CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)of the Securities Exchange Act of 1934
For Nine Months Ended September 30, 2000Commission File Number 000-16435
COMMUNITY BANCORP.
(Exact Name of Registrant as Specified in its Chapter)
Vermont 03-0284070(State of Incorporation) (IRS Employer Identification Number)
Derby Road, Derby, Vermont 05829(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number: (802) 334-7915
Not Applicable
Former Name, Former Address and Formal Fiscal Year
(If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( )
At November 08, 2000 there were 3,369,991 shares outstanding of the Corporation'scommon stock.
Total Pages - 24 Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following are the consolidated financial statements for Community Bancorp.and subsidiaries, "the Company". These statements and the other worksheets following them help to support the opinions and information disclosed in the "Management's Discussion and Analysis of the Results of Operations" in Part 1, Item 2.
COMMUNITY BANCORP. AND SUBSIDIARIES
Consolidated Balance Sheets
( Unaudited )
September 30
December 31
2000
1999
Assets
Cash and due from banks
5,900,762
9,928,586
Federal funds sold and overnight deposits
4,663,905
2,787,558
Total cash and cash equivalents
10,564,667
12,716,144
Securities held-to-maturity (fair value $51,751,518
at 09/30/00 and $29,502,766 at 12/31/99)
52,094,438
29,887,821
Securities available-for-sale
19,016,875
28,982,188
Restricted equity securities
1,141,650
Loans held-for-sale
626,500
660,423
Loans
171,927,463
152,618,876
Allowance for loan losses
(1,761,291)
(1,714,763)
Unearned net loan fees
(927,417)
(891,114)
Net loans
169,238,755
150,012,999
Bank premises and equipment, net
4,598,838
4,322,697
Accrued interest receivable
2,079,398
1,484,192
Other real estate owned, net
297,769
434,694
Other assets
2,631,130
2,572,994
Total assets
$262,290,020
$232,215,802
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing
27,187,479
25,727,709
NOW and money market accounts
51,769,069
52,094,860
Savings
33,097,392
32,854,357
Time deposits, $100,000 and over
16,849,480
15,894,363
Other time deposits
78,855,006
75,271,591
Total deposits
$207,758,426
$201,842,880
Borrowed funds
17,055,000
4,055,000
Repurchase agreements
13,443,825
2,623,282
Accrued interest and other liabilities
1,215,314
1,493,486
Subordinated convertible debentures
20,000
Total liabilities
$239,492,565
$210,034,648
Stockholders' Equity
Common stock - $2.50 par value;
6,000,000 shares authorized and 3,461,721 shares
issued at 09/30/00 and 3,388,394 issued at 12/31/99
8,654,303
8,470,985
Additional paid-in capital
11,389,068
10,942,510
Retained earnings
4,096,193
3,462,966
Accumulated other comprehensive income
(135,676)
(247,086)
Less: treasury stock, at cost;
105,494 shares at 09/30/00 and 29,887 shares at 12/31/99
(1,206,433)
(448,221)
Total stockholders' equity
$22,797,455
$22,181,154
Total liabilities and stockholders' equity
Consolidated Statements of Income
For The Third Quarter Ended September 30,
1998
Interest income
Interest and fees on loans
3,792,690
3,294,974
3,483,609
Interest and dividends on investment securities
U.S. Treasury securities
341,881
554,450
537,196
U.S. Government agencies
380,862
133,946
42,301
States and political subdivisions
254,551
196,180
170,690
Dividends
21,468
20,556
18,162
Interest on federal funds sold and overnight deposits
23,047
47,549
72,490
Total interest income
$4,814,499
$4,247,655
$4,324,448
Interest expense
Interest on deposits
2,004,156
1,831,568
1,992,663
Interest on borrowed funds
257,465
51,495
51,124
Interest on repurchase agreements
132,335
13,647
929
Interest on subordinated debentures
550
229
Total interest expense
$2,394,506
$1,897,260
$2,044,945
Net interest income
2,419,993
2,350,395
2,279,503
Provision for loan losses
(63,000)
(115,000)
(150,000)
Net interest income after provision
$2,356,993
$2,235,395
$2,129,503
Other operating income
Trust department income
93,811
62,054
43,486
Service fees
210,869
176,797
170,762
Security (losses) gains
(7,275)
0
Other
152,869
165,765
167,946
Total other operating income
$450,274
$404,616
$382,194
Other operating expenses
Salaries and wages
778,804
724,113
708,689
Pension and other employee benefits
207,918
205,874
192,326
Occupancy expenses, net
354,521
280,158
323,744
Trust department expenses
23,168
13,080
9,389
612,353
603,047
533,566
Total other operating expenses
$1,976,764
$1,826,272
$1,767,714
Income before income taxes
830,503
813,739
743,983
Applicable income taxes (credit)
198,155
209,833
181,844
Net Income
$632,348
$603,906
$562,139
Earnings per share on weighted average
$0.19
$0.18
$0.17
Weighted average number of common shares
Used in computing earnings per share
3,362,916
3,332,139
3,247,388
Dividends declared per share
$0.16
$0.15
Per share data for 1998 restated to reflect a 5% stock dividend paid on February 1, 1999.
