-----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, LRIa3v9qnG27jio1rMDvEsJ9x197OXAbTBp4pjawjT6oQimQV1dGcNQqLUkw+IvD TD4rSJtTGPrmmomrcd2atw== 0000742170-97-000004.txt : 19970325 0000742170-97-000004.hdr.sgml : 19970325 ACCESSION NUMBER: 0000742170-97-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANCORP INC /MA/ CENTRAL INDEX KEY: 0000742170 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042841993 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-12756-B FILM NUMBER: 97561123 BUSINESS ADDRESS: STREET 1: 17 POPE ST CITY: HUDSON STATE: MA ZIP: 01749 BUSINESS PHONE: 5085688321 MAIL ADDRESS: STREET 1: 17 POPE STREET CITY: HUDSON STATE: MA ZIP: 01749 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- Commission File No. 33-12756-B COMMUNITY BANCORP, INC. ----------------------- A Massachusetts Corporation IRS Employer Identification No. 04-2841993 17 Pope Street, Hudson, Massachusetts 01749 Telephone - (508) 568-8321 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 20, 1997 was $16,316,307. The total number of shares of common stock outstanding at March 20, 1997 was 2,935,012. Documents Incorporated By Reference Parts II, III and IV incorporate information by reference from the Annual Report to shareholders for the year ended December 31, 1996. PART I ------ ITEM 1. BUSINESS Community Bancorp, Inc., a Massachusetts corporation ("Company"), is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Holding Company has one subsidiary, Hudson National Bank, a national banking association ("Bank"). The Holding Company owns all the outstanding shares of the Bank. At present, the Holding Company conducts no activities independent of the Bank. In 1992, the Company formed Community Securities Corporation, a wholly owned subsidiary of the Bank. The activities of the subsidiary consist of buying, selling, dealing in or holding securities in its own behalf and not as a broker. The Bank is engaged in substantially all of the business operations customarily conducted by an independent commercial bank in Massachusetts. Banking services offered include acceptance of checking, savings and time deposits, and the making of commercial, real estate, installment and other loans. The Bank also offers official checks, traveler's checks, safe deposit boxes and other customary bank services to its customers. In 1994 the Bank introduced a telephone banking service allowing customers to perform account inquiries and other functions using a Touch Tone telephone. In 1995 the Bank introduced a PC-based office banking system for businesses that allows business customers to access their accounts and perform a number of functions directly through an office PC. In 1996 the Bank introduced a PC-based home banking system for consumers. The business of the Bank is not significantly affected by seasonal factors. In the last five years the Bank derived its operating income from the following sources:
% of Operating Income -------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Interest and fees on loans 63 65 64 67 69 Interest and dividends on securities 26 24 24 21 16 Charges, fees and other sources 11 11 12 12 15 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
Competition - ----------- The Bank generally concentrates its activities within a 20 mile radius of Hudson, Massachusetts and currently operates full service branch offices in Hudson, Acton, Boxboro, Concord, Marlboro and Stow, Massachusetts. These communities are generally characterized by a growing residential population and moderate to high household income. In addition to its main office, the Bank also operates a full service branch office in the Town of Hudson. -1- The banking business in the Bank's market area is highly competitive. The Bank competes actively with other banks, as well as with other financial institutions engaged in the business of accepting deposits or making loans, such as savings and loan associations, savings banks and finance companies. In the Bank's general market area there are approximately 2 national banks, 3 Massachusetts trust companies, 6 savings banks, 2 cooperative banks and 6 credit unions. Since several of the competing institutions are significantly larger than the Bank in assets and deposits, the Bank strongly emphasizes a personal approach to service in order to meet and surpass the vigorous competition. Regulation of the Company - ------------------------- The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and files with the Federal Reserve Board the reports as required under the Bank Holding Company Act. The Bank Holding Company Act requires prior approval by the Federal Reserve Board of the acquisition by the Company of substantially all the assets or more than five percent of the voting stock of any bank. The Bank Holding Company Act also allows the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the Company can engage in such activities or transactions between the affiliated banks and the Company or other affiliates. The Bank Holding Company Act prohibits the Company and the Bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services. Regulation of the Bank - ---------------------- The Bank is a national banking association chartered under the National Bank Act. As such, it is subject to the supervision of the Comptroller of the Currency and is examined by his office. In addition, it is subject to examination by the Federal Reserve Board by reason of its membership in the Federal Reserve System and by the Federal Deposit Insurance Corporation by reason of the insurance of its deposits by such corporation. Areas in which the Bank is subject to regulation by federal authorities include reserves, loans, investments, issuances of various types of securities, participation in mergers and consolidations, and certain transactions with or in the stock of the Company. Employees - --------- The Company and the Bank employ 132 full-time and part-time officers and employees. -2- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The following tables present the condensed average balance sheets and the components of net interest differential for the three years ended December 31, 1996, 1995 and 1994. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a taxable equivalent basis.
