- (1,404,957) -0-
-0- (1,404,957)
Issuance of stock 52,624 131,559 627,259 -0- -0-
-0- 758,818
Purchase of treasury stock (10) -0- -0- -0- -0-
(189) (189)
Balances,
December 31, 1996 1,383,128 3,531,233 6,140,962 9,871,409 7,963
(440,212) 19,111,355
Comprehensive income,
net of taxes
Net income -0- -0- -0- 2,145,395 -0-
-0- 2,145,395
Net unrealized holding
gain on securities
available-for-sale,
net of tax, ($13,263) -0- -0- -0- -0- 25,746
-0- 25,746
Comprehensive income
2,171,141
Dividends paid -0- -0- -0- (1,652,355) -0-
-0- (1,652,355)
5% stock dividend 69,161 172,903 1,121,103 (1,294,006) -0-
-0- -0-
Issuance of stock 55,509 138,771 716,370 -0- -0-
-0- 855,141
Purchase of treasury
stock (264) -0- -0- -0- -0-
(4,925) (4,925)
Balances,
December 31, 1997 1,507,534 3,842,907 7,978,435 9,070,443 33,709
(445,137) 20,480,357
Comprehensive income,
net of taxes
Net income -0- -0- -0- 2,190,374 -0-
-0- 2,190,374
Net unrealized holding
gain on securities
available-for-sale,
net of tax ($103,889) -0- -0- -0- -0- 201,666
-0- 201,666
Comprehensive income
2,392,040
Dividends paid -0- -0- -0- (1,833,146) -0-
-0- (1,833,146)
100% stock split
effected in the
form of a dividend 1,529,430 3,823,575 -0- (3,823,575) -0-
-0- -0-
Issuance of stock 74,013 185,034 778,018 -0- -0-
-0- 963,052
Purchase of treasury
Stock (17) -0- -0- -0- -0-
(244) (244)
Balances,
December 31, 1998 3,110,960 $7,851,516 $8,756,453 $5,604,096 $235,375
$(445,381) $22,002,059
</TABLE>
See accompanying notes.
<TABLE>
Consolidated Statements of Cash Flows
Community Bancorp. and Subsidiaries
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,190,374 $ 2,145,395 $ 2,219,804
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 407,226 407,238 392,775
Provision for possible loan losses 660,000 660,000 365,000
Provision for deferred income taxes (75,246) 37,392 110,709
Gain on sale of loans (153,699) (19,680) (22,281)
Securities losses -0- -0- 1,928
Losses(gains) on sales of OREO 4,448 (225,343) (41,297)
OREO writedowns 26,592 173,496 38,712
Amortization of bond premium, net 48,621 19,962 53,626
Proceeds from sales of loans held for sale 18,780,207 6,547,719 7,949,649
Originations of loans held for sale (19,658,705) (6,308,539) (7,862,161)
(Increase) decrease in interest receivable (373) 78,339 (14,462)
Increase in mortgage service rights (92,544) (36,438) (38,529)
(Increase) decrease in other assets (261,297) (159,114) 67,100
Decrease in unamortized loan fees (17,626) (37,714) (4,428)
Increase in taxes payable 20,628 19,947 65,337
(Decrease) increase in interest payable (10,694) 41,597 (29,119)
Increase (decrease) in accrued expenses 950 17,080 (2,858)
Increase (decrease) in other liabilities 55,359 (2,849) 119,956
Net cash provided by operating activities 1,924,221 3,358,488 3,369,461
Cash flows from investing activities
Securities held-to-maturity
Maturities and paydowns 26,602,459 22,663,019 20,893,071
Purchases (22,365,543)(18,866,987)(26,292,738)
Securities available-for-sale
Sales and maturities 3,000,000 -0- 10,004,844
Purchases (15,282,969) -0- (4,998,437)
Purchase of restricted equity securities (41,900) (36,700) (23,300)
Decrease (increase) in loans, net 1,758,500 (6,304,459) (9,421,187)
Capital expenditures, net (108,756) (271,540) (550,968)
Investments in limited partnership, net 12,779 (29,106) (69,723)
Premium paid on purchase of subsidiary -0- (342,662) -0-
Proceeds from sales of OREO 864,835 466,850 508,880
Recoveries of loans charged off 202,057 172,523 101,914
Net cash used in investing activities (5,358,538) (2,549,062) (9,847,644)
(continued)
<CAPTION>
1998 1997 1996
Cash flows from financing activities
Net increase in demand, NOW, savings
and money market accounts 11,281,205 908,511 8,381,093
Net (decrease)increase in
certificates of deposit (1,064,312) 2,817,414 (3,410,139)
Net increase(decrease) in short-term
borrowings and repurchase agreement 288,241 (1,600,000) 1,600,000
Net increase in borrowed funds -0- 3,995,000 -0-
Payments to acquire treasury stock (244) (4,925) (189)
Dividends paid (954,095) (863,214) (741,139)
Net cash provided by
financing activities 9,550,795 5,252,786 5,829,626
Net increase(decrease) in
cash and cash equivalents 6,116,478 6,062,212 (648,557)
Cash and cash equivalents
Beginning 14,307,610 8,245,398 8,893,955
Ending $20,424,088 $14,307,610 $8,245,398
Supplemental schedule of cash paid during the year
Interest $ 8,087,316 $ 7,792,566 $8,205,545
Income taxes $ 764,964 $ 697,765 $ 444,351
Supplemental schedule of noncash investing and financing activities:
Unrealized gain(loss) on securities
available-for-sale $ 305,555 $ 39,009 $ (64,452)
Other Real Estate Owned acquired
in settlement of loans $ 348,911 $ 1,592,401 $ 723,596
Debentures converted to common stock $ 84,000 $ 66,000 $ 95,000
Stock dividends $ 3,823,575 $ 1,294,006 $ -0-
Dividends paid:
Dividends payable $ 1,833,146 $ 1,652,355 $1,404,957
Dividends reinvested (879,051) (789,141) (663,818)
$ 954,095 $ 863,214 $ 741,139
</TABLE>
See accompanying notes.
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 fair value
with unrealized gains and losses net of applicable income taxes reported
as a net amount in other comprehensive income.
The specific identification method is used to determine realized gains
and losses on sales of securities available-for-sale.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
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 Community National Bank'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-Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
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-The Company recognizes 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.
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.
Stock split effected in the form of a dividend-Effective June 1, 1998,
the shareholders authorized a two-for-one stock split of the Company's
$2.50 par value common stock. The stock split was effected in the form of
a dividend. All references in the accompanying financial statements to the
number of common shares and per-share amounts have been restated to reflect
the stock split.
Comprehensive income-As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or stockholders' equity.
Comprehensive income includes the reported net income of a company adjusted
for items that are currently accounted for as direct entries to equity, such
as the mark-to-market adjustment on securities available-for-sale, foreign
currency items and minimum pension liability adjustments. The December 31,
1998, and December 31, 1997, financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
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-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 and loans held for sale: 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.
Changes in accounting policies-The Company adopted SFAS 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 supersedes FASB No. 122. (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.
In 1998, the FASB issued SFAS No.131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards relative
to public companies for the reporting of certain information about operating
segments within their financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Management has determined
that the Company does not have reportable segments as defined within the
Statement.
In June, 1998, the FASB issued Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for the fiscal years beginning after June 15,1999.
