UNITED STATES
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. 33-12756-B
COMMUNITY BANCORP, INC.
A Massachusetts Corporation
IRS Employer Identification No. 04-2841993
17 Pope Street, Hudson, Massachusetts 01749
Telephone - (978) 568-8321
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 15, 1999 was $30,167,313.
The total number of shares of common stock outstanding at March 15, 1999
was 2,944,588.
Documents Incorporated By Reference
Parts II, III and IV incorporate information by reference from the Annual
Report to shareholders for the year ended December 31, 1998.
<PAGE>
PART I
------
ITEM 1. BUSINESS
Community Bancorp, Inc., a Massachusetts corporation ("Company"), is
a registered bank holding company under the Bank Holding Company Act of
1956, as amended. The Holding Company has one subsidiary, Community
National Bank, a national banking association ("Bank"). The Holding
Company owns all the outstanding shares of the Bank. At present, the
Holding Company conducts no activities independent of the Bank. In 1992,
the Bank formed Community Securities Corporation as a wholly owned
subsidiary. The activities of this subsidiary consist of buying, selling,
dealing in or holding securities in its own behalf and not as a broker.
In 1998, the Bank formed Community Benefits Consulting, Inc. as a wholly
owned subsidiary. The activities of this subsidiary consist of providing
consulting services to small businesses in the areas of employee benefits
and human resources administration.
The Bank is engaged in substantially all of the business operations
customarily conducted by an independent commercial bank in Massachusetts.
Banking services offered include acceptance of checking, savings and time
deposits, and the making of commercial, real estate, installment and other
loans. The Bank also offers official checks, traveler's checks, safe
deposit boxes and other customary bank services to its customers. In 1994
the Bank introduced a telephone banking service allowing customers to
perform account inquiries and other functions using a Touch Tone
telephone. In 1995 the Bank introduced a PC-based office banking system
for businesses that allows business customers to access their accounts and
perform a number of functions directly through an office PC. In 1996 the
Bank introduced a PC-based home banking and bill payment system for
consumers. In 1997, the bank formed a third-party arrangement with Murphy
Insurance Brokerage, Ltd. for the purpose of providing insurance products
and services to the bank's customers and the general public.
The business of the Bank is not significantly affected by seasonal
factors.
In the last five years the Bank derived its operating income from
the following sources:
% of Operating Income
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Interest and fees on loans 55% 60% 63% 65% 64%
Interest and dividends on
securities 31 28 26 24 24
Charges, fees and other sources 14 12 11 11 12
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
Competition
The Bank generally concentrates its activities within a 20 mile
radius of Hudson, Massachusetts and currently operates full service branch
offices in Hudson, Acton, Boxboro, Concord, Marlboro and Stow,
Massachusetts. These communities are generally characterized by a growing
residential population and moderate to high household income. In addition
to its main office, the Bank also operates a full service branch office
and a consumer lending office in the Town of Hudson. The Bank is planning
to open two additional branch offices, in Framingham and Sudbury,
Massachusetts, during the second quarter of 1999. The Bank operates three
remote ATM facilities in Hudson and Marlboro.
-2-
<PAGE>
The banking business in the Bank's market area is highly
competitive. The Bank competes actively with other banks, as well as with
other financial institutions engaged in the business of accepting deposits
or making loans, such as savings and loan associations, savings banks and
finance companies. In the Bank's general market area there are
approximately 2 national banks, 3 Massachusetts trust companies, 6 savings
banks, 1 cooperative bank and 6 credit unions. Since several of the
competing institutions are significantly larger than the Bank in assets
and deposits, the Bank strongly emphasizes a personal approach to service
while utilizing the latest in technology in order to meet and surpass the
vigorous competition.
Regulation of the Company
The Company is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended. It is subject to the supervision
and examination of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") and files with the Federal Reserve Board the
reports as required under the Bank Holding Company Act.
The Bank Holding Company Act requires prior approval by the Federal
Reserve Board of the acquisition by the Company of substantially all the
assets or more than five percent of the voting stock of any bank. The
Bank Holding Company Act also allows the Federal Reserve Board to
determine (by order or by regulation) what activities are so closely
related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities or transactions between
the affiliated banks and the Company or other affiliates. The Bank
Holding Company Act prohibits the Company and the Bank from engaging in
certain tie-in arrangements in connection with any extension of credit,
sale of property or furnishing of services.
Regulation of the Bank
The Bank is a national banking association chartered under the
National Bank Act. As such, it is subject to the supervision of the
Comptroller of the Currency and is examined by his office. In addition,
it is subject to examination by the Federal Reserve Board, by reason of
its membership in the Federal Reserve System, and by the Federal Deposit
Insurance Corporation, by reason of the insurance of its deposits by such
corporation. Areas in which the Bank is subject to regulation by federal
authorities include reserves, loans, investments, issuances of various
types of securities, participation in mergers and consolidations, and
certain transactions with or in the stock of the Company.
Employees
The Company and the Bank employ 113 full-time equivalent employees.
-3-
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
The following tables present the condensed average balance sheets
and the components of net interest differential for the three years ended
December 31, 1998, 1997 and 1996. The total dollar amount of interest
income from earning assets and the resultant yields are calculated on a
taxable equivalent basis.
<TABLE>
<CAPTION>
1998
-----------------------------------
Average Interest Yield/
ASSETS Balance Inc./Exp. Rate
----------- ---------- -----
<S> <C> <C> <C>
Federal funds sold $ 21,759,343 $ 1,155,014 5.31%
Securities:
Taxable 97,953,145 5,854,481 5.98%
Non-taxable (1) 9,908,169 699,584 7.06%
Total loans and leases (1)(2) 138,310,868 13,210,520 9.55%
----------- ---------- ----
Total earning assets 267,931,525 20,919,599 7.81%
----------
Reserve for loan losses (3,121,829)
Other non interest-
bearing assets 24,798,936
-----------
Total average assets $289,608,632
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings, money market and NOW $113,384,703 $ 2,665,123 2.35%
Time deposits 72,259,015 3,984,185 5.51%
Federal funds purchased and
repurchase agreements 23,234,738 1,025,804 4.41%
----------- --------- ----
Total interest-bearing
liabilities 208,878,456 7,675,112 3.67%
---------
Non interest-bearing deposits 54,657,106
Other non interest-bearing
liabilities 1,860,238
Stockholders' equity 24,212,832
-----------
Total average liabilities
and stockholders' equity $289,608,632
===========
Net interest income $13,244,487
==========
Net yield on interest
earning assets 4.94%
====
<FN>
(1) Interest income and yield are stated on a fully taxable-equivalent
basis. The total amount of adjustment is $259,818. A federal tax
rate of 34% was used in performing this calculation.
(2) The average balances of non-accruing loans and loans held for sale
are included in the loan balance.
</TABLE>
-4-
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
1997
-----------------------------------
Average Interest Yield/
ASSETS Balance Inc./Exp. Rate
----------- ---------- -----
<S> <C> <C> <C>
Federal funds sold $ 8,534,521 $ 464,016 5.44%
Securities:
Taxable 86,006,643 5,241,159 6.09%
Non-taxable (1) 6,544,073 472,507 7.22%
Total loans and leases (1)(2) 136,844,378 13,186,467 9.64%
----------- ---------- ----
Total earning assets 237,929,615 19,364,149 8.14%
----------
Reserve for loan losses (3,394,971)
Other non interest-
bearing assets 22,530,388
-----------
Total average assets $257,065,032
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings, money market and NOW $100,555,499 $ 2,451,529 2.44%
Time deposits 68,313,627 3,687,605 5.40%
Federal funds purchased and
repurchase agreements 15,799,413 756,088 4.79%
----------- --------- ----
Total interest-bearing
liabilities 184,668,539 6,895,222 3.73%
---------
Non interest-bearing deposits 49,067,530
Other non interest-bearing
liabilities 1,984,377
Stockholders' equity 21,344,586
-----------
Total average liabilities
and stockholders' equity $257,065,032
===========
Net interest income $12,468,927
==========
Net yield on interest
earning assets 5.24%
====
<FN>
(1) Interest income and yield are stated on a fully taxable-equivalent
basis. The total amount of adjustment is $194,199. A federal tax
rate of 34% was used in performing this calculation.
(2) The average balances of non-accruing loans and loans held for sale
are included in the loan balance.
</TABLE>
-5-
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
1996
-----------------------------------
Average Interest Yield/
ASSETS Balance Inc./Exp. Rate
----------- ---------- -----
<S> <C> <C> <C>
Federal funds sold $ 11,361,749 $ 590,663 5.20%
Securities:
Taxable 78,493,267 4,619,558 5.89%
Non-taxable (1) 2,752,956 192,885 7.01%
Total loans and leases (1)(2) 129,443,069 12,495,000 9.65%
----------- ---------- ----
Total earning assets 222,051,041 17,898,106 8.06%
----------
Reserve for loan losses (3,503,861)
Other non interest-
bearing assets 21,384,220
-----------
Total average assets $239,931,400
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings, money market and NOW $ 94,508,038 $ 2,258,835 2.39%
Time deposits 66,704,196 3,581,610 5.37%
Federal funds purchased and
repurchase agreements 11,798,277 527,313 4.47%
----------- --------- ----
Total interest-bearing
liabilities 173,010,511 6,367,758 3.68%
---------
Non interest-bearing deposits 44,425,461
Other non interest-bearing
liabilities 1,977,905
Stockholders' equity 20,517,523
-----------
Total average liabilities
and stockholders' equity $239,931,400
===========
Net interest income $11,530,348
==========
Net yield on interest
earning assets 5.19%
====
<FN>
(1) Interest income and yield are stated on a fully taxable-equivalent
basis. The total amount of adjustment is $137,004. A federal tax
rate of 34% was used in performing this calculation.
(2) The average balances of non-accruing loans and loans held for sale
are included in the loan balance.
</TABLE>
-6-
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Continued)
The following table shows, for the periods indicated, the dollar
amount of changes in interest income and interest expense resulting from
changes in volume and interest rates. The total dollar amount of interest
income from earning assets is calculated on a taxable equivalent basis.
<TABLE>
<CAPTION>
1998 as compared to 1997
Due to a change in:
-------------------------------------
Volume Rate Total
--------- --------- ---------
<S> <C> <C> <C>
Interest income from:
Federal funds sold $ 702,093 $ (11,095) $ 690,998
Securities:
Taxable 707,929 (94,607) 613,322
Non-taxable 237,548 (10,471) 227,077
Loans & leases 147,213 (123,160) 24,053
--------- --------- ---------
Total 1,794,783 (239,333) 1,555,450
--------- --------- ---------
Interest expense on:
Interest-bearing deposits:
Savings, money market and NOW 304,094 (90,500) 213,594
Time deposits 221,434 75,145 296,579
Federal funds purchased and
repurchase agreements 329,755 (60,038) 269,717
--------- --------- ---------
Total 855,283 (75,393) 779,890
--------- --------- ---------
Net interest income $ 939,500 $ (163,940) $ 775,560
========= ========= =========
<CAPTION>
1997 as compared to 1996
Due to a change in:
-------------------------------------
Volume Rate Total
--------- --------- ---------
<S> <C> <C> <C>
Interest income from:
Federal funds sold $ (153,915) $ 27,268 $ (126,647)
Securities:
Taxable 464,614 156,987 621,601
Non-taxable 273,841 5,781 279,622
Loans & leases 704,411 (12,944) 691,467
--------- --------- ---------
Total 1,288,951 177,092 1,466,043
--------- --------- ---------
Interest expense on:
Interest-bearing deposits:
Savings, money market and NOW 145,440 47,254 192,694
Time deposits 85,984 20,011 105,995
Federal funds purchased and
repurchase agreements 191,021 37,754 228,775
--------- --------- ---------
Total 422,444 105,020 527,464
--------- --------- ---------
Net interest income $ 866,507 $ 72,072 $ 938,579
========= ========= =========
<FN>
Note: The change due to the volume/rate variance has been allocated to
volume.
</TABLE>
-7-
<PAGE>
Securities Portfolio
The following table indicates the carrying value of the Company's
consolidated securities portfolio at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
(in $000)
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
U.S. Government obligations $ 14,166 $21,134 $16,002
U.S. Government agencies and corp. 91,953 64,667 67,043
Obligations of states and political
subdivisions 11,571 8,414 4,141
Other securities 1,054 969 888
------- ------ ------
Total $118,744 $95,184 $88,074
======= ====== ======
</TABLE>
The following table shows the maturities, carrying value and
weighted average yields of the Company's consolidated securities portfolio
at December 31, 1998. The yields are calculated by dividing the annual
interest, net of amortization of premiums and accretion of discounts, by
the amortized cost of the securities at the dates indicated. The yields
on state and municipal securities are presented on a taxable equivalent
basis.
<TABLE>
<CAPTION>
After one After five
Maturing: Within but within but within After
-------- one year five years ten years ten years
------------ ------------ ------------ ------------
(in $000) Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Govt. obli-
gations held to
maturity $1,000 5.09% $ 0 0% $ 0 0% $ 0 0%
U.S. Govt. obli-
gations avail-
able for sale 9,068 6.17 4,097 6.47 0 0 0 0
U.S. Govt. agencies
& corps. held to
maturity 0 0 24,981 6.06 3,465 6.02 0 0
U.S. Govt. agencies
& corps. available
for sale 0 0 3,030 6.30 0 0 0 0
State and political
subdivisions
held to maturity 415 7.13 195 7.13 1,782 7.33 9,179 7.33
Mortgage-backed
securities avail-
able for sale 699 5.70 0 0 0 0 13,738 6.05
Mortgage-backed
securities held to
maturity 4,316 6.30 6,103 6.12 0 0 35,622 6.29
Other securities 0 0 0 0 0 0 1,054 6.00
<FN>
Current estimated prepayment speed assumptions were used in estimating
the maturities of mortgage-backed securities in the above table. At
December 31, 1998 the Company did not own securities of any issuer where the
aggregate book value of such securities exceeded ten percent of the
Company's stockholders' equity.
</TABLE>
-8-
<PAGE>
Loan Portfolio
The following table summarizes the distribution of the Bank's loan
portfolio as of December 31 for each of the years indicated:
<TABLE>
<CAPTION>
(in $000)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 21,127 $ 18,066 $ 17,227 $ 13,784 $ 13,685
Real estate - residential 55,055 54,211 49,790 50,979 44,246
Real estate - commercial 47,399 48,329 45,106 44,983 50,195
Real estate - construction 2,795 4,868 4,833 3,903 3,330
Mortgage loans held for sale 1,330 2,173 1,222 1,057 559
Loans to individuals 13,197 13,571 13,221 13,178 10,850
Other 651 795 171 188 173
------- ------- ------- ------- -------
Total loans $141,554 $142,013 $131,570 $128,072 $123,038
======= ======= ======= ======= =======
</TABLE>
Loan maturities for commercial and real estate (construction) loans
at December 31, 1998 were as follows: $10,585,099 due in one year or less;
$8,190,712 due after one year through five years; $5,145,977 due after
five years. Of the Bank's commercial and real estate (construction) loans
due after one year, $9,083,781 have floating or adjustable rates and
$4,252,908 have fixed rates.