1996 ----------------------------------- Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ----------- ---------- ------ Federal funds sold $ 11,361,749 $ 590,663 5.20% Securities: Taxable 78,493,267 4,619,558 5.89% Non-taxable (1) 2,752,956 192,885 7.01% Total loans and leases (1)(2) 129,443,069 12,495,000 9.65% ----------- ---------- ---- Total earning assets 222,051,041 17,898,106 8.06% ---------- Reserve for loan losses (3,503,861) Other non interest- bearing assets 21,384,220 ----------- Total average assets $239,931,400 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $ 94,508,038 $ 2,258,835 2.39% Time deposits 66,704,196 3,581,610 5.37% Federal funds purchased and repurchase agreements 11,798,277 527,313 4.47% ----------- ---------- ---- Total interest-bearing liabilities $173,010,511 $ 6,367,758 3.68% ---------- Non interest-bearing deposits 44,425,461 Other non interest-bearing liabilities 1,977,905 Stockholders' equity 20,517,523 ----------- Total average liabilities and stockholders' equity $239,931,400 =========== Net interest income $11,530,348 ========== Net yield on interest earning assets 5.19% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $137,004. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-3- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued)
1995 ----------------------------------- Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ----------- ---------- ------ Federal funds sold $ 7,115,616 $ 406,977 5.72% Securities: Taxable 69,470,273 4,055,415 5.84% Non-taxable (1) 1,879,882 146,427 7.79% Total loans and leases (1)(2) 127,033,820 12,450,001 9.80% ----------- ---------- ---- Total earning assets 205,499,591 17,058,820 8.30% ---------- ---- Reserve for loan losses (3,779,610) Other non interest- bearing assets 20,993,896 ----------- Total average assets $222,713,877 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $ 89,849,771 $ 2,417,573 2.69% Time deposits 61,842,194 3,317,979 5.37% Federal funds purchased and repurchase agreements 11,453,322 549,198 4.80% ----------- ---------- ---- Total interest-bearing liabilities $163,145,287 $ 6,284,750 3.85% ---------- Non interest-bearing deposits 39,366,065 Other non interest-bearing liabilities 1,853,949 Stockholders' equity 18,348,576 ----------- Total average liabilities and stockholders' equity $222,713,877 =========== Net interest income $10,774,070 ========== Net yield on interest earning assets 5.24% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $141,196. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-4- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued)
1994 ----------------------------------- Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ----------- ---------- ------ Federal funds sold $ 1,527,940 $ 61,642 4.03% Securities: Taxable 69,513,479 3,871,111 5.57% Non-taxable (1) 1,072,378 92,522 8.63% Total loans and leases (1)(2) 120,017,690 10,524,329 8.77% ----------- ---------- ---- Total earning assets 192,131,487 14,549,604 7.57% ---------- Reserve for loan losses (3,860,367) Other non interest- bearing assets 21,227,612 ----------- Total average assets $209,498,732 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $ 88,782,185 $ 1,854,068 2.09% Time deposits 53,789,007 2,288,637 4.25% Federal funds purchased and repurchase agreements 11,971,422 379,483 3.17% Short term debt 41,968 3,370 8.03% ----------- ---------- ---- Total interest-bearing liabilities $154,584,582 $ 4,525,558 2.93% --------- Non interest-bearing deposits 37,001,536 Other non interest-bearing liabilities 1,392,148 Stockholders' equity 16,520,466 ----------- Total average liabilities and stockholders' equity $209,498,732 =========== Net interest income $10,024,046 ---------- Net yield on interest earning assets 5.22% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $119,672. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-5- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued) The following table shows, for the periods indicated, the dollar amount of changes in interest income and interest expense resulting from changes in volume and interest rates. The total dollar amount of interest income from earning assets is calculated on a taxable equivalent basis.
