-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CepVGgfxo6QQzd69Fl8SVj4fvHyZ41k5ggcqsyKUferNQeuqxw4TF5sl9XayZz+x TJPbAoGmkciOMzwXDA2WxA== 0000718413-00-000003.txt : 20000420 0000718413-00-000003.hdr.sgml : 20000420 ACCESSION NUMBER: 0000718413-00-000003 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANCORP /VT CENTRAL INDEX KEY: 0000718413 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030284070 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-16435 FILM NUMBER: 604598 BUSINESS ADDRESS: STREET 1: DERBY ROAD CITY: DERBY STATE: VT ZIP: 05829 BUSINESS PHONE: 8023347915 MAIL ADDRESS: STREET 1: DERBY ROAD CITY: DERBY STATE: VT ZIP: 05829 10-K/A 1 CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No. 000-16435 COMMUNITY BANCORP. (Exact name of registrant as specified in its charter) Vermont 03-0284070 (State of Incorporation) (IRS Employer Identification No.) Derby Road, Derby, Vermont 05829 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (802) 334-7915 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock - $2.50 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of March 10, 2000, the date of the latest known sale of the registrant's stock, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the per share sale price of the stock on that date, was $26,804,367. There were 3,387,177 shares outstanding of the issuer's class of common stock as of the close of business on March 10, 2000. DOCUMENTS INCORPORATED BY REFERENCE Report of Independent Public Accountants Financial Statements: Consolidated Statements of Condition as of December 31, 1999 and 1998 Consolidated Statements of Income for the fiscal years 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the fiscal years 1999, 1998 and 1997 Consolidated Statements of Changes in Financial Position for the fiscal years 1999, 1998 and 1997 Notes to Consolidated Financial Statements Condensed Financial Information (Parent Company Only) Portions of the Annual Report to Shareholders for fiscal year 1999 incorporated by reference to Part II. Portions of the Proxy Statement for the Annual Meeting to be held May 2, 2000 are incorporated by reference to Part III. Total Number of Pages - 35 Exhibit Index Begins on Page 24 FORM 10-K ANNUAL REPORT Table of Contents PART I Page Item I The Business 4 Organization and Operation 4 Distribution of Assets, Liabilities & Stockholders' Investment 10 Interest Income, Interest Expense and Interest Differential 11 Rate Volume Analysis 12 Investment Portfolio 13 Loan Portfolio 14 Summary of Loan Loss Experience 15 Non-Accrual, Past Due, and Restructured Loans 16 Deposits, Return on Equity and Assets 17 Item 2 Properties 18 Item 3 Legal Proceedings 19 Item 4 Submission of Matters to a Vote of Security Holders 19 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 19 Item 6 Selected Financial Data 19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A Qualitative and Quantitative Disclosures About Market Risk 23 Item 8 Financial Statements and Supplementary Data 23 Item 9 Disagreements on Accounting and Financial Disclosures 23 PART III Item 10 Directors and Executive Officers of the Registrant 23 Item 11 Executive Compensation 23 Item 12 Security Ownership of Certain Beneficial Owners and Management 23 Item 13 Certain Relationships and Related Transactions 23 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 24 Signatures 35 PART I Item 1. The Business Organization and Operation Community Bancorp. (The Corporation) was organized under the laws of the State of Vermont in 1982 and became a registered bank holding company under the Bank Holding Company Act of 1956, as amended, in October 1983 when it acquired all of the voting shares of Community National Bank (the Bank). The Bank is one of two subsidiaries of the Corporation and principally all of the Corporation's business operations are presently conducted through it. Liberty Savings Bank (Liberty), a New Hampshire guaranty savings bank, is the other subsidiary of Community Bancorp and is presently inactive. On December 31, 1997, Community Bancorp. acquired all of the outstanding stock of Liberty Savings Bank, as well as the assets consisting of a U.S. Treasury Strip and a small amount of cash. Currently, since no building was purchased at the time of acquisition, the main office of Community National Bank serves as the mailing address for this bank. Community National Bank was organized in 1851 as the Peoples Bank, and was subsequently reorganized as the National Bank of Derby Line in 1865. In 1975, after 110 continuous years of operation as the National Bank of Derby Line, the Bank acquired the Island Pond National Bank and changed its name to "Community National Bank." Community National Bank provides a complete range of retail banking services to the residents and businesses in northeastern Vermont. These services include checking, savings and time deposit accounts, mortgage, consumer and commercial loans, safe deposit and night deposit services, automatic teller machine (ATM) facilities, credit card services, 24 hour telephone banking and a full line of personal fiduciary services. The Bank was among the first financial institutions to offer internet banking to the Northeast Kingdom. This service was first offered to employees in order for them to become more familiar with it, test the different uses, and work out any potential problems. The Bank then began offering this service to its customers near the end of the second quarter of 1999. Additionally, the Bank maintains cash machines in three different businesses located in the towns of Irasburg, West Danville and Concord, Vermont. Competition The Bank has five offices located in Orleans County, one office in Essex County, and one office in Caledonia County, all in northeastern Vermont. Its primary service area is in the towns of Derby and Newport, Vermont, with approximately 59% of its total deposits as of December 31, 1999 derived from that area. The Bank competes in all aspects of its business with other banks and credit unions in northern Vermont, including two of the largest banks in the state, which maintain branch offices throughout the Bank's service area. Historically, competition in Orleans and Essex Counties has come from The Chittenden Trust Company and The Howard Bank, N.A., a subsidiary of Banknorth Group, Inc., based in Burlington, Vermont. The Chittenden Trust Company maintains a branch office in Newport, and The Howard Bank maintains one office in Barton, one office in Orleans, and one office in St. Johnsbury. Competition in Caledonia County comprises of the Passumpsic Savings Bank and Citizens Savings Bank, both based in St. Johnsbury, Lyndonville Savings Bank and Trust Company, based in Lyndonville, The Merchants Bank based in Burlington, and with two local credit unions for deposits and consumer loans. With recent changes in the regulatory framework of the banking industry, the competition for deposits and loans has broadened to include not only traditional rivals such as the mutual savings banks and stock savings banks, but also several non-traditional rivals such as insurance companies, brokerage firms, mutual funds and consumer finance companies. Employees As of December 31, 1999, the Bank employed 93 full-time employees and 25 part-time employees. Management of the Bank considers its employee relations to be good. Regulation and Supervision Holding Company Regulations-As a registered bank holding company, the Corporation is subject to on-going regulation supervision and examination by the Board of Governors of the Federal Reserve System, under the Bank Holding Company Act of 1956, as amended (the "Act"). A bank holding company for example, must obtain the prior approval of the Board before it acquires all or substantially all of the assets of any bank, or acquires ownership or control of more than 5% of the voting shares of a bank. Prior Federal Reserve Board approval is also required before a bank holding company may acquire more than 5% of any outstanding class of voting securities of a company other than a bank or a more than 5% interest in its property. The Act generally limits the activity in which the Corporation and its subsidiaries may engage to certain specified activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve Board has determined to be closely related to banking are: (1) making, and servicing loans that could be made by mortgage, finance, credit card or factoring companies; (2) performing the functions of a trust company; (3) certain leasing of real or personal property; (4) providing certain financial, banking or economic data processing services; (5) except as otherwise prohibited by law, acting as an insurance agent or broker with respect to insurance that is directly related to the extension of credit or the provision of other financial services or, under certain circumstances, with respect to insurance that is sold in certain small communities in which the bank holding company system maintains banking offices; (6) acting as an underwriter for credit life insurance and credit health and accident insurance directly related to extensions of credit by the holding company system; (7) providing certain kinds of management consulting advice to unaffiliated banks and non-bank depository institutions; (8) performing real estate appraisals; (9) issuing and selling money order and similar instruments and travelers checks and selling U.S. Savings Bonds; (10) providing certain securities brokerage and related services for the account of bank customers; (11) underwriting and dealing in certain government obligations and other obligations such as bankers' acceptances and certificates of deposit; (12) providing consumer financial counseling; (13) providing tax planning and preparation services; (14) providing check guarantee services to merchants; (15) operating a collection agency; and (16) operating a credit bureau. The Corporation does not presently engage, directly or indirectly, in any non-banking activities. A bank holding company must also obtain prior Federal Reserve approval in order to purchase or redeem its own stock if the gross consideration to be paid, when added to the net consideration paid by the company for all purchases or redemptions by the company of its equity securities within the preceding 12 months, will equal 10% or more of the company's consolidated net worth. The Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Board may require pursuant to the Act. The Board may also make examinations of the Corporation and any direct or indirect subsidiary of the Corporation. Community Bancorp. and its subsidiaries, Community National Bank and Liberty Savings Bank, are considered "affiliates" for the purposes of Section 18(j) of the Federal Deposit Insurance Act, as amended, and Section 23A of the Federal Reserve Act, as amended. Accordingly, they are subject to limitations with respect to the Bank's ability to make loans and other extensions of credit to or investments in the Corporation or in any other subsidiaries that the Corporation may acquire. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property of the furnishing of services. Financial Modernization. On March 11, 2000 the federal Gramm-Leach-Bliley financial modernization act ("Gramm-Leach-Bliley") became effective. Under Gramm-Leach-Bliley, eligible bank holding companies will be permitted to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in a broader range of activities than is otherwise permissible for bank holding companies. A bank holding company is eligible to elect to become a financial holding company and to engage in activities that are "financial in nature" if each of its subsidiary banks is well capitalized for regulatory capital purposes, is well managed and has at least a satisfactory rating under the Community Reinvestment Act ("CRA"). Activities which are deemed "financial in nature" under Gramm-Leach-Bliley would include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. Gramm-Leach-Bliley also contains similar provisions authorizing eligible national banks to engage indirectly through a financial subsidiary and subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank. In order to be considered eligible for these expanded activities, the bank must be well capitalized, well managed and have at least a satisfactory CRA rating. Implementation of Gramm-Leach-Bliley will likely result in structural changes to the financial services industry, the full effect of which cannot be predicted with any certainty. The Corporation has registered its Common Stock under Section 12(g) of the Securities Exchange Act of 1934 and is required to file annual and periodic reports and proxy statements and other information with the Securities and Exchange Commission. Interstate Banking and Branching. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and less than 30% of such deposits in that state (or such lesser or greater amount set by state law). The Interstate Banking and Branching Act also authorizes banks to merge across state lines, subject to certain restrictions, thereby creating interstate branches, and to open new branches in a state in which it does not already have banking operations if the state enacts a law permitting such de novo branching. Capital and Operational Requirements. The Federal Reserve Board, the OCC and other banking regulators have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. "Tier 1 capital" generally consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. "Tier 2 capital" and "Tier 3 capital" generally consist of subordinated and other qualifying debt, preferred stock that does not qualify as Tier 1 capital and the allowance for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in unconsolidated subsidiaries, represents qualifying "total capital," at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 capital and total capital by risk- weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%. The "leverage ratio" requirement is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective U.S. federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, Community National Bank is considered "well capitalized." The Federal bank regulatory agencies also have adopted regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. That evaluation will be made as part of the institution's regular safety and soundness examination. Banking agencies also have adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the determination of a bank's capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. The banking agencies do not intend to establish an explicit risk-based capital charge for interest rate risk but will continue to assess capital adequacy for interest rate risk under a risk assessment approach based on a combination of quantitative and qualitative factors and have provided guidance on prudent interest rate risk management practices. Distributions. The Corporation derives funds for cash distributions to its shareholders primarily from dividends received from its subsidiary, Community National Bank. The Bank is subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The prior approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of such bank's net profits for that last year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends which would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan losses. In addition, the Corporation and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit such payment. The federal bank regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings. "Source of Strength" Policy. According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC--either as a result of default of a banking subsidiary of a bank holding company or related to FDIC assistance provided to a subsidiary in danger of default--the other banking subsidiaries of such bank holding company may be assessed for the FDIC's loss, subject to certain exceptions. Bank Regulation. The Bank is a national banking association and subject to the provisions of the National Bank Act and federal and state statutes and rules and regulations applicable to national banks. The primary supervisory authority for the Bank is the Comptroller of the Currency. The Comptroller's examinations are designed for the protection of the Bank's depositors and not for its shareholders. The Bank is subject to periodic examination by the Comptroller and must file periodic reports with the Comptroller containing a full and accurate statement of its affairs. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank is also subject to regulation by the FDIC. Liberty is subject to similar banking regulations and provisions in the state of New Hampshire. Effects of Government Monetary Policy The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open market operations and United States Government Securities, varying the discount rate on member bank borrowings, setting reserve requirements against member and nonmember bank deposits, and regulating interest rates payable by member banks on time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to continue to do so in the future. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY The following tables summarize various consolidated information and provides a three year comparison relating to the average assets, liabilities, and stockholders' equity. (Dollars in Thousands)
Year ended December 31, 1999 1998 1997 ASSETS Balance % Balance % Balance % Cash and Due from Banks Non-Interest Bearing 5,212 2.25% 4,522 2.05% 4,979 2.37% Taxable Investment Securities(1) 49,832 21.54% 38,784 17.56% 35,649 17.00% Tax-exempt Investment Securities(1) 13,843 5.98% 13,060 5.91% 12,140 5.79% Other Securities(1) 1,254 0.54% 1,270 0.57% 1,168 0.56% Total Investment Securities 64,929 28.06% 53,114 24.04% 48,957 23.35% Overnight Deposits(2) 2,638 1.14% 3,339 1.51% 0 0.00% Federal Funds Sold 2,897 1.25% 4,928 2.23% 2,583 1.23% Loans, Net 147,128 63.59% 147,830 66.92% 145,778 69.53% Premises and Equipment 4,144 1.79% 3,135 1.42% 3,328 1.59% Other Real Estate Owned 678 0.29% 660 0.30% 997 0.48% Other Assets 3,737 1.63% 3,368 1.46% 3,026 1.45% Total Assets 231,363 100% 220,896 100% 209,648 100% LIABILITIES Demand Deposits 23,619 10.21% 20,857 9.44% 18,694 8.92% Now and Money Market Accounts 51,850 22.41% 44,916 20.34% 39,337 18.76% Savings Accounts 32,748 14.15% 30,840 13.96% 31,907 15.22% Time Deposits 94,694 40.93% 98,181 44.45% 94,751 45.19% Total Deposits 202,911 87.70% 194,794 88.19% 184,689 88.09% Other Borrowed Funds 4,059 1.75% 4,060 1.84% 4,061 1.94% Repurchase Agreements(3) 1,305 0.56% 93 0.04% 0 0.00% Other Liabilities 1,154 0.50% 1,020 0.46% 734 0.35% Subordinated Debentures 20 0.02% 48 0.02% 107 0.05% Total Liabilities 209,449 90.53% 200,015 90.55% 189,591 90.43% STOCKHOLDERS' EQUITY Common Stock 8,220 3.55% 6,174 2.79% 3,814 1.82% Surplus 10,624 4.59% 8,293 3.75% 7,769 3.71% Retained Earnings 3,654 1.58% 6,649 3.01% 8,916 4.25% Less: Treasury Stock (447) -0.19% (445) -0.20% (445) -0.21% Accumulated Other Comprehensive Income(1) (137) -0.06% 210 0.10% 3 0.00% Total Stockholders' Equity 21,914 9.47% 20,881 9.45% 20,057 9.57% Total Liabilities and Stockholders' Equity 231,363 100% 220,896 100% 209,648 100% FASB No. 115, an accounting method in which securities classified as Held to Maturity are carried at book value and securities classified as Available for Sale are carried at fair value with the unrealized gain (loss), net of applicable income taxes, reported as a net amount in accumulated other comprehensive income. The Company does not carry, nor does it intend to carry, securities classified as Trading Securities. Overnight deposits refers to the BankBoston sweep account established during the first half of 1998 as another means of selling funds overnight. Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers.