Nonaccrual, Past Due and Restructured Loans
It is the policy of the Bank to discontinue the accrual of interest
on loans when, in management's judgment, the collection of the full amount
of interest is considered doubtful. This will generally occur once a loan
has become 90 days past due, unless the loan is well secured and in the
process of collection. The following table sets forth information on
nonaccrual, past due loans and restructured loans as of December 31 for
each of the years indicated:
<TABLE>
<CAPTION>
(in $000)
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 913 $ 633 $ 897 $1,650 $ 909
Accruing loans past due 90
days or more 2 239 370 160 66
Restructured loans 0 0 0 0 1,155
----- ----- ----- ----- -----
Total $ 915 $ 872 $1,267 $1,810 $2,130
===== ===== ===== ===== =====
<FN>
The entire "restructured loans" balance at December 31, 1994 in the
above table was comprised of a single loan. That loan was placed on
nonaccrual status in September of 1995 and transferred to "Other Real
Estate Owned" in August of 1996.
</TABLE>
For the period ended December 31, 1998, the reduction of interest
income associated with nonaccrual and restructured loans was $63,870. The
interest on these loans that was included in interest income for 1998 was
$82,456.
Potential Problem Loans
As of December 31, 1998 other than the above, there were no loans
where management had serious doubts as to the ability of the borrowers to
comply with the present loan repayment terms.
Concentrations of Credit
As of December 31, 1998 except as disclosed in the above table,
there were no concentrations of loans exceeding 10% of total loans.
-9-
<PAGE>
Summary of Loan Loss Experience
The following table summarizes historical data with respect to loans
outstanding, loan losses and recoveries, and the allowance for possible
loan losses at December 31 for each of the years indicated:
<TABLE>
<CAPTION>
(in $000)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average outstanding loans (1) $138,311 $136,844 $129,443 $127,034 $120,018
======= ======= ======= ======= =======
<CAPTION>
Allowance for possible loan losses
(in $000)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,216 $ 3,482 $ 3,455 $ 3,703 $ 3,910
Charge-offs:
Commercial and industrial (37) (133) (39) (31) (506)
Real estate - residential (132) (16) (53) (70) (221)
Real estate - commercial (59) (99) 0 (415) 0
Real estate - construction 0 0 0 0 0
Loans to individuals (76) (118) (138) (113) (112)
----- ----- ----- ----- -----
Total charge-off (304) (366) (230) (629) (839)
Recoveries:
Commercial and industrial 48 35 147 105 174
Real estate - residential 6 41 1 100 128
Real estate - commercial 2 0 79 18 3
Real estate - construction 0 0 0 0 0
Loans to individuals 13 24 30 38 27
----- ----- ----- ----- -----
Total recoveries 69 100 257 261 332
Net (charge-off) recovery (235) (266) 27 (368) (507)
Provision for possible
loan losses 0 0 0 120 300
----- ----- ----- ----- -----
Balance at end of period $ 2,981 $ 3,216 $ 3,482 $ 3,455 $ 3,703
==== ===== ===== ===== =====
Ratio of net charge-offs to
average loans .17% .19% .00% .29% .42%
==== ===== ===== ===== =====
<FN>
(1) Includes the aggregate average balance of loans held for sale.
</TABLE>
The provision for possible loan losses is based upon management's
estimation of the amount necessary to maintain the allowance at an
adequate level to absorb inherent possible losses in the loan portfolio,
as determined by current and anticipated economic conditions and other
pertinent factors. Significant credits classified as "substandard" and
"doubtful", in accordance with applicable bank regulatory guidelines, are
individually analyzed to estimate inherent possible losses associated with
each such credit. A portion of the allowance for possible loan losses is
set aside or "allocated" against such estimated inherent losses, without
regard to if or when those estimated losses will actually be realized.
Additional "unallocated" reserves are provided for estimated inherent
losses in pools of loans. Such allocated and unallocated reserves are
established to absorb potential future losses and may or may not reflect
the Company's actual loss history for any specific category of loans.
-10-
<PAGE>
Summary of Loan Loss Experience (Continued)
The following table reflects the allocation of the allowance for
loan losses and the percent of loans in each category to total outstanding
loans, including loans held for sale, as of December 31 for each of the
years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Percent of Percent of Percent of
loans in loans in loans in
category to category to category
(in $000) Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 238 15.4% $ 318 12.7% $ 195 13.1%
Real estate -
residential 197 39.8% 198 39.7% 166 38.8%
Real estate -
commercial 518 33.5% 565 34.1% 767 34.2%
Real estate -
construction 35 2.0% 62 3.4% 82 3.7%
Loans to
individuals 130 9.3% 126 10.1% 126 10.2%
Unallocated 1,863 N/A 1,947 N/A 2,146 N/A
----- ----- ----- ----- ----- -----
Total $2,981 100.0% $3,216 100.0% $3,482 100.0%
===== ===== ===== ===== ===== =====
<CAPTION>
1995 1994
------------------- -------------------
Percent of Percent of
loans in loans in
category to category to
(in $000) Amount total loans Amount total loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial &
industrial $ 165 10.9% $ 165 11.2%
Real estate -
residential 174 40.7 222 36.1%
Real estate -
commercial 746 35.1% 1,440 40.9%
Real estate -
construction 96 3.0% 45 2.8%
Loans to
individuals 100 10.3% 87 9.0%
Unallocated 2,174 N/A 1,744 N/A
----- ----- ----- -----
Total $3,455 100.0% $3,703 100.0%
===== ===== ===== =====
<FN>
The allocation of the allowance for possible loan losses to the
categories of loans shown above includes both specific potential loss
estimates for individual loans and general allocations deemed to be
reasonable to provide for additional potential losses within the
categories of loans set forth.
</TABLE>
-11-
<PAGE>
Deposits
The following table shows the average deposits and average interest
rate paid for each of the last three years:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
Average Average Average Average Average Average
(in $000) Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 54,658 0.00% $ 49,068 0.00% $ 44,426 0.00%
NOW deposits 30,382 1.10% 23,419 1.34% 22,544 1.29%
Money market
deposits 27,273 2.87% 27,996 2.74% 27,924 2.75%
Savings deposits 55,729 2.78% 49,140 2.79% 44,040 2.73%
Time deposits 72,259 5.51% 68,314 5.40% 66,704 5.37%
------- ---- ------- ---- ------- ----
Total $240,301 2.77% $217,937 2.82% $205,638 2.84%
======= ==== ======= ==== ======= ====
</TABLE>
As of December 31, 1998, the Bank had certificates of deposit in
amounts of $100,000 or more aggregating $19.1 million. These certificates
of deposit mature as follows:
<TABLE>
<CAPTION>
Maturity Amount (in $000)
-------- ---------------
<S> <C>
3 months or less $ 5,800
Over 3 months through 6 months 3,165
Over 6 months through 12 months 7,533
Over 12 months 2,632
------
Total $19,130
======
</TABLE>
-12-
<PAGE>
Return on Equity and Assets
The following table summarizes various financial ratios of the
Company for each of the last three years:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average total
assets (net income divided
by average total assets) 1.31% 1.33% 1.31%
Return on average
stockholders' equity
(net income divided by
average stockholders'
equity) 15.72% 16.07% 15.36%
Dividend payout ratio
(total declared dividends
per share divided by net
income per share) 24.94% 24.43% 24.99%
Equity to assets (average
stockholders' equity as
a percentage of average
total assets) 8.36% 8.30% 8.55%
</TABLE>
-13-
<PAGE>
Short-Term Borrowings
The Bank engages in certain borrowing agreements throughout the
year. These are in the ordinary course of the Bank's business. Such
short-term borrowings consisted of securities sold under repurchase
agreements, which are short-term borrowings from customers, and federal
funds purchased. The following table summarizes such short-term
borrowings at December 31 for each of the years indicated:
<TABLE>
<CAPTION>
Weighted Max. Weighted
average amount average
interest out- Average interest
Balance, rate at standing amount rate
end of end of at any out- during
period period month-end standing period
---------- ------- ---------- --------- --------
Year ended
12/31/98
- ----------
<S> <C> <C> <C> <C> <C>
Federal
Funds
Purchased $ 0 0% $ 0 $ 8,219 6.87%
Repurchase
Agreements 19,747,496 3.79% 32,342,233 23,226,519 4.41%
<CAPTION>
Year ended
12/31/97
- ----------
<S> <C> <C> <C> <C> <C>
Federal
Funds
Purchased $ 3,000,000 7.05% $ 3,000,000 $ 55,616 5.95%
Repurchase
Agreements 13,637,063 4.71% 20,135,834 15,743,797 4.78%
<CAPTION>
Year ended
12/31/96
- ----------
<S> <C> <C> <C> <C> <C>
Federal
Funds
Purchased $ 0 0% $ 0 $ 2,732 6.40%
Repurchase
Agreements 11,454,687 4.45% 14,435,268 11,795,545 4.39%
</TABLE>
-14-
<PAGE>
ITEM 2. PROPERTIES
The Bank's Main Office (approximately 32,000 square feet) at 17 Pope
Street, Hudson, Massachusetts, the Consumer Loan Center (2,623 square
feet) at 12 Pope Street, Hudson, Massachusetts, the Hudson South Office
(1,040 square feet) at 177 Broad Street, Hudson, Massachusetts and the
Marlboro Center Office (1,800 square feet) at 96 Bolton Street, Marlboro,
Massachusetts, are owned by the Bank. In December of 1998 the Bank
purchased a property located at 35 Edgell Road, Framingham, Massachusetts.
That property contains two buildings, a 4,450 square foot building that
will be used by the Bank as a branch office and a 2,050 square foot
building that is leased to a tenant. The Framingham branch office is
expected to open for business in the second quarter of 1999.
The Bank's Stow Office (1,228 square feet) at 159 Great Road, Stow,
Massachusetts, the Concord office (1,200 square feet) at 1134 Main Street,
Concord, Massachusetts, the Acton office (2,100 square feet) at 274 Great
Road, Acton, Massachusetts, the Marlboro office (1,110 square feet) at 500
Boston Post Road, Marlboro, Massachusetts and the Boxboro office (1,350
square feet) at 629 Massachusetts Avenue, Boxboro, Massachusetts, are
leased by the Bank from third parties. The Bank has also contracted to
lease from a third party a 2,700 square foot branch office at 450 Boston
Post Road, Sudbury, Massachusetts. The Sudbury branch office is expected
to open for business in the second quarter of 1999.
All properties occupied by the Bank are in good condition and are
adequate at present and for the foreseeable future for the purposes for
which they are being used. In the opinion of management the properties
are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding. The Bank is
involved in various routine legal actions arising in the normal course of
business. Based on its knowledge of the pertinent facts and the opinions
of legal counsel, management believes the aggregate liability, if any,
resulting from the ultimate resolution of these actions will not have a
material effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1998.
-15-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's
common stock.
The record number of holders of the Company's common stock was
approximately 440 as of March 15, 1999.
The Company customarily declares quarterly cash dividends on its
outstanding common stock. The following table sets forth the cash
dividends per share declared for the years 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
First quarter $ .077 $ .068
Second quarter .079 .070
Third quarter .082 .072
Fourth quarter .085 .075
----- -----
Total $ .323 $ .285
===== =====
</TABLE>
For a discussion of restrictions on the ability of the Bank to pay
dividends to the Company, see footnote 11 on page 19 of the Annual Report
to Shareholders for the year ended December 31, 1998, which is hereby
incorporated by reference.
On May 5, 1998 the Company sold 12,998 unregistered shares of its
common stock to the Community Bancorp, Inc. 401(k) Savings Plan and 5,333
unregistered shares of its common stock to the Community Bancorp, Inc.
Employee Stock Ownership Plan at a per share price of $15.00. The
aggregate cash price of these shares was $274,965. Registration of such
shares involved in the above transactions was not required because the
transactions were exempt pursuant to the private offering provisions of
the Securities Act and the rules thereunder. Alternatively, the Company
believes that registration of the shares issued to its 401(k) Plan was not
required because the transaction did not constitute a "sale" under Section
2(3) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
A five year summary of selected consolidated financial data for the
Company is presented on page 1 of the Annual Report to Shareholders for
the year ended December 31, 1998 and is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations is contained on pages 25 through 28 of the Annual
Report to Shareholders for the year ended December 31, 1998 and is hereby
incorporated by reference.
-16-
<PAGE>
Safe Harbor Statements Under the Private Securities Litigation Reform Act
This report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains, in addition to
historic information, forward-looking statements. When used in this and
other Reports, the words "anticipate", "estimate", "expect", "objective",
and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to a variety of
risks and uncertainties. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking
statements, risk factors that could cause the Company's actual results to
differ materially from those contemplated in any forward-looking statement
include, but are not limited to, the following:
1. Adverse changes in asset quality;
2. Adverse changes in general economic conditions, including changes in
interest rates, inflation, or the strength of the economy in the
Company's service area;
3. Increased competition for the services offered by the Bank;
4. Legal and regulatory developments.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No.
133 establishes the accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either an
asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The
Statement is effective for the Company's fiscal year beginning January 1,
2000. The Company does not believe the adoption of SFAS No. 133 will have
any material effect on its financial position or results of operations.
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires computer software costs associated with
internal-use software to be expensed as incurred until certain
capitalization criteria are met. SOP 98-1 is effective for the Company's
fiscal year beginning January 1, 1999. The Company does not believe the
adoption of SOP 98-1 will have any material impact on the Company's
financial statements or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" (SOP 98-5). SOP 98-5 requires all costs associated
with pre-opening, pre-operating and organization activities to be expensed
as incurred. SOP 98-5 is effective for the Company's fiscal year
beginning January 1, 1999. The Company does not believe the adoption of
SOP 98-5 will have any material impact on the Company's financial
statements or results of operations.
-17-
<PAGE>
Asset/Liability Management and Interest Rate Risk
It is the Company's general policy to reasonably match the rate
sensitivity of its assets and liabilities in an effort to prudently manage
interest rate risk. A common benchmark of this sensitivity is the one
year gap position, which is a reflection of the difference between the
speed and magnitude of rate changes of interest rate sensitive liabilities
as compared with the Company's ability to adjust the rates of its interest
rate sensitive assets in response to such changes. The Company's negative
one-year cumulative gap position at December 31, 1998, which represents
the excess of repricing liabilities versus repricing assets, was 1.7%
expressed as a percentage of total assets.
The following table presents rate-sensitive assets and rate-sensitive
liabilities as of December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998
--------------------------------------------------------------------------
1 to 6 7 to 12 1 to 2 2 to 5 Over 5
Months Months Years Years Years Total
---------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS
Federal funds sold $ 17,000 $ $ $ $ $ 17,000
Securities 22,566 9,531 13,757 46,001 26,889 118,744
Adjustable-rate loans 43,262 17,397 21,760 22,926 1,312 106,657
Fixed-rate loans 5,454 4,640 4,492 7,803 11,178 33,567
Loans held for sale 1,330 1,330
--------- --------- ---------- ---------- -------- ---------
Total $ 89,612 $ 31,568 $ 40,009 $ 76,730 $ 39,379 $ 277,298
--------- --------- ---------- --------- -------- ---------
RATE-SENSITIVE LIABILITIES
Demand deposits $ $ $ $ $ 60,511 $ 60,511
NOW accounts* 36,319 36,319
Money market accounts 25,419 25,419
Savings accounts 36,060 36,060
Cash management accounts 22,238 22,238
Certificates of deposit 36,126 22,863 8,326 6,541 5 73,861
Short term borrowings 19,161 587 19,748
--------- --------- ---------- --------- -------- ---------
Total $ 102,944 $ 23,450 $ 8,326 $ 6,541 $ 132,895 $ 274,156
--------- --------- ---------- --------- -------- ---------
Gap $ (13,332) $ 8,118 $ 31,683 $ 70,189 $ (93,516) $ 3,142
========== ========= ========= ========= ========= =========
Cumulative Gap $ (13,332) $ (5,214) $ 26,469 $ 96,658 $ 3,142
========== ========= ========= ========= =========
Gap as a percent of
total assets (4.43%) 2.70% 10.53% 23.33% (31.08%)
Cumulative gap as a
percent of total assets (4.43%) (1.73%) 8.80% 32.12% 1.04%
* Cumulative gap as a
percent of total
assets if NOW accounts
are considered
immediately
withdrawable (16.50%) (13.80%) (3.27%) 20.05% 1.04%
<FN>
Whenever possible, maturity dates or contractual repricing dates have been
used in the preparation of the above table. In addition to those factors,
-18-
<PAGE>
certain assumptions are utilized such as the estimation of prepayments
associated with certain loans and mortgage-backed securities. The Bank's
historical experience over the past ten years, during which time interest
rates have risen and fallen significantly, has demonstrated that savings
account balances, demand deposit balances and NOW account balances are
rate insensitive. Other deposit categories are considered to be rate
sensitive. That rate sensitivity or insensitivity is reflected in the
above table. (For purposes of this table, the Bank's FlexValue deposit
account balances have been included in the "NOW accounts" category.)