1996 as compared to 1995 ------------------------------------- Due to a change in: ------------------- Volume Rate Total --------- --------- --------- Interest income from: Federal funds sold $ 220,687 $ (37,001) $ 183,686 Securities: Taxable 529,408 34,735 564,143 Non-taxable 61,121 (14,663) 46,458 Loans & leases 235,550 (190,551) 44,999 --------- --------- --------- Total $1,046,766 $ (207,480) $ 839,286 --------- --------- --------- Interest expense on: Interest-bearing deposits: Savings, money market and NOW $ 110,811 $ (269,549) $ (158,738) Time deposits 263,631 0 263,631 Federal funds purchased and repurchase agreements 15,911 (37,796) (21,885) Short term debt 0 0 0 --------- --------- --------- Total $ 390,353 $ (307,345) $ 83,008 --------- --------- --------- Net interest income $ 656,413 $ 99,865 $ 756,278 ========= ========= =========
1995 as compared to 1994 ------------------------------------- Due to a change in: ------------------- Volume Rate Total --------- --------- --------- Interest income from: Federal funds sold $ 319,513 $ 25,822 $ 345,335 Securities: Taxable (3,382) 187,686 184,304 Non-taxable 62,913 (9,008) 53,905 Loans & leases 689,490 1,236,182 1,925,672 --------- --------- --------- Total $1,068,533 $1,440,683 $2,509,216 --------- --------- --------- Interest expense on: Interest-bearing deposits: Savings, money market and NOW $ 30,812 $ 532,693 $ 563,505 Time deposits 426,905 602,437 1,029,342 Federal funds purchased and repurchase agreements (25,419) 195,134 169,715 Short term debt (3,370) 0 (3,370) --------- --------- --------- Total $ 428,928 $1,330,264 $1,759,192 --------- --------- --------- Net interest income $ 639,605 $ 110,419 $ 750,024 ========= ========= ========= Note: The change due to the volume/rate variance has been allocated to volume.
-6- Securities Portfolio - -------------------- The following table indicates the carrying value of the Company's consolidated securities portfolio at December 31, 1996, 1995 and 1994.
(in $000) 1996 1995 1994 - --------- ------ ------ ------ U.S. Government obligations $16,002 $17,160 $12,881 U.S. Government agencies and corp. 67,043 54,627 56,990 Obligations of states and political subdivisions 4,141 1,941 1,569 Other securities 888 888 1,125 ------ ------ ------ Total $88,074 $74,616 $72,565 ====== ====== ======
The following table shows the maturities, carrying value and weighted average yields of the Company's consolidated securities portfolio at December 31, 1996. The yields are calculated by dividing the annual interest, net of amortization of premiums and accretion of discounts, by the amortized cost of the securities at the dates indicated. The yields on state and municipal securities are presented on a taxable equivalent basis.