AVERAGE BALANCES AND INTEREST RATES The table below presents the following information: average earning assets (including non-accrual loans) and average interest-bearing liabilities supporting earning assets; and interest income and interest expense as a rate/yield. (Dollars in Thousands)
1999 1998 1997 AVE. INC./ RATE/ AVE. INC./ RATE/ AVE. INC./ RATE/ BAL. EXP. YIELD BAL. EXP. YIELD BAL. EXP. YIELD EARNING ASSETS Loans(net)(1) 147,128 13,036 8.86% 147,830 13,758 9.31% 145,778 13,868 9.51% Taxable Investment Securities 49,832 2,715 5.45% 38,784 2,196 5.66% 35,649 2,117 5.94% Tax-exempt Investment Securities(2) 13,843 924 6.67% 13,060 930 7.12% 12,140 929 7.65% Federal Funds Sold 2,897 143 4.94% 4,928 237 4.81% 2,583 140 5.42% Overnight Deposits(3) 2,638 133 5.04% 3,339 185 5.54% N/A Other Securities(4) 1,254 85 6.78% 1,270 82 6.46% 1,168 79 6.76% TOTAL 217,592 17,036 7.83% 209,211 17,388 8.31% 197,318 17,133 8.68% INTEREST-BEARING LIABILITIES Savings Deposits 32,748 756 2.31% 30,840 807 2.62% 31,907 877 2.75% NOW and Money Market Funds 51,850 1,656 3.19% 44,916 1,565 3.48% 39,337 1,397 3.55% Time Deposits 94,694 4,865 5.14% 98,181 5,496 5.60% 94,751 5,304 5.60% Other Borrowed Funds 4,059 203 5.00% 4,060 198 4.88% 4,061 245 6.03% Repurchase Agreements(5) 1,305 52 3.98% 93 4 4.30% N/A Subordinated Debentures 20 2 11.00% 48 5 10.42% 107 11 10.28% TOTAL 184,676 7,534 4.08% 178,138 8,075 4.53% 170,163 7,834 4.60% Net Interest Income 9,502 9,313 9,299 Net Interest Spread(6) 3.75% 3.78% 4.08% Interest Differential(7) 4.37% 4.45% 4.71% Included in net loans are non-accrual loans with an average balance of $1,894,097 for 1999, $2,004,438 for 1998, and $1,750,037 for 1997. Income on investment securities of state and political subdivisions is stated on a tax equivalent basis (assuming a 34% rate). The amount of adjustment was $314,301 in 1999, $316,232 in 1998, and $315,855 in 1997. Overnight deposits refers to the BankBoston sweep account established during the first half of 1998 as another means of selling funds overnight. Included in other securities are taxable industrial development bonds (VIDA), with income of $5,443 for 1999, $7,549 for 1998, $8,440 for 1997. Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers. Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. 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 years 1999, 1998, 1997, and 1996 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid. (Dollars in Thousands)
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996 RATE VOLUME Variance(1) Variance(1) Variance(1) Due to Total Due to Total Due to Total Rate Volume Variance Rate Volume Variance Rate Volume Variance Income-Earning Assets Loans(2) (660) (62) (722) (305) 195 (110) (197) 689 492 Taxable Investment Securities (107) 626 519 (107) 186 79 28 (6) 22 Tax-Exempt Investment Securities (3) (62) 56 (6) (69) 70 1 (29) (156) (185) Federal Funds Sold 6 (100) (94) (30) 127 97 9 (115) (106) Overnight Deposits (17) (35) (52) 0 185 185 N/A Other Securities 4 (1) 3 (4) 7 3 1 0 1 Total Interest Earnings (836) 484 (352) (515) 770 255 (188) 412 224 Interest-Bearing Liabilities Savings Deposits (101) 50 (51) (42) (28) (70) (56) (11) (67) NOW and Money Market Funds (151) 242 91 (30) 198 168 (53) (73) (126) Time Deposits (452) (179) (631) 0 192 192 (294) (83) (377) Other Borrowed Funds 5 0 5 (47) 0 (47) (42) 280 238 Repurchase Agreements (4) 52 48 0 4 4 N/A Subordinated Debentures 0 (3) (3) 0 (6) (6) 1 (11) (10) Total Interest Expense (703) 162 (541) (119) 360 241 (444) 102 (342) Items which have shown a year-to-year increase in volume have variances allocated as follows: Variance due to rate = Change in rate x new volume Variance due to volume = Change in volume x old rate Items which have shown a year-to-year decrease in volume have variances allocated as follows: Variance due to rate = Change in rate x old volume Variance due to volume = Change in volume x new rate Total loans are stated net of unearned discount and allowance for loan losses. Interest on non-accrual loans is excluded from income. The principal balances of non-accrual loans are included in calculations of the yield on loans. Income on tax-exempt securities is stated on a tax equivalent basis. The assumed rate is 34%.
INVESTMENT PORTFOLIO The following tables show the classification of the investment portfolio by type of investment security based on book value for Held to Maturity securities and fair value for Available for Sale securities on December 31 for each of the last 3 years. (Dollars in Thousands)
1999 1998 1997 U.S. Treasury Obligations: Available-for-Sale 28,982 20,590 8,039 Held-to-Maturity 6,650 15,562 22,491 U.S. Agency Obligations 11,127 4,582 1,631 Obligations of State & Political Subdivisions 12,110 9,734 10,004 Restricted Equity Securities 1,142 1,142 1,100 Total Investment Securities 60,011 51,610 43,265 The following is an analysis of the maturities and yields of investment securities as defined: (Available for Sale; fair value, Held to Maturity; book value) December 31, 1999 1998 1997 U.S. Treasury & Agency Obligations Fair Ave. Fair Ave. Fair Ave. Available for Sale Value Yield Value Yield Value Yield Due within 1 year 9,993 5.96% 0 0.00% 2,993 6.08% Due after 1 year within 5 years 18,989 6.27% 20,590 6.16% 5,046 6.12% Total 28,982 6.17% 20,590 6.16% 8,039 6.10% Book Ave. Book Ave. Book Ave. Held to Maturity Value Yield Value Yield Value Yield Due within 1 year 1,000 6.38% 14,634 6.51% 8,965 5.78% Due after 1 year within 5 years 14,824 5.30% 5,510 5.78% 15,157 5.69% Due after 5 years within 10 years 1,953 6.93% 0 0.00% 0 0.00% Total 17,777 5.54% 20,144 6.31% 24,122 5.72% Obligations of State & Political Subdivisions(1) Book Ave. Book Ave. Book Ave. Value Yield Value Yield Value Yield Due within 1 year 8,738 6.40% 6,473 6.58% 6,624 7.94% Due after 1 year within 5 years 1,507 7.18% 1,522 7.58% 1,543 7.91% Due after 5 years within 10 years 600 7.78% 392 8.03% 363 8.03% Due after 10 years 1,265 9.76% 1,347 9.65% 1,474 9.67% Total 12,110 6.92% 9,734 7.21% 10,004 8.19% Restricted Equity Securities Total Restricted Equity Securities 1,142 6.00% 1,142 6.00% 1,100 6.76% Income on Obligations of State and Political Subdivisions is stated on a tax equivalent basis assuming a 34 percent tax rate. Also included are taxable industrial development bonds (VIDA) with a fair value of $92,828 as of December 31, 1999, $123,546 as of December 31, 1998, and $150,235 as of December 31, 1997 with respective yields of 5.23%, 4.76%, and 5.55%.
LOAN PORTFOLIO The following table reflects the composition of the Company's loan portfolio for years ended December 31: (Dollars in Thousands)
1999 1998 1997 1996 1995 TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL Real Estate Loans Construction & Land Development 1,620 1.06% 2,025 1.37% 1,091 0.73% 1,432 0.98% 912 0.66% Farm Land 3,229 2.11% 2,634 1.78% 2,093 1.39% 2,148 1.48% 1,814 1.32% 1-4 Family Residential 98,439 64.22% 98,407 66.34% 98,743 65.78% 94,393 64.83% 91,104 66.38% Commercial Real Estate 21,223 13.85% 19,555 13.18% 19,992 13.32% 20,602 14.15% 18,646 13.59% Loans to Finance Agricultural Production 661 0.43% 829 0.56% 1,354 0.90% 1,222 0.84% 1,127 0.82% Commercial & Industrial 11,527 7.52% 8,767 5.91% 7,759 5.17% 7,084 4.87% 6,749 4.92% Consumer Loans 16,344 10.66% 16,008 10.79% 18,943 12.62% 18,556 12.74% 16,578 12.08% All Other Loans 236 0.15% 110 0.07% 141 0.09% 166 0.11% 310 0.23% Gross Loans 153,279 100% 148,335 100% 150,116 100% 145,603 100% 137,240 100% Less: Reserve for Loan Losses (1,715)-1.12% (1,659)-1.12% (1,502)-1.00% (1,401)-0.96% (1,519) - -1.11% Deferred Loan Fees (891)-0.58% (849)-0.57% (867)-0.58% (904)-0.62% (909) - -0.66% Net Loans 150,673 98.30% 145,827 98.31% 147,747 98.42% 143,298 98.42% 134,812 98.23%
MATURITY OF LOANS The following table shows the estimated maturity of loans (excluding residential properties of 1 - 4 families, consumer loans and other loans) outstanding as of December 31, 1999.
Fixed Rate Loans Maturity Schedule Within 1 - 5 After 1 Year Years 5 years Total Real Estate Construction & Land Development 1,420 0 0 1,420 Secured by Farm Land 15 15 858 888 Commercial Real Estate 151 501 5,083 5,735 Loans to Finance Agricultural Production 17 170 0 187 Commercial & Industrial Loans 323 5,587 1,257 7,167 Total 1,926 6,273 7,198 15,397 Variable Rate Loans Within 1 - 5 After 1 Year Years 5 years Total Real Estate Construction & Land Development 200 0 0 200 Secured by Farm Land 2,063 278 0 2,341 Commercial Real Estate 10,202 5,286 0 15,488 Loans to Finance Agricultural Production 283 191 0 474 Commercial & Industrial Loans 3,637 723 0 4,360 Total 16,385 6,478 0 22,863
SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Company's loan loss experience for each of the last five years. (Thousands of Dollars)
December 31, 1999 1998 1997 1996 1995 Loans Outstanding End of Period 153,279 148,335 150,116 145,603 137,240 Ave. Loans Outstanding During Period 147,128 147,830 145,778 138,635 131,879 Loan Loss Reserve, Beginning of Period 1,659 1,502 1,401 1,519 1,708 Loans Charged Off: Real Estate 227 177 191 116 198 Commercial 41 41 104 86 17 Loans to Individuals 281 487 436 383 238 Total 549 705 731 585 453 Recoveries: Real Estate 10 65 12 18 5 Commercial 8 17 27 16 20 Loans to Individuals 90 120 133 68 119 Total 108 202 172 102 144 Net Loans Charged Off 441 503 559 483 309 Provision Charged to Income 497 660 660 365 120 Loan Loss Reserve, End of Period 1,715 1,659 1,502 1,401 1,519 Net Losses as a Percent of Ave. Loans 0.30% 0.34% 0.38% 0.35% 0.23% Provision Charged to Income as a Percent of Average Loans 0.34% 0.45% 0.45% 0.26% 0.09% At End of Period: Loan Loss Reserve as a Percent of Outstanding Loans 1.12% 1.12% 1.00% 0.96% 1.11%
Factors considered in the determination of the level of loan loss coverage include, but are not limited to historical loss ratios, composition of the loan portfolio, overall economic conditions as well as future potential losses. The following table shows an allocation of the allowance for loan losses, as well as the percent to the total allowance for the last five years (the corporation has no foreign loans, therefore, allocations for this category are not necessary).
December 31, 1999 % 1998 % 1997 % 1996 % 1995 % Domestic Residential Real Estate 421 25% 559 33% 362 24% 490 35% 265 17% Commercial 372 22% 475 29% 645 43% 307 22% 631 42% Loans to Individuals 356 21% 448 27% 487 32% 395 28% 485 32% Unallocated 566 33% 177 11% 8 1% 209 15% 138 9% Total 1,715 100% 1,659 100% 1,502 100% 1,401 100% 1,519 100%
NON-ACCURAL, PAST DUE, AND RESTRUCTURED LOANS The following table summarizes the bank's past due, non-accrual, and restructured loans: (Dollars in Thousands)
December 31, 1999 1998 1997 1996 1995 Accruing Loans Past Due 90 Days or More: Consumer 77 53 121 36 28 Commercial 0 119 19 5 15 Real Estate 732 246 211 360 249 Total Past Due 90 Days or More 809 418 351 401 292 Non-accrual Loans 1,758 2,228 1,486 1,255 1,389 Restructured Loans (incl. non-accrual) 0 126 136 506 359 Total Non-accrual, Past Due and Restructured Loans 2,567 2,772 1,973 2,162 2,040 Other Real Estate Owned 435 542 1,089 663 761 Total Non Performing Loans 3,002 3,314 3,062 2,825 2,801 Percent of Gross Loans 1.96% 2.23% 2.04% 1.94% 2.04% Reserve Coverage of Non performing Loans 57.13% 50.06% 49.05% 49.59% 54.23% When a loan reaches non-accrual status, it is determined that future collection of interest and principal is doubtful. At this point, the Company's policy is to reverse the accrued interest and to discontinue the accrual of interest until the borrower clearly demonstrates the ability to resume normal payments. Our portfolio of non-accrual loans for the years ended 1999, 1998, 1997, 1996, and 1995 are made up primarily of commercial real estate loans and residential real estate loans. Management does not anticipate any substantial effect to future operations if any of these loans are liquidated. Although interest is included in income only to the extent received by the borrower, deferred taxes are calculated monthly, based on the accrued interest of all non- accrual loans. This accrued interest amounted to $398,006 in 1999, $363,713 in 1998, $216,770 in 1997, $309,388 in 1996, and $256,754 in 1995. The Company had total foreign loans of less than one percent in 1999, and has no concentration in any industrial category.
DEPOSITS The average daily amount of deposits and rates paid on such deposits is summarized for the last three years. (Dollars in Thousands)
December 31, 1999 1998 1997 Amount Rate Amount Rate Amount Rate Non-Interest Bearing Demand Deposits 23,619 0.00% 20,857 0.00% 18,694 0.00% NOW & Money Market Funds 51,850 3.19% 44,916 3.48% 39,337 3.55% Savings Deposits 32,748 2.31% 30,840 2.62% 31,907 2.75% Time Deposits 94,694 5.14% 98,181 5.60% 94,751 5.60% Total Deposits 202,911 3.59% 194,794 4.04% 184,689 4.10% Increments of maturity of time certificates of deposit and other time deposits of $100,000 or more issued by domestic offices outstanding on December 31, 1999 are summarized as follows: Time Certificates Maturity Date of Deposit 3 Months or Less 1,679 Over 3 through 6 Months 5,190 Over 6 through 12 Months 3,814 Over 12 Months 5,211 Total 15,894 RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Company for each of the last three years. December 31, 1999 1998 1997 Return on Average Assets 1.01% 0.99% 1.02% Return on Average Equity 10.65% 10.49% 10.69% Dividend Payout Ratio 89.40% 83.69% 77.02% Ave. Equity to Ave. Assets Ratio 9.47% 9.45% 9.57%
Item 2. Properties Community Bancorp. does not own or lease real property. The Corporation's offices are located at the main offices of the Bank. All of the Bank's offices are located in Vermont. In addition to the main office in Derby, the Bank maintains facilities located in; City of Newport, Towns of Barton and St. Johnsbury, and Villages of Island Pond, Troy and Derby Line. As mentioned earlier, the newly acquired Liberty Savings Bank shares the same address as the main offices as it does not maintain a facility. The Bank's main offices are located in a two-story brick building on U.S. Route 5 in Derby, Vermont. The main banking lobby and adjacent offices were constructed in 1972, expanded in 1978, and the most recent expansion was completed in July 1993, providing us with a total of 15,000 square feet at this location. The main office is equipped with a drive-up facility as well as an Automated Teller Machine (ATM). Computer and similar support equipment is also located in the main office building. The building previously housing our computer equipment currently houses an office for employees of the Bank's Administrative department, and also serves as a conference center for the Bank as well as various non-profit organizations, free of charge, upon request. The Bank owns the Derby Line office located on Main Street in a renovated bank building. The facility consists of a small banking lobby containing approximately 200 square feet and a walk-up window area. Recently, the walk-up window area was removed, and in its place, an ATM was installed. Now all seven offices of the Bank are equipped with an ATM. The Island Pond office is located in the renovated "Railroad Station" acquired by the town of Brighton in 1993. The Bank leases approximately two-thirds of the downstairs including a banking lobby, a drive-up window, and an ATM. The other portion of the downstairs is occupied by an information center, and the upstairs section houses the Island Pond Historical Society. The Barton office is located on Church Street, in a renovated facility. This office is equipped with a banking lobby, a drive-up window, and an ATM, making most deposit and withdrawal transactions possible at this branch 24 hours a day. The facility is leased from Dean M. Comstock, who is a member of the Bank's Barton Advisory Committee. The lease was entered into in 1985 and provides a fifteen-year term. It is anticipated that the lease will be renewed. The Bank occupies condominium space in the state office building on Main Street in Newport to house its Newport office. The Bank occupies approxi- mately 3,084 square feet on the first floor of the building for a full service banking facility equipped with a remote drive-up facility and an ATM. In addition, the Bank owns approximately 4,400 square feet on the second floor housing our trust department, marketing department, and an office for our public relations coordinator, with room for future expansion. The Bank's Troy office is located in a new facility, which was leased for a few years and then purchased in 1992 from Tom and Eleanor Watts. The bank currently occupies 2,200 square feet, and leases additional space to another business. An ATM is available in this office to provide the same type of limited 24-hour accessibility as all other offices. The St. Johnsbury office is located at the corner of the I-91 Access Road and Route 5 in the town of St. Johnsbury. The Bank occupies approximately 2,250 square feet in the front of the Price Chopper building. Fully equipped with an Automatic Teller Machine and a drive-up window, this office operates as a full service banking facility. The Bank leases this space from Murphy Realty of St. Johnsbury. Peter Murphy is President of Murphy Realty, and is a member of the Bank's St. Johnsbury Advisory Committee. Item 3. Legal Proceedings Community National Bank is currently involved in a lawsuit against the State of Vermont. The issue involves OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport. According to a so- called "public trust doctrine", the State of Vermont might have ownership of any lands created by filling any portion of the navigable waters of the state. The result of this is that the Bank has been unable to sell these properties because some attorneys will not clear title to the property. The suit filed is an attempt to clear title to said properties by seeking judicial clarification of the public trust doctrine. The outcome of the suit is not likely to have a material impact on the financial statements of the Bank or consolidated Company. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Bank, and the aforementioned to which the Bank is a party or of which any of its property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II. Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Common Stock Performance by Quarter Incorporated by reference to Page 40 of the Annual Report to Shareholders for fiscal year 1999. Item 6. Selected Financial Data Following pages SELECTED FINANCIAL DATA (Not covered by Report of Independent Public Accountants) (Dollars in thousands, except per share data)
Year Ended December 31, 1999 1998 1997 1996 1995 Total Interest Income 16,723 17,072 16,817 16,532 15,406 Less: Total Interest Expense 7,535 8,077 7,834 8,177 8,248 Net Interest Income 9,188 8,995 8,983 8,355 7,158 Less: Provision for Loan Losses 497 660 660 365 120 Other Operating Income 1,759 1,586 1,336 1,281 1,181 Less: Other Operating Expense 7,330 7,021 6,759 6,397 5,943 Income Before Income Taxes 3,120 2,900 2,900 2,874 2,276 Less: Applicable Income Taxes (1) 786 710 755 654 324 Net Income 2,334 2,190 2,145 2,220 1,952 Per Share Data: (2) Earnings per Share 0.71 0.68 0.69 0.74 0.68 Cash Dividends Declared 0.64 0.60 0.56 0.52 0.48 Weighted Average Number of Common Shares Outstanding 3,309,375 3,229,702 3,125,270 3,005,843 2,881,424 Number of Common Shares Outstanding 3,358,507 3,266,508 3,165,821 3,049,798 2,933,784 Balance Sheet Data: Net Loans 150,673 145,827 147,747 143,298 134,812 Total Assets 232,216 225,051 213,001 205,536 197,382 Total Deposits 201,843 197,797 187,580 183,854 178,884 Total Liabilities 210,035 203,049 192,521 186,425 179,801 Borrowed Funds 4,075 4,080 4,164 235 330 Total Shareholders' Equity 22,181 22,002 20,480 19,111 17,580 Applicable Income Taxes above includes the income tax effect, assuming a 34% tax rate, on securities gains (losses), which totaled $0 in each 1999, 1998, 1997, $(656) in 1996, and $6,272 in 1995. All per share data for prior calendar years have been restated to reflect a 5% stock dividend paid in the first quarter of 1999. A 100% stock dividend was paid on June 1, 1998, requiring restatement of per share data for the calendar years 1997, 1996, and 1995. Additionally, a 5% stock dividend was declared payable during the first quarter of 1997, requiring restatement of per share data for the 1996 and 1995 calendar years.