Reclassification-Certain amounts in the 1997 and 1996 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, 1998 and 1997:
<TABLE>
<CAPTION>
Securities AFS, December 31, 1998
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Government and
agency securities $20,233,371 $357,237 $ 608 $20,590,000
<CAPTION>
Securities AFS, December 31, 1997
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government and
agency securities $ 7,987,988 $ 51,075 $ -0- $ 8,039,063
<CAPTION>
Securities HTM, December 31, 1998
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government and
agency securities $20,143,530 $160,472 $ -0- $20,304,002
States and political
Subdivisions 9,734,321 -0- -0- 9,734,321
$29,877,851 $160,472 $ -0- $30,038,323
<CAPTION>
Securities HTM, December 31, 1997
Amortized Unrealized Unrealized Fair
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
<CAPTION>
Restricted equity securities, December 31, 1998
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Federal Home Loan
Bank stock $ 1,003,500 $ -0- $ -0- $ 1,003,500
Federal Reserve Bank stock 138,150 -0- -0- 138,150
$ 1,141,650 $ -0- $ -0- $ 1,141,650
<CAPTION>
Restricted equity securities, December 31, 1997
Amortized Unrealized Unrealized Fair
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
</TABLE>
Investment securities with a carrying amount of $6,036,736 and $5,046,607
and a market value of $6,097,500 and $5,076,875 at December 31, 1998 and
1997, 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-,
$-0- and $2,004,844 in 1998, 1997 and 1996, respectively. Realized gains
from sales of investments available-for-sale were $-0-, $-0- and $909, with
realized losses of $-0-, $-0- and $2,837 for the years 1998, 1997 and 1996,
respectively.
The carrying amount and estimated fair 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, 1998, were
as follows:
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due from one to five years $20,233,371 $20,590,000
The maturities of securities held-to-maturity at December 31, 1998, were
as follows:
<CAPTION>
Amortized Fair
Cost Value
Due in one year or less $21,107,083 $21,166,559
Due from one to five years 7,031,351 7,132,347
Due from five to ten years 392,179 392,179
Due after ten years 1,347,238 1,347,238
$29,877,851 $30,038,323
</TABLE>
Included in the caption "States and Political Subdivisions" are securities
of local municipalities carried at $9,610,774 and $9,853,657 at December
31, 1998 and 1997, 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>
1998 1997
<S> <C> <C>
Commercial $ 9,596,168 $ 9,021,928
Real estate - Construction 2,024,545 1,090,612
Real estate - Mortgage 120,595,977 120,816,761
Installment and other 16,118,656 19,186,551
148,335,346 150,115,852
Deduct:
Allowance for possible loan losses 1,658,967 1,502,202
Unearned net loan fees 848,963 866,589
2,507,930 2,368,791
$145,827,416 $147,747,061
</TABLE>
Commercial and mortgage loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of commercial
and mortgage loans serviced for others were $44,821,268 and $34,039,031 at
December 31, 1998 and 1997, respectively. Mortgage servicing rights of
$122,533 and $43,211 were capitalized in 1998 and 1997, respectively.
The total recorded investment in impaired loans as determined in
accordance with FASB Statements No. 114 and No. 118 approximated $1,102,661
and $1,000,973 at December 31, 1998 and 1997, respectively. These loans
were subject to allowances for loan losses of approximately $30,512 and
$58,019 which represented the total allowance for loan losses related to
impaired loans at December 31, 1998 and 1997, respectively. The average
recorded investment in impaired loans amounted to approximately $1,065,049
and $1,078,509 for the years ended December 31, 1998 and 1997, respectively.
Cash receipts on impaired loans amounted to $173,694 and $621,293 in 1998
and 1997, respectively, of which $186,703 and $592,379 were applied to the
principal balances of the loans.
In addition, the Company had other nonaccrual loans of approximately
$1,250,961 and $485,100 at December 31, 1998 and 1997, 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 $91,458 and $77,724 for the years ended December
31, 1998 and 1997, respectively.
The Company is not committed to lend additional funds to debtors with
impaired, nonaccrual or modified loans.
Residential real estate loans aggregating $1,327,195 and $1,882,450 at
December 31, 1998 and 1997, respectively, were pledged as collateral on
deposits of municipalities.
Note 4. Allowance for Loan Losses
<TABLE>
Changes in the allowance for loan losses for the years ended December 31
are as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning $1,502,202 $1,401,042 $1,519,247
Provision charged to operating expense 660,000 660,000 365,000
Recoveries of amounts charged off 202,057 172,523 101,914
2,364,259 2,233,565 1,986,161
Amounts charged off (705,292) (731,363) ( 585,119)
Balance, ending $1,658,967 $1,502,202 $1,401,042
</TABLE>
Note 5. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 80,747 $ 80,747
Buildings and improvements 2,455,707 2,452,267
Furniture and equipment 4,089,860 3,984,544
Leasehold improvements 408,187 408,187
7,034,501 6,925,745
Less accumulated depreciation (4,024,460) (3,640,084)
$ 3,010,041 $ 3,285,661
</TABLE>
Depreciation included in occupancy and equipment expense amounted to
$384,376, $407,238 and $392,775 for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company occupies leased quarters at four branch office locations
under operating leases expiring in various years through 2013 with options
to renew.
Minimum future rental payments under non-cancelable operating leases
having original terms in excess of one year as of December 31, 1998, for
each of the next five years and in aggregate are:
<TABLE>
<C> <C>
1999 $ 98,425
2000 79,575
2001 66,110
2002 66,110
2003 66,110
Subsequent to 2003 252,170
$628,500
</TABLE>
Note 6. Other Real Estate Owned
Total rental expense amounted to $293,784, $293,560 and $307,885 for the
years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
A summary of foreclosed real estate at December 31 is as follows:
<CAPTION>
1998 1997
<S> <C> <C>
Other real estate owned $ 793,449 $1,391,593
Less allowance for losses on OREO (251,546) (302,726)
Other real estate owned, net $ 541,903 $1,088,867
</TABLE>
<TABLE>
Changes in the allowance for losses on OREO for the years ended December 31
were as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning $302,726 $152,098 $113,386
Provision for losses 26,592 173,496 38,712
Charge-offs, net (77,772) (22,868) -0-
Balance, ending $251,546 $302,726 $152,098
</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 $301,936 and $314,715 at December 31, 1998 and 1997,
respectively. The provision for undistributed net (gains) and losses of the
partnerships charged to earnings were $74,779, $24,000 and ($16,126) for
1998, 1997 and 1996, respectively.
Note 8. Deposits
<TABLE>
The following is a maturity distribution of time certificates of deposit
at December 31, 1998:
<S> <C>
Maturing in 1999 $66,871,262
Maturing in 2000 18,001,893
Maturing in 2001 9,428,291
Maturing in 2002 223,508
Maturing in 2003and after 1,077,883
$95,602,837
</TABLE>
Note 9. Borrowed Funds
<TABLE>
FHLB borrowings for the years ended December 31, were as follows:
<CAPTION>
1998 1997
<S> <C> <C>
Community Investment Program borrowings,
fixed rate (vary 6.73% to 7.67%), payable at maturities $ 60,000 $ 60,000
FHLB term borrowing, 5.71% fixed rate,
payable February 13, 1998 -0- 4,000,000
FHLB term borrowing, 4.89% fixed rate,
payable February 25, 2003 4,000,000 -0-
$4,060,000 $4,060,000
</TABLE>
<TABLE>
Principal maturities of borrowed funds as of December 31, 1998,
are as follows:
<C> <C>
1999 $ 5,000
2000 -0-
2001 -0-
2002 15,000
2003 -0-
Thereafter 4,040,000
$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- at both December 31, 1998 and 1997. 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. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase amounted to $288,241 as of
December 31, 1998. These agreements are collateralized by a U. S. Treasury
note with a carrying value of $1,008,393 and a fair value of $1,012,188.
This security pays interest at 6.875% and matures July 31, 1999.