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the sensitivity of income to variations in
interest rates over a specified time horizon. The primary goal of
interest rate risk management is to control this risk within limits
approved by the Board of Directors and narrower guidelines approved by the
Asset/Liability Committee. Those limits and guidelines reflect the
Company's tolerance for interest rate risk.
The Company also uses simulation analysis to measure the exposure of
net interest income to changes in interest rates over a one year time
horizon. Simulation analysis involves projecting future income and
expense from the Company's assets and liabilities under various interest
rate scenarios.
The Company's limits on interest rate risk specify that if interest
rates were to shift immediately up or down by 200 basis points, estimated
net interest income for the subsequent twelve months should decline by no
more than 5.00% of net interest income. The following table sets forth
the Company's estimated net interest income exposure, assuming an
immediate, parallel shift in interest rates:
<TABLE>
<CAPTION>
Rate Change Estimated Exposure to
(Basis Points) Net Interest Income
-------------- ---------------------
<C> <C>
+200 (1.39%)
-200 0.85%
</TABLE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are included on page
1 and on pages 4 through 24 of the Annual Report to shareholders for the
year ended December 31, 1998 and are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in the Company's independent public
accountants or disagreements with the Company's accountants on accounting
or financial disclosure during the 24 months ended December 31, 1998 or in
any period subsequent to the most recent financial statements.
-19-
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as to each of the Directors and
Executive Officers of the Company and the Bank, such person's age,
position, term of office, and all business experience during the past five
years. All Directors of the Company have served since 1984, except Mr.
Frias who has been a Director of the Company since 1985, Mr. Parker who
has been a Director of the Company since 1986, and Messrs. Hughes and
Webster who have been Directors of the Company since 1995. Each Director
of the Company is also a Director of the Bank. Each executive officer
holds office until the first Director's meeting following the annual
meeting of stockholders and thereafter until his or her successor is
elected and qualified.
<TABLE>
<CAPTION>
Business Experience
Term of During Past
Name Age Position Office Five Years
- -------------- --- ------------- ------- -----------------------
<S> <C> <C> <C> <C>
Richard K. 46 Senior Vice Senior Vice President,
Bennett President Community National Bank
of Bank
Grace L. Blunt 44 Senior Vice Senior Vice President,
President Community National Bank,
of Bank Assistant Clerk,
Community Bancorp, Inc.
Alfred A. 81 Director of 2000 Retired
Cardoza Company and
Bank
Antonio Frias 59 Director of 2000 President and Treasurer,
Company and S & F Concrete
Bank Contractors, Inc.;
Secretary/Clerk, Frias
Bros. Service Station
John P. Galvani 42 Senior Vice Senior Vice President,
President Community National Bank
of Bank
I. George 82 Director of 1999 Chairman, Gould's, Inc.
Gould (1) Company and
Bank
Horst Huehmer 71 Director of 2001 Retired; formerly
Company and Manager, Hudson Light
Bank and Power Department
-20-
<PAGE>
Donald R. 49 Treasurer and 2001 Executive Vice
Hughes, Jr. Clerk of President and Cashier,
Company; Exec. Community National Bank;
Vice President Treasurer and Clerk,
of Bank; Director Community Bancorp, Inc.
of Company and
Bank
James A. 59 President & 1999 President and CEO,
Langway (1) CEO of Company Community National Bank
and Bank; and Community
Director of Bancorp, Inc.
Company and
Bank
Robert E. Leist 45 Senior Vice Senior Vice President,
President Community National Bank
of Bank
Janet A. Lyman 52 Senior Vice Senior Vice President,
President Community National Bank
of Bank
Dennis F. 61 Chairman of 2000 President and
Murphy, Jr. the Board, Treasurer, D. F.
Company and Murphy Insurance
Bank Agency, Inc.;
Treasurer, Village
Real Estate
David L. 70 Director of 1999 Chairman of the Board,
Parker (1,2) Company and Larkin Lumber Co.
Bank
Mark Poplin 75 Director of 2001 President and
Company and Treasurer, Poplin
Bank Supply Co.;
Secretary, Poplin
Furniture Co.
David W. 57 Director of 2001 President & Treasurer,
Webster (2) Company and Knight Fuel Co., Inc.
Bank
<FN>
(1) Messrs. Gould, Langway, and Parker have been nominated for
election at the 1999 Annual Meeting to serve until 2002.
(2) Mr. Webster's wife and Mr. Parker are cousins.
</TABLE>
No Director holds a directorship in any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934 or subject to the requirements of Section 15(d) of such Act or
any company registered as an investment company under the Investment
Company Act of 1940.
-21-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all plan and non-plan compensation
awarded to, earned by or paid to the CEO and other executive officers
whose aggregate compensation by the Company and the Bank exceeded
$100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation
---------------------------------------------
(a) (b) (c) (d) (i) (1)
Name and All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------- ------ ------------
<S> <C> <C> <C> <C>
James A. Langway 1998 $211,503 $90,000 $ 9,500
President and CEO 1997 205,353 75,000 8,989
of the Company and 1996 195,574 68,451 8,838
the Bank
Donald R. Hughes, Jr. 1998 122,595 30,036 8,877
Treasurer and Clerk of 1997 116,757 28,605 8,104
Company; Executive Vice 1996 111,197 27,244 7,825
President and Cashier
of the Bank
Richard K. Bennett 1998 90,061 15,310 5,584
Senior Vice President 1997 85,772 14,581 5,037
of the Bank 1996 81,688 13,887 3,999
John P. Galvani 1998 89,250 15,173 5,526
Senior Vice President 1997 85,000 14,450 3,946
of the Bank 1996 75,000 12,750 3,587
<FN>
Notes:
1. The Company maintains an Employee Stock Ownership Plan (ESOP) for
employees age 21 or older who are participants in the Company's
Retirement Plan and who meet other requirements. The Company also
maintains a 401(k) Savings Plan (401(k) Plan) for employees age 21
or over and who meet other requirements. Messrs. Langway, Hughes,
Bennett and Galvani are participants in the Company's ESOP and
401(k) Plans. Of the $9,500 reported above for 1998 in column (i)
for Mr. Langway, $3,533 represents Company ESOP contributions,
$4,800 represents Company 401(k) Plan contributions and $1,167
represents group life insurance premiums paid by the Company. Of
the $8,877 reported above for 1998 in column (i) for Mr. Hughes,
$3,422 represents Company ESOP contributions, $4,579 represents
Company 401(k) Plan contributions and $876 represents group life
insurance premiums paid by the Company. Of the $5,584 reported
above for 1998 in column (i) for Mr. Bennett, $2,432 represents
Company ESOP contributions, $2,810 represents Company 401(k) Plan
contributions and $342 represents group life insurance premiums
paid by the Company. Of the $5,526 reported above for 1998 in
column (i) for Mr. Galvani, $2,399 represents Company ESOP
contributions, $2,785 represents Company 401(k) Plan contributions
and $342 represents group life insurance premiums paid by the
Company.
</TABLE>
-22-
<PAGE>
Compensation of Directors
The Bank paid its Directors an annual fee of $9,265 in 1998. The
Chairman of the Board was paid $15,443 in 1998. Director fees are paid on
a monthly basis. The Company pays no compensation to its Directors for
their services.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company has entered into five-year Employment Agreements with
James A. Langway, President and Chief Executive Officer of the Company,
and with Donald R. Hughes, Jr., Treasurer and Clerk of the Company, which
specify the employee's duties and minimum compensation during the period
of the Employment Agreement. Each Employment Agreement is extended for one
additional year, on the anniversary of the commencement date, unless prior
notice is given by either party. Employment by the Company shall
terminate upon the employee's resignation, death, disability, or for
"cause" as defined in the Employment Agreement. If employment is
involuntarily terminated by the Company for any reason except for cause,
or if the Employment Agreement is not renewed at its expiration, the
Company is required to make additional payments to the employees. During
the term of the Employment Agreement and for one year afterwards, the
employee cannot compete with the Company within its market area.
The Company has also entered into Severance Agreements with Mr.
Langway and Mr. Hughes regarding termination of employment by the Company
or Bank subsequent to a "change in control" of the Company, as defined in
the Severance Agreement. Following the occurrence of a change in control,
if the employee's employment is terminated (except because of gross
dereliction of duty, death, retirement, disability or conviction for
criminal misconduct) or is involuntarily terminated for "good reason" as
defined in the Severance Agreement, then the employee shall be entitled to
a lump sum payment from the Company approximately equal to three times his
average annual compensation for the previous five years, plus accrued
vacation pay and bonus awards. If Mr. Langway or Mr. Hughes is entitled
to receive benefits under both his Employment Agreement and his Severance
Agreement, he must choose the agreement under which he will claim
benefits.
The Company has entered into an Executive Supplemental Income
Agreement with James A. Langway, President and Chief Executive Officer of
the Company, which commenced July 12, 1988 and which specifies benefits
payable to Mr. Langway for a ten (10) year period following the date on
which he ceases to be employed by the Company. The Agreement provides
that the Company will pay Mr. Langway $40,774 each year, increased by
increases in the Consumer Price Index, for a ten (10) year period
following the date he ceases to be employed by the Company for any cause
whatsoever after attaining age 55. The Agreement was amended on January
26, 1990, increasing the annual base retirement benefit to be paid to Mr.
Langway from $40,774 to $60,774 each year, increased by increases in the
Consumer Price Index in the same manner as the original Agreement. Mr.
Langway attained age 55 during 1994. The Company records annual expense
in anticipation of future payments expected to be made under this
Agreement. The annual expense amount recorded is determined by an
independent actuary based on Mr. Langway's life expectancy at the time he
begins receiving payments. During 1998, the Company recorded $47,340 in
such expense.
The Bank has entered into "change in control" Severance Agreements
with its five Senior Vice Presidents.
-23-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and related notes set forth information
regarding stock owned by each of the directors of the Company and Bank,
and by all directors and executive officers of the Company and Bank as a
group, at March 15, 1999.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Title (Number of shares) (1) Percent
of Name of ------------------------------------- of
Class Beneficial Owner Sole (2) Shared (3) Total Class
---- ---------------- -------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
Common Alfred A. Cardoza 12,600 9,886 22,486 .8%
Stock
($2.50 Antonio Frias 26,586 0 26,586 .9%
par)
I. George Gould 9,235 113,962 (4) 123,197 4.2%
Horst Huehmer 700 21,932 22,632 .8%
Donald R. Hughes, Jr. 2,000 118,339 (4,5) 120,339 4.1%
James A. Langway 94,170 245,392 (4,6,9) 339,562 11.5%
Dennis F. Murphy, Jr. 198,724 239,484 438,208 14.9%
David L. Parker 22,514 21,784 (7) 44,298 1.5%
Mark Poplin 364 152,690 153,054 5.2%
David W. Webster 750 70,084 70,834 2.4%
All directors and
executive officers
of the Company and
Bank as a group
(15 persons) 368,971 747,295 (4,8,9) 1,116,266 37.9%
<FN>
(1) Based upon information provided to the Company by the indicated
persons. Certain directors may disclaim beneficial ownership of
certain of the shares listed beside their names.
(2) Indicates sole voting and investment power.
(3) Indicates shared voting and investment power.
(4) Includes 78,209 shares held by the Company's ESOP for which
Messrs. Gould, Hughes and Langway are co-trustees.
(5) Includes 10,130 shares held by the Company's 401(k) plan for
which Mr. Hughes has voting power in certain circumstances.
(6) Includes 16,716 shares held by the Company's 401(k) plan for
which Mr. Langway has voting power in certain circumstances.
-24-
<PAGE>
(7) Includes 2,000 shares held by the Unitarian Church of Marlboro
and Hudson, MA, for which Mr. Parker is a trustee, and 13,584
shares held in the name of Arline Parker, for whom Mr. Parker
has power of attorney.
(8) Includes 71,936 shares held by the Company's 401(k) plan, for
which Grace L. Blunt, Senior Vice President, and Robert E.
Leist, Senior Vice President, are co-trustees.
(9) Includes 53,428 shares held by the Mark Poplin Family Trust and
96,814 shares held by the Shirley E. Poplin Family Trust, for
which Mr. Langway is a trustee. Mr. Langway disclaims any
beneficial interest in these shares.
</TABLE>
The following persons own beneficially more than five percent of the
outstanding stock of the Company as of March 15, 1999:
<TABLE>
<CAPTION>
Amount and
Title Name and Address Nature of Percent
of of Beneficial Beneficial of
Class Owner Ownership Class
----- ---------------- ---------- -------
<S> <C> <C> <C>
Common Stock Dennis F. Murphy, Jr. 438,208 shares 14.9%
($2.50 par) 188 Prospect Hill Rd.
Harvard, MA 01467
James A. Langway 339,562 shares (1,2) 11.5%
1143 Grove Street
Framingham, MA 01701
Mark Poplin 153,054 shares 5.2%
108 Barretts Mill Road
Concord, MA 01742
Einar P. Robsham 151,900 shares 5.2%
164 Cochituate Road
Wayland, MA 01778
(1) Includes 78,209 shares held by the Company's ESOP, for which Mr.
Langway is a trustee, and 16,716 shares held by the Company's
401(k) plan, for which Mr. Langway has voting power in certain
circumstances.
(2) Includes 53,428 shares held by the Mark Poplin Family Trust and
96,814 shares held by the Shirley E. Poplin Family Trust, for
which Mr. Langway is a trustee. Mr. Langway disclaims any
beneficial interest in these shares.
-25-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, through its wholly-owned bank subsidiary, has had,
currently has, and expects to continue to have in the future, banking
(including loans and extensions of credit) transactions in the ordinary
course of its business with its Directors, Executive Officers, members of
their families and associates. Such banking transactions have been and
are on substantially the same terms, including interest rates, collateral
and repayment conditions, as those prevailing at the same time for
comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
In October of 1997 the Bank entered into a third-party insurance
sales agreement with Murphy Insurance Brokerage, Ltd. ("Murphy"). By
entering into the agreement, the Bank implemented a decision of the Board
of Directors to expand the Bank's product line by providing the public
with access to insurance products. The agreement between the Bank and
Murphy is structured in the form of a lease arrangement for floor space in
the Bank's Main Office located at 17 Pope Street, Hudson, Massachusetts.
Murphy Insurance Brokerage, Ltd. is a subsidiary of Murphy Insurance
Agency, Inc., which is owned by Dennis F. Murphy, Jr., Chairman of the
Company's Board of Directors. The third-party agreement between the Bank
and Murphy had no material affect on the Company's 1998 financial
statements or results of operations.