QUARTERLY RESULTS OF OPERATIONS The following is an unaudited summary of the quarterly results of operations for the years ended December 31, 1999, 1998 and 1997. (Dollars in thousands, except per share data)
1999 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 Interest Income 4,050 4,203 4,248 4,221 Interest Expense 1,872 1,889 1,897 1,876 Net Interest Income 2,178 2,314 2,351 2,345 Provisions For Loan Losses 150 150 115 82 Other Operating Expenses 1,847 1,829 1,826 1,827 Income Before Taxes 554 785 814 967 Applicable Income Taxes 143 219 210 214 Net Income 411 566 604 753 Net Income Per Share(1): 0.13 0.17 0.18 0.23 1998 Interest Income 4,225 4,207 4,325 4,315 Interest Expense 1,990 2,053 2,045 1,989 Net Interest Income 2,235 2,154 2,280 2,326 Provisions For Loan Losses 200 160 150 150 Other Operating Expenses 1,810 1,761 1,768 1,730 Income Before Taxes 522 747 744 888 Applicable Income Taxes 114 189 182 226 Net Income 408 558 562 662 Net Income Per Share(1): 0.13 0.17 0.17 0.21 1997 Interest Income 4,040 4,172 4,253 4,352 Interest Expense 1,897 1,924 1,999 2,014 Net Interest Income 2,143 2,248 2,254 2,338 Provisions For Loan Losses 205 105 215 135 Other Operating Expenses 1,529 1,685 1,815 1,761 Income Before Taxes 695 832 576 798 Applicable Income Taxes 175 220 125 236 Net Income 520 612 451 562 Net Income Per Share (1): 0.17 0.20 0.14 0.18 All per share data for 1998 and 1997 restated to reflect a 5% stock dividend paid during the first quarter of 1999. Per share data for all 1997 quarters and the first quarter of 1998 restated to reflect a 100% stock dividend paid on June 1, 1998.
CAPITAL RATIOS Community Bancorp. and Subsidiaries (Dollars in Thousands)
ANNUAL GROWTH RATE At December 31, 1999 1998 1997 99/'98 98/'97 Total Assets 232,216 225,051 213,001 3.18% 5.66% LESS: Goodwill (3) 297 320 343 Allowance for Possible Loan Losses 1,715 1,659 1,502 3.38% 10.45% Total Adjusted Assets 233,634 226,390 214,160 3.20% 5.71% Gross Risk-Adjusted Assets 111,995 107,450 106,298 4.23% 1.08% Allowance for Loan Loss over limit (2) 315 316 173 -0.32% 82.66% Total Risk-Adjusted Assets 111,680 107,134 106,125 4.24% 0.95% Shareholders' Equity 22,181 22,002 20,480 0.81% 7.43% LESS: Valuation Allowance for Securities (247) 236 34 Intangible Assets(3) 319 339 352 Total Adjusted Tier 1 Capital (1) 22,109 21,427 20,094 3.18% 6.63% Eligible Discounted Subordinated Debt 16 16 42 0.00% -61.90% Max. Allowance for Possible Loan Losses (2) 1,400 1,343 1,329 4.24% 1.05% Total Capital (Tier II) 23,525 22,786 21,465 3.24% 6.15% 1999 1998 1997 Tier l Capital/Total Adjusted Assets 9.46% 9.46% 9.38% Tier ll Capital/Total Adjusted Assets 10.07% 10.06% 10.02% Tier l Capital/Total Risk-Adjusted Assets 19.80% 20.00% 18.93% Tier ll Capital/Total Risk-Adjusted Assets 21.06% 21.27% 20.23% Net unrealized holding gains and losses on available-for-sale securities are excluded from common stockholders' equity for regulatory capital purposes. However, National Banks continue to deduct unrealized losses on equity securities in their computation of Tier I Capital. The maximum allowance for possible loan losses used in calculating primary (Tier ll) capital is the lower of the period end allowance for possible loan losses or 1.25% of gross risk - adjusted assets, as implemented by regulatory capital guidelines. Included in the 1999, 1998 and 1997 balances of intangible assets are $296,974, $319,818 and $342,662, respectively, in goodwill associated with the acquisition of Liberty Savings Bank. Excess mortgage servicing rights totaling $21,817, $18,706, and $9,452 for 1999, 1998, and 1997, respectively, comprise the balance of intangible assets.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated by reference to Pages 27-35 of the Annual Report to Shareholders for fiscal year 1999. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Incorporated by reference to Pages 29 - 31 of the Management's Discussion of the Annual Report to Shareholders for the fiscal year 1999. Item 8. Financial Statements and Supplementary Data The financial statements and related notes of Community Bancorp. and Subsidiaries are incorporated herein by reference from the Company's annual report to shareholders for the fiscal year 1999, Page 12 through Note 24 on Page 27. Item 9. Disagreements on Accounting and Financial Disclosures Inapplicable. PART III. Item 10. Directors and Executive Officers of the Registrant Incorporated by reference to Pages 3, 4 and 9 of the Company's Proxy Statement for the Annual Meeting of Shareholders on May 2, 2000. Item 11. Executive Compensation Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 2, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 2, 2000. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 2, 2000 and incorporated by reference to the Annual Report to the shareholders for the fiscal year 1999, Page 23, Note 16. PART IV. Item 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K (a) (1) and (2) Financial Statements Financial statements are incorporated by reference to the Annual Report to the shareholders for the fiscal year 1999. (a) (3) Exhibits The following exhibits are incorporated by reference: Exhibit 3(i) - Restated Articles of Association filed as Exhibit 1 to the Company's current report of Form 8-K filed with the Commission on September 8, 1998. Exhibit 3(ii)- By-laws of Community Bancorp. are incorporated by reference to Community Bancorp.'s Registration Statement dated May 20, 1983 (Registration No.2-83166). Exhibit 4 - Indenture dated August 1, 1984 between Community Bancorp. and Community National Bank as trustee, relating to $750,000 in principal amount of 11% Convertible Subordinated Debentures due 2004 is incorporated by reference to Community Bancorp.'s Registration Statement dated July 11, 1984 (Registration No. 2-92147). Exhibit 10(iii) - Officer Incentive Plan* is incorporated by reference to page 11-12 of the Company's Proxy Statement for the Annual Meeting of Shareholders on May 2, 2000. Exhibit 13 - Portions of the Annual Report to Shareholders of Community Bancorp. for Year Ended December 31, 1999, specifically mentioned in this report, incorporated by reference. Exhibit 27 - Financial Data Schedule is incorporated by reference to the EDGAR Version of the form 10-K for the fiscal year 1999 filed with the SEC. The following exhibits are filed as part of this report: Exhibit 10(i) - Directors Deferred Compensation Plan* Exhibit 10(ii) - Description of Supplemental Retirement Plan* Exhibit 11 - Computation of Per Share Earnings Exhibit 21 - Subsidiaries of Community Bancorp. Exhibit 23 - Consent of A.M. Peisch & Company (b) Reports on Form 8-K None [FN] Denotes compensatory plan or arrangement. Exhibit 10(i) DEFERRED COMPENSATION PLAN Pursuant to due authorization by their Boards of Directors, Community Bancorp. and Community National Bank, hereby constitute, establish and adopt the following Deferred Compensation Plan: I. Definitions: The following words and terms as used in this Plan shall have the meaning set forth below, unless a different meaning is clearly required by the context: (A) "Plan" means the Deferred Compensation Plan for Directors of Community Bancorp. and/or Community National Bank as set forth herein, or as amended from time to time. (B) "Effective date of this Plan" means 01/01/95. (C) The word "Bank" shall mean the Community National Bank. (D) The words "Boards of Directors" shall mean the Board of Directors of Community Bancorp. and/or the Bank. (E) The word "Director" means any duly elected or appointed member of the Board of Directors of Community Bancorp. or Community National Bank. (F) The words "member" and "participant" shall mean any Director who has chosen to participate and has qualified for membership in this Plan as hereinafter provided. (G) The word "compensation" shall mean the usual fees, as established from time to time by Community Bancorp. and/or the Bank and paid to a Director in consideration of services performed as a Director including attendance at meetings of the Board of Directors, Advisory Boards, or other committees, but shall not include fees for appraisals. (H) "Election to defer" shall mean a written statement signed by a Director indicating the desire to participate in the Plan and the extent to which he or she intends to participate. II. Eligibility: Any duly elected or appointed member of the Board of Directors of Community Bancorp. and/or Community National Bank shall be eligible for participation in the Plan. A Director shall become a participant in the Plan by signing an "Election to Defer", a specimen of which is attached to and made a part of this Plan. A participant's membership in the Plan shall take effect on: (1) the effective date of the Plan, if the participant has executed an Election to Defer before the effective date of the Plan; (2) immediately, if a Director executes an Election to Defer before earning any compensation as a Director; or (3) in all other cases on the first day of the month following the month in which the Election to Defer is executed. Membership in the Plan shall continue from month to month unless and until a member indicates in writing the desire to refrain from future participation in the Plan. Notification of a desire to refrain from future participation in the Plan shall apply only to fees and compensation to be earned by a Director after receipt of such notification; in no event shall such notification have the effect of altering the manner of payment of fees or compensation deferred pursuant to the Plan prior to receipt by the Deferred Compensation Committee of such notification. A participant in the Plan may at any time execute an amended Election to Defer, changing the percentage of compensation to be deferred in the future, changing the beneficiary named to receive the deferred compensation in the event of his or her death, or specifying a different time of payment or schedule of payment of compensation. III. Deferral of Compensation: A participant in the Plan may elect to defer all or any portion of the fees to be earned by his or her services as a Director, including attendance at meetings of the Board of Directors, Advisory Boards, or of other committees, (but not fees earned for appraisals, if any). The balance of any compensation earned by the participant and not deferred shall be payable in the year earned. The amounts deferred will be credited the participant at such time as they would have been payable had the participant not elected to become a member of the Plan but the account will not be funded. Neither the Bancorp. nor the Bank will set aside any money, in trust or otherwise, to guarantee payment of any credits to the participant's account, but shall make payments, when due, out of the Company's or Bank's general corporate funds. IV. Payment of Deferred Compensation: Compensation and fees, deferred pursuant to the Plan, and interest accumulated thereon, shall be paid to a participant or to the designated beneficiary in the event of death, at the time specified by the participant in the Election to Defer. Payments may be made in a lump sum, or in annual installments, as specified in the Election to Defer. Interest shall accumulate and be credited to each participant's account at the rate in effect for the Bank's 3-year Certificate of Deposit, or if no such Certificate of Deposit is offered, at a rate determined by the Boards of Directors, which rate may be changed from time to time, at the discretion of said Boards. V. Amendment: This Plan may be amended any time and from time to time by the Boards of Directors, provided, however, that no amendment shall cause or permit any amount already credited to a member's account to be reduced or diminished. VI. Miscellaneous: No credits made to the account of a member of this Plan shall be subject in any way to anticipation, alienation, sale, transfer, pledge, or voluntary or involuntary attachment or encumbrance of any kind by a creditor of a participant hereof; and any attempts to anticipate, alienate, sell, transfer, assign, pledge or otherwise encumber any such credit, whether presently or thereafter payable, shall be void. Deferrals shall remain subject to the claims of any general creditors of Community National Bank and/or Community Bancorp. This Plan shall take effect as of 01/01/95. IN WITNESS WHEREOF, the Community Bancorp. and Community National Bank have caused this Deferred Compensation Plan to be executed and attested on their behalf by its officer thereunto duly authorized this 10th day of January, 1995. COMMUNITY BANCORP. By: COMMUNITY NATIONAL BANK By: ELECTION TO DEFER The undersigned Director of Community Bancorp. and/or Community National Bank hereby elects to participate in the Deferred Compensation Plan effective as of January 1, 1995. Percentage of total fees and compensation to be deferred: ____%. Payment of deferred compensation to commence on the first to occur of the following: _____ Termination of duties as Director. _____ Attainment of the age of __ years. _____ Incapacitating disability. _____ Personal financial hardship (check any options elected) Payment will commence at the participant's death in any event, whether or not participant has elected any of the above options. Payment to be made to participant as follows: _____ Lump sum. _____ in equal _________ installments of ________________________________, commencing on the first day of the month after said sums first become payable and thereafter _______ until paid in full. (indicate option chosen) Beneficiary: Payments to be made to beneficiary as follows: _____ Lump sum. _____ in equal monthly installments of _____________________________, commencing on the first day of the month after said sums first become payable and thereafter monthly until paid in full. (In the event the designated beneficiary has predeceased the participant, payment will be made to the estate of the participant.) Signed this _____ day ________________, 19____, at ______________, Vermont. _______________________ Exhibit 10(ii) Description of Supplemental Retirement Plan The Board of Directors adopted a Supplemental Retirement Plan for Mr. White and the other Executive Officers of the Bank to replace estimated benefits lost as a result of the previous termination of the Bank's defined benefit pension plan. The plan is intended to provide an annual benefit at retirement approximating 75% of the average annual bonus received by the officer. It is estimated that this benefit, combined with the projected benefits under the Bank's 401(k) plan, will be approximately equal to the benefit that would have been provided to the Executive Officers under the terminated defined benefit pension plan. Benefit payments will be funded by annual contributions to a rabbi trust. Exhibit 11 COMMUNITY BANCORP. PRIMARY EARNINGS PER SHARE For The Fourth Quarter Ended December 31, 1999 1998 1997 Net Income $753,166 $662,614 $562,499 Average Number of Common Shares Outstanding. 3,358,506 3,266,510 3,165,681 Earnings Per Common Share $0.23 $0.21 $0.18 For the Years Ended December 31, 1999 1998 1997 Net Income $2,334,358 $2,190,374 $2,145,395 Average Number of Common Shares Outstanding. 3,309,375 3,229,702 3,125,270 Earnings Per Common Share $0.71 $0.68 $0.69 All 1998 and 1997 per share data restated to reflect a 5% stock dividend paid on February 1, 1999, and a 100% stock dividend paid on June 1, 1998. GRAPHICS GRAPHICS