After one After five Maturing: Within but within but within After -------- one year five years ten years ten years ------------ ------------ ------------ ------------ (in $000) Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- U.S. Govt. obli- gations held to maturity $2,003 5.11% $4,037 5.57% $ 0 0% $ 0 0% U.S. Govt. obli- gations avail- able for sale 3,004 5.76% 6,958 6.16% 0 0% 0 0% U.S. Govt. agencies & corps. held to maturity 3,038 5.12% 8,981 6.07% 0 0% 0 0% U.S. Govt. agencies & corps. available for sale 1,005 5.09% 3,957 5.45% 0 0% 0 0% State and political subdivisions held to maturity 730 6.92% 955 7.41% 0 0% 2,456 7.65% Mortgage-backed securities avail- able for sale 1,094 5.34% 4,828 5.85% 2,262 6.61% 5,250 7.09% Mortgage-backed securities held to maturity 1,170 5.74% 30,280 6.39% 5,179 6.79% 0 0% Other securities 0 0% 0 0% 0 0% 888 6.06%
Current estimated prepayment speed assumptions were used in estimating the maturities of mortgage-backed securities in the above table. At December 31, 1996, the Company did not own securities of any issuer where the aggregate book value of such securities exceeded ten percent of the Company's stockholders' equity. -7- Loan Portfolio - -------------- The following table summarizes the distribution of the Bank's loan portfolio as of December 31 for each of the years indicated:
(in $000) 1996 1995 1994 1993 1992 - --------- ------ ------ ------ ------ ------ Commercial and industrial $ 17,227 $ 13,784 $ 13,685 $ 11,108 $ 10,218 Real estate - commercial 45,106 44,983 50,195 45,488 45,882 Real estate - residential 49,790 50,979 44,246 43,167 46,370 Real estate - construction 4,833 3,903 3,330 4,568 3,168 Mortgage loans held for sale 1,222 1,057 559 14,172 11,273 Loans to individuals 13,221 13,178 10,850 10,311 9,223 Other 171 188 173 514 113 ------- ------- ------- ------- ------- Total loans $131,570 $128,072 $123,038 $129,346 $126,247 ======= ======= ======= ======= =======
Loan maturities for commercial and real estate (construction) loans at December 31, 1996 were as follows: $9,108,301 due in one year or less; $9,154,007 due after one year through five years; $3,797,692 due after five years. Of the Bank's commercial and real estate (construction) loans due after one year, $8,518,726 have floating or adjustable rates and $4,432,973 have fixed rates. Nonaccrual, Past Due and Restructured Loans - ------------------------------------------- It is the policy of the Bank to discontinue the accrual of interest on loans when, in management's judgement, the collection of the full amount of interest is considered doubtful. This will generally occur once a loan has become 90 days past due, unless the loan is well secured and in the process of collection. The following table sets forth information on nonaccrual, past due loans and restructured loans as of December 31 for each of the years indicated:
(in $000) 1996 1995 1994 1993 1992 - --------- ----- ----- ----- ----- ----- Nonaccrual loans $ 897 $1,650 $ 909 $1,681 $2,028 Accruing loans past due 90 days or more 370 160 66 346 232 Restructured loans 0 0 1,155 1,357 1,735 ----- ----- ----- ----- ----- Total $1,267 $1,810 $2,130 $3,384 $3,995 ===== ===== ===== ===== =====
The entire "restructured loans" balance at December 31, 1994 in the above table was comprised of a single loan. That loan was placed on nonaccrual status in September of 1995 and transferred to "Other Real Estate Owned" in August of 1996. For the period ended December 31, 1996, the reduction of interest income associated with nonaccrual and restructured loans was $177,618. The interest on these loans that was included in interest income for 1996 was $42,238 Potential Problem Loans - ----------------------- As of December 31, 1996, other than the above, there were no loans where management had serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. Concentrations of Credit - ------------------------ As of December 31, 1996, except as disclosed in the above table, there were no concentrations of loans exceeding 10% of total loans. -8- Summary of Loan Loss Experience - ------------------------------- The following table summarizes historical data with respect to loans outstanding, loan losses and recoveries, and the allowance for possible loan losses at December 31 for each of the years indicated:
(in $000) 1996 1995 1994 1993 1992 - --------- ------- ------- ------- ------- ------- Average outstanding loans (1) $129,443 $127,034 $120,018 $122,411 $124,741 ======= ======= ======= ======= =======
Allowance for possible loan losses
(in $000) 1996 1995 1994 1993 1992 - --------- ------ ------ ------ ------ ------ Balance at beginning of period $ 3,455 $ 3,703 $ 3,910 $ 4,178 $ 3,968 Charge-offs: Commercial and industrial (39) (31) (506) (305) (318) Real estate - residential (53) (70) (221) (169) (390) Real estate - commercial 0 (415) 0 (455) (505) Real estate - construction 0 0 0 0 0 Loans to individuals (138) (113) (112) (87) (217) ----- ----- ----- ----- ----- Total charge-offs (230) (629) (839) (1,016) (1,430) Recoveries: Commercial and industrial 147 105 174 60 54 Real estate - residential 1 100 128 11 11 Real estate - commercial 79 18 3 44 32 Real estate - construction 0 0 0 0 0 Loans to individuals 30 38 27 33 118 ----- ----- ----- ----- ----- Total recoveries 257 261 332 148 215 ----- ----- ----- ----- ----- Net (charge-off) recovery 27 (368) (507) (868) (1,215) Provision for possible loan losses 0 120 300 600 1,425 ----- ----- ----- ----- ----- Balance at end of period $ 3,482 $ 3,455 $ 3,703 $ 3,910 $ 4,178 ===== ===== ===== ===== ===== Ratio of net charge-offs to average loans (0.00)% 0.29% 0.42% 0.71% 0.97% ==== ==== ==== ==== ==== (1) Includes the aggregate average balance of loans held for sale.