For the First Nine Months Ended September 30,
10,618,741
9,748,162
10,352,917
1,170,260
1,684,898
1,525,088
948,757
401,999
83,380
560,221
447,769
462,851
63,927
59,405
55,566
87,219
159,082
276,518
$13,449,125
$12,501,315
$12,756,320
5,560,791
5,483,598
5,933,489
403,319
150,567
147,367
272,022
22,957
3,122
1,650
4,047
$6,237,782
$5,658,772
$6,088,025
7,211,343
6,842,543
6,668,295
(321,000)
(415,000)
(510,000)
$6,890,343
$6,427,543
$6,158,295
251,314
167,563
109,326
596,786
520,060
503,305
(18,782)
541,845
540,556
580,099
1,371,163
1,228,179
1,192,730
2,231,405
2,131,401
2,117,596
668,870
604,324
544,062
1,080,981
923,954
967,674
73,511
41,082
36,805
1,902,705
1,801,701
1,672,431
$5,957,472
$5,502,462
$5,338,568
2,304,034
2,153,260
2,012,457
589,397
572,069
484,698
$1,714,637
$1,581,191
$1,527,759
$0.51
$0.48
3,380,466
3,292,879
3,217,343
Book value per share on shares outstanding
$6.79
$6.73
$6.68
$0.45
NOTES
Note 1 - The financial information included in this report reflect all adjustments management deems necessary to accurately disclose the fair value of items presented. Results for interim periods are not necessarily indicative of the results of operations for the full year or any other interim period. The financial information disclosed is unaudited.
Consolidated Statements of Cash Flows
Reconciliation of net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation
448,650
304,786
303,012
Provisions for loan losses
321,000
415,000
510,000
Provisions for deferred income taxes
(6,193)
(30,150)
(70,245)
(Gain) loss on sale of loans
(24,772)
(89,534)
(118,886)
Securities losses
18,782
(Gain) loss on sales of OREO
(56,594)
6,244
(2,712)
OREO writedowns
6,883
19,590
26,592
Amortization of bond premium, net
133,604
240,582
35,412
Proceeds from sales of loans held for sale
2,008,907
9,424,068
3,489,568
Originations of loans held for sale
(1,950,212)
(9,467,687)
(4,600,524)
Increase (decrease) in taxes payable
96,554
28,240
15,944
(Increase) decrease in interest receivable
(595,206)
(461,965)
(269,813)
Decrease (increase) in mortgage service rights
22,361
(32,119)
(63,190)
(Increase)decrease in other assets
(117,218)
201,483
(126,978)
Increase(decrease) in unamortized loan fees
36,303
36,270
(9,749)
Increase (decrease) in interest payable
89,505
(29,686)
(9,725)
(Decrease) increase in accrued expenses
(16,846)
1,229
56,345
Increase (decrease) in other liabilities
79,575
120,326
148,160
Net cash provided by operating activities
$2,209,720
$2,267,868
$840,970
Cash Flows from investing activities:
Investments - held to maturity
Sales and maturities
9,586,421
18,936,104
12,861,980
Purchases
(31,799,200)
(26,313,397)
(17,220,197)
Investments - available for sale
9,987,892
2,000,000
(9,291,211)
(14,236,406)
Purchase of restricted equity securities
(41,900)
Investment in limited partnership
(4,078)
(14,130)
(40,312)
Increase in Loans, Net of Payments
(20,073,351)
(4,337,162)
(78,380)
Capital Expenditures
(724,791)
(1,622,280)
(81,917)
Recoveries of loans charged off
113,377
74,913
165,911
Proceeds from sales of other real estate owned
563,551
453,841
771,784
Net Cash Used in Investing Activities
($32,350,179)
($22,113,322)
($15,899,437)
Cash Flows from Financing Activities:
Net increase (decrease) in demand deposits, NOW, Money Mkt and savings