Exhibit 11 (cont'd.) COMMUNITY BANCORP. FULLY DILUTED EARNINGS PER SHARE
For The Fourth Quarter Ended December 31, 1999 1998 1997 Net Income $753,166 $662,614 $562,499 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 363 363 1,639 Adjusted Net Income $753,530 $662,978 $564,138 Average Number of Common Shares Outstanding. 3,358,506 3,266,510 3,165,681 Increase in Shares (Assuming Conversion of Subordinated Convertible Debentures). 8,557 8,557 28,167 Average Number of Common Shares Outstanding (Fully Diluted). 3,367,063 3,275,067 3,193,848 Earnings Per Common Share Assuming Full Dilution. $0.23 $0.21 $0.18 For the Years Ended December 31, 1999 1998 1997 Net Income $2,334,358 $2,190,374 $2,145,395 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 1,452 3,034 7,583 Adjusted Net Income $2,335,810 $2,193,408 $2,152,978 Average Number of Common Shares Outstanding. 3,309,375 3,229,702 3,125,270 Increase in Shares (Assuming Conversion of Subordinated Convertible Debentures). 8,557 16,691 33,933 Average Number of Common Shares Outstanding (Fully Diluted). 3,317,933 3,246,393 3,159,203 Earnings Per Common Share Assuming Full Dilution. $0.71 $0.68 $0.69 All 1998 and 1997 per share data restated to reflect a 5% stock dividend paid on February 1, 1999, and a 100% stock dividend paid on June 1, 1998. GRAPHICS GRAPHICS
Exhibit 21 Community Bancorp.'s subsidiaries include Community National Bank, a banking corporation incorporated under the Banking Laws of The United States, and Liberty Savings Bank, a New Hampshire guaranty savings bank. Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Community Bancorp. of our report dated January 6, 2000, included in the 1999 Annual Report to Shareholders of Community Bancorp. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-18535) pertaining to the Community Bancorp. Dividend Reinvestment Plan and in the Registration Statement (Form S-8 No. 33- 44713) pertaining to the Community Bancorp. Retirement Savings Plan of our Report dated January 6, 2000, with respect to the consolidated financial statements incorporated herein by reference of Community Bancorp. included In the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ A.M. Peisch & Company March 28, 2000 St. Johnsbury, Vermont VT Reg. No. 92-0000102 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY BANCORP. BY: /s/ Richard C. White Date: March 28, 2000 Richard C. White, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY: /s/ Stephen P. Marsh Date: March 28, 2000 Stephen P. Marsh, Treasurer and Chief Financial and Accounting Officer COMMUNITY BANCORP. DIRECTORS /s/ Thomas E. Adams Date: March 28, 2000 Thomas E. Adams /s/ Jacques R. Couture Date: March 28, 2000 Jacques R. Couture /s/ Elwood G. Duckless Date: March 28, 2000 Elwood G. Duckless /s/ Michael H. Dunn Date: March 28, 2000 Michael H. Dunn /s/ Rosemary M. Lalime Date: March 28, 2000 Rosemary M. Lalime /s/ Marcel Locke Date: March 28, 2000 Marcel Locke /s/ Stephen P. Marsh Date: March 28, 2000 Stephen P. Marsh /s/ Anne T. Moore Date: March 28, 2000 Anne T. Moore /s/ Dale Wells Date: March 28, 2000 Dale Wells /s/ Richard C. White Date: March 28, 2000 Richard C. White EX-13 2 Community Bancorp. 1999 Annual Report An eye toward the future. A focus on people. Community Bancorp. 4811 US Route 5 PO Box 259 Derby, Vermont 05829 (802) 334-7915 Community Bancorp. and Subsidiaries Consolidated Balance Sheets
December 31, 1999 1998 Assets Cash and due from banks (Note 18) $ 9,928,586 $ 4,896,947 Federal funds sold and overnight deposits 2,787,558 15,527,141 Cash and cash equivalents 12,716,144 20,424,088 Securities held-to-maturity (approximate fair value $29,502,766 and $30,038,323 at December 31, 1999 and 1998) (Note 2) 29,887,821 29,877,851 Securities available-for-sale (Note 2) 28,982,188 20,590,000 Restricted equity securities (Note 2) 1,141,650 1,141,650 Loans held-for-sale 660,423 1,032,197 Loans (Note 3) 152,618,876 147,303,149 Allowance for loan losses (Note 4) (1,714,763) (1,658,967) Unearned net loan fees (891,114) (848,963) Net loans 150,012,999 144,795,219 Bank premises and equipment, net (Note 5) 4,322,697 3,010,041 Accrued interest receivable 1,484,192 1,460,671 Other real estate owned, net (Note 6) 434,694 541,903 Other assets (Notes 7 and 12) 2,572,994 2,177,043 Total assets $232,215,802 $225,050,663 Liabilities and stockholders' equity Liabilities Deposits: Demand, non-interest bearing $ 25,727,709 $ 21,743,065 NOW and money market accounts 52,094,860 49,939,162 Savings 32,854,357 30,512,230 Time, $100,000 and over (Note 8) 15,894,363 17,874,124 Other time (Note 8) 75,271,591 77,728,713 201,842,880 197,797,294 Repurchase agreements (Note 10) 2,623,282 288,241 Borrowed funds (Note 9) 4,055,000 4,060,000 Accrued interest and other liabilities 1,493,486 883,069 Subordinated debentures (Note 11) 20,000 20,000 210,034,648 203,048,604 Commitments and contingent liabilities (Notes 5, 13, 14, 15 and 17) STOCKHOLDERS' EQUITY Common stock, $2.50 par value; 6,000,000 shares authorized 3,388,394 shares issued at 12/31/99 and 3,140,606 shares issued at 12/31/98 8,470,985 7,851,516 Additional paid-in capital 10,942,510 8,756,453 Retained earnings (Note 19) 3,462,966 5,604,096 Accumulated other comprehensive (loss) income (247,086) 235,375 Less treasury stock, at cost (1999: 29,887 shares; 1998: 29,646 shares) (448,221) (445,381) 22,181,154 22,002,059 Total liabilities and stockholders' equity $232,215,802 $225,050,663 See accompanying notes.
Community Bancorp. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 1999 1998 1997 Interest income Interest and fees on loans $13,036,041 $13,758,226 $13,867,588 Interest and dividends on investment securities U.S. Treasury securities 2,192,557 2,058,981 2,033,179 U.S. Government agencies 522,774 137,074 84,194 States and political subdivisions 615,557 621,411 621,571 Dividends 79,540 74,046 70,899 Interest on federal funds sold and overnight deposits 276,322 421,972 140,163 16,722,791 17,071,710 16,817,594 Interest expense Interest on deposits 7,277,456 7,868,323 7,577,571 Interest on borrowed funds and securities sold under agreements to repurchase 254,884 203,702 245,103 Interest on subordinated debentures 2,200 4,597 11,489 7,534,540 8,076,622 7,834,163 Net interest income 9,188,251 8,995,088 8,983,431 Provision for loan losses (Note 4) (497,000) (660,000) (660,000) Net interest income after provision for loan losses 8,691,251 8,335,088 8,323,431 Other income Trust Department income 247,001 185,877 119,144 Service fees 704,348 676,558 695,260 Security (losses) gains (Note 2) -0- -0- -0- Other (Note 24) 808,014 771,947 553,027 1,759,363 1,634,382 1,367,431 Other expenses Salaries and wages 2,839,193 2,795,987 2,795,732 Pension and other employee benefits (Note 13 and 17) 792,328 744,715 681,030 Occupancy expenses 1,284,339 1,250,077 1,240,165 Other operating expenses (Note 24) 2,413,915 2,277,971 2,073,436 7,329,775 7,068,750 6,790,363 Income before income taxes 3,120,839 2,900,720 2,900,499 Income taxes (Note 12) 786,481 710,346 755,104 Net income $ 2,334,358 $ 2,190,374 $ 2,145,395 Earnings per common share on weighted average $0.71 $0.68 $0.69 Weighted average number of common shares used in computing earnings per share 3,309,375 3,229,702 3,125,270 Book value per share on shares outstanding at December 31 $6.60 $6.74 $6.47 See accompanying notes.
Community Bancorp. and Subsidiaries Consolidated Statements of Stockholders' Equity
Accumulated Additional other Total -Common Stock- paid-in Retained comprehensive Treasury stockholders' Shares Amount capital earnings income (loss) Stock equity Balances, December 31, 1996 1,383,128 $3,531,233 $ 6,140,962 $9,871,409 $ 7,963 $(440,212) $19,111,355 Comprehensive income, net of taxes Net income -0- -0- -0- 2,145,395 -0- -0- 2,145,395 Net unrealized holding gains on securities available-for-sale, net of tax ($13,263) -0- -0- -0- -0- 25,746 -0- 25,746 Total comprehensive Income 2,171,141 Dividends paid -0- -0- -0- (1,652,355) -0- -0- (1,652,355) 5% stock dividend 69,161 172,903 1,121,103 (1,294,006) -0- -0- -0- Issuance of stock 55,509 138,771 716,370 -0- -0- -0- 855,141 Purchase of treasury stock (264) -0- -0- -0- -0- (4,925) (4,925) Balances, December 31, 1997 1,507,534 3,842,907 7,978,435 9,070,443 33,709 (445,137) 20,480,357 Comprehensive income, net of taxes Net income -0- -0- -0- 2,190,374 -0- -0- 2,190,374 Net unrealized holding gains on securities available-for-sale, net of tax ($103,889) -0- -0- -0- -0- 201,666 -0- 201,666 Total comprehensive Income 2,392,040 Dividends paid -0- -0- -0- (1,833,146) -0- -0- (1,833,146) 100% stock split effected in the form of a dividend 1,529,430 3,823,575 -0- (3,823,575) -0- -0- -0- Issuance of stock 74,013 185,034 778,018 -0- -0- -0- 963,052 Purchase of treasury stock (17) -0- -0- -0- -0- (244) (244) Balances, December 31, 1998 3,110,960 7,851,516 8,756,453 5,604,096 235,375 (445,381) 22,002,059 Comprehensive income, net of taxes Net income -0- -0- -0- 2,334,358 -0- -0- 2,334,358 Net unrealized holding losses on securities available-for-sale, net of tax ($248,541) -0- -0- -0- -0- (482,461) -0- (482,461) Total comprehensive Income 1,851,897 Dividends declared -0- -0- -0- (2,624,150) -0- -0- (2,624,150) 5% stock dividend 156,633 391,582 1,459,756 (1,851,338) -0- -0- -0- Issuance of stock 91,155 227,887 726,301 -0- -0- -0- 954,188 Purchase of treasury stock (241) -0- -0- -0- -0- (2,840) (2,840) Balances, December 31, 1999 3,358,507 $8,470,985 $10,942,510 $3,462,966 $(247,086) $(448,221) $22,181,154 See accompanying notes.
Community Bancorp. and Subsidiaries Consolidated Statements of Cash Flows
Years Ended December 31, 1999 1998 1997 Cash flows from operating activities Net income $ 2,334,358 $ 2,190,374 $ 2,145,395 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 516,824 407,226 407,238 Provision for loan losses 497,000 660,000 660,000 Provision (credit) for deferred income taxes 21,068 (75,246) 37,392 Gain on sale of loans (108,389) (153,699) (19,680) Losses on sales of fixed assets 1,675 -0- -0- (Gains) losses on sales of OREO (96,318) 4,448 (225,343) OREO write-downs 19,590 26,592 173,496 Amortization of bond premium, net 270,141 48,621 19,962 Proceeds from sales of loans held for sale 10,790,620 18,780,207 6,547,719 Originations of loans held for sale (10,310,457) (19,658,705) (6,308,539) (Increase) decrease in interest receivable (23,521) (373) 78,339 Increase in mortgage servicing rights (31,114) (92,544) (36,438) Decrease (increase) in other assets 158,157 (261,297) (159,114) Increase (decrease) in unamortized loan fees 42,151 (17,626) (37,714) (Decrease) increase in taxes payable (41,049) 20,628 19,947 (Decrease) increase in interest payable (38,366) (10,694) 41,597 Increase in accrued expenses 55,097 950 17,080 Increase (decrease) in other liabilities 103,265 55,359 (2,849) Net cash provided by operating activities 4,160,732 1,924,221 3,358,488 Cash flows from investing activities Securities held-to-maturity Maturities and paydowns 31,875,523 26,602,459 22,663,019 Purchases (31,987,612) (22,365,543) (18,866,987) Securities available-for-sale Sales and maturities -0- 3,000,000 -0- Purchases (9,291,211) (15,282,969) -0- Purchase of restricted equity securities -0- (41,900) (36,700) (Increase) decrease in loans, net (6,589,397) 1,758,500 (6,304,459) Capital expenditures, net (1,808,310) (108,756) (271,540) Investments in limited partnership, net (324,258) 12,779 (29,106) Premium paid on purchase of subsidiary -0- -0- (342,662) Proceeds from sales of other real estate owned 908,399 864,835 466,850 Recoveries of loans charged off 108,004 202,057 172,523 Net cash used in investing activities (17,108,862) (5,358,538) (2,549,062) (continued) 1999 1998 1997 Cash flows from financing activities Net increase in demand, NOW, savings and money market accounts 8,482,469 11,281,205 908,511 Net (decrease) increase in certificates of deposit (4,436,883) (1,064,312) 2,817,414 Net increase (decrease) in short-term borrowings and repurchase agreements 2,335,041 288,241 (1,600,000) Net (decrease) increase in borrowed funds (5,000) -0- 3,995,000 Payments to acquire treasury stock (2,840) (244) (4,925) Dividends paid (1,132,601) (954,095) (863,214) Net cash provided by financing activities 5,240,186 9,550,795 5,252,786 Net (decrease) increase in cash and cash equivalents (7,707,944) 6,116,478 6,062,212 Cash and cash equivalents Beginning 20,424,088 14,307,610 8,245,398 Ending $ 12,716,144 $ 20,424,088 $ 14,307,610 Supplemental schedule of cash paid during the year Interest $ 7,572,906 $ 8,087,316 $ 7,792,566 Income taxes $ 806,462 $ 764,964 $ 697,765 Supplemental schedule of noncash investing and financing activities Unrealized (loss) gain on securities available-for-sale $ (731,001)$ 305,555 $ 39,009 Other real estate owned acquired in settlement of loans $ 724,462 $ 348,911 $ 1,592,401 Debentures converted to common stock $ -0- $ 84,000 $ 66,000 Stock dividends $ 1,851,338 $ 3,823,575 $ 1,294,006 Dividends paid: Dividends declared $ 2,624,150 $ 1,833,146 $ 1,652,355 (Increase) in dividends payable (537,361) -0- -0- Dividends reinvested (954,188) (879,051) (789,141) $ 1,132,601 $ 954,095 $ 863,214 See accompanying notes.