The average daily balance of this repurchase agreement approximated
$93,282 during 1998. The maximum borrowings outstanding on this agreement
at any month-end reporting period of the Bank was $367,459 in 1998. These
repurchase agreements mature daily. The securities underlying these
agreements are held in safekeeping by the Institution.
Note 11. 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 Company. At December 31, 1998 and 1997, $20,000 and
$27,000, 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 $2.45 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, 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, 1998 and 1997, $-0- and $77,000, 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.
Note 12. 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.
<TABLE>
Federal income tax expense for the years ended December 31 was as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Currently paid or payable $785,592 $717,712 $543,383
Deferred (75,246) 37,392 110,709
$710,346 $755,104 $654,092
</TABLE>
<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:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Computed "expected" tax expense $986,170 $986,170 $977,125
Tax exempt interest (208,713) (208,465) (250,140)
Disallowed interest 32,786 30,893 38,412
Partnership tax credits (64,405) (66,300) (69,000)
Other (35,492) 12,806 (42,305)
$710,346 $755,104 $654,092
</TABLE>
<TABLE>
The deferred income tax provision consisted of the following items at
December 31:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Depreciation ($16,003) ($9,040) $ 14,515
Loan fees 30,689 28,523 37,180
Mortgage servicing 31,465 12,389 13,100
Deferred compensation (23,984) (22,542) (19,429)
Bad debts (53,300) (34,394) 40,190
Limited partnerships 42,958 16,248 21,000
Nonaccrual loan interest (49,960) 31,490 17,135
OREO 17,401 (51,214) (13,162)
Other (54,512) 65,932 180
($75,246) $37,392 $110,709
</TABLE>
<TABLE>
Listed below are the significant components of the net deferred tax asset
at December 31:
<CAPTION>
1998 1997
Components of the deferred tax asset:
<S> <C> <C>
Bad debts $426,882 $373,582
Unearned loan fees 102,454 133,143
Nonaccrual loan interest 123,662 73,702
OREO writedowns 85,526 102,927
Deferred compensation 74,732 50,748
Other 125 561
Total deferred tax asset 813,381 734,663
Valuation allowance -0- -0-
Total deferred tax asset, net of valuation allowance 813,381 734,663
</TABLE>
<TABLE>
<CAPTION>
Components of the deferred tax liability: 1998 1997
<S> <C> <C>
Depreciation 157,228 173,231
Limited partnerships 124,206 81,248
Mortgage servicing rights 63,600 32,135
Other 12,307 14,743
Unrealized gain on securities available-for-sale 121,254 17,365
Total deferred tax liability 478,595 318,722
Net deferred tax asset $334,786 $415,941
</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 13. 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 $287,788, $240,000 and
$188,000 for 1998, 1997 and 1996, respectively.
Note 14. 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.
<TABLE>
The Company generally requires collateral or other security to support
financial instruments with credit risk.
<CAPTION>
Contract or
-Notional Amount-
1998 1997
Financial instruments whose contract
amounts represent credit risk:
<S> <C> <C>
Commitments to extend credit $11,593,014 $7,519,854
Standby letters of credit and
commercial letters of credit $ 869,746 $ 538,629
Credit card arrangements $ 2,912,747 $3,802,931
</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
counter-party. 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 15. 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 16. 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>
1998 1997
<S> <C> <C>
Balance, beginning $906,811 $1,044,294
New loans 448,280 302,579
Repayments (778,182) (440,062)
Other (32,145) -0-
Balance, ending $544,764 $ 906,811
</TABLE>
Other loan activity consists of borrowings related to a director who has
retired.
Total deposits with related parties approximated $920,194 and $556,814 at
December 31, 1998 and 1997, respectively.
Note 17. 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
$992,000 and $825,000 at December 31, 1998 and 1997, respectively. In
addition, the Company was required to maintain contracted clearing balances
of $275,000 at December 31, 1998 and 1997.
Note 18. Regulatory Matters
The Bank (Community National 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, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, 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
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $21,021 19.62% $8,570 8.0% $10,713 10.0%
Tier I capital
(to risk-weighted assets) $19,678 18.37% $4,285 4.0% $ 6,428 6.0%
Tier I capital
(to average assets) $19,678 8.72% $9,028 4.0% $11,286 5.0%
As of December 31, 1997:
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%
</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 19. Fair Value of Financial Instruments
<TABLE>
The estimated fair values of the Company's financial instruments
are as follows:
<CAPTION>
December 31, 1998
Carrying Amount Fair Value
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 20,424,088 $ 20,424,088
Securities held-to-maturity 29,877,851 30,038,323
Securities available-for-sale 20,590,000 20,590,000
Restricted equity securities 1,141,650 1,141,650
Loans, net of allowance 145,827,416 147,709,582
Accrued interest receivable 1,460,671 1,460,671
Financial liabilities:
Deposits 197,797,294 198,544,164
Repurchase agreements 288,241 288,241
Borrowed funds 4,080,000 3,967,755
Accrued interest payable 325,122 325,122
<CAPTION>
December 31, 1997
Carrying Amount Fair Value
Financial assets:
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 335,817 335,817
</TABLE>
The estimated fair values of deferred fees on commitments to extend credit
and letters of credit were immaterial at December 31, 1998 and 1997.
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 20. 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 consolidated financial statements. The excess of the
purchase price over the assets of the Bank is being amortized on a straight-
line basis over 15 years. Unamortized goodwill amounted to $342,662 and
$319,817 as of December 31, 1998 and 1997, respectively, and is included
in "Other Assets" on the balance sheet. Amortization expense was $22,845
and $-0- for the years ended December 31, 1998 and 1997, respectively.