1,377,014
11,950,238
7,660,272
Net increase (decrease) in certificates of deposit
4,538,532
(1,430,512)
2,233,653
Net increase in short-term borrowings and repurchase agreements
10,820,543
1,171,117
Net increase in borrowed funds
13,000,000
Payments to acquire treasury stock
(758,212)
(2,831)
(197)
Dividends paid
(988,895)
(841,065)
(705,186)
Net cash provided by financing activities
$27,988,982
$10,846,947
$9,188,542
Net decrease in cash and cash equivalents
($2,151,477)
($8,998,507)
($5,869,925)
Cash and cash equivalents:
Beginning
$12,716,144
$20,424,088
$14,307,610
Ending
$10,564,667
$11,425,581
$8,437,685
Supplemental Schedule of Cash Paid During the Year
Interest paid
$6,148,277
$5,687,724
$6,096,466
Income Taxes Paid
$499,038
$573,980
$538,999
Supplemental schedule of noncash investing and financing activities:
Net change in securities valuation
$168,803
($498,281)
$455,709
OREO acquired in settlements of loans
$376,915
$589,427
$318,577
Debentures converted to common stock
$0
$84,000
Stock dividends
$1,851,338
$3,823,576
Dividends payable
$1,618,771
$1,553,648
$1,369,090
Dividends reinvested
($629,876)
($712,583)
($663,904)
$988,895
$841,065
$705,186
AVERAGE BALANCES AND INTEREST RATES
The table below presents the following information:
Average earning assets (including non-accrual loans)
Average interest bearing liabilities supporting earning assets
Interest income and interest expense as a rate/yield
For the First Nine Months Ended:
Average
Income/
Rate/
Balance
Expense
Yield
EARNING ASSETS
Loans (gross)
161,838,476
8.76%
148,626,379
8.77%
Taxable Investment Securities
48,214,804
2,119,019
5.87%
51,170,109
2,086,899
5.45%
Tax Exempt Investment
Securities (1)
15,337,669
843,786
7.35%
13,349,015
672,198
6.73%
Federal Funds Sold
709,489
32,971
6.21%
2,271,978
75,689
4.45%
Sweep Account
1,342,913
54,248
5.40%
2,271,173
83,393
4.91%
Other Securities (2)
1,226,271
67,249
7.33%
1,257,359
63,523
6.75%
TOTAL
228,669,622
13,736,014
8.02%
218,946,013
12,729,864
7.77%
INTEREST BEARING LIABILITIES
Savings Deposits
33,132,423
570,659
2.30%
32,548,493
564,046
2.32%
NOW & Money Market Funds
50,123,609
1,364,209
3.64%
50,786,777
1,225,765
3.23%
Time Deposits
91,711,292
3,625,924
5.28%
95,272,339
3,693,788
5.18%
Other Borrowed Funds
8,582,391
6.28%
4,060,000
4.96%
Repurchase Agreements
7,568,065
4.80%
774,618
3.96%
Subordinated Debentures
11.02%
11.03%
191,137,780
6,237,783
4.36%
183,462,227
5,658,773
4.12%
Net Interest Income
7,498,231
7,071,091
Net Interest Spread(3)
3.66%
3.65%
Interest Differential(4)
4.38%
4.32%
(1) Income on investment securities of state and political subdivisions is stated on a fully taxable
basis (assuming a 34 percent tax rate).
(2) Included in other securities are taxable industrial development bonds (VIDA) with income
of $3,322 for 2000 and $4,119 for 1999.
(3) Net interest Spread is the difference between the yield on earning assets and the rate paid on
interest bearing liabilities.
(4) Interest differential is net interest income divided by average earning assets.
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income
for the first nine months of 2000 and 1999 resulting from
volume changes in assets and liabilities and fluctuations
in rates earned and paid.