-26-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS AND FINANCIAL STATEMENTS
(a) 1. & 2. Index to Consolidated Financial Statement Schedules
The following consolidated financial statements, which are included
in the Annual Report to Shareholders of Community Bancorp, Inc. for the
year ended December 31, 1998, are hereby incorporated by reference:
</TABLE>
<TABLE>
<CAPTION>
Annual Report to
Shareholders
Description page reference
----------- ----------------
<S> <C>
Consolidated balance sheets at
December 31, 1998 and 1997 4
Consolidated statements of income for
the years ended December 31, 1998,
1997 and 1996 5
Consolidated statements of comprehensive
income for the years ended December 31,
1998, 1997 and 1996 6
Consolidated statements of stockholders'
equity for the years ended December 31, 1998,
1997 and 1996 7
Consolidated statements of cash flows
for the years ended December 31, 1998,
1997 and 1996 8
Notes to consolidated financial statements 9 - 24
<FN>
With the exception of the aforementioned information, and
information incorporated by reference in Items 5, 6, 7, and 8, the Annual
Report to Shareholders for the year ended December 31, 1998 is not deemed
to be filed as part of this Form 10-K. Certain schedules required by
Regulation S-X have been omitted as the items are either not applicable or
are presented in the notes to the financial statements contained in the
Annual Report to Shareholders for the year ended December 31, 1998.
</TABLE>
3. Exhibits
See accompanying Exhibit Index.
(b) The Company did not file a Form 8-K during the quarter ended
December 31, 1998.
-27-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
<S> <S> <C>
3.1 Articles of Organization of Company
Amendments to Articles of Organization,
(dated prior to April 12, 1988) (a)
3.1.i Amendment to Articles of Organization,
dated April 12, 1988
3.2 By-Laws of Company (a)
10.1 Community Bancorp, Inc. Employee Stock
Ownership Plan (as amended and restated
effective January 1, 1985) (b)
10.2 Employment Agreement dated August 19, 1986
between Community Bancorp, Inc. and
James A. Langway (c)
10.3 Severance Agreement dated June 10, 1986
between Community Bancorp, Inc. and
James A. Langway (d)
10.4 Employment Agreement dated August 19, 1986
between Community Bancorp, Inc. and
Donald R. Hughes, Jr. (c)
10.5 Severance Agreement dated June 10, 1986
between Community Bancorp, Inc. and
Donald R. Hughes, Jr. (d)
10.6 Executive Supplemental Income Agreement
dated July 12, 1988 between Community
Bancorp, Inc. and James A. Langway (e)
10.7 Amendment to Executive Supplemental
Income Agreement dated January 26, 1990
between Community Bancorp, Inc. and
James A. Langway. (f)
10.8 Stock Purchase Agreement dated March 29, 1993
by and among Community Bancorp, Inc. and
certain specific persons. (g)
10.9 Form of Severance Agreement dated February 19,
1998 between Community National Bank and the
Bank's five Senior Vice Presidents.
13. 1998 Annual Report to shareholders
21. Subsidiaries of Company Page 30
27. Financial Data Schedule
<FN>
(a) Incorporated herein by reference to Exhibits 3.1, and 3.2 and filed
as part of Company's Amendment No. 1 to the Registration Statement on
Form S-18 (File No. 33-12756-B) filed with Commission on April 16,
1987.
-28-
<PAGE>
(b) Incorporated herein by reference to Exhibit 10.1 as part of Company's
Registration Statement on Form S-18 (File No. 33-12756-B) filed with
the Commission on March 19, 1987.
(c) Incorporated herein by reference to Exhibits 5.8 and 5.9 filed as
part of Company's Amendment No. 2 to the Offering Statement on Form
1-A (File No. 24B-2076) filed with the Commission on August 14, 1986.
(d) Incorporated herein by reference to Exhibits 5.2 and 5.4 filed as
part of Company's Offering Statement on Form 1-A (File No. 24B-2076)
filed with the Commission on June 24, 1986.
(e) Incorporated herein by reference as filed as part of the Company's
December 31, 1988 Form 10-K (File No. 33-12756-B), filed with the
Commission on March 30, 1989.
(f) Incorporated herein by reference as filed as part of the Company's
December 31, 1989 Form 10-K (File No. 33-12756-B), filed with the
Commission on March 29, 1990.
(g) Incorporated herein by reference as filed as part of the Company's
December 31, 1992 Form 10-K (File No. 33-12756-B), filed with the
Commission on March 30, 1993.
</TABLE>
-29-
<PAGE>
SUBSIDIARIES OF COMPANY
-----------------------
1. Community National Bank, a national banking association.
-30-
<PAGE>
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, INC.
Date: March 18, 1999 By: /s/ Donald R. Hughes, Jr.
-------------------------
Donald R. Hughes, Jr.
Treasurer and Clerk
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.
Date Name and Capacity
---- -----------------
March 18, 1999 /s/ James A. Langway
-----------------------------------
James A. Langway, President & CEO
Principal Executive Officer
March 18, 1999 /s/ Donald R. Hughes, Jr.
-----------------------------------
Donald R. Hughes, Jr., Treasurer & Clerk,
Principal Financial Officer and Principal
Accounting Officer
March 18, 1999 /s/ James A. Langway
-----------------------------------
James A. Langway, Director
March 18, 1999 /s/ Donald R. Hughes, Jr.
-----------------------------------
Donald R. Hughes, Jr., Director
March 18, 1999 /s/ Alfred A. Cardoza
-----------------------------------
Alfred A. Cardoza, Director
March 19, 1999 /s/ David W. Webster
-----------------------------------
David W. Webster, Director
March 19, 1999 /s/ David L. Parker
-----------------------------------
David L. Parker, Director
March 23, 1999 /s/ I. George Gould
-----------------------------------
I. George Gould, Director
-31-
<PAGE>
SUPPLEMENTAL INFORMATION
------------------------
Copies of the Notice of Annual Meeting of Shareholders, Proxy
Statement and Proxy For Annual Meeting of Shareholders for the
Registrant's 1999 annual meeting of shareholders, to be held on April 13,
1999, are being submitted separately as an EDGAR Submission Type DEF 14A.
Such material is not deemed to be filed with the Commission or otherwise
subject to the liabilities of Section 18 of the Securities Exchange Act.
-32-
[Community National Bank letterhead]
February 19, 1998
[Officer's name]
[Officer's address]
[Officer's address]
Dear [Officer's name]:
Community National Bank, a wholly-owned subsidiary of Community Bancorp, a
Massachusetts corporation (the "Bank" and the "Holding Company") expects that
during your tenure as an officer of the Bank, you will contribute to the growth
and success of the Bank in significant ways, and that you will develop an
intimate knowledge of the affairs of the Bank and of its policies, methods,
personnel and problems.
The Board of Directors of the Bank (the "Board") recognizes that a change in
control of the Bank or the Holding Company may occur and that the threat of
such a change in control may result in the departure of management personnel
to the detriment of the Bank, the Holding Company and its stockholders. The
Board has determined that appropriate steps should be taken to reinforce and
encourage the continued dedication of members of the Bank's management,
including yourself, to their assigned duties in the face of the potentially
disturbing circumstances arising from the possibility of such a change in
control.
In order to induce you to remain in the employ of the Bank and to continue to
perform your duties as an officer of the Bank in a manner which is, in your
judgment, in the best interest of the Bank, the Bank hereby agrees to provide
you with certain severance benefits in the event your employment with the Bank
is terminated subsequent to a change in control under the circumstances
described below.
1. Definitions. For purposes of this Agreement, the following terms shall have
the meaning set forth below.
(a) Change in Control. A "Change in Control" shall mean any "person" (as
such term is used in Sections 13(d) and 14(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the Holding Company or
Dennis F. Murphy, Jr., his personal representatives or members of his
immediate family) becomes the "beneficial owner" as
<PAGE>
-2-
defined in Rule 13d-3 thereunder), directly or indirectly, of
securities of the Holding Company representing 51% or more of the
combined voting power of the Holding Company's or the Bank's then-
outstanding securities;
(b) Retirement. Termination by the Bank or you of your employment based
on retirement shall mean the mandatory or involuntary termination of
your employment in accordance with the Bank's retirement policy,
including early retirement, or in accordance with any retirement
arrangement established with your consent with respect to you.
(c) Disability. Disability shall mean your inability, as a result of your
incapacity due to physical or mental illness, to perform the services
required of you as an employee for a period of ninety (90) consecutive
days.
(d) Good Reason. For purposes of this Agreement only, "Good Reason" shall
exist if any of the following shall be true:
(i) You shall be required, subsequent to a Change in Control, to
transfer your place of employment 30 miles or more from the
present office of the Bank in Hudson, Massachusetts;
(ii) There is a reduction in the rate of your salary or benefits from
the Bank, provided that reductions applicable generally to all
employees shall not constitute Good Reason; or
(iii) There is a substantial negative change in the nature or scope of
your duties, responsibilities, powers or authority or in your
title, position or status with the Bank.
(e) Cause. For purposes of this Agreement, the Bank shall be deemed to
have "Cause" to terminate your employment only if:
(i) You are convicted by a court of competent jurisdiction of any
criminal offense involving dishonesty or breach of trust;
(ii) You shall commit an act of fraud toward the Bank, the Holding
Company or any subsidiary of either of them;
<PAGE>
-3-
(iii) You willfully refuse to perform the duties reasonably assigned
to you by the Board, which failure or breach continues for more
than ten (10) days after written notice given to you pursuant
to a vote of the Board (exclusive of you if you are then a
Director) at a meeting duly called for such purpose, such vote
to set forth in reasonable detail the nature of such refusal;
(iv) You engage in willful misconduct materially injurious to the
Bank, the Holding Company or any subsidiary of either of them,
monetarily or otherwise.
(f) Resignation. Your voluntary resignation from employment with the
Bank for any reason as set forth in a letter from you delivered to the
Board.
2. Compensation Upon Termination Following Change in Control.
(a) If, within twenty-four (24) months after a Change in Control shall
have occurred, your employment by the Bank shall be terminated by Bank
other than for (i) Cause, (ii) Death, (iii) Disability or (iv)
Retirement, or you shall terminate your employment by Resignation for
Good Reason, then the Bank shall pay you within five days after the
date of termination an amount equal to your annual base compensation
paid to you by the Bank and includible in your taxable income for the
12 months preceding the Change in Control. In addition, the Bank
shall provide the same health insurance coverage for you and your
family, at the same cost, for one year after the termination of your
employment that the Bank, or its successor, provides for its senior
officers. The foregoing shall be in addition to payment of your full
base salary through the date of termination at the rate then in
effect, together with any accrued vacation pay and reimbursement of
expenses.
(b) You shall not be required to mitigate the amount of any payment
provided for in the Section 2 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 2 be reduced by any compensation earned by you as the result
of employment by another employer after the Date of Termination, or
otherwise.
(c) It is the intention of the parties to this Agreement that no payments
by the Bank to or for your benefit under this Agreement shall be non-
deductible to the Bank by reason of the operation of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, notwithstanding any other provision hereof, if by
reason of the operation of said Section 280G, any such payments,
whether alone or when aggregated with other compensation, exceed the
amount which can be deducted by the Bank, the amount of such payments
shall be reduced to the maximum which can
<PAGE>
-4-
be deducted by the Bank. To the extent that payments in excess of
the amount which can be deducted by the Bank have been made to and for
your benefit, they shall be refunded with interest at the applicable
rate provided under Section 1274(d) of the Code, or at such other rate
as may be required in order that no such payment to or for your
benefit shall be non-deductible pursuant to Section 280G of the Code.
(d) Notwithstanding any provision hereof to the contrary, no payment
hereunder shall be made if it would violate any applicable law, rule
or regulation, including without limitation, 12 C.F.R. Part 359, as
promulgated by the Federal Deposit Insurance Corporation.
3. Successors; Binding Agreement. This agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
4. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
on the first page of this Agreement provided that all notices to the Bank
shall be directed to the attention of the Board with a copy to the
President, or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
5. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated
by the Board. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the Commonwealth of Massachusetts.
This Agreement is made under seal.
6. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.
<PAGE>
-5-
7. Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Boston,
Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such
dispute or controversy, the Bank will pay you promptly an amount equal to
your full compensation in effect when the notice giving rise to the dispute
was given (including, but not limited to, base salary) and provide you with
all compensation benefits and insurance plans in which you were
participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved. Amounts paid under this Section 7 shall
reduce any other amounts due under this Agreement.
8. Election of Benefits. An election by you to resign for Good Reason after a
Change in Control under the provisions of this Agreement will not be deemed
a voluntary termination of employment by you for the purpose of interpreting
the provisions of any benefit plans, programs or policies. For purposes of
this Section 8, rights to receive distributions under a qualified pension or
profit sharing plan shall not constitute termination benefits.
If this letter correctly sets forth our agreement on the subject matter hereof,
kindly sign and return to the Bank the enclosed copy of this letter which will
then constitute our agreement.
Agreed to this 19th day of February, 1998.
COMMUNITY NATIONAL BANK
______________________________
I. George Gould
Chairman, Personnel Committee
______________________________
Dennis F. Murphy, Jr.
Member, Personnel Committee,
Chairman of the Board of Directors
______________________________
David W. Webster
Member, Personnel Committee
______________________________
Officer's Name
[The annual report front cover contains a color graphic
and the following text:]
1998 Annual Report
Community Bancorp, Inc.
Parent Company of Community National Bank
<PAGE>
[The following text appears on the inside front cover.]
Table of Contents
Selected Consolidated Financial Data - - - - - - - - - - - 1
Message to Stockholders and Friends - - - - - - - - - - - - 2
Consolidated Balance Sheets - - - - - - - - - - - - - - - - 4
Consolidated Statements of Income - - - - - - - - - - - - - 5
Consolidated Statements of Consolidated Income - - - - - - 6
Consolidated Statements of Stockholders' Equity - - - - - - 7
Consolidated Statements of Cash Flows - - - - - - - - - - - 8
Notes to Consolidated Financial Statements - - - - - - - - 9
Report of Independent Public Accountants - - - - - - - - - 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations - - - - - - 25
Directors & Officers - - - - - - - - - - - Inside back cover
<PAGE>
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $300,886,831 $273,550,527 $250,002,458 $237,580,796 $219,850,767
Total deposits 254,408,735 232,788,534 217,181,869 207,039,865 186,862,986
Total net loans 137,242,930 136,624,294 126,866,560 123,558,839 118,775,581
Allowance for possible loan losses 2,981,012 3,215,559 3,481,705 3,455,098 3,703,470
Total interest income 20,659,783 19,169,951 17,761,102 16,917,624 14,429,932
Total interest expense 7,675,112 6,895,222 6,367,758 6,284,750 4,525,558
Net interest income 12,984,671 12,274,729 11,393,344 10,632,874 9,904,374
Gains (losses) on sales of securities 0 8,587 (9,460) 0 (29,828)
Provision for possible loan losses 0 0 0 120,000 300,000
Net income 3,805,761 3,429,859 3,152,098 2,643,877 2,105,433
Earnings per share 1.30 1.17 1.01 0.84 0.67
Dividends per share 0.323 0.285 0.253 0.234 0.214
</TABLE>
[Five-year bar graphs for the following categories appear in this space.
Data for the graphs was obtained from the above table.]