The provision for possible loan losses is based upon management's estimation of the amount necessary to maintain the allowance at an adequate level to absorb inherent possible losses in the loan portfolio, as determined by current and anticipated economic conditions and other pertinent factors. Significant credits classified as "substandard" and "doubtful", in accordance with applicable bank regulatory guidelines, are individually analyzed to estimate inherent possible losses associated with each such credit. A portion of the allowance for possible loan losses is set aside or "allocated" against such estimated inherent losses, without regard to if or when those estimated losses will actually be realized. Additional "unallocated" reserves are provided for estimated inherent losses in pools of loans. Such allocated and unallocated reserves are established to absorb potential future losses and may or may not reflect the Company's actual loss history for any specific category of loans. -9- Summary of Loan Loss Experience (Continued) - ------------------------------------------- The following table reflects the allocation of the allowance for loan losses and the percent of loans in each category to total outstanding loans as of December 31 for each of the years indicated:
1996 1995 1994 ------------------- ------------------- ------------------ Percent of Percent of Percent of loans in loans in loans in category to category to category (in $000) Amount total loans Amount total loans Amount total loans - --------- ------ ----------- ------ ----------- ------ ----------- Commercial & industrial $ 195 13.1% $ 165 10.9% $ 165 11.2% Real estate - commercial 767 34.2% 746 35.1% 1,440 40.9% Real estate - residential 166 38.8% 174 40.7% 222 36.1% Real estate - construction 82 3.7% 96 3.0% 45 2.8% Loans to individuals 126 10.2% 100 10.3% 87 9.0% Unallocated 2,146 N/A 2,174 N/A 1,744 N/A ----- ----- ----- ----- ----- ----- Total $3,482 100.0% $3,455 100.0% $3,703 100.0% ===== ===== ===== ===== ===== =====
1993 1992 ------------------- ------------------- Percent of Percent of loans in loans in category to category to (in $000) Amount total loans Amount total loans - --------- ------ ----------- ------ ----------- Commercial & industrial $ 157 8.6% $ 360 8.1% Real estate - commercial 1,986 35.2% 1,615 36.7% Real estate - residential 217 44.6% 210 45.3% Real estate - construction 32 3.6% 87 2.5% Loans to individuals 126 8.0% 207 7.4% Unallocated 1,392 N/A 1,699 N/A ----- ----- ----- ----- Total $3,910 100.0% $4,178 100.0% ===== ===== ===== =====
The allocation of the allowance for possible loan losses to the categories of loans shown above includes both specific potential loss estimates for individual loans and general allocations deemed to be reasonable to provide for additional potential losses within the categories of loans set forth. -10- Deposits - -------- The following table shows the average deposits and average interest rate paid for each of the last three years:
1996 1995 1994 ---------------- ---------------- ---------------- Average Average Average Average Average Average (in $000) Balance Rate Balance Rate Balance Rate - --------- ------- ------- ------- ------- ------- ------- Demand deposits $ 44,426 0.00% $ 39,366 0.00% $ 37,001 0.00% NOW deposits 22,544 1.29% 21,621 1.78% 21,025 1.95% Money market deposits 27,924 2.75% 26,812 2.91% 27,047 2.34% Savings deposits 44,040 2.73% 41,417 3.02% 40,711 2.58% Time deposits 66,704 5.37% 61,842 5.37% 53,789 3.81% ------- ---- ------- ---- ------- ---- Total $205,638 2.84% $191,058 3.00% $179,573 2.31% ======= ==== ======= ==== ======= ====
As of December 31, 1996, the Bank had certificates of deposit in amounts of $100,000 or more aggregating $19.1 million. These certificates of deposit mature as follows:
Maturity Amount (in $000) -------- ---------------- 3 months or less $11,430 Over 3 months through 6 months 2,544 Over 6 months through 12 months 4,356 Over 12 months 814 ------ Total $19,144 ======
-11- Return on Equity and Assets - --------------------------- The following table summarizes various financial ratios of the Company for each of the last three years:
Years ended December 31, ----------------------------- 1996 1995 1994 ---- ---- ---- Return on average total assets (net income divided by average total assets) 1.31% 1.19% 1.00% Return on average stockholders' equity (net income divided by average stockholders' equity) 15.36% 14.41% 12.74% Dividend payout ratio (total declared dividends per share divided by net income per share) 24.99% 27.86% 31.91% Equity to assets (average stockholders' equity as a percentage of average total assets) 8.55% 8.24% 7.89%
-12- Short-Term Borrowings - --------------------- The Bank engages in certain borrowing agreements throughout the year. These are in the ordinary course of the Bank's business. Such short-term borrowings consisted of securities sold under repurchase agreements, which are short-term borrowings from customers, and federal funds purchased. The following table summarizes such short-term borrowings at December 31 for each of the years indicated:
Weighted Max. Weighted average amount average interest out- Average interest Year Balance, rate at standing amount rate ended end of end of at any out- during 12/31/96 period period month-end standing period - -------------------------------------------------------------------------- Federal Funds Purchased $ 0 0% $ 0 $ 2,732 6.40% Repurchase Agreements 11,454,687 4.45% 14,435,268 11,795,545 4.39%
Weighted Max. Weighted average amount average interest out- Average interest Year Balance, rate at standing amount rate ended end of end of at any out- during 12/31/95 period period month-end standing period - ------------------------------------------------------------------------- Federal Funds Purchased $ 1,000,000 6.40% $ 6,200,000 $ 1,536,438 6.12% Repurchase Agreements 8,289,963 4.38% 14,374,499 9,916,887 4.56%
Weighted Max. Weighted average amount average interest out- Average interest Year Balance, rate at standing amount rate ended end of end of at any out- during 12/31/94 period period month-end standing period - ------------------------------------------------------------------------- Federal Funds Purchased $10,900,000 6.65% $10,900,000 $ 1,446,000 4.64% Repurchase Agreements 4,040,801 3.67% 15,752,377 10,526,000 2.95%
-13- ITEM 2. PROPERTIES The Bank's Main Office (approximately 32,000 square feet) at 17 Pope Street, Hudson, Massachusetts, the Consumer Loan Center (2,623 square feet) at 12 Pope Street, Hudson, Massachusetts, the Hudson South Office (1,040 square feet) at 177 Broad Street, Hudson, Massachusetts and the Marlboro Center Office (1,800 square feet) at 96 Bolton Street, Marlboro, Massachusetts, are owned by the Bank. The Bank's Stow Office (1,228 square feet) at 159 Great Road, Stow, Massachusetts, the Concord office (1,200 square feet) at 1134 Main Street, Concord, Massachusetts, the Acton office (2,100 sqare feet) at 274 Great Road, Acton, Massachusetts, the Marlboro office (1,110 square feet) at 500 Boston Post Road, Marlboro, Massachusetts and the Boxboro office (679 square feet) at 629 Mass Avenue, Boxboro, Massachusetts, are leased by the Bank from third parties. All properties occupied by the Bank are in good condition, and are adequate at present and for the foreseeable future for the purposes for which they are being used. In the opinion of management, the properties are adequately insured. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceeding. The Bank is involved in various routine legal actions arising in the normal course of business. Based on its knowledge of the pertinent facts and the opinions of legal counsel, management believes the aggregate liability, if any, resulting from the ultimate resolution of these actions will not have a material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1996. -14- PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's common stock. The record number of holders of the Company's common stock was approximately 434 as of March 20, 1997. The Company customarily declares quarterly cash dividends on its outstanding common stock. The following table sets forth the cash dividends per share declared for the years 1996 and 1995:
1996 1995 ------ ------ First quarter $ .061 $ .057 Second quarter .062 .058 Third quarter .064 .059 Fourth quarter .066 .060 ------ ------ Total $ .253 $ .234 ====== ======