Variance
RATE / VOLUME
Due to
Total
Rate(1)
Volume(1)
INCOME EARNING ASSETS
3,934
866,645
870,579
161,990
(129,870)
32,120
Securities (2)
71,486
100,102
171,588
29,922
(72,640)
(42,718)
8,381
(37,526)
(29,145)
Other Securities
5,432
(1,706)
3,726
Total Interest Earnings
281,145
725,005
1,006,150
(3,520)
10,133
6,613
156,516
(18,072)
138,444
72,897
(140,761)
(67,864)
84,980
167,772
252,752
47,852
201,213
249,065
Total Interest Expense
358,725
220,285
579,010
(1) Items which have shown a year-to-year increase in volume have
variances allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have
Variance due to rate = Change in rate x old volume
Variances due to volume = Change in volume x new rate
(2) Income on tax exempt securities is stated on a fully taxable basis.
The assumed rate is 34%.
PRIMARY EARNINGS PER SHARE
Average Number of Common Shares Outstanding.
Earnings Per Common Share
FULLY DILUTED EARNINGS PER SHARE
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures).
363
151
Adjusted Net Income
$632,711
$604,269
$562,290
Increase in Shares (Assuming Conversion of
Subordinated Convertible Debentures).
8,557
9,566
Average Number of Common Shares Outstanding
(Fully Diluted).
3,371,473
3,340,696
3,256,954
Earnings Per Common Share Assuming Full Dilution.
1,089
2,671
$1,715,726
$1,582,280
$1,530,430
19,422
3,389,023
3,301,436
3,236,765
$0.47
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 2000
Community Bancorp. is a bank holding company whose subsidiaries include Community National Bank and Liberty Savings Bank. Community National Bank ("the Bank") is a full service institution operating in the state of Vermont. The Bank has seven offices, five of which are located in Orleans County, one in Essex County, and one in Caledonia County. Liberty Savings Bank ("Liberty") is a New Hampshire guaranty savings bank acquired by Community Bancorp. on December 31, 1997. Currently this bank is inactive and shares the mailing address of Community Bancorp. Management is working with the board of directors to find a suitable location in the northern part of New Hampshire to operate Liberty as a lending facility, and may expand in the future into a full service financial institution. Most of the Bancorp's business is conducted through the Bank, therefore, the following narrative is based primarily on the Bank's operations.
OVERVIEW
Net income for the third quarter ended September 30, 2000 was $632,348, representing an increase of 4.7% and 12.5%, respectively, over the net income figures of $603,906 for the third quarter ended September 30, 1999, and $562,139 for the same period in 1998. Earnings per share of $0.19, $0.18, GRAPHICS GRAPHICSand $0.17 were reported for the respective third quarters. The Company declared a cash dividend of $0.16 per share payable August 1, 2000 to shareholders of record as of July 15, 2000. Additionally, a two-for-one stock split was declared in 1998, payable June 1, 1998, to shareholders of record as of May 15, 1998. As a result of the stock split, all 1998 per share data prior to that date has been restated. Net income for the first nine months of 2000 was $1.7 million compared to $1.6 million for the first nine months of 1999, and $1.5 million for the first nine months of 1998, representing an increase of 8.4% compared to 1999, and 12.2% for 1998. Earnings per share for the first nine months were $0.51 for 2000 and $0.48 for 1999 and 1998. The third quarter of 2000 was better than both the third quarter of 1999 and 1998 due in part to increases in the Bank's investment portfolio and loan portfolio, as well as a decrease in the provision for loan losses. The increases in the investment and loan portfolios helped to generate more interest income, contributing to the overall increase in net income. Net income for the nine months comparison periods followed similar patterns with interest income accounting for the biggest increase and provisions for loan losses noting a decrease in both comparison periods. A year to date decrease is noted in non-performing and trouble loans resulting in a decrease in the monthly provision for loan losses.
Net interest income, the difference between interest income and expense, represents the largest portion of the Company's earnings, and is affected by the volume, mix, rate sensitivity of earning assets as well as interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets.