Total Assets (in millions)
Net Income (in millions)
Earnings Per Share (in dollars)
Total Deposits (in millions)
Total Net Loans (in millions)
Net Interest Income (in millions)
-1-
<PAGE>
To Our Stockholders and Friends
It is with great pride that we present the 1998 Annual Report of
Community Bancorp, Inc. and its subsidiary Community National Bank.
The year was marked by solid progress as we again achieved record
earnings while continuing to plan for the future. Net income for the
year was $3,805,761, compared to $3,429,859 recorded in 1997. Earnings
per share of common stock was $1.30, representing an 11.1% increase
over $1.17 in the previous year.
Community Bancorp achieved a return on assets (ROA) of 1.31% and a
return on equity (ROE) of 15.72% during 1998, comparing very favorably
to peer institutions. As a result of our continued strong earnings
during 1998, the Board of Directors increased the cash dividend to
stockholders in each of the four quarters. Total dividends declared
were $.323 per share, representing a 13.3% increase over $.285 declared
in 1997.
As we have indicated in previous reports, conservative, yet innovative,
banking practices provide the foundation for Community National Bank to
thrive as a strong, locally-owned, independent community bank. The Bank's
consistently strong performance has once again resulted in our being
recognized as a "Blue Ribbon" bank by one of the nation's top financial
institution rating services.
Your Board and management team are continuing to pave the way for the
Company's continued success in the future. A new commercial lending
program was introduced in 1998 called Professional Credit Plus. This
program allows professional organizations to obtain lines of credit,
equipment financing, corporate credit cards and a number of other
valuable financial services all in one package and at very competitive
prices.
A branch renovation project was initiated in 1998, designed to enhance
the appearance, efficiency and convenience of the bank's branch offices.
Renovations to the Acton and Boxborough offices were completed during the
year. The Boxborough branch was doubled in size and a drive-up window
was installed to provide easier access for customers in that community,
and the Acton office was modernized to enhance customer service and
efficiency. The Bank expects to complete renovations to several
additional branch offices during 1999.
Diligent efforts continued during the year to prepare the Bank for the
millennium date change. The Bank's Year 2000 Committee has been working
on this project since 1996 so our customers will not be adversely
affected when the clock strikes midnight on December 31, 1999. More
information on the Bank's Year 2000 preparedness program is contained
later in the report.
Representing a major commitment to the future, Community National Bank
is opening two new branch offices during the first half of 1999, the
first in Framingham and the second in Sudbury. The Framingham office is
located at 35 Edgell Road, and the Sudbury office is located at 450
Boston Post Road. These new branches represent excellent opportunities
for the bank to enter two new markets, and they will provide new sources
of deposits, loans and earnings.
In addition to these two new branch offices, the Bank is utilizing the
latest in technology to introduce an electronic "virtual branch" on the
Internet. The virtual branch will allow customers to perform many of
the functions they have previously performed in traditional branch
offices such as opening accounts, applying for loans and accessing their
account information, as well as providing additional features such as
online electronic bill payment, the ability to calculate projected loan
payments or periodic deposits needed to reach savings goals, and online
check ordering. Extensive information about the Bank's entire product
line, including current deposit and loan interest rates, will also be
instantly available, and a direct communication link with the Bank via
e-mail will be provided. Based on the high
-2-
<PAGE>
level of success our current HomeBanc and ExecuBanc PC-based banking
systems have achieved, we believe our new virtual branch will prove
to be an additional service delivery system that will provide solid
value and convenience to our customers.
In 1999 we will continue to distinguish ourselves from our competition.
The implementation of a business development sales team will assist us
in introducing new customers to the bank as well as providing even
better service to our many existing commercial customers. Our success
has been based on providing our customers with excellent personal
service and innovative products, and we will continue to do so in the
coming year.
We would like to take a moment to extend our thanks and appreciation
to Argeo R. Cellucci, Jr., who retired from the Company's Board of
Directors this past December. Mr. Cellucci was a director of the
Company and the Bank for thirty years, and over those many years he
has served on the Investment, Branch, Nominating and Proxy Committees.
His guidance and leadership contributed significantly to the success
of the Company, and we wish him well in his retirement.
Community Bancorp is a strong, well-capitalized, community-oriented
financial institution. We intend to continue to do what a community
bank does best - know its customers and provide the best banking
service possible. The Board of Directors, management and staff will
continue to work diligently to enhance shareholder value, and we look
forward to 1999 with enthusiasm.
Sincerely,
/s/ James A. Langway /s/ Dennis F. Murphy, Jr.
- -------------------- -------------------------
James A. Langway Dennis F. Murphy, Jr.
President and Chief Executive Officer Chairman of the Board
-3-
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31, 1998 and 1997
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,601,043 $ 16,704,667
Federal funds sold 17,000,000 14,600,000
Securities available for sale at market value (Note 2) 31,685,402 38,880,166
Securities held to maturity (market value $87,832,432
in 1998 and $56,404,323 in 1997) (Note 2) 87,058,589 56,304,224
Mortgage loans held for sale 1,330,278 2,173,322
Loans (Notes 3 and 9) 140,223,942 139,839,853
Less allowance for possible loan losses
(Notes 4 and 12) 2,981,012 3,215,559
----------- -----------
Total net loans 137,242,930 136,624,294
Premises and equipment, net (Note 5) 5,576,789 4,637,965
Other assets, net (Note 13) 3,391,800 3,625,889
----------- -----------
Total assets $300,886,831 $273,550,527
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 10):
Noninterest bearing $ 60,511,257 $ 55,678,794
Interest bearing 193,897,478 177,109,740
----------- -----------
Total deposits 254,408,735 232,788,534
----------- -----------
Securities sold under repurchase
agreements and federal funds purchased 19,747,496 16,637,064
Other liabilities (Note 7) 1,265,351 1,688,830
----------- -----------
Total liabilities 275,421,582 251,114,428
----------- -----------
Commitments (Notes 8 and 12)
Stockholders' equity:
Preferred stock, $2.50 par value, 100,000 shares
authorized, none issued or outstanding
Common stock, $2.50 par value, 12,000,000 shares
authorized, 3,199,218 shares issued,
2,944,588 shares outstanding, (2,926,257 shares
outstanding at December 31, 1997) 7,998,045 7,998,045
Surplus 524,106 414,120
Undivided profits 19,274,861 16,418,790
Treasury stock, at cost, 254,630 shares,
(272,961 at December 31, 1997) (2,364,573) (2,529,552)
Accumulated other comprehensive income (Note 1) 32,810 134,696
----------- -----------
Total stockholders' equity 25,465,249 22,436,099
----------- -----------
Total liabilities and stockholders'
equity $300,886,831 $273,550,527
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $13,167,815 $13,138,908 $12,430,327
Interest and dividends on securities:
Taxable interest 5,790,375 5,181,809 4,565,311
Nontaxable interest 482,473 325,868 120,553
Dividends 64,106 59,350 54,248
Interest on federal funds sold 1,155,014 464,016 590,663
---------- ---------- ----------
Total interest income 20,659,783 19,169,951 17,761,102
---------- ---------- ----------
Interest expense:
Interest on deposits 6,649,308 6,139,134 5,840,445
Interest on federal funds purchased and
securities sold under repurchase
agreements 1,025,804 756,088 527,313
---------- ---------- ----------
Total interest expense 7,675,112 6,895,222 6,367,758
---------- ---------- ----------
Net interest income 12,984,671 12,274,729 11,393,344
---------- ---------- ----------
Provision for possible loan losses
(Note 4) 0 0 0
---------- ---------- ----------
Net interest income after provision
for possible loan losses 12,984,671 12,274,729 11,393,344
---------- ---------- ----------
Noninterest income:
Merchant credit card processing
assessments 1,194,584 1,028,404 855,488
Service charges 590,255 611,089 612,786
Other charges, commissions and fees 1,107,893 883,316 899,481
Gains on sales of loans, net 224,388 41,744 21,105
Gains (losses) on sales of securities, net 0 8,587 (9,460)
Other 83,367 81,488 75,399
---------- ---------- ----------
Total noninterest income 3,200,487 2,654,628 2,454,799
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Note 7) 5,176,505 4,777,520 4,541,551
Data processing 618,438 584,125 582,334
Occupancy 609,638 584,484 580,519
Furniture and equipment 458,120 409,897 362,453
Credit card processing 1,097,664 891,461 738,227
Printing, stationery and supplies 259,901 289,061 198,313
Marketing and advertising 311,551 383,339 223,899
Other 1,665,108 1,525,622 1,442,089
---------- ---------- ----------
Total noninterest expense 10,196,925 9,445,509 8,669,385
---------- ---------- ----------
Income before income tax expense 5,988,233 5,483,848 5,178,758
Income tax expense 2,182,472 2,053,989 2,026,660
---------- ---------- ----------
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
========== ========== ==========
Earnings per common share (Note 1) $ 1.30 $ 1.17 $ 1.01
Weighted average number of shares
outstanding 2,938,360 2,940,158 3,113,388
========== ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE>
<TABLE>
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
---------- ---------- ----------
Other comprehensive income:
Unrealized securities (losses) gains
arising during period (173,276) 255,855 43,642
Income tax benefit (expense) on
securities (losses) gains during period 71,390 (106,103) (18,216)
---------- ---------- ----------
Net unrealized securities (losses)
gains arising during period (101,886) 149,752 25,426
---------- ---------- ----------
Less: reclassification adjustment for
securities (gains) losses included
in income 0 (8,587) 9,460
Income tax expense (benefit) on
securities (gains) losses included
in income 0 3,561 (3,949)
---------- ---------- ----------
Net reclassification adjustment for
securities (gains) losses included
in net income 0 (5,026) 5,511
---------- ---------- ----------
Other comprehensive income (101,886) 144,726 19,915
---------- ---------- ----------
Comprehensive income $ 3,703,875 $ 3,574,585 $ 3,172,013
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-6-
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
Accumulated
Other
Common Undivided Treasury Comprehensive
Stock Surplus Profits Stock Income
----- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 7,998,045 $ 290,253 $11,463,544 $ (181,224) $ (29,945)
Net income 3,152,098
Cash dividends declared
($.253 per share) (788,684)
Purchase of 257,665 shares
of treasury stock (2,318,985)
Reissuance of 33,731 shares
of treasury stock 84,327 151,790
Change in accumulated other
comprehensive income (Note 1) 19,915
- -------------------------- --------- ------- --------- --------- ---------
Balance, December 31, 1996 7,998,045 374,580 13,826,958 (2,348,419) (10,030)
Net income 3,429,859
Cash dividends declared
($.285 per share) (838,027)
Purchase of 24,301 shares
of treasury stock (291,612)
Reissuance of 15,546 shares
of treasury stock 39,540 110,479
Change in accumulated other
comprehensive income (Note 1) 144,726
- -------------------------- --------- ------- ---------- ------- -------
Balance, December 31, 1997 7,998,045 414,120 16,418,790 (2,529,552) 134,696
Net income 3,805,761
Cash dividends declared
($.323 per share) (949,690)
Reissuance of 18,331 shares
of treasury stock 109,986 164,979
Change in accumulated other
comprehensive income (Note 1) (101,886)
- -------------------------- --------- ------- ---------- --------- -------
Balance, December 31, 1998 $7,998,045 $524,106 $19,274,861 $(2,364,573) $ 32,810
========= ======= ========== ========= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-7-
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in mortgage loans held
for sale 843,044 (951,157) (164,784)
Premium on sale of mortgages 193,368 162,766 325,139
Depreciation and amortization 834,209) 802,623 839,476
Deferred income taxes (6,691) 80,729 25,581
(Decrease) increase in other liabilities (192,937) 72,638 (230,258)
(Decrease) increase in taxes payable (183,595) (40,301) 85,239
(Decrease) in interest payable (56,143) (616) (5,592)
Decrease (increase) in other assets, net 23,449 (201,423) 74,150
(Increase) decrease in interest receivable (146,039) (229,236) 42,708
---------- ---------- ----------
Total adjustments 1,308,665 (303,977) 991,659
---------- ---------- ----------
Net cash provided by operating activities 5,114,426 3,125,882 4,143,757
---------- ---------- ----------
Cash flows used in investing activities:
Purchases of securities held to maturity (62,344,812) (16,731,111) (22,899,227)
Purchases of securities available for sale (5,482,625 (17,560,698) (14,347,861)
Maturities and principal repayments of
securities held to maturity 31,590,326 17,174,567 14,056,633
Maturities and principal repayments of
securities available for sale 12,499,965 5,342,727 6,257,701
Sales of securities held to maturity 0 2,000,000 0
Sales of securities available for sale 0 2,913,737 3,507,742
Net change in federal funds sold (2,400,000) (3,300,000) (5,400,000)
Net change in loans and other real estate owned (564,601) (9,910,398) (3,446,092)
Sales of other real estate owned 170,000 15,600 100,000
Acquisition of premises and equipment (1,773,032) (592,386) (488,905)
---------- ---------- ----------
Net cash used in investing activities (28,304,779) (20,647,962) (11,860,009)
---------- ---------- ----------
Cash flows from financing activities:
Net change in deposits 21,620,201 15,606,665 10,142,004
Net change in securities sold under
repurchase agreements 6,110,432 2,182,377 3,164,724
Net change in federal funds purchased (3,000,000) 3,000,000 (1,000,000)
Purchase of treasury stock 0 (291,612) (2,318,985)
Reissuance of treasury stock 274,965 150,019 236,117
Dividends paid (918,869) (812,269) (784,487)
---------- ---------- ----------
Net cash provided by financing activities 24,086,729 19,835,180 9,439,373
---------- ---------- ----------
Net increase in cash and due from banks 896,376 2,313,100 1,723,121
Cash and due from banks at beginning of year 16,704,667 14,391,567 12,668,446
---------- ---------- ----------
Cash and due from banks at end of year $17,601,043 $16,704,667 $14,391,567
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-8-
<PAGE>
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Community Bancorp, Inc. (the "Company"), a Massachusetts corporation
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended, and its wholly-owned subsidiary, Community National Bank,
(the "Bank"), a national banking association. The Bank has also formed
Community Securities Corporation and Community Benefits Consulting, Inc. as
wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
At present, the Company conducts no activities independent of the Bank. The
Bank has eight offices and is engaged in substantially all of the business
operations normally conducted by an independent commercial bank in
Massachusetts. Banking services offered include the acceptance of checking,
savings, and time deposits, and the making of commercial, real estate,
installment and other loans. The Bank also offers official checks, safe
deposit boxes, electronic banking and bill payment services and other
customary banking services to its customers.
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.
Securities
Debt securities that the Company has the positive intent and ability to hold
to maturity are reported at amortized cost. Securities purchased to be held
for indefinite periods of time and not intended to be held until maturity
are classified as "available for sale" securities. Securities classified as
available for sale are reported at fair value with unrealized gains and
losses excluded from earnings and reported net of taxes in a separate
component of stockholders' equity. Securities held for indefinite periods
of time include securities that management may use in conjunction with the
Company's asset/liability in management program and that may be sold in
response to changes in interest rates, prepayment risks or other economic
factors. When securities classified as available for sale are sold, the
adjusted cost of each specific security sold is used to calculate gains or
losses on sale, which are included in earnings.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization, which is computed by using both the straight-line and
accelerated methods. Estimated useful lives are as follows:
Buildings................30 to 40 years
Buildings and leasehold
improvements.............5 to 25 years
Furniture and equipment...3 to 10 years
Cash and due from banks
Included in cash and due from banks as of December 31, 1998 and 1997 is
approximately $7,611,000 and $5,341,000, respectively, that is subject to
Federal Reserve withdrawal restrictions.