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 21. 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>
<CAPTION>
Community Bancorp. (Parent Company Only)
Condensed Balance Sheets December 31,
Assets 1998 1997
<S> <C> <C>
Cash $ 276,634 $ 386,277
Investment in subsidiary - Community National Bank 19,932,481 18,441,126
Investment in subsidiary - Liberty Savings Bank 1,789,822 1,746,538
Other assets 23,489 12,066
Total assets $22,022,426 $20,586,007
Liabilities and stockholders' equity
Liabilities
Other liabilities $ 367 $ 1,650
Subordinated convertible debentures 20,000 104,000
Total liabilities 20,367 105,650
<CAPTION>
Stockholders' equity 1998 1997
Common stock, $2.50 par value: 6,000,000 shares
authorized, 3,140,606 shares issued at 12/31/98
and 3,044,697 shares issued at 12/31/97 7,851,516 3,842,907
Additional paid-in capital 8,756,453 7,978,435
Retained earnings (Note 17) 5,604,096 9,070,443
Accumulated other comprehensive income 235,375 33,709
Less treasury stock, at cost (1998: 29,646 shares;
1997: 29,629 shares) (445,381) (445,137)
Total stockholders' equity 22,002,059 20,480,357
Total liabilities and stockholders' equity $22,022,426 $20,586,007
</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>
<CAPTION>
Community Bancorp. (Parent Company Only)
Condensed Statements of Income Years ended December 31,
1998 1997 1996
Revenues
<S> <C> <C> <C>
Dividends
Bank subsidiaries $ 903,000 $2,913,800 $ 711,200
Total revenues 903,000 2,913,800 711,200
Expenses
Interest on long-term debt 4,597 11,489 20,828
Administrative and other 64,490 24,000 22,522
Total expenses 69,087 35,489 43,350
Income before applicable income tax and equity
in undistributed net income of subsidiaries 833,913 2,878,311 667,850
Applicable income tax (benefit) (23,489) (12,066) (14,739)
Income before equity in undistributed net
income of subsidiaries 857,402 2,890,377 682,589
Equity (deficit) in undistributed net
income - subsidiaries 1,332,972 (744,982) 1,537,215
Net income $2,190,374 $2,145,395 $2,219,804
</TABLE>
<TABLE>
Community Bancorp. (Parent Company Only)
Condensed Statements of Cash Flows
<S> <C> <C> <C>
Cash flows from operating activities
Net income $2,190,374 $2,145,395 $2,219,804
Adjustments to reconcile net income to net
cash provided by operating activities
(Equity) deficit in undistributed net
income of subsidiaries (1,332,972) 744,982 (1,537,215)
(Increase) decrease in income
taxes receivable (11,423) 2,673 5,806
Decrease in other liabilities (1,283) (1,114) (525)
Net cash provided by
operating activities 844,696 2,891,936 687,870
Cash flows from investing activities
Purchase of stock in subsidiary -
Liberty Savings Bank -0- (1,746,538) -0-
Net cash used for investing activities -0- (1,746,538) -0-
Cash flows from financing activities
Purchase of treasury stock (244) (4,925) (189)
Dividends paid (954,095) (863,214) (741,139)
Net cash used for financing activities (954,339) (868,139) (741,328)
Net (decrease) increase in cash (109,643) 277,259 (53,458)
Cash
Beginning 386,277 109,018 162,476
Ending $ 276,634 $ 386,277 $ 109,018
Supplemental schedule of cash paid
(received) during the year
Interest $ 5,880 $ 12,602 $ 21,353
Income taxes $ (12,066) $ (14,739) $ (20,543)
Supplemental schedule of noncash investing
and financing activities
Unrealized gain (loss) on securities
available-for-sale $ 305,555 $ 39,009 $ (64,452)
Debentures converted to common stock $ 84,000 $ 66,000 $ 95,000
Stock dividends $3,823,575 $1,294,006 $ -0-
Dividends paid
Dividends payable $1,833,146 $1,652,355 $1,404,957
Dividends reinvested (879,051) (789,141) (663,818)
$ 954,095 $ 863,214 $ 741,139
</TABLE>
Note 22. Quarterly Financial Data (Unaudited)
<TABLE>
A summary of financial data for the four quarters of 1998, 1997 and 1996 is
presented below:
<CAPTION>
Community Bancorp. and Subsidiaries Quarters in 1998 ended
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Interest income $4,224,450 $4,207,422 $4,324,448 $4,315,390
Interest expense 1,990,049 2,053,030 2,044,945 1,988,598
Provision for loan losses 200,000 160,000 150,000 150,000
Securities gains (loss) -0- -0- -0- -0-
Other operating expenses 1,801,595 1,741,842 1,758,325 1,718,789
Net income 407,679 557,942 562,139 662,614
Earnings per common share $ .14 $.18 $.18 $.21
<CAPTION>
Quarters in 1997 ended
March 31 June 30 Sept. 30 Dec. 31
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 $.18 $.21 $.15 $.18
<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 $.17 $.18 $.19 $.24
</TABLE>
Note 23. 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>
1998 1997 1996
<S> <C> <C> <C>
Income
Other $ 771,947 $ 553,027 $ 564,894
Expenses
Printing and supplies $ 198,008 225,318 $ 183,831
State deposit tax 205,354 145,000 91,795
Other 1,826,410 1,671,386 1,628,049
$2,229,772 $2,041,704 $1,903,675
</TABLE>
Management's Discussion and Analysis of the results of operations
For the Year Ended December 31, 1998
Community Bancorp. is a holding company whose subsidiaries include Community
National Bank ("The Bank") and Liberty Savings Bank ("Liberty"). Community
National Bank is a full service institution operating in the state of Vermont,
with seven offices located throughout three counties in northern Vermont.
Liberty Savings Bank is a New Hampshire guaranty savings bank which Community
Bancorp. acquired on December 31, 1997. Acquired were the assets; primarily a
U.S. Treasury Strip with a fair value of approximately $1.4 million, and all
of the outstanding stock of Liberty Savings Bank. Presently, since no building
was involved in the transaction, the address for Liberty Savings Bank is c/o
Community Bancorp., Derby, Vermont. The future goal of Community Bancorp. is
to operate Liberty as a lending facility primarily serving the north country
of New Hampshire. Management is working closely with the Board of Directors
to find a suitable location for this endeavor. Once an ideal location is found,
the goal of expanding the operations of Community Bancorp and subsidiaries
("The Company") to include the northern portion of the state of New Hampshire
will be achieved.
As mentioned above, this transaction occurred on December 31, 1997, resulting
in no business activity for the 1997 fiscal year and moderate income for the
1998 fiscal year. With that in mind, the following discussion refers primarily
to the operations of the Bank, with consolidated balance sheet and income
statement figures of the Company.
On March 13,1998, the Company announced a two-for-one stock split to be
accomplished by a 100% stock dividend payable on June 1, 1998 to shareholders
of record as of May 15, 1998, contingent upon the approval by the Company's
shareholders of a proposal to increase the number of shares the Company may
issue. This proposal was voted on and approved at the annual shareholders
meeting held on May 5, 1998. To that end, all per share data disclosed
throughout this discussion and in the accompanying tables has been restated
to reflect this dividend.
At the end of this narrative 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 Bancorp.
and subsidiaries.
Liquidity-Liquidity 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 decreased from $18.2 million at
the end of 1997 to $17.9 million at the end of 1998, a decrease of $308,214
or 1.7%. Other time deposits decreased to $77.7 million from $78.5 million
for the same time period, a decrease of just under 1%. A review of these
deposits indicates that any change is generated locally and regionally by
established customers of the Company. The Company has no brokered deposits.
Our gross loan portfolio decreased $1.8 million, or by 1.2%, to end the
1998 year at $148.3 million compared to $150.1 million a year ago. Of this
total loan portfolio of $158.3 million, $78.9 million or 53%, 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, 1998, the Company had borrowed $4 million
against the $105 million at Federal Home Loan Bank of Boston.
As of year-end 1998, the Company maintained short-term investments of
almost $30 million. Of this total, approximately $20.6 million or 69% are
treasuries classified as "available-for-sale." As of December 31, 1998, the
Company had $18.6 million in "held-to-maturity" treasuries, less $5 million
pledged, netting $13.6 million compared to $19.1 million, less $5 million
pledged, netting $14.1 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 increased by $9.8 million, or
24.7%, in 1998, and demand deposit accounts increased to $21.7 million from
$20.3 million for the same time period, an increase of 7.12%.
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 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 1998 the
Company had $1.14 million in equity securities classified as available-for-
sale compared to $1.1 million at the end of 1997. In addition, at December
31, 1998, the Company had $20.6 million in U.S. Government securities
available-for-sale, compared to $8.04 million at December 31, 1997. These
securities have been marked to market, with a resulting gain after taxes of
$235,375 for 1998 compared to $33,709 for 1997. These figures are presented
in the equity section of our financial statement as "Accumulated other
comprehensive income." As adjusted for this item, our investment portfolios
at the respective years' ends were as follows:
<TABLE>
<CAPTION>
December 31, 1998: Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and
agency securities
Available-for-sale $20,233,371 $357,237 $ 608 $20,590,000
Held-to-maturity (1) 20,143,530 160,472 -0- 20,304,002
States and political
subdivisions
Held-to-maturity 9,734,321 -0- -0- 9,734,321
Restricted equity securities
Available-for-sale 1,141,650 -0- -0- 1,141,650
$51,252,872 $517,709 $ 608 $51,769,973
<CAPTION>
December 31, 1997: Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government and
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 and 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>
<F01> Included in this portfolio is the U.S. Treasury Strip for Liberty
Savings Bank with an amortized cost and fair value of $1,392,338 as
of December 31, 1997, and an amortized cost of $1,480,767 and a fair
value of $1,519,752 as of December 31, 1998.