Net interest income for the third quarter comparison period started at $2.28 million for 1998, increased to $2.35 million for 1999, and then increased to $2.42 million for 2000, resulting in an increase of 3% for 2000 versus 1999, and an increase of 6.2% for 2000 versus 1998. Interest on loans reported an increase of $497,716 or 15.1%, accounting for the biggest increase for the third quarter of 2000 compared to the same quarter in 1999. Interest on US Government agencies increased $338,561 for the third quarter of 2000 compared to the same quarter in 1998 accounting for the biggest increase in that period. The Bank sold a portion of it's U.S Treasury securities and replaced them with higher yielding Government Agencies, thereby creating more interest income. Interest expense increased $497,246 or by 26.2% for the third quarter of 2000compared to the same quarter in 1999, and an increase of $349,561 or 17.1% noted for 2000 and 1998. An increase in borrowed funds and repurchase agreements accounts for a substantial portion of the increase in interest expense. Provisions for loan losses decreased $52,000 for 2000 compared to 1999 and $87,000 for 2000 compared to 1998. These decreases helped to offset a portion of the overall increase in interest expense.
In the nine month comparison periods, net interest income started at $6.7 million as of the end of the first nine months of 1998, increased $174,248 or 2.6% to $6.8 million as of the end the first nine months of 1999, and then increased $368,800 or 5.4% to end the first nine months of 2000 at a figure of $7.2 million. Interest on loans reported an increase of $870,579 or 8.9% for 2000 compared to 1999, and U.S. Government agencies reporting an increase in interest income of $865,377 for 2000 compared to 1998. Interest expense associated with repurchase agreements has shown considerable increase for both comparison periods for reasons mentioned above, with increases of $249,065 for 2000 compared to 1999 and $268,900 for 2000 compared to 1998. Interest on deposits reported the only decrease of $372,698 for the nine months of 2000 compared to 1998. Provisions for loan losses reported decreases of $94,000 for 2000 compared to 1999 and $189,000 for 1999 compared to 1998.
Additionally, as the loan portfolio matures or reprices, increases are noted in the rates for these earning assets. Interest bearing deposit accounts are repricing at a lower rate creating less expense on these liabilities. The result is a tax equivalent spread for the first nine months equaling 3.66% for 2000 versus 3.65% for 1999.
CHANGES IN FINANCIAL CONDITION
The Company had total assets of $262 million at September 30, 2000 and $232 million at December 31, 1999. Average earning assets were $229 million for the first nine months ended September 30, 2000, including average loans of $162 million and average investment securities of $64.5 million. Average earning assets were $220 million for the year ended December 31, 1999 including average loans of $150 million and average investment securities of $65 million. The Company attributes the desire to increase the loan portfolio for the increase in average loan volume.
Average interest bearing liabilities at September 30, 2000 were $191 million, with average time deposits reported totaling $92 million and NOW & money market funds of $50 million. At December 31, 1999, average interest bearing liabilities of $185 million were reported including average time deposits of $95 million and NOW & money market funds at an average volume of $52 million.
Repurchase agreements have experienced a steady increase starting at an average volume of $1.3 million at December 31, 1999, and increasing $6.3 million to end at a nine month average balance of $7.6 million. These accounts have been well received since they were introduced in 1998, and have been successful in attracting new business customers, and retaining current business customers.
RISK MANAGEMENT
Liquidity Risk - Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The repayment of loans and growth in deposits are two of the major sources of liquidity. Our time deposits greater than $100,000 increased $955,117 or 6% to end the first nine months of 2000 at a volume of $16.85 million compared to $15.89 million at the end of the 1999 calendar year. Other time deposits increased $3.6 million from December 31, 1999 to September 30, 2000. The Bank has offered a few new products in recent months in an effort to attract long-term deposits. A total of approximately $4.6 million in new money was recognized as a result of these various offers. A review of time deposits, predominantly the time deposits over $100,000 indicates that they are primarily generated locally and regionally and are established customers of the Company. The Company has no brokered deposits. Our gross loan portfolio increased 12.7% from $152.6 million at the end of 1999 to $171.9 million at the end of the first nine months of 2000. The Bank has purchased approximately $4.4 million in loans from other institutions contributing to the increase in the loan portfolio. An increase in the Company's investment portfolio also helped to increase assets for the first nine months of 2000. As of September 30, 2000, the Company held in it's investment portfolio treasuries classified as "Available for Sale" at a fair value of $19 million, compared to $29 million as of December 31, 1999, a decrease of $10 million or 34.4%. Treasuries classified as "Held to Maturity" ended the first nine months of 2000 at a book value of $52 million compared to $30 million as of the end of the 1999 calendar year, an increase of approximately $22 million or 74.3%. Both of these types of investments mature at monthly intervals as shown on the gap report at the end of this section. Securities classified as "Restricted Equity Securities" are made up of equity securities the Company is required to maintain in the form Federal Home Loan Bank of Boston (FHLB) and Federal Reserve stock. These securities remain at a balance totaling $1.14 million as of September 30, 2000. The Companycurrently has an advance of just over $17 million against an available line of $105.6 million, with $2 million and $4.1 million available at First Boston and FHLB, respectively.