Allowance for possible loan losses
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for possible
loan losses. The allowance for possible loan losses is increased through a
provision for possible loan losses charged to expense and decreased by
charge-offs, net of recoveries. The provision is based on management's
estimation of the amount necessary to maintain the allowance at an adequate
level. Management's periodic evaluation of the adequacy of the allowance is
based on specific credit reviews, past loan loss experience, current
economic conditions and trends, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and the volume,
growth and composition of the loan port-
-9-
<PAGE>
folio. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary.
Effective January 1, 1995, the Company adopted Financial Accounting
Standards Board Statement No 114, "Accounting by Creditors for Impairment of
a Loan" (SFAS No. 114). For purposes of this Statement, a loan is considered
to be impaired when it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
The Financial Accounting Standards Board also issued SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(SFAS No. 118), which amended SFAS No. 114 by allowing creditors to use their
existing methods of recognizing interest income on impaired loans.
Securities sold under repurchase agreements
The Company sells securities under open-ended repurchase agreements with
certain customers. The principal balance of the repurchase agreements
changes daily. Specific securities are not sold and securities are not
transferred to the name of the customers. Instead, the customer has an
interest in a portion of the U.S. Government securities held in the
Company's investment portfolio.
Earnings per share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" (SFAS No. 128), effective December 31, 1997. This
Statement requires the presentation of "basic" earnings per share, which
excludes the effect of dilution, and "diluted" earnings per share, which
includes the effect of dilution. The Company's "basic" and "diluted"
earnings per share computations are identical in 1998, 1997 and 1996, as
there is no dilution effect. Earnings per share is based on the weighted
average number of shares outstanding during the year.
Loan sales and loans held for sale
Gains and losses on sales of mortgage loans are recognized at the time of
sale based on the difference between the selling price and the carrying
value of the related loans sold. The gains and losses are increased or
decreased by the present value of the difference (generally referred to as
"excess servicing") between the interest rate on the loans sold, adjusted for
a normal servicing fee and, in the case of mortgage-backed securities, a
guaranty fee, and the agreed-upon yield to the buyer. The present value is
computed over the estimated life of the loans sold, taking into account
scheduled payments and estimated prepayments. At December 31, 1998 and
1997, loans held for sale totaled $1,330,278 and $2,173,322, respectively.
In accordance with Financial Accounting Standards Board Statement No. 122,
"Accounting for Mortgage Servicing Rights" (SFAS No. 122) and No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS No. 125), the Company capitalizes the
rights to service mortgage loans for others and assesses those rights for
impairment based on the fair value of those rights.
Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), effective January 1, 1998.
Components of comprehensive income are net income and all other non-owner
changes in equity. The Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in the financial statement
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in the Consolidated
Statements of Comprehensive Income. Prior year data has been restated to
conform to the requirements of SFAS No. 130.
Operating Segments
The Company adopted Financial Accounting Standards Board Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
No. 131), during 1998. SFAS No. 131 established standards for reporting
information about operating segments in annual financial statements and
requires selected information about operating seg-
-10-
<PAGE>
ments in interim financial reports issued to the stockholders. It also
established standards for related disclosures about products and services,
and geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company has one reportable segment: community banking. At present, the
Company conducts no activities independent of the Bank. The Bank is engaged
in substantially all of the business operations customarily conducted by an
independent commercial bank in Massachusetts. Banking services offered
include acceptance of checking, savings and time deposits, and the making of
consumer, commercial, real estate and other loans. The Bank also offers
official checks, traveler's checks, safe deposit boxes, electronic banking
and bill payment services and other customary banking services to its
customers.
Revenue recognition
Interest on loans, securities and other earning assets is accrued and
credited to operations based on contractual rates and principal amounts
outstanding. Nonrefundable loan fees and certain related costs are deferred
and recognized as income over the life of the loan as an adjustment of the
yield.
It is the policy of the Company to discontinue the accrual of interest on
loans when, in the judgment of management, the ultimate collectibility of
principal or interest becomes doubtful. The accrual of interest income
generally is discontinued when a loan becomes 90 days past due as to
principal or interest. When interest accruals are discontinued, unpaid
interest credited to income in the current year is reversed, and interest
accrued in prior years is charged to the allowance for possible loan losses.
Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral is sufficient to cover the principal
balance and accrued interest. Otherwise, interest income is subsequently
recognized only to the extent cash payments are received.
Reclassifications
Certain amounts in prior year's financial statements have been reclassified
to be consistent with the current year's presentation. The
reclassifications have no effect on net income.
2. Securities
The book and estimated market values of securities at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
to Maturity Cost Gains Losses Value
--------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $ 1,000,458 $ 483 $ 0 $ 1,000,941
U.S. Government agencies
and corporations 28,446,008 165,426 0 28,611,434
Obligations of states and
political subdivisions 11,571,113 407,267 0 11,978,380
Mortgage-backed securities 46,041,010 222,979 22,312 46,241,677
------------ ---------- ---------- -----------
$ 87,058,589 $ 796,155 $ 22,312 $ 87,832,432
============ ========== ========== ===========
<CAPTION>
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $ 13,011,174 $ 154,136 $ 0 $ 13,165,310
U.S. Government agencies
and corporations 2,990,631 38,919 0 3,029,550
Mortgage-backed securities 14,573,840 70,439 207,693 14,436,586
Other securities 1,053,956 0 0 1,053,956
------------ ---------- ---------- -----------
$ 31,629,601 $ 263,494 $ 207,693 $ 31,685,402
============ ========== ========== ===========
-11-
<PAGE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
to Maturity Cost Gains Losses Value
--------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $ 4,008,114 $ 1,403 $ 5,357 $ 4,004,160
U.S. Government agencies
and corporations 9,970,706 7,021 80,955 9,896,772
Obligations of states and
political subdivisions 8,414,205 131,412 0 8,545,617
Mortgage-backed securities 33,911,199 127,021 80,446 33,957,774
------------ ---------- ---------- -----------
$ 56,304,224 $ 266,857 $ 166,758 $ 56,404,323
============ ========== ========== ===========
<CAPTION>
Gross Gross
Securities Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $ 17,004,822 $ 120,818 $ 0 $ 17,125,640
U.S. Government agencies and
corporations 3,987,259 11,892 701 3,998,450
Mortgage-backed securities 16,685,383 112,686 11,349 16,786,720
Other securities 969,356 0 0 969,356
------------ ---------- ---------- -----------
$ 38,646,820 $ 245,396 $ 12,050 $ 38,880,166
============ ========== ========== ===========
</TABLE>
The book and estimated market value of securities at December 31, 1998 by
contractual maturity are shown in the following table. Actual maturities may
differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Within one year $ 1,415,360 $ 1,415,940 $ 9,007,990 $ 9,067,800
One to five years 25,176,040 25,325,408 6,993,815 7,127,060
Five to ten years 5,246,875 5,295,896 0 0
Ten to fifteen years 9,179,236 9,553,511 0 0
Mortgage-backed securities 46,041,078 46,241,677 14,573,840 14,436,586
Other securities 0 0 1,053,956 1,053,956
----------- ---------- ---------- ----------
$87,058,589 $87,832,432 $31,629,601 $31,685,402
========== =========== ========== ==========
</TABLE>
Securities with a book value of $42,410,000 and $33,718,000 at December 31,
1998 and 1997, respectively, were pledged to secure public funds on deposit
and for other purposes.
There were no sales of securities in 1998. Proceeds from sales of securities
in 1997 were $4,914,737. Gross realized gains and losses on sales of securities
in 1997 were $25,839 and $17,252, respectively. Realized gains or losses on
sales of securities were determined by specific identification.
-12-
<PAGE>
3. Loans
The composition of the loan portfolio at December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and industrial $ 21,127,456 $ 18,065,586
Real estate - residential 55,054,776 54,211,465
Real estate - commercial 47,398,631 48,328,565
Real estate - residential
construction 2,794,688 4,868,265
Loans to individuals 13,196,604 13,571,431
Other 651,787 794,541
----------- -----------
Total loans $140,223,942 $139,839,853
============ ===========
</TABLE>
Substantially all of the Company's loan portfolio is collateralized by assets
in the New England region, especially central Massachusetts. The Company
generally requires collateral when extending credit and, with respect to loans
secured by real estate, Company policy requires appropriate appraisals and
repayment sources.
Total impaired loans at December 31, 1998 and 1997 that required a related
allowance were $120,728 and $0, respectively, and the allowance allocated to
such loans was $41,250 and $0, respectively. In addition, at December 31, 1998
and 1997, the Company had impaired loans of $792,423 and $632,569, respectively,
that did not require a related allowance. Interest payments on impaired loans
are recorded as principal reductions if the remaining loan balance is not
expected to be repaid in full. If full collection of the remaining loan balance
is expected, interest payments are recognized as interest income on a cash
basis. Impaired loans averaged $813,447 and $649,075 during 1998 and 1997,
respectively. The Company recorded interest income on impaired loans of
$82,456 during 1998 and $19,475 during 1997.
At December 31, 1998 and 1997, accruing loans 90 days or more past due totaled
$1,404 and $239,050, respectively, and nonaccruing loans totaled $913,151
and $632,569, respectively. There were no troubled debt restructurings at
December 31, 1998 or 1997. The reduction of interest income associated with
nonaccrual and restructured loans for the years ended December 31, 1998, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income per original terms $ 146,326 $ 143,869 $ 220,029
Income recognized 89,456 19,475 42,411
-------- -------- --------
Foregone interest income $ 63,870 $ 124,394 $ 177,618
======== ======== ========
</TABLE>
-13-
<PAGE>
4. Allowance for Possible Loan Losses
Activity in the allowance for possible loan losses for the years ended
December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<S> <C>
Balance, December 31, 1995 $3,455,098
Provision for possible losses 0
Charge-offs (230,545)
Recoveries 257,152
---------
Balance, December 31, 1996 3,481,705
Provision for possible losses 0
Charge-offs (366,139)
Recoveries 99,993
---------
Balance, December 31, 1997 3,215,559
Provision for possible losses 0
Charge-offs (303,525)
Recoveries 68,978
---------
Balance, December 31, 1998 $2,981,012
=========
</TABLE>
5. Premises and Equipment
The composition of premises and equipment at December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Premises $ 5,985,628 $ 5,057,478
Equipment 2,961,737 2,935,940
---------- -----------
8,947,365 7,993,418
Less accumulated depreciation and
amortization 3,370,576 3,355,453
---------- -----------
$ 5,576,789 $ 4,637,965
========== ===========
</TABLE>
Total depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $834,209, $802,623 and $746,120, respectively, and is
included in data processing, occupancy and furniture and equipment expense. In
December of 1998 the Bank purchased a branch office in Framingham, Massachusetts
which is expected to open in the spring of 1999.
6. Income Taxes
The components of income tax expense for the years ended December 31, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,713,257 $ 1,531,216 $ 1,508,248
State 475,906 442,044 492,831
---------- ---------- ----------
Total current 2,189,163 1,973,260 2,001,079
---------- ---------- ----------
Deferred:
Federal (10,307) 54,614 6,430
State 3,616 26,115 19,151
---------- ---------- ----------
Total deferred (6,691) 80,729 25,581
---------- ---------- ----------
Total $ 2,182,472 $ 2,053,989 $ 2,026,660
========== ========== ==========
</TABLE>
-14-
<PAGE>
The difference between the income tax provision computed by applying the
statutory federal income tax rate of 34% to income before income taxes and the
cumulative effect of a change in accounting principle and the actual income tax
provision is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense
at statutory rates $ 2,035,999 $ 1,864,508 $ 1,760,833
State income taxes, net of
federal income tax benefit 316,485 308,984 337,908
Tax-exempt interest (175,993) (132,117) (69,794)
Other, net 5,981 12,614 (2,287)
---------- ---------- ----------
$ 2,182,472 $ 2,053,989 $ 2,026,660
========== ========== ==========
</TABLE>
The Company has recorded a net deferred tax asset of $652,980. Realization is
dependent on the generation of sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely than
not that the full amount of the net deferred tax asset will be realized.
However, the amount realizable could be reduced if estimates of future taxable
income are reduced.
At December 31, 1998 and 1997, the Company's net deferred tax asset, as
presented in the accompanying consolidated balance sheets, consisted of the
following components:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Gross deferred tax asset:
Provision for possible loan losses $ 899,555 $ 899,555
Employee benefits and other
compensation arrangements 328,752 381,227
OREO write-downs 0 20,600
Other 20,003 14,491
--------- ---------
1,248,310 1,315,873
Gross deferred tax liability:
Accelerated tax depreciation (228,531) (377,005)
Other (366,799) (366,948)
--------- ---------
(595,330) (743,953)
--------- ---------
Net deferred tax asset $ 652,980 $ 571,920
========= =========
</TABLE>
7. Employee Benefits
The Company has a defined benefit pension plan covering all eligible employees.
The benefits are based on years of service and the employees' compensation as
defined in the Plan agreement. The Company's funding policy is to make annual
contributions to the Plan equal to at least the minimum amount required for
actuarial purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those to be earned in the future.
-15-
<PAGE>
In accordance with Financial Accounting Standards Board Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132), which the Company adopted during 1998, the following table
sets forth the Plan's funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $(3,161,057) $(2,732,471)
Service cost (247,666) (213,920)
Interest cost (226,980) (202,397)
Actuarial gain (265,151) (78,096)
Benefits paid 149,112 65,827
--------- ---------
Benefit obligation at end of year (3,751,742) (3,161,057)
--------- ---------
Change in plan assets:
Fair value of assets at beginning of year 2,831,044 2,277,087
Actual return on plan assets (166,661) 419,388
Employer contributions 483,121 200,396
Benefits paid (149,112) (65,827)
--------- ---------
Fair value of plan assets at end of year $ 2,998,392 $ 2,831,044
========= =========
</TABLE>
The following weighted-average assumptions were used in accounting for the
Company's pension plan for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate 6.50% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 5.00%
</TABLE>
Net periodic benefit cost for the years ended December 31, 1998 and 1997
included the following components:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Service cost $ 247,666 $ 213,920
Interest cost 226,980 202,397
Expected return on plan assets (228,798) (188,254)
Amortization of prior service cost 1,380 1,380
Amortization of transition obligation (8,954) (8,954)
Amortization of unrecognized gain 0 6,481
--------- ---------
Net periodic benefit cost $ 238,274 $ 226,970
========= =========
</TABLE>
-16-
<PAGE>
The Company has an Employee Stock Ownership Plan (ESOP) that enables eligible
employees to own common stock. Annual cash contributions of $70,000 were
made to the ESOP in 1998, 1997 and 1996.
The Company implemented a 401(k) plan in 1989, covering all eligible employees.
The Company matches a percentage of each participant's annual contribution to
the plan as determined by the Board of Directors each year. Compensation
expense recorded in 1998, 1997 and 1996 related to this plan was approximately
$81,400, $78,900 and $61,400, respectively.
8. Commitments
The Company leases branch offices and equipment under noncancelable agreements
expiring at various dates through 2008 that require various minimum annual
rentals. The total future minimum rental commitments at December 31, 1998
aggregate $1,146,502. Rental commitments for each of the next five fiscal
years and thereafter are as follows:
1999 $210,404
2000 199,004
2001 164,982
2002 144,162
2003 66,150
Thereafter 361,800
Rental expense totaled approximately $185,000, $170,000 and $149,000, for
1998, 1997 and 1996, respectively. The Bank has contracted to lease a
branch office in Sudbury, Massachusetts beginning in the second quarter
of 1999. The rental commitment for that branch is included in the figures
above.