</TABLE>
<TABLE>
Gross realized gains and gross realized losses on actual sales of securities
were:
<CAPTION>
1998 1997 1996
<S> <C> <S> <C>
Gross realized gains:
U.S. Government and agency securities -0- -0- $ 909
Other securities -0- -0- -0-
-0- -0- $ 909
Gross realized losses:
U.S. Government and agency securities -0- -0- $2,837
Other securities -0- -0- -0-
-0- -0- $2,837
</TABLE>
Allowance for possible losses on loans-Management believes that the
policies and procedures established for the underwriting of its loan
portfolio are both 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 also help to ensure the adequacy of the allowance.
An ongoing review of the loan portfolio is performed by the executive
officers and the Board of Directors, who meet 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 employs both a full-time loan review and credit
administration officer staffed with a department whose duties include, but
are not limited to, a review of the loan portfolio including delinquent
and non-accrual loans. Also on staff are personnel whose primary duties
are to monitor non-performing loans. Included in the duties of this
department are the tracking of payments by delinquent loan customers and
management of the Company's OREO portfolio. A quick review of the OREO
portfolio shows positive results since the establishment of this department.
Results from both departments mentioned 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 ensure
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, 1998, of
$1.66 million constitutes just over 1% of the total loan portfolio compared
to $1.5 million or 1% a year ago. In management's opinion this is both
adequate and reasonable in light of the fact that $122.6 million of the total
loan portfolio, or 82.7%, consists of real estate mortgage loans. These
figures are higher than the year-end figures for last year of $121.9 million,
or 81.2%. Included in the 1998 total are $98.4 million, or 66.3% of loans
secured by 1-4-family residences. 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 $1.66
million would comprise 3.3% of eligible loans, compared to 2.9% a year ago.
In management's opinion a loan portfolio consisting of 82.7% 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 1998 and 1997 reveals an
overall increase of $429,956 or almost 15% from a figure of $2.9 million
to $3.3 million. A decrease of 50.23% is noted in the Company's OREO
portfolio, while increases are recognized in non-accrual loans and loans
90 days or more past due and still accruing of 58.4% and 37.5%, respectively.
Of the total non-accrual loan portfolio of $2.4 million, approximately $2.1
million, or 90%, are real estate secured mortgage loans on which the Company
has suffered relatively few losses. Loans 90 days or more past due and still
accruing ended the 1998 calendar year at a balance of $401,301 compared to
$291,931 for the prior calendar year. The portfolio of Other Real Estate
Owned (OREO) notes the only decrease, ending 1998 at a figure of $541,903
compared to $1.1 million for the same period in 1997.
<TABLE>
Non-performing assets as of December 31, 1998 and 1997, were made up of the
following:
<CAPTION>
1998 1997
<S> <C> <C>
Non-accruing loans $ 2,353,623 $1,486,073
Loans past due 90 days or more and still accruing 401,301 291,931
Other real estate owned 541,903 1,088,867
Total $3,296,827 $2,866,871
</TABLE>
In summary, non-performing assets increased 15% from the December 31, 1997,
figure of $2.87 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 for 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, a "write-down" is necessary to bring the
loan balance to a level equal to the appraised value prior 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 $87,300 in
properties deeded in lieu with the remaining $454,603 acquired through the
normal foreclosure process. All properties are located in Vermont, and are
as follows: land in Jay; two commercial condominium units in Newport; two
commercial buildings in Newport; an apartment building in Newport Center and
one in Orleans; two single-family residences in Newport; and land in Island
Pond. 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 our Credit Administration
Department, the impact of this accounting standard continues to have little
effect on the Company's bottom line.
<TABLE>
Bank premises and Equipment-The major classes of bank premises and equipment
and the total accumulated depreciation is as follows:
<CAPTION>
December 31,
1998 1997
<S> <C> > <C>
Land $ 80,747 $ 80,747
Buildings and improvements 2,455,707 2,452,267
Furniture and equipment 4,089,860 3,984,544
Leasehold improvements 408,187 408,187
7,034,501 6,925,745
Less accumulated depreciation (4,024,460) (3,640,084)
$ 3,010,041 $ 3,285,661
</TABLE>
Depreciation included in occupancy and equipment expense amounted to $384,376,
$407,238 and $392,775 for the years ended December 31, 1998, 1997 and 1996,
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 extended until March 31, 1999. The company
is in the process of moving this office to a condominium space of approximately
3,084 square feet in the new state office building 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, 1998, for each of
the next five years and in aggregate are:
<C> <C>
1999 $ 98,425
2000 79,575
2001 66,110
2002 66,110
2003 66,110
Subsequent to 2003 252,170
Total $628,500
</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 $194.4 million at year-
end 1996 to $197.3 million at the end of 1997 to $209.2 million at December
31, 1998, an increase of $2.9 million for 1996 to 1997, and $11.9 million
for 1997 to 1998. The average volume of loans grew from $138.6 million at
year-end 1996 to $145.8 million at year-end 1997 to $147.8 million at year-
end 1998. The results are increases of $7.2 million or 5.2% for 1996 versus
1997 and $2.1 million or 1.4% for 1997 versus 1998. Taxable investment
securities decreased slightly from $35.75 million at the end of 1996 to
$35.65 million at the end of the same comparison period in 1997 and then
increased to $38.78 million as of December 31, 1998, resulting in a
decrease of $105 thousand or .3% and an increase of $3.14 million or 8.8%,
respectively. Tax exempt securities started at $14.2 million at the end of
1996 and decreased to $12.2 million at year-end 1997 and then increased to
$13.1 million as of December 31, 1998. The decrease of $2.1 million or 14.4%
for 1996 versus 1997 is attributable in part to a decrease in non-arbitrage
borrowing. Federal funds sold started the comparison period at $4.7 million
as of December 31, 1996, and decreased $2.1 million or 45.2% to $2.6 million
as of December 31, 1997, and then increased almost $2.4 million or 90.8% to
$4.9 million as of December 31, 1998. The Bank of Boston sweep account, which
was established during the first half of 1998, ended at an average volume of
$3.34 million with an average yield of 5.54%. The average volume of other
securities ended the 1996 and 1997 comparison periods at $1.17 million and
then increased slightly to $1.27 million with an average yield of 6.46% as of
the end of the 1998 fiscal year.
Loans make up most of the total earning assets at 70.7% for 1998, a
decrease from the 1997 portion of 73.9 %, which is an increase from the 1996
portion of 71.3%. Other securities count for the smallest percentage at .61%,
.59% and .60%, respectively, for the years ended 1998, 1997 and 1996.
Average interest-bearing liabilities decreased from $170.25 million in
1996 to $170.16 million for 1997 and then increased to $178.14 million as of
December 31, 1998. A review of the areas that comprise this total shows a
steady decrease in savings deposits. These funds started at $32.3 million as
of year-end 1996, then decreased to $31.9 million or by 1.28% as of year-end
1997 and closed year-end 1998 at an average volume of $30.8 million, a
decrease of 3.34%. Subordinated debentures also report a steady decrease
starting at an average volume of $216 thousand as of year-end 1996,
decreasing 51% to an average volume of $107 thousand as of year-end 1997
and then decreasing 55% to end the 1998 year at an average volume of $48
thousand. NOW and money market funds set a different trend by starting
year-end 1996 at an average volume of $41.4 million, then decreasing to
$39.3 million or by 4.9% as of year-end 1997, then increasing by 14.2% to
$44.9 million as of year-end 1998. Time deposits followed the same trend
beginning at an average volume of $96.2 million, decreasing to $94.8
million or by 1.5% and then increasing to $98.2 million or by 3.6% for
the same comparison period. Other borrowed funds charted its own course with
an average volume reported for year-end 1996 of $99 thousand, increasing to
an average volume of $4.061 million as of year-end 1997, and then decreasing
slightly to an average volume of $4.060 million as of year-end 1998.