Credit Risk - Management follows strict underwriting guidelines, and has established a thorough loan-by-loan review policy. These measures help to insure the adequacy of the loan loss coverage. The Executive Officers and the Board of Directors conduct periodic reviews of the loan portfolio. Topics discussed include potential exposures existing within the portfolio. Factors considered are each borrower's financial condition, the industry or sector for the economy in which the borrower operates, and overall economic conditions. Existing or potential problems are noted and addressed by senior management in order to assess the risk of probable loss or delinquency. A variety of loans are reviewed periodically by an independent firm in order to assure accuracy and compliance with various policies and procedures set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duties include, among others, a review of the loan portfolio including delinquent and non-performing loans.
Allowance for loan losses and provisions - The valuation allowance for loan losses of $1.76 million as of September 30, 2000 composed 1% of the total gross loan portfolio. A primary concern of management is to reduce the exposure of credit loss within the portfolio. The Company maintains a residential loan portfolio of approximately $105 million and a commercial real estate portfolio of approximately $33 million accounting for 61% and 19%, respectively, of the total loan portfolio. This large loan volume together with the low historical loan loss experience helps to support our basis for loan loss coverage.
The Company's non-performing assets are made up of $331,776 in loans 90 days or more past due, $1,137,549 in non-accruing loans, and $297,769 in other real estate owned (OREO). A comparison of these non-performing assets revealed decrease in all portfolios starting with a decrease of $300,683 or 47.5% in loans 90 days or more past due, a decrease in non-accruing loans of $621,000 or 35.3%, and the OREO portfolio decreased $136,925 or by 31.5%. The Company employs personnel whose main duties are to manage the non-performing assets. Their efforts speak for themselves when reviewing these substantial decreases in all three portfolios. The portfolio of non-accruing loans makes up the biggest portion of the non-performing assets and consists of just over $1 million of real estate secured mortgage loans at the end of the first nine months of 2000, thereby reducing the exposure to loss.
Non-performing assets as of September 30, 2000 and December 31, 1999 were as follows:
09/30/2000
12/31/1999
Loans past due 90 day or more and still accruing
331,776
632,458
Non-Accruing loans
$1,137,549
$1,758,549
Other real estate owned
$1,767,094
$2,825,701
Other real estate owned is made up of property that the Company owns in lieu of foreclosure or through normal foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The value of the property is determined prior to transferring the balance to other real estate owned. The balance transferred to OREO is the lesser of the appraised value of the property, or book value of the loan. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals are then done periodically thereafter charging any additional write-downs to the appropriate expense account.
Market Risk and Asset and Liability Management - Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The Asset/Liability Committee's methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet, and a simulation analysis which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest.
Interest Rate Sensitivity "Gap" Analysis - An interest rate sensitivity "gap" is defined as the difference between the interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.
The following tables set forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at September 30, 2000, and December 31, 1999. The Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that:
* Adjustable-rate loans and certificates of deposit are included in the period when they are first scheduled to adjust and not in the period in which they mature;
* Fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments;
and
* NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit, to changes in interest rates.
Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experiences on which the assumptions are based.