9. Loans to Related Parties
The schedule below discloses indebtedness of certain parties related to the
Company:
<TABLE>
<CAPTION>
Balance Balance
January 1 New Loans Repayments December 31
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
1997 $ 5,618,569 $ 787,285 $ 625,805 $ 5,780,049
1998 $ 5,780,049 $1,373,994 $ 1,613,213 $ 5,540,830
</TABLE>
These loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than normal risk of
collectibility.
10. Deposits
Deposits consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Demand deposits $ 60,511,257 $ 55,678,794
Money-market deposits 25,419,293 25,721,390
NOW and FlexValue deposits 36,319,201 30,079,576
Cash management investment deposits 22,238,050 15,580,137
Savings deposit 36,059,685 34,813,944
Time certificates of deposit in
denominations of $100,000 or more 19,130,242 21,183,954
Other time deposits 54,731,007 49,730,739
----------- -----------
$254,408,735 $232,788,534
=========== ============
</TABLE>
-17-
<PAGE>
11. Condensed Financial Information of Community Bancorp, Inc.
The following tables disclose certain parent-company-only financial
information at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998:
<TABLE>
Balance Sheets
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 366,631 $ 92,421
Investment in subsidiary, at equity 25,066,007 22,309,350
Other assets 250,290 219,469
---------- ----------
Total assets $ 25,682,928 $ 22,621,240
=========== ==========
Liabilities and stockholders' equity:
Other liabilities $ 217,679 $ 185,141
---------- ----------
Total liabilities 217,679 185,141
---------- ----------
Stockholders' equity:
Preferred stock, $2.50 par value, 100,000
shares authorized, none issued or outstanding
Common stock, $2.50 par value, 12,000,000 shares
authorized, 3,199,218 shares issued,
2,944,588 shares outstanding, (2,926,257 shares
outstanding at December 31, 1997) 7,998,045 7,998,045
Surplus 524,106 414,120
Undivided profits 19,274,861 16,418,790
Treasury stock at cost, 254,630 shares
(272,961 shares at December 31, 1997) (2,364,573) (2,529,552)
Accumulated other comprehensive income 32,810 134,696
---------- ----------
Total stockholders' equity 25,465,249 22,436,099
---------- ----------
Total liabilities and stockholders' equity $25,682,928 $22,621,240
=========== ==========
</TABLE>
<TABLE>
Statements of Income
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 949,690 $ 979,641 $ 2,407,668
Other income 341,027 326,669 322,048
----------- ----------- ----------
Total income 1,290,717 1,306,310 2,729,716
----------- ----------- ----------
Expenses:
Other 343,499 344,822 324,478
----------- ----------- ----------
Total expenses 343,499 344,822 324,478
----------- ----------- ----------
Income before undistributed net income of
subsidiary bank 947,218 961,488 2,405,238
Equity in undistributed net income of
subsidiary bank 2,858,543 2,468,371 746,860
----------- ----------- ----------
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
=========== =========== ===========
</TABLE>
-18-
<PAGE>
<TABLE>
Statements of Cash Flows
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiary bank (2,858,543) (2,468,371) (746,860)
Increase in other assets (30,821) (2,935) (26,997)
Increase (decrease) in other liabilities 32,538 (8,698) 21,441
---------- ---------- ----------
Total adjustments (2,856,826) (2,480,004) (752,416)
---------- ---------- ----------
Net cash provided by operating activities 948,935 949,855 2,399,682
---------- ---------- ----------
Cash flows from financing activities:
Purchase of treasury stock 0 (291,612) (2,318,985)
Reissuance of treasury stock 274,965 150,019 236,117
Dividends declared (949,690) (838,027) (788,684)
---------- ---------- ----------
Net cash used in financing activities (674,725) (979,620) (2,871,552)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 274,210 (29,765) (471,870)
Cash and cash equivalents at beginning of year 92,421 122,186 594,056
---------- ---------- ----------
Cash and cash equivalents at end of year $ 366,631 $ 92,421 $ 122,186
========== ========== ===========
</TABLE>
Cash and cash equivalents consist of a money market demand deposit account on
deposit with the subsidiary bank.
The approval of the Comptroller of the Currency is required for a national bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds the bank's net profits (as defined) for that year combined with its
retained net profits for the preceding two calendar years. During 1999,
Community National Bank can, under this formula, declare dividends to
Community Bancorp, Inc. of approximately $5,469,000, plus an additional
amount equal to the Bank's net profit for 1999, up to the date of any such
dividend declaration, without the approval of the Comptroller of the Currency.
12. Financial Instruments With Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business. These financial instruments primarily consist
of commitments to extend credit and standby letters of credit. Loan
commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. They are
primarily issued to guarantee other customer obligations. Both arrangements
have credit risk essentially the same as that involved in extending loans to
customers and are subject to the Company's normal credit policies. Collateral
typically is obtained based on management's credit assessment of the
customer. Loan commitments and standby letters of credit usually have fixed
expiration dates or other termination clauses. Some commitments and letters of
credit expire without being drawn upon. Accordingly, the total commitment
amounts do not necessarily represent future cash requirements of the Company.
-19-
<PAGE>
The Company's maximum exposure to credit loss for loan commitments (unfunded
loans and unused lines of credit) and standby letters of credit outstanding at
December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit:
Fixed-rate (6.99% to 10.00%) $ 1,241,424 $ 1,394,116
Adjustable rate 36,125,831 38,754,983
Standby letters of credit $ 615,530 $ 629,086
=========== ===========
</TABLE>
Commitments to extend credit on a fixed-rate basis expose the Company to a
certain amount of interest rate risk if market rates of interest substantially
increase during the commitment period.
The Company has also sold mortgage loans with recourse in the event of the
default of the borrower. Loans sold with recourse are accounted for as sales in
the accompanying financial statements, with provisions made for anticipated
losses under the recourse provisions. At December 31, 1998 and 1997, the
outstanding balance of such mortgages totaled approximately $254,000 and
$272,000, respectively.
Fees associated with the Company's off-balance-sheet financial instruments are
minimal; therefore, the fair value of off-balance-sheet financial instruments
is not material.
13. Loan Servicing Asset
The loan servicing asset, included in other assets, represents the estimated
present value of the interest rate differential resulting from the sale of
loans with servicing rights retained. This amount is amortized over the
estimated lives of the underlying loans sold. The loan servicing asset is
also reduced by a charge to earnings if actual prepayments exceed estimated
prepayments. The loan servicing asset totaled $157,569 and $350,937 at
December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the
Company was servicing mortgage loans for others of approximately $108,181,000
and $118,137,000, respectively.
14. Regulatory Capital
The Company and the Bank are 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
classifications 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 Company and 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 Company and the Bank met all capital adequacy requirements
to which they are subject.
As of December 31, 1998 and 1997, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized", the Bank must maintain 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.
-20-
<PAGE>
The Company's and the Bank's actual capital amounts and ratios at December 31,
1998 and 1997 are presented in the following table (dollars are in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under 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>
Company (consolidated):
Total capital
(to risk-weighted >
assets) $27,434 17.08% $12,850 - 8.00% N/A N/A
Tier 1 capital
(to risk-weighted >
assets) 25,414 15.82% 6,425 - 4.00% N/A N/A
Tier 1 capital >
(to average assets) 25,414 8.78% 11,584 - 4.00% N/A N/A
Bank:
Total capital
(to risk-weighted > >
assets) 27,035 16.83% 12,850 - 8.00% $16,063 - 10.00%
Tier 1 capital
(to risk-weighted > >
assets) 25,015 15.57% 6,425 - 4.00% 9,638 - 6.00%
Tier 1 capital > >
(to average assets) 25,015 8.64% 11,584 - 4.00% 14,480 - 5.00%
<CAPTION>
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Company (consolidated):
Total capital
(to risk-weighted >
assets) $24,234 15.75% $12,312 - 8.00% N/A N/A
Tier 1 capital
(to risk-weighted >
assets) 22,295 14.49% 6,156 - 4.00% N/A N/A
Tier 1 capital >
(to average assets) 22,295 8.67% 10,283 - 4.00% N/A N/A
Bank:
Total capital
(to risk-weighted > >
assets) 24,108 15.66% 12,312 - 8.00% $15,390 - 10.00%
Tier 1 capital
(to risk-weighted > >
assets) 22,168 14.40% 6,156 - 4.00% 9,234 - 6.00%
Tier 1 capital > >
(to average assets) 22,168 8.62% 10,283 - 4.00% 12,853 - 5.00%
</TABLE>
-21-
<PAGE>
15. Disclosures about Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments" (SFAS No. 107). This statement requires disclosure of
fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and due from banks and federal funds sold: The carrying amounts reported
in the balance sheet for cash and due from banks and federal funds sold
approximate those assets' fair values.
Securities (including mortgage-backed securities, securities held to maturity
and securities available for sale): Fair values for 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.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for certain one-to-four family residential mortgages are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for credit card loans and other consumer loans are based on carrying
values, as the loans reprice frequently at current market rates. The fair
values for other loans (e.g., commercial real estate and rental property
mortgage loans, and commercial and industrial loans) are estimated using
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
Off-balance-sheet instruments: The fair value of lending commitments discussed
in Note 12 is not considered material nor has it been reflected in the
estimation of the fair value of the related loans.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Commitments to extend credit/sell loans: The fair value of commitments is
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 customers. For fixed-rate loan commitments and obligations
to deliver fixed-rate loans, fair value also considers the difference between
committed rates and current levels of interest rates.
Values not determined: SFAS No. 107 excludes certain financial instruments
from its disclosure requirements, including real estate included in banking
premises and equipment, the intangible value of the Bank's portfolio of loans
serviced (both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e. core
deposits) among others. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
-22-
<PAGE>
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------
Carrying Estimated
Amount Fair Value
------------ -----------
<S> <C> <C>
Financial instrument assets:
Cash and cash equivalents $ 34,601,043 $ 34,601,043
Securities 118,743,991 119,517,834
Loans, including held for sale, net 138,573,208 141,091,987
Financial instrument liabilities:
Deposits 254,408,735 254,796,482
Short-term borrowings 19,747,496 19,747,496
<CAPTION>
1997
------------------------------
Carrying Estimated
Amount Fair Value
------------ -----------
<S> <C> <C>
Financial instrument assets:
Cash and cash equivalents $ 31,304,667 $ 31,304,667
Securities 95,184,390 95,284,489
Loans, including held for sale, net 138,797,615 140,905,729
Financial instrument liabilities:
Deposits 232,788,534 232,248,046
Short-term borrowings 16,637,064 16,637,064
</TABLE>
-23-
<PAGE>
[The following report appears on Arthur Andersen LLP letterhead]
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Community Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Bancorp, Inc. (a Massachusetts corporation) and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income,
comprehensive income, shareholders' investment and cash flows for the three
years in the period ended December 31, 1998. 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 audit 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 financial position of Community Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 25, 1999
-24-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary
The Company recorded net income of $3,805,761 for the year ended December 31,
1998, representing an increase of $375,902 or 11.1% over $3,429,859 recorded
in 1997. Earnings per share of $1.30 for the current period compared to
$1.17 for the year ended December 31, 1997. The improvement in net income
resulted primarily from increases in net interest income and noninterest
income, partially offset by an increase in noninterest expense.
Deposits of $254,408,735 at December 31, 1998 increased by $21,620,201 or
9.3% from $232,788,534 at December 31, 1997. The increase occurred primarily
in interest bearing categories and secondarily in noninterest bearing
categories.
Loans of $140,223,942 at December 31, 1998 increased by $384,089 or .3%
from $139,839,853 at December 31, 1997. Noncurrent loans (nonaccrual loans
and loans 90 days or more past due but still accruing) totaled $914,555 and
$871,619 at December 31, 1998 and 1997, respectively. There were no
accruing troubled debt restructurings at December 31, 1998 or 1997. Other
real estate owned of $0 at December 31, 1998 compared to $170,000 at
December 31, 1997.
Assets of $300,886,861 at December 31, 1998 represented a $27,336,304 or 10.0%
increase over $273,550,527 at December 31, 1997.
1998 Compared to 1997
Interest income for the year ended December 31, 1998 was $20,659,783,
representing an increase of $1,489,832 or 7.8% over $19,169,951 for the year
ended December 31, 1997, primarily due to a $30,001,910 or 12.6% increase in
average earning assets during 1998. The weighted average taxable equivalent
yield on net earning assets was 7.81% and 8.14% in 1998 and 1997,
respectively. Interest expense of $7,675,112 in 1998 represented an increase
of $779,890 or 11.3% from $6,895,222 in 1997, primarily due to a $24,209,917 or
13.1% increase in average interest bearing liabilities during 1998. The weighted
average cost of interest bearing liabilities was 3.67% in 1998 and 3.73% in
1997. Net interest income for 1998 was $12,984,671, representing an increase
of $709,942 or 5.8% compared to $12,274,729 recorded in 1997.
Noninterest income for the year ended December 31, 1998 was $3,200,487,
representing an increase of $545,859 or 20.6% from $2,654,628 in 1997. This
increase resulted primarily from increases in merchant credit card
processing, gains on sales of loans and other charges, commissions and fees,
partially offset by reductions in service charges and gains on sales of
securities.
Noninterest expense for the year ended December 31, 1998 of $10,196,925
represented an increase of $751,416 or 8.0% from $9,445,509 recorded during
1997. This increase was the result of increases in all primary noninterest
expense categories.
There was no provision for possible loan losses in 1998 or 1997, reflecting
management's continuing evaluation of the adequacy of the allowance for
possible loan losses and its belief that the allowance is adequate.
Management will continue its ongoing assessment of the adequacy of the
allowance for possible loan losses during 1999 and may adjust the provision
for possible loan losses if necessary.
Income tax expense of $2,182,472 for the year ended December 31, 1998
compared to $2,053,989 for 1997, the result of an increase in taxable income
during the current period.
Net income of $3,805,761 for the year ended December 31, 1998 represented an
increase of $375,902 or 11.0% over $3,429,859 recorded in 1997. The
foregoing discussion summarized the primary components of this increase in
earnings.
1997 Compared to 1996
Interest income for the year ended December 31, 1997 was $19,169,951,
representing an increase of $1,408,849 or 7.9% over $17,761,102 for the year
ended December 31, 1996, primarily due to a $15,878,574 or 7.2% increase in
average earning assets during 1997. The weighted average taxable equivalent
yield on net earning assets was 8.14% and 8.06% in 1997
-25-
<PAGE>
and 1996, respectively. Interest expense of $6,895,222 in 1997 represented
an increase of $527,464 or 8.3% from $6,367,758 in 1996, primarily due to an
$11,658,028 or 6.7% increase in average interest bearing liabilities during
1997. The weighted average cost of interest bearing liabilities was 3.73% in
1997 and 3.68% in 1996. Net interest income for 1997 was $12,274,729,
representing an increase of $881,385 or 7.7% compared to $11,393,344 recorded
in 1996.
Noninterest income for the year ended December 31, 1997 was $2,654,628,
representing an increase of $199,829 or 8.1% from $2,454,799 in 1996. This
increase resulted primarily from increases in merchant credit card
processing, gains on sales of loans and gains on sales of securities.
Noninterest expense for the year ended December 31, 1997 of $9,445,509
represented an increase of $776,124 or 9.0% from $8,669,385 recorded during
1996. This increase was primarily the result of increases in salaries and
employee benefits, furniture and equipment, credit card processing and other
expense.
There was no provision for possible loan losses in 1997 or 1996, reflecting
management's continuing evaluation of the adequacy of the allowance for
possible loan losses and its belief that the allowance is adequate.