Time deposit accounts for the biggest portion of interest-bearing
liabilities with figures of 56.5%, 55.7% and 55.1%, respectively, as of
December 31, 1996, 1997 and 1998. Other borrowed funds accounted for the
smallest portion for the year ended 1996 at .06%, while subordinated
debentures claim the least for December 31, 1997, at a figure of .06%, and
.03% for December 31, 1998.
The average volume of subordinated debentures has been steadily decreasing
over the last three years. The 9% debentures have all been converted as of
December 31, 1998, and the redemption period for the 11% debentures is in
the second phase with a price of 103%, translating into 407.48 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, 1998, was
$20,000.
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 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. In 1998 the spread was not as favorable as
1997 due to a decrease in loan volume, the biggest source of interest
income, and an increase in deposit volume, the biggest source of interest
expense.
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 $16.91 million at the end of 1996 to $17.13
million for 1997 and then to $17.39 million for 1998, an increase of 1.3%
and 1.5%, respectively. Interest expense decreased from $8.2 million to
$7.8 million and then increased to $8.1 million as of year-end 1998, or
4.2% for 1996 versus 1997, and 3.1% for 1997 versus 1998. The overall
effect, or net interest income, was $8.7 million for the year ended 1996
versus $9.3 million for the year ended 1997 and a 1998 year-end net
interest income of $9.31 million.
Net interest spread, the difference between the yield on interest-earning
assets versus interest-bearing liabilities, at the end of 1998 was 3.78%
compared to 4.08% for 1997 and 3.90% for 1996. Interest differential, defined
as net interest income divided by average earning assets, for the years ended
1998, 1997 and 1996, was reported at 4.45%, 4.71% and 4.49% respectively.
Income from loans for the year was $13.8 million for 1998, $13.9 million
for 1997 and $13.4 million for 1996, resulting in yields of 9.31% for 1998,
9.51% for 1997 and 9.65% for 1996.
The income on taxable investment went from $2.10 million for 1996 to
$2.12 million for 1997 and then increased to $2.2 million for 1998. The
respective yields on these investments are 5.86% for 1996, 5.94% for 1997
and 5.66% for 1998. 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 1996 of $1.1 million, then decreasing by 16.6% to end
at a 12-month figure for 1997 of $929 thousand and increasing slightly to
end the 12 months of 1998 at an interest figure of $930 thousand. The tax-
equivalent yield for these investments started at 7.86% at the end of 1996
and decreased 21 basis points to 7.65% for 1997, and then decreased 53 basis
points to a 1998 year-end yield of 7.12%. The income on other securities
increased from $78 thousand for 1996, to $79 thousand for 1997, and then
increased to $82 thousand for 1998, with average yields reported at 6.68%,
6.76% and 6.46%, respectively.
Interest income for federal funds sold was reported at $246 thousand with
a yield of 5.22% for the 12-month comparison period of 1996, compared to
income of $140 thousand with a yield of 5.42% for 1997, and income of $237
thousand yielding 4.81% for the same period of 1998.
Interest income of $185 thousand yielding 5.54% was reported on the new
Bank of Boston sweep account as of December 31, 1998.
Overall, interest generated by our average earning assets increased by
1.3% from 1996 to 1997 and 1.5% from 1997 to 1998 to end the 1998 year with
tax-equivalent interest income of approximately $17.4 million. The average
yield on total average earning assets decreased from 8.70% for 1996 to 8.68%
for 1997 and ended the 1998 calendar year at 8.31%, a decrease of two basis
points and 37 basis points, respectively.
Interest expense associated with our savings accounts decreased for each
comparison year, starting at $944 thousand at year-end 1996, decreasing $67
thousand or 7.1% to $877 thousand as of year-end 1997, and then decreasing
$70 thousand or 8.0% to a 1998 year-end expense figure of $807 thousand.
The average yield also decreased throughout the three-year comparison period
to end at 2.62% as of December 31, 1998.
Interest expense on NOW and money market funds began the year-end
comparison period at $1.5 million as of 1996, then decreased 8.3% to end
1997 at $1.4 million; then an increase of 12% is noted when comparing year-
end 1997 to year-end 1998, to end at a reported expense figure of $1.6
million. The average yield started the comparison period at a rate of 3.68%
as of December 31, 1996, then decreased 13 basis points to a rate of 3.55%
as of December 31, 1997, and then decreased seven basis points to end at
3.48% as of December 31, 1998.
Interest expense on time deposits reported the same trend as NOW and
money market funds beginning at year-end 1996 with an expense figure of
$5.68 million, then decreasing $377 thousand or 6.6% to a year-end 1997
expense figure of $5.3 million, then increasing by $192 thousand or 3.6%
to a reported expense figure of $5.5 million as of year-end 1998. The
average yield on these funds tracked its own course starting at an average
yield of 5.90%, then decreasing 30 basis points to end at 5.60% as of the
end of 1997, and then reported the same average yield of 5.60% as of the
end of the 1998 fiscal year.
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
1996, increased $238 thousand to end the 1997 fiscal year at $245 thousand,
and then decreased to $198 thousand or by 19% as of year-end 1998. 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 for the 1996
versus 1997 comparison period. The average yields decreased steadily from
7.07% to 6.03% and then to 4.88%, respectively, for December 31, 1996, 1997
and 1998.
As the volume of subordinated debentures decreases, so does the expense
associated with this liability. Interest expense of $21,000, $11 thousand
and $5 thousand was noted for the twelve months ended 1996, 1997 and 1998,
respectively, which transforms into a decrease of 47.6% and 54.5%,
respectively. The results are average yields of 9.72% as of year-end 1996,
10.28% as of year end 1997 and 10.42% as of year-end 1998.
In total, interest expense associated with total interest-bearing
liabilities began the year-end comparison periods at $8.2 million for 1996,
decreased to $7.8 million for 1997 and ended 1998 at a figure of $8.1
million, with average yields of 4.80%, 4.60% and 4.53%, 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 fourth quarter of 1997 resulted in lower earnings for the 1997
fiscal year. The fourth quarter of 1998 was better than 1997, but not quite
as good as 1996 due in part to a shortfall in the anticipated tax credits
for the 1998 calendar year. Other operating income for this quarter was
reported at $430,258 for 1998, $346,910 for 1997 and $343,572 for 1996.
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 decrease for the fourth quarter of 1998 compared to the same
period of 1997. Other income reported the biggest increase for the fourth
quarter of 1998 versus 1997, with an increase of $44,962, or 30.6%. Income
from sold loans, a component of other income, reported income of $34,813
for the fourth quarter of 1998 versus income of $1,879 for the same period
in 1997, clearly supporting the total increase for the quarter. Trust
department income increased $40,400 for the fourth quarter of 1998 versus
1997, while a decrease of $10,244 or 29.3% was reported for 1997 versus
1996. Expenses incurred for the set-up and installation of new equipment
in 1997 for trust processing are key reasons for the respective increase
and decrease, as well as solid growth in trust accounts during 1998.