GAP ANALYSYSCommunity Bancorp. & SubsidiariesSeptember 30, 2000Cumulative repriced within
Dollars in thousands,
3 Months
4 to 12
1 to 3
3 to 5
Over 5
by repricing date
or less
Months
Years
Interest sensitive assets:
Federal funds sold
2,050
Overnight deposits
2,614
Investments
Available for Sale(1)
9,007
10,010
19,017
Held to Maturity
9,902
10,646
14,335
2,518
14,693
52,094
1,142
Loans(2)
26,589
51,692
45,196
12,009
35,930
171,416
Total interest sensitive assets
41,155
71,345
69,541
14,527
51,765
248,333
Interest sensitive liabilities:
Certificates of deposit
16,159
70,258
8,124
1,164
95,705
Money markets
33,016
Regular savings
3,097
30,000
33,097
Now and super accounts
18,753
12,000
5,000
15
40
17,055
13,444
Subordinated debentures
20
Total interest sensitive liabilities
74,619
78,355
8,139
1,184
48,793
211,090
Net interest rate sensitivity gap
(33,464)
(7,010)
61,402
13,343
2,972
Cumulative net interest rate
sensitivity gap
(40,474)
20,928
34,271
37,243
sensitivity gap as a
percentage of total assets
-12.76%
-15.43%
7.98%
13.07%
14.20%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets
-13.48%
-16.30%
8.43%
13.80%
15.00%
Cumulative interest earning assets
as a percentage of cumulative
interest-bearing liabilities
55.15%
73.54%
112.99%
121.12%
117.64%
(1) The Company may sell investments available for sale with a fair value of $19,016,875 at any time.
(2) Loan totals exclude non-accruing loans amounting to $1,137,549.
GAP ANALYSYS
Community Bancorp. & Subsidiaries
December 31, 1999
Cumulative repriced within:
Or less
600
2,188
Investments -
9,993
18,989
28,982
3,057
6,680
14,910
1,426
3,814
29,887
23,254
51,250
41,673
8,317
27,027
151,521
29,099
67,923
75,572
9,743
31,983
214,320
13,405
65,237
11,072
1,452
91,166
32,299
2,854
32,854
Now accounts
19,796
4,040
4,055
2,623
48,327
68,091
11,087
1,472
53,836
182,813
(19,228)
(168)
64,485
8,271
(21,853)
(19,396)
45,089
53,360
31,507
Sensitivity gap as a
Percentage of total assets
-8.28%
-8.35%
19.42%
22.98%
13.57%
Gap as a percentage of total
Interest-earning assets
-8.97%
-9.05%
21.04%
24.90%
14.70%
Interest-bearing liabilities
60.21%
83.34%
135.36%
141.37%
117.23%
(1) The Company may sell investments available for sale with a fair value of $28,982,188 at any time.(2) Loan totals exclude non-accruing loans amounting to $1,758,549.
OTHER OPERATING INCOME AND EXPENSES
Total other operating income for the third quarter of 2000 was $450,274 compared to $404,616 for the third quarter of 1999, an increase of $45,658 or 11.3%. Service fees reports the biggest increase for the third quarter comparison period while a decrease of $12,896 is noted in other income. The increase in volume for repurchase agreements and the increase in usage of our VISA check cards have generated more fee income for the reporting period. In an effort to increase our loan portfolio, fewer loans are being sold on the secondary market generating less income.
Total other operating income for the first nine months of 2000 ended at $1.37 million compared to $1.23 million a year ago. Trust department income notes the biggest increase of $83,751 or almost 50%. Our trust department continues to build its customer base resulting in more income over the last few years. A loss of $18,782 was taken during the first nine months of 2000 as the result of the sale of some low yielding treasuries. These treasuries were replaced with higher yielding agencies, anticipating that the higher yield would soon make up for the loss on the sale of the treasuries.
Total other operating expenses increased for the third quarter comparison with figures of $1.98 million for 2000, an increase of $150,492 or 8.2% over the 1999 figure of $1.83 million. Occupancy expense notes the biggest increase for the third quarter of 2000 versus 1999, due to significant increases in depreciation, taxes on bank properties, and service contracts.
Total other operating expense for the nine month comparison periods increased from $5.5 million for 1999 to just under $6 million for 2000, resulting in increases of $455,010 or 8.3%. Occupancy expense tops the increase at $157,027 for the first nine months reporting a figure of $1.1 million compared to $0.9 million a year ago.
All components of other operating expenses are monitored by management, however, a quarterly review is performed on crucial components to assure that the accruals for these expenses are accurate. This helps alleviate the need to make drastic adjustments to these accounts that in turn effect the net income of the Company.