Community Bancorp. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies The accounting policies of Community Bancorp. and Subsidiaries ("Company") are in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. Basis of presentation and consolidation-The consolidated financial statements include the accounts of Community Bancorp. and its wholly- owned subsidiaries, Community National Bank (Community) and Liberty Savings Bank (Liberty). All significant intercompany accounts and transactions have been eliminated. Nature of operations-The Company provides a variety of financial services to individuals and corporate customers through its branches in northeastern Vermont, which is primarily a small business and agricultural area. The Company's primary deposit products are checking and savings accounts and certificates-of-deposit. Its primary lending products are commercial, real estate and consumer loans. Concentration of risk-The Company's operations are affected by various risk factors, including interest-rate risk, credit risk and risk from geographic concentration of lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although the Company has a diversified loan portfolio and economic conditions are stable, most of its lending activities are conducted within the geographic area where it is located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy. In addition, a substantial portion of the Company's loans are secured by real estate. Use of estimates-The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and deferred tax assets. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Presentation of cash flows-For purposes of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one-day periods) and overnight deposits. Trust assets-Assets of the Trust Department, other than trust cash on deposit at the Company, are not included in these consolidated financial statements because they are not assets of the Company. Investment securities-Investment securities purchased and held primarily for resale in the near future are classified as trading. Trading securities are carried at fair value with unrealized gains and losses included in earnings. Debt securities the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt and equity securities not classified as either held- to-maturity or trading are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses net of tax and reclassification adjustment reported as a net amount in other comprehensive income. The specific identification method is used to determine realized gains and losses on sales of securities available-for-sale. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Restricted equity securities-Restricted equity securities are comprised of Federal Reserve Bank stock and Federal Home Loan Bank stock. These securities are carried at cost. As a member of the Federal Reserve Bank (FRB), the Company is required to invest in FRB stock in an amount equal to 3% of Community National Bank's capital stock and surplus. As a member of the Federal Home Loan Bank, the Company is required to invest in $100 par value stock of the Federal Home Loan Bank. The stock is nonmarketable, and when redeemed, the Company would receive from the Federal Home Loan Bank an amount equal to the par value of the stock. Loans held for sale-Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. All sales are made without recourse. Net unrealized losses are recognized through a valuation allowance by charges to income. Loans-Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan interest income is accrued daily on the outstanding balances. The accrual of interest is discontinued when a loan is specifically determined to be impaired or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life. Allowance for loan losses-The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's periodic evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Bank premises and equipment-Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over their estimated useful lives. The cost of assets sold or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts, and the resulting gains or losses are reflected in the income statement. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments are capitalized. Other real estate owned-Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Company's carrying amount or fair value, less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis, or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Income taxes-The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company's deferred tax assets are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. Foreign currency transactions-Foreign currency (principally Canadian) amounts are translated to U.S. dollars in accordance with FASB Statement No. 52, "Foreign Currency Translation." The U.S. dollar is the functional currency and therefore translation adjustments are recognized in income. Total translation adjustments, including adjustments on foreign currency transactions, are immaterial. Mortgage servicing-Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying the rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Pension costs-Pension costs are charged to salaries and employee benefits expense and are funded as accrued. Advertising costs-The Company expenses advertising costs as incurred. Stock split effected in the form of a dividend-Effective June 1, 1998, the shareholders authorized a two-for-one stock split of the Company's $2.50 par value common stock. The stock split was effected in the form of a dividend. All references in the accompanying financial statements to the number of common shares and per-share amounts have been restated to reflect the stock split. Comprehensive income-The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of January 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The adoption of SFAS No. 130 had no effect on the Company's net income or shareholders' equity. The components of other comprehensive income and related tax effects at December 31 are as follows:
1999 1998 1997 Unrealized holding (losses) gains on available-for-sale securities $(731,001) $ 305,555 $ 39,009 Reclassification adjustment for gains realized in income -0- -0- -0- Net unrealized (losses) gains (731,001) 305,555 39,009 Tax effect 248,540 (103,889) (13,263) Net of tax amount $(482,461) $ 201,666 $ 25,746
Earnings per common share-The FASB issued Statement No. 128, "Earnings per Share," which became effective for the Company during December 1997. The statement applies prospectively; earlier application is not permitted. The adoption of this statement did not have a material effect on the Company's financial statements. Earnings per common share amounts are computed based on the weighted average number of shares of common stock outstanding during the period (retroactively adjusted for stock splits and stock dividends) and reduced for shares held in treasury. The assumed conversion of subordinated debentures does not result in material dilution. Off-balance-sheet financial instruments-In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Fair values of financial instruments-The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Restricted equity securities: The carrying amounts of these securities approximate their fair values. Loans and loans held for sale: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their market values. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits and borrowed funds: The fair values disclosed for demand deposits (for example, checking and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amount). The fair values for certificates of deposit and debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and debt to a schedule of aggregated contractual maturities on such time deposits and debt. Short-term borrowings: The carrying amounts reported in the balance sheets for federal funds purchased approximate their fair values. These borrowings are short-term and due on demand. Other liabilities: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Accrued interest: The carrying amounts of accrued interest approximates their fair values. Transfers of financial assets-Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Business segments-In 1998 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards relative to public companies for the reporting of certain information about operating segments within their financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Company does not have reportable segments as defined within the Statement. Recent accounting pronouncements-In June 1998 FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which becomes effective for quarters beginning after June 30, 2000. This Statement establishes new accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those derivatives at fair value. The accounting for the gains or losses resulting in the changes of value of those derivatives will depend on the intended use of the derivatives and whether it qualifies for hedge accounting. Management is currently evaluating the impact of this State- ment on the Company's financial statements but does not anticipate it will have a material impact. Reclassification-Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the current year presentation. Note 2. Investment Securities Securities available-for-sale (AFS), held-to-maturity (HTM) and restricted equity securities consist of the following:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities AFS, December 31, 1999 U. S. Government and agency securities $29,356,560 $ 7,065 $381,437 $28,982,188 Securities AFS, December 31, 1998 U. S. Government and agency securities $20,233,371 $357,237 $ 608 $20,590,000 Securities HTM, December 31, 1999 U. S. Government and agency securities $17,777,541 $ 4,108 $389,163 $17,392,486 States and political Subdivisions 12,110,280 -0- -0- 12,110,280 $29,887,821 $ 4,108 $389,163 $29,502,766 Securities HTM, December 31, 1998 U. S. Government and agency securities $20,143,530 $160,472 $ -0- $20,304,002 States and political subdivisions 9,734,321 -0- -0- 9,734,321 $29,877,851 $160,472 $ -0- $30,038,323
Investment securities with a carrying amount of $8,133,750 and $6,036,736 and fair value of $7,949,063 and $6,097,500 at December 31, 1999 and 1998, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Proceeds from the sale of securities available-for-sale amounted to $-0- in 1999, 1998 and 1997. Realized gains from sales of investments available-for-sale were $-0- for each of the years 1999, 1998 and 1997. The carrying amount and estimated fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The scheduled maturities of securities available-for-sale at December 31, 1999, were as follows:
Amortized Fair Cost Value Due in one year or less $10,010,533 $ 9,992,814 Due from one to five years 19,346,027 18,989,374 $29,356,560 $28,982,188
The maturities of securities held-to-maturity at December 31, 1999, were as follows:
Amortized Fair Cost Value Due in one year or less $ 9,737,875 $ 9,737,533 Due from one to five years 16,331,486 15,951,027 Due from five to ten years 2,553,164 2,548,910 Due after ten years 1,265,296 1,265,296 $29,887,821 $29,502,766
Included in the caption "States and Political Subdivisions" are securities of local municipalities carried at $12,017,452 and $9,610,774 at December 31, 1999 and 1998, respectively, which are attributable to private financing transactions arranged by the Company. There is no established trading market for these securities and, accordingly, the carrying amount of these securities has been reflected as their fair value. The Company anticipates no losses on these securities and expects to hold them until their maturity. Note 3. Loans The composition of net loans at December 31 is as follows:
1999 1998 Commercial $ 12,187,872 $ 9,596,168 Real estate - Construction 1,619,793 2,024,545 Real estate - Mortgage 122,230,995 119,563,780 Installment and other 16,580,216 16,118,656 152,618,876 147,303,149 Deduct: Allowance for loan losses 1,714,763 1,658,967 Unearned net loan fees 891,114 848,963 2,605,877 2,507,930 $150,012,999 $144,795,219
Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of commercial and mortgage loans serviced for others were $50,638,724 and $44,821,268 at December 31, 1999 and 1998, respectively. Mortgage servicing rights of $77,926 and $122,533 were capitalized in 1999 and 1998, respectively. The total recorded investment in impaired loans as determined in accordance with FASB Statements No. 114 and No. 118 approximated $717,801 and $1,102,661 at December 31, 1999 and 1998, respectively. These loans were subject to allowances for loan losses of approximately $56,372 and $30,512 which represented the total allowance for loan losses related to impaired loans at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans amounted to approximately $895,365 and $1,065,049 for the years ended December 31, 1999 and 1998, respectively. Cash receipts on impaired loans amounted to $444,327 and $173,694 in 1999 and 1998, respectively, of which $384,860 and $148,703 were applied to the principal balances of the loans. In addition, the Company had other nonaccrual loans of approximately $1,040,747 and $1,250,961 at December 31, 1999 and 1998, respectively, for which impairment had not been recognized. If interest on these loans had been recognized at the original interest rates, interest income would have increased approximately $102,900 and $91,458 for the years ended December 31, 1999 and 1998, respectively. The Company is not committed to lend additional funds to debtors with impaired, nonaccrual or modified loans. Residential real estate loans aggregating $-0- and $1,327,195 at December 31, 1999 and 1998, respectively, were pledged as collateral on deposits of municipalities. Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31 are as follows: 1999 1998 1997 Balance, beginning $1,658,967 $1,502,202 $1,401,042 Provision for loan losses 497,000 660,000 660,000 Recoveries of amounts charged off 108,004 202,057 172,523 2,263,971 2,364,259 2,233,565 Amounts charged off (549,208) (705,292) (731,363) Balance, ending $1,714,763 $1,658,967 $1,502,202
Note 5. Bank Premises and Equipment The major classes of bank premises and equipment and accumulated depreciation at December 31 are as follows:
1999 1998 Land $ 80,747 $ 80,747 Buildings and improvements 3,470,089 2,455,707 Furniture and equipment 4,832,027 4,089,860 Leasehold improvements 416,840 408,187 8,799,703 7,034,501 Less accumulated depreciation (4,477,006) (4,024,460) $4,322,697 $3,010,041
Depreciation included in occupancy and equipment expense amounted to $493,979, $384,376 and $407,238 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company occupies leased quarters at four branch office locations under operating leases expiring in various years through 2013 with options to renew. Minimum future rental payments under non-cancelable operating leases having original terms in excess of one year as of December 31, 1999, for each of the next five years and in aggregate are:
2000 $ 79,575 2001 66,110 2002 66,110 2003 66,110 2004 66,110 Subsequent to 2004 186,060 $530,075
Total rental expense amounted to $150,865, $293,784 and $293,560 for the years ended December 31, 1999, 1998 and 1997, respectively. Note 6. Other Real Estate Owned A summary of foreclosed real estate at December 31 is as follows:
1999 1998 Other real estate owned $ 686,240 $ 793,449 Less allowance for losses on OREO (251,546) (251,546) Other real estate owned, net $ 434,694 $ 541,903
Changes in the allowance for losses on OREO for the years ended December 31 were as follows:
1999 1998 1997 Balance, beginning $251,546 $302,726 $152,098 Provision for losses 19,590 26,592 173,496 Charge-offs, net (19,590) (77,772) (22,868) Balance, ending $251,546 $251,546 $302,726
Note 7. Investments Carried at Equity The Company purchased various partnership interests in limited partnerships. These partnerships were established to acquire, own and rent residential housing for low- and moderate-income Vermonters located in northeastern Vermont. The investments are accounted for under the equity method of accounting. These equity investments, which are included in other assets, are recorded at cost and adjusted for the Company's proportionate share of the partnership's undistributed earnings or losses. The carrying values of these investments were $626,194 and $301,936 at December 31, 1999 and 1998, respectively. The provision for undistributed net losses of the partnerships charged to earnings were $28,992, $74,779 and $24,000 for 1999, 1998 and 1997, respectively. Note 8. Deposits The following is a maturity distribution of time certificates of deposit at December 31, 1999: Maturing in 2000 $63,618,380 Maturing in 2001 13,433,645 Maturing in 2002 12,611,866 Maturing in 2003 1,123,545 Maturing in 2004 and thereafter 378,518 $91,165,954
A maturity distribution of time certificates of deposit in denominations of $100,000 or more at December 31, 1999, is as follows: Three months or less $ 1,678,912 Over three months through six months 5,190,612 Over six months through twelve months 3,813,892 Over twelve months 5,210,947 $15,894,363
Note 9. Borrowed Funds Borrowings from the Federal Home Loan Bank of Boston (FHLB) for the years ended December 31 were as follows:
1999 1998 Community Investment Program borrowings, fixed rate (vary 7.16% to 7.67%), payable at various maturities through November, 2012 $ 55,000 $ 60,000 FHLB term borrowing, 4.89% fixed rate, payable February 25, 2003 -0- 4,000,000 FHLB term borrowing, 5.39% fixed rate, payable November 24, 2009 4,000,000 -0- $4,055,000 $4,060,000
Principal maturities of borrowed funds as of December 31, 1999, are as follows: 2000 $ -0- 2001 -0- 2002 15,000 2003 -0- 2004 -0- Thereafter 4,040,000 $4,055,000
The Company also maintains a $4,301,000 IDEAL Way Line of Credit with the Federal Home Loan Bank of Boston. Outstanding advances under this line were $-0- at both December 31, 1999 and 1998. Interest on these borrowings is chargeable at a rate determined daily by the Federal Home Loan Bank and payable monthly. Collateral on these borrowings consists of Federal Home Loan Bank stock purchased by the Company, all funds placed in deposit with the Federal Home Loan Bank, qualified first mortgages held by the Company and any additional holdings which may be pledged as security. Note 10. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $2,623,282 and $288,241 as of December 31, 1999 and 1998, respectively. These agreements are collateralized by U. S. Treasury notes with a carrying value of $4,095,514 and $1,008,393 and a fair value of $3,967,812 and $1,012,188 at December 31, 1999 and 1998, respectively. These securities pay interest at rates between 5.75% and 6.25% and mature at varying dates in 2002. The average daily balance of this repurchase agreement approximated $1,304,828 and $93,282 during 1999 and 1998, respectively. The maximum borrowings outstanding on this agreement at any month-end reporting period of the Company was $3,000,471 and $367,459 in 1999 and 1998, respectively. These repurchase agreements mature daily. The securities underlying these agreements are held in safekeeping by the Institution. Note 11. Subordinated Debentures On September 1, 1984, the Company issued $750,000 of 11% convertible debentures due August 1, 2004. The notes are subordinated to all other indebtedness of the Company. At December 31, 1999 and 1998, $20,000 remained outstanding. These debentures are convertible prior to maturity in whole or in part, at the option of the holder, into common stock of the Company at a conversion price of $2.34 per share. The debentures are redeemable, in whole or in any part, at the option of the Company at any time after July 31, 1996, and prior to maturity, on not less than 30 days prior notice to holders. The redemption price shall be equal to the percentage set forth below: August 1, 1998 - July 31, 2000 103% August 1, 2000 - July 31, 2002 102% August 1, 2002 - July 31, 2004 101%
Note 12. Income Taxes The Company prepares its federal income tax return on a consolidated basis (see Note 1). Federal income taxes are allocated to members of the consolidated group based on taxable income. Federal income tax expense for the years ended December 31 was as follows:
1999 1998 1997 Currently paid or payable $765,413 $785,592 $717,712 Deferred 21,068 (75,246) 37,392 $786,481 $710,346 $755,104
Total income tax expense differed from the amounts computed at the statutory federal income tax rate of 34% primarily due to the following at December 31:
1999 1998 1997 Computed "expected" tax expense $1,061,085 $ 986,245 $ 986,170 Tax exempt interest (207,439) (208,713) (208,465) Disallowed interest 30,736 32,786 30,893 Partnership tax credits (109,749) (64,405) (66,300) Other 11,848 (35,567) 12,806 $ 786,481 $ 710,346 $ 755,104
The deferred income tax provision consisted of the following items for the years ended December 31:
1999 1998 1997 Depreciation $(23,241) $(16,003) $ (9,040) Loan fees 25,175 30,689 28,523 Mortgage servicing 10,579 31,465 12,389 Deferred compensation (42,985) (23,984) (22,542) Bad debts 4,566 (53,300) (34,394) Limited partnerships 47,344 42,958 16,248 Nonaccrual loan interest (11,660) (49,960) 31,490 OREO -0- 17,401 (51,214) Other 11,290 (54,512) 65,932 $ 21,068 $(75,246) $ 37,392
Listed below are the significant components of the net deferred tax asset at December 31: 1999 1998 Components of the deferred tax asset: Bad debts $ 422,316 $426,882 Unearned loan fees 77,279 102,454 Nonaccrual loan interest 135,322 123,662 OREO writedowns 85,526 85,526 Deferred compensation 117,717 74,732 Other 44,691 125 Unrealized loss on securities available-for-sale 127,286 -0- Total deferred tax asset 1,010,137 813,381 Valuation allowance -0- -0- Total deferred tax asset, net of valuation allowance 1,010,137 813,381 Components of the deferred tax liability: Depreciation 133,987 157,228 Limited partnerships 171,550 124,206 Mortgage servicing rights 74,179 63,600 Other -0- 12,307 Unrealized gain on securities available-for-sale -0- 121,254 Total deferred tax liability 379,716 478,595 Net deferred tax asset $ 630,421 $334,786
FASB Statement No. 109 allows for recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized. Net deferred tax assets are included in the caption "Other assets" on the balance sheets at December 31, 1999 and 1998, respectively. Note 13. Pension Plan The Company has a discretionary defined contribution plan covering all employees who meet certain age and service requirements. Due to the nature of the plan, defined contribution, there is no unfunded past service liability. The provisions for pension expense were $280,650, $287,788 and $240,000 for 1999, 1998 and 1997, respectively. Note 14. Financial Instruments with Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, interest rate caps and floors written on adjustable rate loans and commitments to sell loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of their interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
-Contract or Notional Amount- 1999 1998 Financial instruments whose contract amount represent credit risk: Commitments to extend credit $19,234,830 $11,593,014 Standby letters of credit and commercial letters of credit $ 316,000 $ 869,746 Credit card arrangements $ 3,268,057 $ 2,912,747
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment and income- producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company enters into a variety of interest rate contracts, including interest rate caps and floors written on adjustable rate loans in managing its interest rate exposure. Interest rate caps and floors on loans written by the Company enable customers to transfer, modify or reduce their interest rate risk. Note 15. Commitments and Contingencies In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of the Company's management, after consulting with the Company's legal counsel, any liabilities resulting from such proceedings would not have a material adverse effect on the Company's financial statements. Note 16. Transactions with Related Parties The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Aggregate loan transactions with related parties as of December 31 were as follows:
1999 1998 Balance, beginning $ 544,764 $ 906,811 New loans 292,671 448,280 Repayments (441,096) (778,182) Other, net -0- (32,145) Balance, ending $ 396,339 $ 544,764
Other loan activity consists of borrowings related to a director who has retired. Total deposits with related parties approximated $678,697 and $920,194 at December 31, 1999 and 1998, respectively. Note 17. Deferred Compensation Plans The Company has a deferred compensation and retirement program for directors and key employees of the Company. These employees and directors are general creditors of the Company with respect to these benefits. The benefits accrued under these plans aggregated $346,227 and $219,800 at December 31, 1999 and 1998, respectively. The expense associated with these deferred compensation plans was $131,426, $76,592 and $66,301 for the years ended December 31, 1999, 1998 and 1997, respectively. Note 18. Restrictions on Cash and Due from Banks The Company is required to maintain reserve balances in cash with Federal Reserve Banks. The totals of those reserve balances were approximately $1,043,000 and $992,000 at December 31, 1999 and 1998, respectively. The nature of the Bank's business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. The balance in these accounts at December 31 is as follows:
1999 1998 Non-interest-bearing accounts $ 262,578 $ 512,979 Federal Reserve Bank $6,813,899 $ 3,017,839 Federal funds sold $2,787,558 $15,527,141
No losses have been experienced in these accounts. In addition, the Company was required to maintain contracted clearing balances of $275,000 at December 31, 1999 and 1998. Note 19. Regulatory Matters The Bank (Community National Bank) is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios (000's omitted) are also presented in the table.