Other operating income for the twelve months of 1998 reported at $1.6
million is an increase of almost 19% over the 1997 figure of $1.34 million,
which is a 4% increase over the 1996 figure of $1.28 million. Other income
again reported the biggest increase for 1998 versus 1997, to end 1998 at a
figure of $771,947, an increase of $218,920, or 40% over the 1997 figure of
$553,027. Income from sold loans again contributes to the overall increase
in other income with reported income for the 1998 year of $153,699, compared
to income of $19,580 for 1997. Service fees ended the 1997 year at $695,260,
an increase of $90,811 or 15% over the 1996 year-end figure, while a decrease
is noted for the 1998 versus 1997 comparison period. On the average,
customers are maintaining higher balances in their deposit accounts during
the 1998 fiscal year, leading to a decrease in fees for these accounts.
Trust department income reported the biggest decrease for the calendar years
1997 versus 1996 mostly due to the reasons mentioned above. 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 $122,533 for the twelve months ended December 31, 1998,
compared to $43,211 for the same period in 1997 and $38,531 at year-end
1996.
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 Company 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.
Other operating expenses for the fourth quarter of 1998 were reported
at $1.72 million, resulting in a decrease of 2% over the 1997 fourth quarter
figure of $1.75 million. The fourth quarter of 1996 ended at an expense
figure of $1.58 million, tallying an increase of $174,353 or just over 11%
for the 1997 versus 1996 comparison periods. Pension and other employee
benefits accounts for the biggest increase for 1998 versus 1997 created
by additional funds that were needed to cover a shortfall for the 1997
fiscal year. Other expenses reported the biggest increase for the fourth
quarter ended 1997 versus the same period in 1996 with an expense figure
of $614,150 for 1997 compared to $466,580 for 1996, an increase of 31.6%.
OREO expenses, a component of other expenses, showed expenses totaling
$95,753 for the fourth quarter of 1997 and $88,999 for the same period in
1996, resulting in an increase of $6,754 for this comparison period. 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.
Total other operating expenses ended the 1998 fiscal year at $7.02 million,
an increase of $261,920 or 3.9% over the 1997 fiscal year figure of $6.8
million, which is an increase of $361,554 over the 1996 figure of $6.4
million. Other expenses tallied the biggest increase for 1998 versus 1997
fiscal year comparison periods with an expense figure of $2.23 million and
$2.04 million, respectively. Loss on limited partnership, a component of
other expense, reported an expense figure of $74,779 for the fiscal year
1998 compared to $24,000 a year ago. This increase was the result of a
change in the way the loss for this partnership is booked from year to year.
Salaries reported the biggest increase for the twelve months-comparison
period of 1997 versus 1996 with a figure of $2.8 million for 1997, an
increase of $177,100 or 6.8% over the 1996 figure of $2.6 million, while
it reported the smallest increase for the 1998 versus 1997 fiscal years.
This moderate increase for 1998 versus 1997 can be attributed to a reduction
in the requirement of full-time hours, as well as personnel changes.
Many of the components of other operating expenses are estimated on a
yearly basis and accrued in monthly installments. In an attempt to present
accurate figures on 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-Income before taxes of $888,263 is reported
for the fourth quarter of 1998, compared to $798,066 for the same period in
1997, and $883,687 for the fourth quarter of 1996, translating to an increase
of $90,197 or 11.3% for 1998 versus 1997, and a decrease of $85,621 or 9.7%
for 1997 versus 1996. Figures presented at the end of 1998 for income before
taxes show a tiny increase of less than one-half of 1% compared to the same
period in 1997, and an increase of just under 1% for fiscal year 1997 versus
1996. Provisions for income taxes for the fourth quarters ended 1998, 1997
and 1996 are reported at $225,648, $235,567 and $183,441, respectively.
Provisions for income taxes for each fiscal year are reported as a decrease
of $44,758 or 5.9%, from $755,104 for 1997 to $710,346 for 1998, and an
increase of 15.4% from $654,092 for 1996 to $755,104 for 1997. This increase
in income tax expense for 1997 is due in part to the absence of an
anticipated tax credit for 1997, part of which was booked in 1998 with
the remainder anticipated to be booked within the next fiscal year.
Financial Summary-The calendar year of 1998 ended with a 2.1% increase
over the calendar year of 1997 and a 1.3% decrease over the same period in
1996. Total earnings of $2.19 million were reported for 1998, compared to
$2.15 million for 1997 and $2.22 million for 1996. The results of these
figures are earnings per share of $0.71 for 1998, compared to $0.72 for the
year ended 1997 and $0.78 for 1996. A two-for-one stock split was announced
on March 13, 1998, payable on June 1, 1998, to shareholders of record as of
May 15, 1998. This was accomplished through a 100% stock dividend. In order
for this to occur, the Company's shareholders voted on and approved a proposal
to increase the number of shares the Company may issue. This was voted on at
the annual shareholders meeting held on May 5, 1998. As a result of this stock
split, per share data for all comparison periods has been restated to reflect
this transaction. The most recent cash dividend of $0.15 was paid on November
1, 1998, to shareholders of record as of October 15, 1998.
Return on average assets (ROA), which measures how effectively a
corporation uses its assets to produce earnings, decreased to 1.00% for 1998,
versus 1.02% for 1997 and 1.07% for 1996. Return on average equity (ROE),
which is the ratio of income earned to average shareholders' equity, was
10.35% for 1998 compared to 10.69% for 1997 and 12.16% for 1996.
Capital Resources-Stockholders' equity at December 31, 1997, was
$20,480,357 with a book value of $6.79 per share. It increased through
earnings of $2,190,374, the sale of common stock of $963,052, through our
dividend reinvestment program and debenture conversions mentioned earlier,
and increased $201,666 through adjustments for the valuation allowance of
securities. It decreased through purchases of treasury stock of $244 and
dividends paid totaling $1,833,146. As of December 31, 1998, stockholders'
equity was $22,002,059 with a book value of $7.07 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 required to maintain minimum amounts of capital to total "risk-
weighted" assets as defined by the banking regulators. At December 31, 1998,
the Bank is required to have minimum Tier I and Total Capital ratios of 4.00%
and 8.00%, respectively. The Company's consolidated risk-weighted assets were
reported at $107.5 million with reported ratios at December 31, 1998, of
approximately 20% for Tier I capital and 21.3% for Total capital. The report
labeled "Capital Ratios" provides a better understanding of the components
of each of the Tier I and Tier II capital ratios as well as a three-year
comparison of the growth of these ratios.
The Company intends to continue the 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
Company's future capital needs. From time to time the Company may make
contributions to the capital of either of its subsidiaries, the Bank or
Liberty. At present, regulatory authorities have made no demand on the
Company to make additional capital contributions to either the Bank's or
Liberty'S capital.
Year 2000-The Company is currently working to resolve the potential impact
of the year 2000 (Y2K) on the processing of date-sensitive information by the
Company's computerized information systems. The Y2K 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 systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or systems failures. The
Federal Reserve Board and other federal banking regulators (together known
as the Federal Financial Institutions Examination Council, or "FFEIC") have
developed joint guidelines and benchmarks for assessing Y2K risk, remediation
of non-compliant systems and components and post-remediation testing and
implementation.
In an effort to correctly assess the effect of Y2K on the financial
position of the Company and assess our readiness for Y2K, a Y2K committee
was organized which meets on a regular basis to keep executive management
and the Board of Directors informed of our progress towards Y2K compliance.
The committee has developed strategic, customer awareness, customer risk
assessment, test and contingency plans. In accordance with FFEIC guidelines,
the Y2K committee has defined five phases in the Y2K project management:
Phase I-Awareness Phase
In this phase we defined the problem and gained executive level
commitment. The Y2K committee developed an overall strategy.
This phase has been completed.