Income tax expense of $2,053,989 for the year ended December 31, 1997
compared to $2,026,660 for 1996, the result of an increase in taxable income
during the current period.
Net income of $3,429,859 for the year ended December 31, 1997 represented an
increase of $277,761 or 8.8% over $3,152,098 recorded in 1996. The
foregoing discussion summarized the primary components of this increase in
earnings.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level believed by
management to be adequate to absorb potential losses in the loan portfolio.
Management's methodology in determining the adequacy of the allowance
considers specific credit reviews, past loan loss experience, current
economic conditions and trends, known and inherent risks in the loan
portfolio, adverse situations that may affect a borrower's ability to repay,
the estimated value of any underlying collateral and the volume, growth and
composition of the loan portfolio. Each loan on the Company's internal Watch
List is evaluated periodically to estimate potential loss. For loans with
potential losses, the bank sets aside or allocates a portion of the allowance
against such potential losses. For the remainder of the loan portfolio,
unallocated allowance amounts are determined based on judgments regarding
the type of loan, economic conditions and trends, potential exposure to loss
and other factors. When specific loans, or portions thereof, are deemed to
be uncollectible, those amounts are charged off against the allowance.
Subsequent recoveries, if any, are credited to the allowance. At December
31, 1998 the allowance was $2,981,012, representing 2.1% of total loans,
compared to $3,215,559, representing 2.3% of total loans at December 31, 1997.
Securities
The Company's securities portfolio consists of obligations of the U.S.
Treasury, U.S. Government sponsored agencies, mortgage backed securities and
obligations of various municipalities. These assets are used in part to
secure public deposits and as collateral for repurchase agreements.
Securities averaged $107.9 million for 1998, an increase of $15.3 million or
16.5% over $92.6 million for 1997. There were no sales of securities in 1998.
All mortgage-backed securities in the securities portfolio have been issued by
U.S. Government sponsored agencies. Management believes no other-than-temporary
impairment has occurred with regard to any security in the securities portfolio.
The Company's adequate liquidity position provides the ability to hold all
currently owned securities to maturity.
Liquidity and Capital Resources
The Company's principal sources of liquidity are customer deposits,
amortization and pay-offs of loan principal and amortization and maturities
of securities. These sources provide funds for loan originations, the
purchase of securities and other activities. Deposits are considered a
relatively stable source of funds. At December 31, 1998 and 1997, deposits
were $254.4 million and $232.8 million, respectively. Management anticipates
that deposits will increase moderately during 1999.
Of the Company's $118.7 million in securities at December 31, 1998, $10.5
million or 8.8% mature within one year. As a
-26-
<PAGE>
nationally chartered member of the Federal Reserve System, the Bank has the
ability to borrow funds from the Federal Reserve Bank of Boston by pledging
certain of its investment securities as collateral. Also, the Bank is a
member of the Federal Home Loan Bank which provides additional borrowing
opportunities.
Bank regulatory authorities have established a capital measurement tool
called Tier 1 leverage capital. A 4.00% ratio of Tier 1 leverage capital to
assets now constitutes the minimum capital standard for most banking
organizations. At December 31, 1998 and 1997, the Company's Tier 1 leverage
capital ratio was 8.45% and 8.15%, respectively. Regulatory authorities have
also implemented risk-based capital guidelines requiring a minimum ratio of
Tier 1 capital to risk-weighted assets of 4.00% and a minimum ratio of total
capital to risk-weighted assets of 8.00%. At December 31, 1998, the Company's
Tier 1 and total risk-based capital ratios were 15.82% and 17.08%, respectively.
At December 31, 1997 the Company's Tier 1 and total risk-based capital ratios
were 14.49% and 15.75%, respectively. The Bank is categorized as "well
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991 (F.D.I.C.I.A.).
Year 2000
The following Year 2000 statements constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act
of 1998.
The Company, like most users of computers, computer software, and equipment
utilizing embedded microcontrollers, may be affected by the Year 2000 date
change. The Company recognized the importance of this issue in 1996 and
formally established an internal Year 2000 Committee in 1997, chaired by
a member of the Company's senior management team, to assess all systems to
ensure that they will function properly. This process involves five
separate phases: awareness, assessment, renovation, validation and
implementation.
The Company's Year 2000 Committee established a schedule specifying the
completion dates for each of the process's five phases. During 1997,
the Committee completed the systems assessment phase, identifying each
internal system that could potentially be affected by the Year 2000 issue.
Those systems were then designated as either mission-critical or non-
mission-critical. Mission-critical systems are defined by the Company as
being vital to the successful continuance of core business activities.
The Company has determined that its only mission-critical system is its
mainframe data processing system. The mainframe system has been certified
by its respective hardware and software vendors as being Year 2000 compliant.
In addition, the Company contracted with a qualified consulting firm to
independently test the mainframe system for Year 2000 compatibility. That
testing has verified that the mainframe system is Year 2000 compliant.
For all non-mission-critical systems that could be affected by the Year 2000
issue, action plans have been designed which set forth the process for
determining whether or not those systems are compliant. Those
determinations involve obtaining compliance certifications from vendors wherever
possible and by validation testing conducted by the Company. A similar
procedure is being followed for external systems and services the bank
obtains from third parties. Testing of those third party systems for Year
2000 compliance began during fourth quarter of 1998 and is expected to be
completed by March 31, 1999.
When the results of the Company's validation testing reveals that a
particular system or service is not Year 2000 compliant, a specific
deadline is established by which time that system or service must be
brought into compliance. Contingency plans have been formulated to either
upgrade such systems in order to meet Year 2000 compliance requirements,
replace them with systems that are certified as compliant, or establish
alternative processing arrangements. Those contingency plans document the
action the Company will take for each such non-compliant system. At
December 31, 1998, the Company was in the "validation" and "implementation"
phases of this process.
In certain cases, however, such as the potential loss of electrical power
or telecommunications services due to Year 2000 problems, testing by the
Company is either not practical or not possible. In those cases, detailed
contingency plans have been designed that specify how the Company will deal
with each such potential situation.
The Year 2000 issue presents several potential risks to the Company. The
banking transactions of the Company's customers are processed by its
internal mainframe data processing system. The failure of that system to
function as a result of the millennium date change could result in the
Company's inability to process customer transactions in the usual manner.
In that event, the Company could potentially lose customers to other financial
institutions, resulting in a loss of revenue. A number of the Company's
borrowers utilize computers and computer software to varying degrees in
conjunction with the operation of their
-27-
<PAGE>
businesses. The customers and suppliers of those businesses may utilize
computers as well. Should the Company's borrowers, or the businesses on
which they depend, experience Year 2000 related computer problems, such
borrowers' cash flow could be disrupted, adversely affecting their ability
to repay their loans with the Company. As of December 31, 1998, the Company
had assessed its Year 2000 exposure to credit customers through the use of
questionnaires and personal interviews. Management's determination of the
potential impact the Year 2000 issue could have on those customers' ability
to continue servicing their debt in a satisfactory manner is factored into
the Company's credit risk rating system.
Similar problems could affect certain of the Company's business depositors,
potentially causing interruptions in their cash flow that could result in
their inability to maintain historical deposit balance levels in their
accounts. Such an event could result in the reduction of deposit balances
available to the Company for loans, investments, etc. Concern on the
part of some depositors that Year 2000 related problems could impair access
to their deposit balances following the millennium date change could result
in the Company experiencing a deposit outflow prior to December 31, 1999.
The potential increase in cash requirements has been estimated and
factored into the Company's analysis of projected future liquidity needs.
Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Year 2000
related problems. Also, should Year 2000 related problems occur which
cause any of the Company's systems, or the systems of certain third
parties upon which the Company depends, to become inoperative, increased
personnel costs could be incurred if additional staff is required to perform
functions that the inoperative systems would have otherwise performed. The
Company has designed contingency plans to address such potential occurrences.
As a nationally chartered financial institution, the Company and its subsidiary,
Community National Bank, are regulated by agencies of the federal government.
Federal bank regulators have established specific guidelines and timetables for
all nationally chartered financial institutions to follow in addressing the
Year 2000 issue. The Company's Year 2000 contingency plans follow those
requirements. As of December 31, 1998, the Company is in compliance with all
Year 2000 guidelines and timetables mandated by the banking regulators, and it
is on schedule with its own internal preparedness efforts.
The Company believes it is not possible to estimate the potential lost revenue
due to the Year 2000 issue, as the extent and longevity of such potential
problems cannot be predicted. However, the Company believes it will be able
to modify or replace any affected systems in time to minimize any detrimental
effects on its operations. A number of Year 2000 compliant systems have already
been installed or are in the process of being installed. The Company's
estimated total cost to replace computer equipment, software programs, or
other equipment containing embedded microprocessors that were not Year 2000
compliant is approximately $200,000. As of December 31, 1998, approximately
$57,500 of that amount has been incurred. System maintenance or modification
costs are being expensed as incurred, while the cost of new hardware, software,
or other equipment will be capitalized and amortized over their useful lives.
Asset/Liability Management and Interest Rate Risk
The Company has an asset/liability management committee which oversees all
asset/liability management activities. The committee establishes general
guidelines each year and meets regularly to review the Company's operating
results, to measure and monitor interest rate risk and to make strategic
changes when necessary.
It is the Company's general policy to reasonably match the rate sensitivity
of its assets and liabilities in an effort to prudently manage interest rate
risk. A common benchmark of this sensitivity is the one year gap position,
which is a reflection of the difference between the speed and magnitude of
rate changes of interest rate sensitive liabilities as compared with the
Bank's ability to adjust the rates of it's interest rate sensitive assets in
response to such changes. The Company's negative one-year cumulative gap
position at December 31, 1998, which represents the excess of repricing
liabilities versus repricing assets, was 1.7% expressed as a percentage of
total assets.
-28-
<PAGE>
[The following text appears on the inside back cover]
DIRECTORS & OFFICERS
- --------------------
COMMUNITY BANCORP, INC. AND COMMUNITY NATIONAL BANK
- ----------------------------------------------------
Chairman of the Board
- ---------------------
Dennis F. Murphy, Jr.
President and Treasurer of D. Francis Murphy Insurance Agency, Inc.
Directors:
- ---------
Alfred A. Cardoza
Retired
Antonio Frias
President and Treasurer of S & F Concrete Contractors, Inc.
I. George Gould
Chairman of the Board of Gould's, Inc.
Horst Huehmer
Retired
Donald R. Hughes, Jr.
Treasurer and Clerk of Community Bancorp, Inc.,
Executive Vice President of Community National Bank
James A. Langway
President and Chief Executive Officer
of Community Bancorp, Inc. and Community National Bank
David L. Parker
Chairman of the Board of Larkin Lumber Company
Mark Poplin
President and Treasurer of Poplin Supply Company
David W. Webster
President of Knight Fuel Company, Inc.
Officers:
- --------
James A. Langway
President and Chief Executive Officer
Donald R. Hughes, Jr.
Treasurer and Clerk
COMMUNITY NATIONAL BANK
- -----------------------
Officers
- --------
James A. Langway
President and Chief Executive Officer
Donald R. Hughes, Jr.
Executive Vice President
Robert P. Converse
Auditor
Joy A. Pare'
Administrative Officer
Compliance/Personnel/Legal
- --------------------------
Grace L. Blunt, Esq.
Senior Vice President
Diane L. LeBlanc
Human Resources Officer
Retail Banking/Mortgage Division
- --------------------------------
Richard K. Bennett
Senior Vice President
Nanci J. Pisani
Vice President
Elizabeth M. Tewksbary
Assistant Vice President
M. Jean Mickle
Branch Officer
Lois A. Seymour
Branc Officer
Nancy C. Tobin
Branch Officer
Peter Shinas
Business Development Officer
Raymond A. Murphy III
Facilities Officer
Cynthia M. Farrah
Marketing Officer
Lynda L. D'Orlando
Mortgage Officer
Sandra M. Borella
Mortgage Underwriting Officer
Clark Hooper
Security Officer
Financial Control
- -----------------
Robert E. Leist
Senior Vice President
Commercial Banking Division
- ---------------------------
John P. Galvani
Senior View President
Christal M. Bjork
Vice President
Daniel L. Heney
Vice President
Linda Glaser
Assistant Vice President
Jennifer D. Vasquezi
Commercial Loan Officer
Operations/Data Processing and Electronic Banking
- -------------------------------------------------
Janet A. Lyman
Senior Vice President
James P. Vasquezi
Vice President
Margaret M. Vasquezi
Assistant Vice President
Susan B. Gillespie
Operations Officer
Michelle M. Temple
Loan Servicing Officer
The Company's Securities and Exchange Commission filing on Form 10-K is
available to our stockholders upon request.
<PAGE>
[The following text appears on the back cover.]
Community Bancorp, Inc.
Parent company of Community National Bank
17 Pope Street
Hudson, Massachusetts 01749
tel 978-568-8321
fax 978-568-7129
[Community National Bank's logo appears in this space]
17 Pope Street
Hudson, Massachusetts 01749
tel 978-568-8321
fax 978-562-7129
[email protected]
www.combanc.com
877-CNB-DIRECT
Acton
270 Great Road
tel 978-263-8376
fax 978-266-2610
Boxborough
629 Massachusetts Avenue
tel 978-264-9092
fax 978-266-2600
Concord
1134 Main Street
tel 978-369-5421
fax 978-371-6600
Hudson South
177 Broad Street
tel 978-568-8813
fax 978-568-2610
Loan Center
12 Pope Street, Hudson
tel 978-568-8321
fax 978-562-9984
Marlborough Center
96 Bolton Street
tel 978-485-5003
fax 978-229-4602
Marlborough East
500 Boston Post Road
tel 508-485-3599
fax 508-229-4601
Stow
159 Great Road
tel 978-461-1600
fax 978-461-1610
OPENING 1999:
Framingham
39 Edgell Road
tel 508-875-1333
fax 508-370-3885
Sudbury
450 Boston Post Road
flex24 LOCATIONS:
New England Sports Center
Donald Lynch Blvd., Marlborough
Shaw's Supermarket
Route 85, Hudson
Solomon Pond Mall
Donald Lynch Blvd., Marlborough
Member FDIC
Equal Opportunity Lender
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1998 financial statements of Community Bancorp, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17601043
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17000000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31685402
<INVESTMENTS-CARRYING> 87058589
<INVESTMENTS-MARKET> 87832432
<LOANS> 141554220
<ALLOWANCE> 2981012
<TOTAL-ASSETS> 300886831
<DEPOSITS> 254408735
<SHORT-TERM> 19747496
<LIABILITIES-OTHER> 1265351
<LONG-TERM> 0
0
0
<COMMON> 7998045
<OTHER-SE> 17467204
<TOTAL-LIABILITIES-AND-EQUITY> 300886831
<INTEREST-LOAN> 13167815
<INTEREST-INVEST> 6336954
<INTEREST-OTHER> 1155014
<INTEREST-TOTAL> 20659783
<INTEREST-DEPOSIT> 6649308
<INTEREST-EXPENSE> 7675112
<INTEREST-INCOME-NET> 12984671
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10196925
<INCOME-PRETAX> 5988233
<INCOME-PRE-EXTRAORDINARY> 5988233
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3805761
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 4.94
<LOANS-NON> 913151
<LOANS-PAST> 1404
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3215559
<CHARGE-OFFS> 303525
<RECOVERIES> 68978
<ALLOWANCE-CLOSE> 2981012
<ALLOWANCE-DOMESTIC> 1614490
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1366522
</TABLE>