Minimum to be Well Capitalized Under Minimum for Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1999: Total capital (to risk-weighted assets) $22,466 20.12% $8,935 8.0% $11,168 10.0% Tier I capital (to risk-weighted assets) $21,066 18.86% $4,467 4.0% $ 6,701 6.0% Tier I capital (to average assets) $21,066 8.98% $9,382 4.0% $11,727 5.0% As of December 31, 1998: Total capital (to risk-weighted assets) $21,021 19.62% $8,570 8.0% $10,713 10.0% Tier I capital (to risk-weighted assets) $19,678 18.37% $4,285 4.0% $ 6,428 6.0% Tier I capital (to average assets) $19,678 8.72% $9,028 4.0% $11,286 5.0%
The Bank is restricted as to the amount of dividends which can be paid. Dividends declared by national banks that exceed net income for the current and preceding two years must be approved by the OCC. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. Note 20. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows:
December 31, 1999 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 12,716,144 $ 12,716,144 Securities held-to-maturity 29,887,821 29,502,766 Securities available-for-sale 28,982,188 28,982,188 Restricted equity securities 1,141,650 1,141,650 Loans and loans held-for-sale, net 150,673,422 150,174,039 Accrued interest receivable 1,484,192 1,484,192 Financial liabilities: Deposits 201,842,880 202,091,623 Repurchase agreements 2,623,282 2,623,282 Borrowed funds 4,075,000 3,754,291 Accrued interest payable 286,757 286,757 December 31, 1998 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 20,424,088 $ 20,424,088 Securities held-to-maturity 29,877,851 30,038,323 Securities available-for-sale 20,590,000 20,590,000 Restricted equity securities 1,141,650 1,141,650 Loans and loans held-for-sale, net 145,827,416 147,709,582 Accrued interest receivable 1,460,671 1,460,671 Financial liabilities: Deposits 197,797,294 198,544,164 Repurchase agreements 288,241 288,241 Borrowed funds 4,080,000 3,967,755 Accrued interest payable 325,122 325,122
The estimated fair values of deferred fees on commitments to extend credit and letters of credit were immaterial at December 31, 1999 and 1998. The carrying amounts in the preceding table are included in the balance sheet under the applicable captions, except for long-term debt, which consists of borrowed funds and subordinated debentures. Note 21. Acquisition On December 31, 1997, the Company purchased 100% of the stock of Liberty Savings Bank, a New Hampshire guaranty savings bank, for $1,746,538. The assets of the Bank, principally a U. S. government security, have been included in the consolidated financial statements. The excess of the purchase price over the assets of the Bank is being amortized on a straight-line basis over 15 years. Unamortized goodwill amounted to $296,972 and $319,817 as of December 31, 1999 and 1998, respectively, and is included in "Other Assets" on the balance sheet. Amortization expense was $22,845 for the years ended December 31, 1999 and 1998, respectively. Liberty Savings Bank does not currently maintain any branches and does not have authority to take bank deposits. The Company is planning to acquire full deposit taking capabilities for Liberty Savings Bank. Note 22. Condensed Financial Information (Parent Company Only) The following financial statements are for Community Bancorp. (Parent Company Only), and should be read in conjunction with the consolidated financial statements of Community Bancorp. and Subsidiaries. Community Bancorp. (Parent Company Only) Condensed Balance Sheets
December 31, Assets 1999 1998 Cash $ 55,122 $ 276,634 Investment in subsidiary - Community National Bank 20,840,821 19,932,481 Investment in subsidiary - Liberty Savings Bank 1,825,340 1,789,822 Other assets 17,599 23,489 Total assets $22,738,882 $22,022,426 Liabilities and stockholders' equity Liabilities Other liabilities $ 367 $ 367 Dividends payable 537,361 -0- Subordinated convertible debentures 20,000 20,000 Total liabilities 557,728 20,367 Stockholders' equity Common stock, $2.50 par value: 6,000,000 shares authorized, 3,388,394 shares issued at 12/31/99, and 3,140,606 shares issued at 12/31/98 8,470,985 7,851,516 Additional paid-in capital 10,942,510 8,756,453 Retained earnings (Note 19) 3,462,966 5,604,096 Accumulated other comprehensive (loss) income (247,086) 235,375 Less treasury stock, at cost (1999: 29,887 shares; 1998: 29,646 shares) (448,221) (445,381) Total stockholders' equity 22,181,154 22,002,059 Total liabilities and stockholders' equity $22,738,882 $22,022,426
The investment in the subsidiary banks is carried under the equity method of accounting. The investment and cash, which is on deposit with the Bank, has been eliminated in consolidation. Community Bancorp. (Parent Company Only) Condensed Statements of Income
1999 1998 1997 Revenues Dividends Bank subsidiaries $ 942,200 $ 903,000 $ 2,913,800 Total revenues 942,200 903,000 2,913,800 Expenses Interest on long-term debt 2,200 4,597 11,489 Administrative and other 49,560 64,490 24,000 Total expenses 51,760 69,087 35,489 Income before applicable income tax and equity in undistributed net income of subsidiaries 890,440 833,913 2,878,311 Applicable income tax (benefit) (17,599) (23,489) (12,066) Income before equity in undistributed net income of subsidiaries 908,039 857,402 2,890,377 Equity (deficit) in undistributed net income - subsidiaries 1,426,319 1,332,972 (744,982) Net income $ 2,334,358 $ 2,190,374 $ 2,145,395
Community Bancorp. (Parent Company Only) Condensed Statements of Cash Flows Cash flows from operating activities Net income $ 2,334,358 $ 2,190,374 $ 2,145,395 Adjustments to reconcile net income to net cash provided by operating activities (Equity) deficit in undistributed net income of subsidiaries (1,426,319) (1,332,972) 744,982 Decrease (increase) in income taxes receivable 5,890 (11,423) 2,673 Decrease in other liabilities -0- (1,283) (1,114) Net cash provided by operating activities 913,929 844,696 2,891,936 Cash flows from investing activities Purchase of stock in subsidiary - Liberty Savings Bank -0- -0- (1,746,538) Net cash used for investing activities -0- -0- (1,746,538) Cash flows from financing activities Purchase of treasury stock (2,840) (244) (4,925) Dividends paid (1,132,601) (954,095) (863,214) Net cash used for financing activities (1,135,441) (954,339) (868,139) Net (decrease) increase in cash (221,512) (109,643) 277,259 Cash Beginning 276,634 386,277 109,018 Ending $ 55,122 $ 276,634 $ 386,277 Supplemental schedule of cash paid (received) during the year Interest $ 2,200 $ 5,880 $ 12,602 Income taxes $ (23,489) $ (12,066)$ (14,739) Supplemental schedule of noncash investing and financing activities Unrealized (loss) gain on securities available-for-sale $ (731,001) $ 305,555 $ 39,009 Debentures converted to common stock $ -0- $ 84,000 $ 66,000 Stock dividends $ 1,851,338 $ 3,823,575 $ 1,294,006 Dividends paid Dividends declared $ 2,624,151 $ 1,833,146 $ 1,652,355 Increase in dividends payable (537,361) -0- -0- Dividends reinvested (954,188) (879,051) (789,141) $ 1,132,602 $ 954,095 $ 863,214
Note 23. Quarterly Financial Data (Unaudited) A summary of financial data for the four quarters of 1999, 1998 and 1997 is presented below: Community Bancorp. and Subsidiaries
Quarters in 1999 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,050,380 $4,203,280 $4,247,655 $4,221,476 Interest expense 1,872,028 1,889,484 1,897,260 1,875,768 Provision for loan losses 150,000 150,000 115,000 82,000 Securities gains (loss) -0- -0- -0- -0- Other operating expenses 1,847,475 1,828,715 1,826,272 1,827,313 Net income 410,797 566,489 603,906 753,166 Earnings per common share $.13 $.17 $.18 $.23 Quarters in 1998 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,224,450 $4,207,422 $4,324,448 $4,315,390 Interest expense 1,990,049 2,053,030 2,044,945 1,988,598 Provision for loan losses 200,000 160,000 150,000 150,000 Securities gains (loss) -0- -0- -0- -0- Other operating expenses 1,809,612 1,761,241 1,767,714 1,730,183 Net income 407,679 557,942 562,139 662,614 Earnings per common share $.13 $.17 $.17 $.21 Quarters in 1997 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,040,469 $4,171,803 $4,252,823 $4,352,499 Interest expense 1,897,836 1,923,757 1,998,488 2,014,082 Provision for loan losses 205,000 105,000 215,000 135,000 Securities gains (loss) -0- -0- -0- -0- Other operating expenses 1,529,237 1,684,904 1,815,027 1,761,195 Net income 520,088 611,639 451,169 562,499 Earnings per common share $.17 $.20 $.14 $.18
Note 24. Other Income and Other Expenses The components of other income and other expenses which are in excess of 1% of total revenues in any of the three years disclosed are as follows:
1999 1998 1997 Income Other $ 808,014 $ 771,947 $ 553,027 Expenses Printing and supplies $ 204,707 $ 198,008 $ 225,318 State deposit tax 230,000 205,354 145,000 Other 1,979,208 1,874,609 1,703,118 $2,413,915 $2,277,971 $2,073,436
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS For the Year Ended December 31, 1999 Community Bancorp. is a holding company whose subsidiaries include Community National Bank ("The Bank") and Liberty Savings Bank ("Liberty"). Community National Bank is a full service institution operating in the state of Vermont, with seven branch offices located throughout three counties in northern Vermont. Liberty Savings Bank is a New Hampshire guaranty savings bank acquired by Community Bancorp. on December 31, 1997. Acquired were the assets; primarily a U.S. Treasury Strip with a fair value of approximately $1.4 million, and all of the outstanding stock of Liberty Savings Bank. Presently, since no building was involved in the transaction, the address for Liberty Savings Bank is C/O Community Bancorp., Derby, Vermont. The future goal of Community Bancorp. is to operate Liberty as a lending facility primarily serving the north country of New Hampshire. Management is working closely with the Board of Directors to find a suitable location for this endeavor. Once an ideal location is found, the goal of expanding the operations of Community Bancorp. and subsidiaries, ("The Company"), to include the northern portion of the state of New Hampshire will be achieved. As mentioned above, this transaction occurred on December 31, 1997, resulting in no business activity for the 1997 fiscal year, and moderate income for the 1998 and 1999 fiscal years. With that in mind, the following discussion refers primarily to the operations of the Bank, with consolidated balance sheets and income statement figures for the Company. FINANCIAL SUMMARY The calendar year of 1999 ended with a 6.6% increase over the calendar year of 1998, and an 8.8% increase over the calendar year of 1997. Total earnings of $2.33 million were reported for 1999 compared to $2.19 million in 1998, and $2.15 million for 1997. The results of these figures are earnings per share of $0.71, $0.68, and $0.69, respectively. A cash dividend of $0.16 per share was paid in each of the four quarters of 1999 with the most recent paid on November 1, 1999 to shareholders of record as of October 15, 1999. This dividend of $0.16 per share is a 6% increase over the cash dividends paid in 1998. A 5% stock dividend was declared in 1999, payable on February 1, 1999 to shareholders of record as of the same date. In 1998, a two for one stock split was announced on March 13, 1998, payable on June 1, 1998, to shareholders of record as of May 15, 1998. This was accomplished through a 100% stock dividend. In order for this to occur, the Company's shareholders needed to approve a proposal to increase the number of shares the Company may issue. This was voted on and approved at the annual shareholders meeting held on May 5, 1998. As a result of both of these stock dividends, per share data for all comparison periods have been restated to reflect the applicable dividend. CHANGES IN FINANCIAL CONDITION The financial condition of the Company should be examined in light of its sources and uses of funds. The table entitled "Average Balances and Interest Rates" is a comparison of daily average balances and is indicative of how sources and uses of funds have been managed. The average volume of earning assets grew from $197.3 million at the end of 1997, to $209.2 million at December 31, 1998, and then increased to $217.6 million as of December 31, 1999. The results are an increase of $11.9 million from 1997 to 1998 and an increase of $8.4 million from 1998 to 1999. The average volume of loans grew from $145.8 million at year-end 1997 to $147.8 million at year-end 1998, and then decreased to $147.1 million at year-end 1999. This translates into an increase of $2.1 million or 1.4% for 1997 versus 1998, and a decrease of $702 thousand or just under .50% for 1998 versus 1999. Taxable investment securities increased to $38.8 million as of December 31, 1998, and further increased to end 1999 at an average volume of $49.8 million, resulting in an increase of $3.14 million or 8.8% and $11.05 million or 28.5%, respectively. Tax-exempt securities started at $12.2 million at year-end 1997 and then increased to $13.1 million as of December 31, 1998, with an additional increase reported in 1999, ending the year at an average volume of $13.8 million. Federal funds sold started the comparison period at $2.6 million as of December 31, 1997, increasing $2.35 million to a volume of $4.9 million as of December 31, 1998, and then decreased to an average volume of $2.9 million, or just over $2 million as of December 31, 1999. The Bank- Boston sweep account, established during the first half of 1998, reported an average volume of $3.34 million as of the end of 1998 compared to an average volume of $2.6 million for the 1999 comparison period. The average volume of other securities ended the 1997 comparison period at $1.17 million increasing 8.7% to $1.27 million as of the end of the 1998 fiscal year, and then decreased 1.3% to end at an average volume of $1.25 million as of December 31, 1999. Average interest-bearing liabilities began the comparison period at an average volume of $170.2 million for 1997, increasing to $178.14 million as of the end of 1998, and then increased to an average volume of $184.7 million as of December 31, 1999. A review of the areas that comprise this total shows a decrease then an increase in savings deposits. These funds started at $31.9 million at year-end 1997, decreased 3.34% to an average volume of $30.8 million, and then increased 6.2% to close the 1999 calendar year at an average volume of $32.7 million. NOW and money market funds set a different trend by starting year-end 1997 at an average volume of $39.3 million, increasing to $44.9 million or by 14.2% as of year-end 1998, further increasing by 15.4% to $51.9 million as of year-end 1999. Subordinated debentures reported a steady decrease starting at an average volume of $107 thousand as of year-end 1997, decreasing 55% to an average volume of $48 thousand as of year-end 1998 and then decreasing 58% to end the 1999 year at an average volume of $20 thousand. Time deposits set it's own course be- ginning at an average volume of $94.8 million, increasing to $98.2 million or by 3.6% for the 1998 comparison period, and then decreasing to $94.7 million or by 3.6% as of December 31, 1999. Repurchase agreements have proved to be very popular for our business customers, reporting an average volume of $1.3 million as of December 31, 1999 compared to $93 thousand a year ago. Other borrowed funds noted minimal decreases for each comparison period to end 1999 at an average volume of approximately $4.1 million. The average volume of subordinated debentures has been steadily decreasing as noted over the last three years. The 9% debentures were all converted as of December 31, 1998, and the redemption period for the 11% debentures is in the second phase with a price of 103%, translating into 427.85 shares of Community Bancorp. stock for each debenture redeemed. The redemption price decreases 1% every two years beginning July 31, 1998, with a maturity date of July 31, 2004. Actual debentures outstanding of $20,000 were reported for December 31, 1998 and 1999. 