Phase II-Assessment Phase
During this phase, we assessed the size and complexity of the Y2K issues
and identified both information technology (IT) and non-IT systems that could
be affected by the change. At this time, we also identified systems which
were mission-critical and non-mission-critical.
We define mission-critical systems as vital to the successful continuation
of our core business activities. Our core business activities include servicing
deposits, servicing loans, item processing and accounting, originating
deposits, originating loans, investments and trust. The mission-critical
systems that support our core business activities include: our AS/400
(mainframe computer) and operating system; check processing software; check
sorters; loan, deposit and account origination software; Fedline (interface
to the Federal Reserve Bank); and trust accounting software. Other systems
not deemed mission-critical, but important, include: human resources;
payroll; ATM networks; voice banking system; heating and faxes.
We also evaluated the Y2K effect on strategic business initiatives. We
assessed the risk exposure of our customers as funds providers, funds takers
and capital market/asset counterparties.
This phase has been completed; however, we continue to monitor our
exposure on an on-going basis.
Phase III-Renovation Phase
This phase includes hardware and software upgrades or replacements and
other changes.
No mission-critical hardware or software needed to be replaced. All of
our software applications are provided by vendors and these applications
were already Y2K compliant when we began the renovation phase. We are,
however, replacing several PC's which support non-mission-critical
applications. This will be complete by 6/30/99.
Phase IV-Validation Phase
This is the testing phase. During this phase the systems identified in
Phase II (Assessment) are tested for Y2K compliance. Systems that were deemed
mission-critical were tested first. We have now started testing the remaining
systems.
All mission-critical systems were tested by 12/31/98 and were in
compliance. Non-mission critical systems will be tested by 6/30/99.
Phase V-Implementation Phase
January 1, 2000, will be a processing day. If we detect any failures of
our mission-critical systems, we will implement our contingency plans as
appropriate.
The Company does not write any source programming code and is therefore
dependent upon external vendors and service providers to alter their programs
to become Y2K-compliant. We have received certification from our vendors as to
their product compliance; however, we will still test all mission-critical and
non-mission-critical systems identified in Phase II.
<TABLE>
We have identified the following timetable for the testing phase:
<C> <S>
12/31/98 testing of internal mission-critical systems was completed
03/31/99 testing with service providers for mission critical systems should
be complete
06/30/99 testing of non-mission-critical systems should be complete.
</TABLE>
As of 12/31/98, we had completed the testing of all mission-critical
systems and noted only a few minor date formatting errors in loan documen-
tation for which we have received corrections, which will be installed
during the first quarter of 1999. These minor errors do not affect any
calculations and do not affect our ability to process loans. We will begin
testing of the non-mission-critical systems during the first quarter of 1999
and anticipate testing to be completed by 3/31/99. At this time we expect to
have all our mission-critical and non-mission-critical systems Y2K compliant
by 6/30/99. We do not anticipate any major upgrades to existing systems
before the year 2000.
The costs involved in addressing potential problems are not currently
expected to have a material impact on the Company's financial position,
results of operations or cash flows in future periods. During 1998 we
budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades.
The costs included testing of our contingency site, replacement of ten PC's
which were not Y2K-compliant and proxy testing of some of our mission-
critical systems. We have not calculated the personnel costs relating to Y2K;
however, we did not have to hire additional personnel in our Y2K efforts.
For 1999, we have budgeted $77,000. Projected expenses include the
replacement of additional PCs, PC software upgrades, consulting services,
testing, travel and education. Y2K costs are expensed from current earnings.
No new projects have been deferred due to the Y2K effort. The yearly
software update to our core system provided by one of our vendors has been
postponed by the vendor until 2000 in an effort to minimize changes to an
already compliant system. This will not have an effect on our operations.
We have reviewed the credit risk our commercial borrowers may pose to
us if they are not Y2K-compliant. At this time, we have identified only a
small number of customers deemed as high risk customers, and their inability
or failure to repay their loans as scheduled would not have a material impact
on the Company.
The worst case scenario relating to Y2K is that we would not have
electrical power. If this were the case, our contingency plan is to operate
in a manual mode. We have plans for hiring temporary help in this situation.
The next worst case scenario is that telephones would be unavailable.
If this were the case, the Derby branch could be fully operational. Other
branches would need to service deposits in an off-line mode. Requests for
account and loan origination could be directed to the Derby branch.
Assuming we have electricity and telephones, we anticipate our core
systems to be functional.
Our Y2K contingency plan is based on our disaster recovery plan, which
is written to respond to a complete core system outage. Our contingency
plan also outlines manual processes in the event of individual component
failures.
During the first quarter of 1999, outside consultants will review and
validate our contingency plans.
<TABLE>
Common Stock Performance by Quarter
<CAPTION>
1998
First Second Third Fourth
<S> <C> <C> <C> <C>
Trade price
High $13.00 $13.75 $15.00 $13.75
Low $11.75 $13.00 $13.75 $11.50
Cash Dividends
Declared $ .15 $ .15 $ .15 $ .15
<CAPTION>
1997
First Second Third Fourth
Trade price
High $ 9.75 $10.00 $11.00 $11.75
Low $ 9.38 $ 9.75 $10.00 $10.50
Cash Dividends
Declared $ .14 $ .14 $ .14 $ .14
Trade price information and cash dividends for all quarters in 1997,
and the first quarter of 1998 have been restated to reflect the 100%
stock dividend paid on June 1, 1998.
</TABLE>
Form 10-K
A copy of the Form 10-K 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 1998 is expected to be available about April 1, 1999.
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 1999 Annual Shareholders Meeting will be held at 5:30 p.m., May 4, 1999,
at the Elks Club in Derby. We hope to see many of our shareholders there.
Community Bancorp. Stock
As of February 1, 1999, the Corporation's common stock ($2.50 par value)
was owned by approximately 830 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 1184 Main Street, Suite 1
Burlington, Vermont 05402 St. Johnsbury, Vermont 05819
(800) 451-3249 (800) 457-1002
Salomon Smith Barney Winslow, Evans & Crocker
P.O. Box 1095 33 Broad Street
Burlington, Vermont 05402 Boston, Massachusetts 02109
(800) 446-0193 (800) 556-8600
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,897
<INT-BEARING-DEPOSITS> 8,502
<FED-FUNDS-SOLD> 7,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,731
<INVESTMENTS-CARRYING> 29,878
<INVESTMENTS-MARKET> 30,038
<LOANS> 148,335
<ALLOWANCE> 1,659
<TOTAL-ASSETS> 225,051
<DEPOSITS> 197,797
<SHORT-TERM> 288
<LIABILITIES-OTHER> 883
<LONG-TERM> 4,080
0
0
<COMMON> 7,852
<OTHER-SE> 14,150
<TOTAL-LIABILITIES-AND-EQUITY> 225,051
<INTEREST-LOAN> 13,758
<INTEREST-INVEST> 2,892
<INTEREST-OTHER> 422
<INTEREST-TOTAL> 17072
<INTEREST-DEPOSIT> 7,868
<INTEREST-EXPENSE> 209
<INTEREST-INCOME-NET> 8,995
<LOAN-LOSSES> 660
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,021
<INCOME-PRETAX> 2,901
<INCOME-PRE-EXTRAORDINARY> 2,901
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,190
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 7.92
<LOANS-NON> 2,354
<LOANS-PAST> 401
<LOANS-TROUBLED> 126
<LOANS-PROBLEM> 3,104
<ALLOWANCE-OPEN> 1,502
<CHARGE-OFFS> 705
<RECOVERIES> 202
<ALLOWANCE-CLOSE> 1,659
<ALLOWANCE-DOMESTIC> 1,659
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 177
</TABLE>