APPLICABLE INCOME TAXES
Income before taxes increased from $813,739 for the third quarter of 1999 to $830,503 for the same quarter of 2000. Due in part to this moderate increase, together with an increase in tax exempt income, provisions for income taxes decreased $11,678 or by 5.6%. Income before taxes for the first nine months increased from $2.15 million for 1999 to $2.30 million as of September 30, 2000, with income taxes calculated at $572,069 and $589,397, respectively.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements. As costs and prices rise during periods of monetary inflation, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Company depends primarily on a strong net interest income to enable their purchasing power to remain aggressive.
CAPITAL RESOURCES
The Company reported a figure for stockholders' equity of $22,181,154 as of December 31, 1999. This figure increased through earnings of $1,714,637, sales of common stock of $629,875 through dividend reinvestment, and adjustments totaling $111,410 for valuation allowance for securities. It was decreased by dividends totaling $1,618,771, the purchase of treasury stock of $1,040, and the purchase of stock through the Stock Buyback Plan of $757,171. As of September 30, 2000 stockholders' equity was reported at $22,797,455 with a book value of $6.79 per share. On April 11, 2000, the Company issued a press release announcing plans to buy up to 6% or 205,000 shares of its outstanding common stock at current market prices. Total shares bought back through the end of September totaled 75,497 and the repurchase price paid for these shares ranged from $9.25 to $10.75 per share. Additionally, the Company declared a dividend in December of 1999, payable in February of 2000. As a result, the Company had to accrue the dividend, decreasing stockholders' equity by $537,361 as of December 31, 1999. All stockholders' equity is unrestricted. A review of the valuation allowance for securities shows that the net unrealized loss has decreased since the beginning of the year. In reviewing this activity, it is evident that as the maturity date of the investments gets closer, the market price becomes favorably better, therefore, material loss is greatly reduced.
The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by the banking regulators. The minimum requirements for Tier I and Total Capital are 4% and 8%, respectively. As of September 30, 2000, the Company continued to maintain ratios far above the minimum requirements with reported ratios of approximately 17% for Tier I and 18.5% for Total Capital.
The Company intends to continue maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs.
From time to time the Company may make contributions to the capital of its subsidiaries, Community National Bank and Liberty Savings Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to either Bank's capital.
FORWARD-LOOKING STATEMENTS
The Company's Management's Discussion and Analysis of Results of Operations, Cash Flow and Financial Condition contains certain forward-looking statements about the results of operations, financial condition and business of the Company and its subsidiaries. When used therein, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.
Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Although these statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. In addition, the Company does not undertake to, and disclaims any obligation to, publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.
Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) competitive pressures increase among financial services providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from nonbank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (2) interest rates change in such a way as to reduce the Company's margins; (3) general economic or monetary conditions, either nationally or regionally, are less favorable than expected, resulting in a deterioration in credit quality or a diminished demand for the Company's products and services; and (4) changes in laws or government rules, or the way in which courts interpret those laws or rules, adversely affect the Company's business.
PART II.
Item 1
Legal Proceedings
Community National Bank is currently involved in a lawsuit filed on March 23, 1998, in the Orleans Superior Court against the State of Vermont. The issue involves OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport. According to a so-called "public trust doctrine", the State of Vermont might have ownership of any lands created by filling any portion of the navigable waters of the state. The result of this is that the Bank has been unable to sell these properties for fair value because some attorneys will not clear title to the property. The suit filed is an attempt to clear title to said properties by seeking judicial clarification of the public trust doctrine. The Bank received documents in mid April pertaining to the ruling of the lawsuit. The judgement was not in the Bank's favor. On June 23, 2000, The Bank filed an appeal to the Vermont Supreme Court, but it may take up to six months to have it set for oral arguments. Regardless of the outcome of the suit, is not likely to have a material impact on the financial statements of the Bank or consolidated Company.
There are no other pending legal proceedings to which the Company is a party or of which any of its property is the subject, other than routine litigation incidental to its banking business.
Item 2 - Changes in Securities
NONE
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report:Exhibit 3 (ii) - Revised Section 2.01 of the By-Laws for Community Bancorp.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By: /s/ Richard C. White
Richard C. White, President
DATED: November 09, 2000
By: /s/ Stephen P. Marsh
Stephen P. Marsh,
Vice President & Treasurer