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 decreased from $17.9 million at the end of 1998 to $15.9 million at the end of 1999, a decrease of approximately $2 million or 11.1%. Other time deposits decreased from $77.7 million to $75.3 million for the same time period, a decrease of 3.2%. A review of these deposits indicates that changes are generated locally and regionally by established customers of the Company. The Company has no brokered deposits. Savings deposits increased to $32.9 million at December 31, 1999 from $30.5 million at the end of December 1998, an increase of $2.3 million or 7.7%. NOW and money market funds followed closely with an increase of $2.2 million or 4.3% to end the '99 calendar year at $52 million. Unfavorable rates on time deposits generated a stronger demand for other interest-bearing accounts as customers wait for higher yields before investing in long-term deposit accounts. Our gross loan portfolio increased $4.9 million or by 3.3% to end the 1999 calendar year at $153.3 million compared to $148.3 million a year ago. More fixed rate "in-house" loans were generated this year in an effort to increase our loan portfolio. Of this total loan portfolio of $153.3 million, $74.5 million, or 49% is scheduled to reprice or mature within one year. Federal funds sold and overnight deposits decreased dramatically from December 31, 1998 to end at a balance of $2.8 million as of December 31, 1999. An increase of $8.4 million in the Company's investment portfolio made up the decrease in these overnight funds. As of year-end 1999, the Company held in it's investment portfolio treasuries classified as "Available for Sale" with a fair value of almost $29 million compared to almost $21 million a year ago. The Company also carried investments classified as "Held to Maturity" with a book value of almost $30 million, which is comparable to the balances as of December 31, 1998. Both of these types of investments mature at monthly intervals as shown on the gap report enclosed in this discussion. Securities classified as "Restricted Equity Securities" are made up of equity securities the Company is required to maintain in the form of Federal Home Loan Bank of Boston (FHLB) and Federal Reserve Bank stock. These securities remain at a balance totaling $1.14 million as of December 31, 1999. The Company has two credit lines with available balances totaling $6.1 million and additional borrowing capacity of approximately $106 million through the Federal Home Loan Bank of Boston, which is secured by the Company's qualifying 1-4 family residential loan portfolio. As of December 31, 1999, the Company has an advance of just over $4 million against the $105 million line at the Federal Home Loan Bank of Boston. Credit Risk - Management believes that the policies and procedures established for the underwriting of its loan portfolio are both accurate and up-to-date helping to alleviate many of the problems that could exist within the portfolio in a changing environment. Loans are typically reviewed on a loan-by-loan basis with more emphasis placed on larger loans and loans that have the potential for a higher level of risk. These measures also help to ensure the adequacy of the allowance. The Executive Officers and Board of Directors perform periodic reviews of the loan portfolio. Among the topics discussed during their review are potential exposures that exist within the loan portfolio. Factors considered include, but are not limited to, historical loss ratios, each borrower's financial condition, the industry or sector of the economy in which the borrower operates, and overall economic conditions. Existing or potential problems are noted and reviewed by senior management to ensure that adequate loan-to-value ratios exist to help cover any cost associated with these loans. The Company employs both a full-time loan review and credit administration officer staffed with a department whose duties include, but are not limited to, a review of the loan portfolio including delinquent and non-accrual loans. Also on staff are personnel whose primary duties are to monitor non-performing loans. Included in the duties of this department are the tracking of payments by delinquent loan customers, and management of the Company's OREO portfolio. A quick review of the OREO portfolio shows positive results since the establishment of this department. Results from both departments mentioned are reported to senior management for further review and additional action if necessary. Specific allocations are made in situations management feels are at a greater risk for loss. A quarterly review of certain qualitative factors, which include "Levels of, and Trends in, Delinquencies and Non-Accruals" and "National and Local Economic Trends and Conditions", helps to ensure that areas with potential risk are noted and coverage adjusted to reflect current trends in delinquencies and non-accruals. First mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio helping to alleviate overall risk. Allowance for Loan Losses and Provisions - The valuation allowance for loan losses as of December 31, 1999 of $1.7 million constitutes one percent of the total loan portfolio compared to $1.66 million or just over one percent a year ago. In management's opinion, this is both adequate and reasonable in view of the fact that $124.5 million of the total loan portfolio, or 81.2% consists of real estate mortgage loans, compared to $122.6 million or 82.7%, as of December 31, 1998. Of this total for 1999 $98.4 million or 64.2% are loans secured by 1-4 family residences. This volume of home loans, together with the low historic loan loss experience, helps to support our basis for loan loss coverage. Additionally, in management's opinion, a loan portfolio consisting of 81.2% in residential and commercial real estate secured mortgage loans is more stable and less vulnerable than a portfolio with a higher concentration of unsecured commercial and industrial loans or personal loans. A comparison of non-performing assets for 1999 and 1998 reveals an overall decrease of $313,074 or 9.5% from a figure of $3.3 million to $3 million. Decreases of 19.78% and 25.28%, respectively, are noted in the Company's OREO portfolio and non-accruing loan portfolio, while an increase of almost 100% is recognized in loans 90 days or more past due and still accruing. This portfolio increased from $401,301 as of December 31, 1998 to $790,510 as of December 31, 1999. Of the total non-accrual loan portfolio of $1.8 million, approximately $1.6 million, or 93%, are real estate secured mortgage loans on which the Company has suffered relatively few losses. The portfolio of Other Real Estate Owned (OREO) decreased from a figure of $541,903 as of year-end 1998 to $434,694 for the same period in 1999. Non-performing assets as of December 31, 1999 and 1998 were made up of the following:
1999 1998 Non-accruing loans $1,758,549 $2,353,623 Loans past due 90 days or more and still accruing 790,510 401,301 Other real estate owned 434,694 541,903 Total $2,983,753 $3,296,827
Management continues to monitor the allowance for loan and lease losses very carefully and maintains the reserve at a level of approximately one percent of total eligible loans. The Northeast Kingdom is known for being on the lower end of the economic scale, and as such suffers greatly in times of economic uncertainty. In view of this, the Company will always maintain its conservative approach to the review process for reserve requirements and adjust accordingly for any changes. Other Real Estate Owned consists of properties that the Company has acquired in lieu of foreclosure or through normal foreclosure proceedings. The policy of the Company is to value property in other real estate owned at the lesser of appraised value or book value. An appraisal is necessary to determine the value of the property. If the book value of the property is less than the appraised value, a "write-down" is necessary to bring the loan balance to a level equal to the appraised value prior to including it in OREO. Any such write-down is charged to the reserve for loan losses. Once the property is in OREO, any additional write-downs are charged to earnings. Our current portfolio of Other Real Estate Owned consists of $109,083 in properties deeded in lieu with the remaining $325,611 acquired through the normal foreclosure process. All properties are located in Vermont, and are as follows: land in Jay; two commercial condominium units in Newport; one commercial building in Newport; a single family residence in the towns of Averill, Irasburg, Jay, East Burke and one in the city of Newport. The Company is actively attempting to sell all of these properties, and expects no material loss on any of them. Other Real Estate Owned is by definition a non-earning asset, and as such does have a negative impact on the Company's earnings. 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 December 31, 1999, and December 31, 1998. 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 ANALYSYS Community Bancorp. & Subsidiaries December 31, 1999 Cumulative 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 Years Years Total Interest-sensitive assets: Federal funds sold 600 0 0 0 0 600 Overnight deposits 2,188 0 0 0 0 2,188 Investments Available for Sale(1) 0 9,993 18,989 0 0 28,982 Held to Maturity 3,057 6,680 14,910 1,426 3,814 29,887 Restricted equity Securities 0 0 0 0 1,142 1,142 Loans(2) 23,254 51,250 41,673 8,317 27,027 151,521 Total interest-sensitive assets 29,099 67,923 75,572 9,743 31,983 214,320 Interest-sensitive liabilities: Certificates of deposit 13,405 65,237 11,072 1,452 0 91,166 Money markets 32,299 0 0 0 0 32,299 Regular savings 0 2,854 0 0 30,000 32,854 NOW accounts 0 0 0 0 19,796 19,796 Borrowed funds 0 0 15 0 4,040 4,055 Repurchase agreements 2,623 0 0 0 0 2,623 Subordinated debentures 0 0 0 20 0 20 Total interest-sensitive liabilities 48,327 68,091 11,087 1,472 53,836 182,813 Net interest rate sensitivity gap (19,228) (168) 64,485 8,271 (21,853) Cumulative net interest rate sensitivity gap (19,228) (19,396) 45,089 53,360 31,507 Cumulative net interest rate sensitivity gap as a percentage of total assets -8.28% -8.35% 19.42% 22.98% 13.57% Cumulative interest rate sensitivity gap as a percentage of total interest-earning assets -8.97% -9.05% 21.04% 24.90% 14.70% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities 60.21% 83.34% 135.36% 141.37% 117.23% The Company may sell investments available for sale with a fair value of $28,982,188 at any time. Loan totals exclude non-accruing loans amounting to $1,758,549.
GAP ANALYSYS Community Bancorp. & Subsidiaries December 31, 1998 Cumulative 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 Years Years Total Interest-sensitive assets: Federal funds sold 7,025 0 0 0 0 7,025 Overnight deposits 8,502 0 0 0 0 8,502 Investments Available for Sale(1) 0 0 19,546 1,044 0 20,590 Held to Maturity 5,860 15,246 5,549 1,482 1,741 29,878 Restricted equity Securities 0 0 0 0 1,142 1,142 Loans(2) 22,240 56,570 46,12 6,146 14,901 145,981 Total interest-sensitive assets 43,627 71,816 71,219 8,672 17,784 213,118 Interest-sensitive liabilities: Certificates of deposit 18,044 62,790 13,486 1,283 0 95,603 Money markets 30,817 0 0 0 0 30,817 Regular savings 0 2,512 0 0 28,000 30,512 NOW accounts 0 0 0 0 19,122 19,122 Borrowed funds 4,000 5 0 15 40 4,060 Repurchase agreements 288 0 0 0 0 288 Subordinated debentures 0 0 0 0 20 20 Total interest-sensitive Liabilities 53,149 65,307 13,486 1,298 47,182 180,422 Net interest rate sensitivity gap (9,522) 6,509 57,733 7,374 (29,398) Cumulative net interest rate sensitivity gap (9,522) 3,013 54,720 62,094 32,696 Cumulative net interest rate sensitivity gap as a percentage of total assets -4.23% -1.34% 24.31% 27.59% 14.53% Cumulative interest Sensitivity gap as a percentage of total interest-earning asset s -4.47% -1.41% 25.68% 29.14% 15.34% Cumulative interest- earning assets as a percentage of cumulative interest-bearing liabilities 82.08% 97.46% 141.47% 146.60% 118.12% The Company may sell investments available for sale with a fair value of $20,590,000 at any time. Loan totals exclude non-accruing loans amounting to $2,353,623.
INVESTMENT SECURITIES The adoption of FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities", has had an impact on our investment portfolio. This new accounting standard, effective for 1994 statements, requires banks to recognize all appreciation or depreciation of the investment portfolio either on the balance sheet or through the income statement even though a gain or loss had not been realized. These changes require securities classified as "trading securities" to be marked to market with any gain or loss charged to income. Securities classified as "available-for-sale" are marked to market with any gain or loss after taxes charged to the equity portion of the balance sheet. Securities classified as "held-to-maturity" are to be held at book value. The Company does not own any trading securities as our investment policy prohibits active trading in our investment account. The Company had $1.14 million in equity securities classified as available-for-sale for both the 1999 and 1998 comparison periods. In addition, at December 31, 1999, the Company had almost $30 million in U.S. Government securities classified as available-for- sale, compared to $20.6 million at December 31, 1998. These securities have been marked to market, with a resulting unrealized loss after taxes of $247,086 for 1999 compared to an unrealized gain of $235,375 for 1998. These figures are presented in the equity section of our financial statement as "accumulated other comprehensive income". As adjusted for this item, our investment portfolios at the respective years' ends were as follows:
December 31, 1999: Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government & agency securities Available-for-sale $29,356,560 $ 7,065 $381,437 $28,982,188 Held-to-maturity(1) 17,777,541 4,108 389,163 17,392,486 States & political subdivisions Held-to-Maturity 12,110,280 0 0 12,110,280 Restricted equity securities Available-for-Sale 1,141,650 0 0 1,141,650 $60,386,031 $ 11,173 $770,600 $59,626,604 December 31, 1998: Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government & agency securities Available-for-sale $20,233,371 $357,237 $608 $20,590,000 Held-to-maturity 20,143,530 160,472 0 20,304,002 States & political subdivisions Held-to-maturity 9,734,321 0 0 9,734,321 Restricted equity securities Available-for-sale 1,141,650 0 0 1,141,650 $51,252,872 $517,709 $608 $51,769,973 Included in this portfolio is the U.S. Treasury Strip for Liberty Savings Bank with an amortized cost of $1,569,196 and fair value of $1,546,319 as of December 31, 1999; and an amortized cost of $1,480,767 and a fair value of $1,519,752 as of December 31, 1998.
Gross realized gains and gross realized losses on actual sales of securities were:
Gross realized gains: 1999 1998 1997 U.S. Government & agency securities $ 0 $ 0 $ 0 Other Securities 0 0 0 $ 0 $ 0 $ 0 Gross realized losses: 1999 1998 1997 U.S. Government & agency securities $ 0 $ 0 $ 0 Other Securities 0 0 0 $ 0 $ 0 $ 0
BANK PREMISES AND EQUIPMENT Major classes of bank premises and equipment and the total accumulated depreciation are as follows:
December 31, 1999 1998 Land $ 80,747 $ 80,747 Buildings and improvements 3,470,089 2,455,707 Furniture and equipment 4,832,027 4,089,860 Leasehold improvements 416,840 408,187 8,799,703 7,034,501 Less accumulated depreciation (4,477,006) (4,024,460) $4,322,697 $3,010,041
Depreciation included in occupancy and equipment expense amounted to $493,979, $384,376, and $407,238 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company currently leases four of the seven offices it occupies. These leased offices are in Island Pond, Newport, Barton, and St. Johnsbury, Vermont. During the first part of 1999, the Company moved it's Newport office to a condominium space of approximately 3,084 square feet in the new state office building at the opposite end of Main Street from the Company's former office. The operating leases for the three other locations expire in various years through 2013 with options to renew. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year, as of December 31, 1999, for each of the next five years and in aggregate are:
2000 $79,575 2001 66,110 2002 66,110 2003 66,110 2004 66,110 Subsequent to 2004 186,060 Total $530,075
EFFECTS OF INFLATION Rates of inflation effect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements because, as costs and prices rise, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Company's ability to preserve its purchasing power depends primarily on its ability to manage net interest income. The Company's net interest income improved slightly during 1999, in light of the fact that the spread decreased from 1998 to 1999. An increase is noted in the volume of loans, the biggest source of interest income, and a decrease is noted in the volume of time deposits, which accounts for the biggest source of interest expense. INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME) Net interest income represents the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e. other borrowings). Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and from changes in the yield earned and costs paid (rate). The table labeled "Average Balances and Interest Rates" provides the visual analysis for the comparison of interest income versus interest expense. These figures, which include earnings on tax-exempt investment securities, are stated on a tax equivalent basis with an assumed rate of 34%. Net interest income was $9.3 million, $9.31 million and $9.5 million, respectively for the years ended 1997, 1998 and 1999. Net interest spread, the difference between the yield on interest earning assets versus interest bearing liabilities, at the end of 1999 was 3.75% versus 3.78% for 1998 and 4.08% for 1997. Interest differential, defined as net interest income divided by average earning assets, for the years ended 1999, 1998 and 1997, was reported at 4.37%, 4.45%, and 4.71% respectively. Interest income rose from $17.13 million at the end of 1997, to $17.39 million for 1998, and then decreased to $17.04 million for the year ended 1999, an increase of 1.5% and a decrease of 2%, respectively. Interest expense rose from $7.8 million at the end of 1997 to $8.1 million as of year-end 1998, and then decreased to $7.5 million as of December 31, 1999. This translates to an increase of 3.1% for 1997 versus 1998 and a decrease of 6.7% for 1998 versus 1999. Income from loans for the year was $13.9 million for 1997, $13.8 million for 1998, and $13.04 million for 1999, resulting in yields of 9.51%, 9.31%, and 8.86%, respectively. The income on taxable investments went from $2.12 million for 1997 to $2.2 million for 1998, and then increased to $2.7 million at year-end 1999. The respective yields on these investments are 5.94% for 1997, 5.66% for 1998, and 5.45% for 1999. The income on tax-exempt securities took a different course for the same comparison periods, revealing a tax equivalent interest income figure for the twelve months of 1997 of $929 thousand versus $930 thousand for the twelve months of 1998, and $924 thousand for the same period in 1999. The tax- equivalent yield for these investments started at 7.65% at the end of 1997, and decreased 53 basis points to 7.12% for 1998, and then decreased 45 basis points to a 1999 year-end yield of 6.67%. The income on other securities increased from $79 thousand for 1997, to $82 thousand for 1998, and then increased to $85 thousand for 1999, with average yields reported at 6.76%, 6.46%, and 6.78%, respectively. Interest income for federal funds sold was reported at $140 thousand with a yield of 5.42% for the twelve-month comparison period of 1997, compared to income of $237 thousand with a yield of 4.81% for 1998, and income of $143 thousand yielding 4.94% for the same period of 1999. Interest income on overnight deposits of $185 thousand yielding 5.54% was reported for the twelve months of 1998 compared to $133 thousand yielding 5.04% for the twelve months of 1999. Interest expense associated with total interest bearing liabilities began the year-end comparison periods at $7.8 million for 1997, increased to $8.1 million for 1998, and ended 1999 at a figure of $7.5 million, with average yields of 4.60%, 4.53%, and 4.08%, respectively. Interest expense associated with our savings accounts decreased for each comparison year starting at $877 thousand as of year-end 1997, decreasing $70 thousand or 8.0% to a 1998 year-end expense figure of $807 thousand, and then decreasing $51 thousand or 6.3% to end 1999 at a figure of $756 thousand. The average yield decreased accordingly throughout the three year-end comparison periods to end at 2.31% as of December 31, 1999. Interest expense on NOW and money market funds began the comparison period at $1.4 million as of year-end 1997 increasing 12% to end 1998 at $1.6 million, and then increased 5.8% to end 1999 at a reported expense figure of $1.7 million. The average yield started the comparison period at a rate of 3.55% as of December 31, 1997, then decreased seven basis points to a rate of 3.48% as of December 31, 1998, and then decreased 29 basis points to end at 3.19% as of December 31, 1999. Interest expense on time deposits reported a year-end 1997 expense figure of $5.3 million, increasing $192 thousand or 3.6% to a year-end 1998 expense figure of $5.5 million, then decreasing by $631 thousand or 11.5% to a reported expense figure of $4.9 million as of year-end 1999. The average yield on these funds tracked its own course, reporting 5.60% for both 1997 and 1998 with a decrease of 46 basis points to end the 1999 fiscal year at an average yield of 5.14%. Interest expense for other borrowed funds began the year-end comparison periods at a figure of $245 thousand for year-end 1997, decreasing $47 thousand to end the 1998 fiscal year at $198 thousand, and then increased to $203 thousand or by 2.5% as of year-end 1999. The average yields followed accordingly from 6.03% to 4.88%, and then to 5.00%, respectively, for December 31, 1997, 1998, and 1999. Repurchase agreements reported an increase in interest expense with figures Of $4 thousand for 1998, increasing $48 thousand to end 1999 at a total expense figure of $52 thousand, with respective yields of 4.30% and 3.98%. As the volume of subordinated debentures decreases, so does the associated expense. Interest expense of $11 thousand, $5 thousand and $2 thousand was noted for the 12 months ended 1997, 1998, and 1999, respectively, which transforms into a decrease of 54.6% and 56%, respectively. The results are average yields of 10.28% for 1997, 10.42% for 1998, and 11% for 1999. OTHER OPERATING INCOME AND EXPENSES Other operating income for the fourth quarter was reported at $531,185 for 1999, $441,652 for 1998, and $355,844 for 1997. Other income reports the biggest increase for both comparison periods with income of $267,459 for 1999 versus $191,848 for 1998 and $146,886 for 1997, an increase of $75,611 or 39.4% for 1999 versus 1998 and an increase of $44,962 or 30.6% for 1998 versus 1997. A gain of $108,605 on the sale of an OREO property helped to boost other income for the fourth quarter of 1999 compared to 1998. Income from sold loans, a component of other income, reported income of $34,813 for the fourth quarter of 1998 versus income of $1,879 for the same period in 1997, clearly supporting the total increase for that quarter. Additionally, trust department income increased $42,860 for the fourth quarter of 1998 versus 1997 further supporting the total increase from 1997 to 1998. The portfolio of trust account customers increased dramatically during 1998, helping to increase the income associated with this department. Other operating income for the 12 months of 1999 reported at $1.8 million is an increase of 7.7% over the 1998 figure of $1.6 million, which is an increase of almost 20% over the 1997 figure of $1.4 million. Trust department income reported the biggest increase for 1999 versus 1998 at $61,124 or 32.9% ending 1999 with total income of $247,001 compared to $185,877. Other income again reported the biggest increase for 1998 versus 1997, to end 1998 at a figure of $771,947, an increase of $218,920, or almost 40% over the 1997 figure of $553,027. The trust department continued to grow throughout 1999 generating favorable income for the Company. Income from sold loans again contributed to the overall increase in other income with reported income for the 1998 year of $153,699, compared to income of $19,580 for 1997. Other operating expenses for the fourth quarter of 1999 was reported at $1.83 million, resulting in an increase of 5.6% over the 1998 fourth quarter figure of $1.73 million, which decreased almost 2% compared to the 1997 fourth quarter figure of $1.76 million. Occupancy expense accounts for the biggest increase for 1999 versus 1998, with a reported figure of $360,385 compared to $282,403, respectively. The expense for furniture and equipment was greater this year than anticipated, resulting in an increase in depreciation on these assets. Pension and other employee benefits accounts for the biggest increase for 1998 versus 1997 created by additional funds that were needed to cover a shortfall for the 1997 fiscal year. Other expenses for the fourth quarter ended 1997 were greater than the same period in 1998 and 1999 by $56,808 and $59,222, respectively. OREO expenses, a component of other expenses, showed expenses totaling $95,753 for the fourth quarter of 1997 compared to $27,937 for 1998 and $39,003 for 1999. An auction was held during the last quarter of 1997 in an attempt to decrease our OREO portfolio. Most of the properties that sold did so at a loss, increasing overall expenses associated with these properties. Additionally, a substantial write-down was taken in 1997 on a property the Company has held for several years. Total other operating expenses ended the 1999 fiscal year at $7.33 million, an increase of $261,026 or 3.7% over the 1998 fiscal year of $7.07 million. The 1998 fiscal year total of $7.07 million is an increase of $278,387 or 4.1% over the 1997 fiscal year figure of $6.8 million. Other expenses tallied the biggest increase for both 1999 versus 1998 and 1998 versus 1997 with increases of $135,944 and $204,535, respectively. Expenses associated with our ATMs increased $42,879 contributing to the increase in other expenses for the 1999 fiscal year. Loss on limited partnership, a component of other expense, reported an expense figure of $74,779 for the fiscal year 1998 compared to $24,000 for 1997. This increase is the result of a change in the way the loss for this partnership is booked from year to year. Many of the components of other operating expenses are estimated on a yearly basis and accrued in monthly installments. In an attempt to present accurate figures on the statement of income for any interim period, these expenses are reviewed quarterly by senior management to ensure that monthly accruals are accurate, and any necessary adjustments are made at that time. APPLICABLE INCOME TAXES Income before taxes of $967,578 are reported for the fourth quarter of 1999 compared to $888,262for the fourth quarter of 1998, and $798,066 for the same period in 1997, translating to increases of $79,316 or 8.9% for 1999 versus 1998 and $90,196or 11.3% for 1998 versus 1997. As a result, provisions for income taxes for the fourth quarters ended 1999, 1998, and 1997 are reported at $214,411, $225,647, and $235,567, respectively. Figures presented at the end of 1999 for income before taxes show an increase of $220,119 or 7.6% for 1999 versus 1998 and a tiny increase of $221 for 1998 compared to the same period in 1997. Provisions for income taxes for each fiscal year are reported as an increase of $76,135 or 10.7% from $710, 346 for 1998 to $786,481 for 1999 and a decrease of $44,758 or 5.9%, from $755,104 for 1997 to $710,346for 1998. This decrease in income tax expense for 1998 compared to 1997 is due in part to the absence of an anticipated tax credit for 1997, part of which was booked in 1998. Return on average assets (ROA), which measures how effectively a corporation uses its assets to produce earnings, increased to 1.02% for 1999 versus 1.00% for 1998 and 1.02% for 1997. Return on average equity (ROE), which is the ratio of income earned to average shareholders' equity was 10.54% for 1999 compared to 10.35% for 1998 and 10.69% for 1997. CAPITAL RESOURCES Stockholders' equity at December 31, 1998 was $22,002,059, with a book value of $6.74 per share. It increased through earnings of $2,334,358, the sale of common stock of $954,188 through our dividend reinvestment program. It decreased through purchases of treasury stock of $2,840, dividends paid totaling $2,086,789, and $482,461 through adjustments for the valuation allowance of securities. Stockholders' equity also decreased due to an adjustment of $537,361 for a cash dividend that was declared in December of 1999, payable in February of 2000. As of December 31, 1999, stockholders' equity was $22,181,154 with a book value of $6.60 per share. All stockholders' equity is unrestricted. Additionally, it is noted that as the maturity date on securities classified as available for sale draws near, the market price on these securities becomes more favorable, thereby greatly reducing the material loss associated with these investments through the valuation allowance. The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The Bank is required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1999, the Bank is required to have minimum Tier I and Total Capital ratios of 4.00% and 8.00%, respectively. The Company's consolidated risk weighted assets were reported at $112 million with reported ratios, at December 31, 1999, of approximately 20% for Tier I capital and 21% for Total capital. The report labeled "Capital Ratios" provides a better understanding of the components of each the Tier I and Tier II capital ratios as well as a three-year comparison of the growth of these ratios. The Company intends to continue the past policy of maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs. From time to time the Company may make contributions to the capital of either of its subsidiaries, Community National Bank or Liberty Savings Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to either the Bank's or Liberty's capital. YEAR 2000 Now that the century (and millennium) date change has come and gone, we are pleased to report that we experienced no significant difficulties as the new year began. The power stayed on, the phone lines worked, our ATMs were operable, and our computer systems worked fine. Furthermore, no unusual demands were placed on us for large cash withdrawals. Apparently our customers fully realized that the safest place for their money was in the bank. There are some key dates to watch throughout the year 2000, including February 29th (leap year day), March 31 (the end of the first quarter) and of course December 31st. We will continue to monitor our systems on these dates and throughout the year, but we expect no real problems to develop. The Company worked to resolve the potential impact of the year 2000 (Y2K) on the processing of date-sensitive information by the Company's computerized information systems. The Y2K problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 which could result in miscalculations or systems failures. The Federal Reserve Board and other federal banking regulators (together known as the Federal Financial Institutions Examination Council, or "FFEIC") have developed joint guidelines and benchmarks for assessing Y2K risk, remediation of non-compliant systems and components and post-remediation testing and implementation. In an effort to correctly assess the effect of Y2K on the financial position of the Company and assess our readiness for Y2K, a Y2K committee was organized which met on a regular basis to keep executive management and the Board of Directors informed of our progress towards Y2K compliance. The committee developed strategic, customer awareness, customer risk assessment, test and contingency plans. In accordance with FFEIC guidelines, the Y2K committee defined five phases in the Y2K project management: Phase I - Awareness Phase In this phase we defined the problem and gained executive level commitment. The Y2K committee developed an overall strategy. This phase has been completed. Phase II - Assessment Phase During this phase, we assessed the size and complexity of the Y2K issues and identified both information technology (IT) and non-IT systems that could be affected by the change. At this time, we also identified mission-critical and non-mission-critical systems. We defined mission-critical systems as vital to the successful continuation of our core business activities. Our core business activities include servicing deposits, servicing loans, item processing and accounting, originating deposits, originating loans, investments, and trust. The mission-critical systems that support our core business activities include our AS/400 (mainframe computer) and operating system; check processing software; check sorters; loan, deposit and account origination software; Fedline (interface to the Federal Reserve Bank); and trust accounting software. Other systems not deemed mission-critical, but important, include human resources; payroll; ATM networks; voice banking system; heating and faxes. We also evaluated the Y2K effect on strategic business initiatives. We assessed the risk exposure of our customers as funds providers, funds takers, and capital market/asset counter-parties. This phase has been completed, however, we continue to monitor our exposure on an on-going basis. Phase III - Renovation Phase This phase includes hardware and software upgrades or replacements and other changes. No mission-critical hardware or software needed to be replaced. All our software applications are provided by vendors and these applications were already Y2K compliant when we began the renovation phase. We replaced several PCs supporting non-mission critical applications. This phase has been completed. Phase IV - Validation Phase This is the testing phase. During this phase, the systems identified in Phase II (Assessment) were tested for Y2K compliance. Systems that were deemed mission-critical were tested first. We have finished testing the remaining systems. All mission-critical systems were tested by 12/31/98 and were in compliance. Non-mission-critical systems were tested by 6/30/99 and were in compliance. Phase V - Implementation Phase January 1, 2000 was a processing day. We detected no failures in our mission- critical systems. The Company does not write any source programming code and is therefore dependent upon external vendors and service providers to alter their programs to become Y2K compliant. We have received certification from our vendors as to their product compliance; however, we tested all mission-critical and non- mission-critical systems identified in Phase II. The following timetable identifies the testing phases: 12/31/98 testing of internal mission-critical systems completed 03/31/99 testing with service providers for mission-critical systems completed 06/30/99 testing of non-mission-critical systems completed
During 1999, we did not install any major upgrades to our systems after testing was completed. The costs involved in addressing potential problems did not have a material impact on the Company's financial position or cash flows. During 1998, we budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades. The costs included testing of our contingency site, replacement of 10 PCs not Y2K compliant and proxy testing of some of our mission-critical systems. We did not calculate the personnel costs relating to Y2K, however, we did not have to hire additional personnel in our Y2K efforts. For 1999, we budgeted and spent $77,000. Expenses included the replacement of additional PCs, PC software upgrades, consulting services, testing, travel and education. Y2K costs were expensed from current earnings. No new projects were deferred due to the Y2K effort. The yearly software update to our core system provided by one of our vendors was postponed by the vendor until 2000 in an effort to minimize changes to an already compliant system. This did not have an effect on our operations. We have reviewed the credit risk our commercial borrowers may pose to us if they are not Y2K compliant. At this time, we have no customers deemed as high risk. It may be that some of our small business customers may yet experience Y2K related difficulties, but none has appeared so far, and we believe our exposure to these kinds of problems is minimal. The worst case scenario relating to Y2K would have been the loss of electrical power. In an effort to mitigate this risk, as well as to protect us in the event of other power outages, a generator was purchased and installed at our main office in Derby. The next worst case scenario would have been the loss of our telephones. If this had happened, the Derby branch would have been fully operational. Other branches would have had to service deposits in an off-line mode. Requests for account and loan origination would have been directed to the Derby branch. Our Y2K contingency plan was based on our disaster recovery plan written to respond to a complete core system outage. Our contingency plan also outlines manual processes in the event of individual component failures. During the second quarter of 1999, outside consultants reviewed the feasibility of our contingency plans. This review did not constitute a third- party review as outlined by the FFIEC guidelines. After reviewing our plan, they made recommendations that, if implemented, would further enhance our Business Resumption Contingency Plan (BRCP). The third-party review as outlined by the FFIEC guidelines was performed by an officer of Community National Bank who was not involved with developing the plan. COMMON STOCK PERFORMANCE BY QUARTER
1999 First Second Third Fourth Trade price High $13.00 $12.50 $11.00 $10.88 Low $11.88 $12.00 $ 9.25 $ 8.63 Cash Dividends Declared $0.16 $0.16 $0.16 $0.16 1998 First Second Third Fourth Trade price High $13.00 $13.75 $15.00 $13.75 Low $11.75 $13.00 $13.75 $11.50 Cash Dividends Declared $0.15 $0.15 $0.15 $0.15 Trade price information for the first quarter of 1998 has been restated to reflect the 100% stock dividend paid on June 1, 1998.
EX-27 3
9 1000 12-MOS DEC-31-1999 DEC-31-1999 9,929 2,187 600 0 30,124 29,888 29,503 153,279 1,715 232,216 201,843 2,623 1,493 4,075 0 0 8,471 14,606 232,216 13,036 3,411 276 16,723 7,277 257 9,188 497 0 7,330 3,121 3,121 0 0 2,334 .71 .71 7.74 1,759 791 0 3,284 1,659 549 108 1,715 1,715 0 566
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