For a discussion of restrictions on the ability of the Bank to pay dividends to the Company, see footnote 12 on page 20 of the Annual Report to Shareholders for the year ended December 31, 1996, which is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA A five year summary of selected consolidated financial data for the Company is presented on page 1 of the Annual Report to Shareholders for the year ended December 31, 1996 and is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is contained on pages 25 through 29 of the Annual Report to Shareholders for the year ended December 31, 1996 and is hereby incorporated by reference. For a discussion of restrictions on the ability of the Bank to pay dividends to the Company, see footnote 12 on page 20 of the Annual Report to shareholders for the year ended December 31, 1996, which is hereby incorporated by reference. -15- ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements are included on page 1 and pages 9 through 23 of the Annual Report to shareholders for the year ended December 31, 1996 and are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in the Company's independent public accountants or disagreements with the Company's accountants on accounting or financial disclosure during the 24 months ended December 31, 1996 or in any period subsequent to the most recent financial statements. -16- PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth, as to each of the Directors and Executive Officers of the Company and the Bank, such person's age, position, term of office, and all business experience during the past five years. All Directors and Executive Officers of the Company have served since 1984, except Mr. Frias who has been a Director of the Company since 1985, Mr. Parker who has been a Director of the Company since 1986, and Messrs. Hughes and Webster who have been Directors of the Company since 1995. Each Director of the Company is also a Director of the Bank. Each executive officer holds office until the first Director's meeting following the annual meeting of stockholders and thereafter until his or her successor is elected and qualified.
Business Experience Term of During Past Name Age Position Office Five Years ----- --- -------- ------- ------------------- Richard K. 44 Senior Vice Senior Vice President, Bennett President Vice President, of Bank Hudson National Bank Grace L. Blunt 42 Senior Vice Senior Vice President, President Vice President, of Bank Hudson National Bank Alfred A. 79 Director of 1997 Retired Cardoza (1) Company and Bank Argeo R. 73 Director of 1997 Retired; formerly Cellucci (1) Company and President and Treasurer, Bank Washington Street Motors, Inc.; President, Cellucci Hudson Corp. Antonio 57 Director of 1997 President and Treasurer, Frias (1) Company and S & F Concrete Bank Contractors, Inc.; Secretary/Clerk, Frias Bros. Service Station John P. Galvani 40 Senior Vice Senior Vice President, President Vice President, of Bank Hudson National Bank I. George Gould 80 Director of 1999 Chairman, Gould's, Inc. Company and Bank Horst Huehmer 69 Director of 1998 Retired; formerly Company and Manager, Hudson Light Bank and Power Department -17- Donald R. 47 Treasurer and 1998 Executive Vice Hughes, Jr. Clerk of President, Hudson Company; Exec. National Bank; Vice President Treasurer and Clerk, of Bank; Director Community Bancorp, Inc. of Company and Bank James A. Langway 57 President & 1999 President and CEO, CEO of Company Hudson National Bank and Bank; and Community Director of Bancorp, Inc. Company and Bank Robert E. Leist 43 Senior Vice Senior Vice President, President Vice President, of Bank Hudson National Bank Janet A. Lyman 50 Senior Vice Senior Vice President, President Vice President, of Bank Hudson National Bank Dennis F. 59 Chairman of 1997 President and Murphy, Jr. (1) the Board, Treasurer, D. F. Company and Murphy Insurance Bank Agency, Inc.; Treasurer, Village Real Estate David L. 68 Director of 1999 Chairman of the Board, Parker (2) Company and Larkin Lumber Co. Bank Mark Poplin 73 Director of 1998 President and Company and Treasurer, Poplin Bank Supply Co.; Secretary, Poplin Furniture Co. David W. 55 Director of 1998 President & Treasurer, Webster (2) Company and A. T. Knight Fuel Co., Bank Inc. (1) Messrs. Cardoza, Cellucci, Frias and Murphy have been nominated for election at the 1997 Annual Meeting to serve until 2000. (2) Mr. Webster's wife and Mr. Parker are cousins. No Director holds a directorship in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
-18- ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all plan and non-plan compensation awarded to, earned by or paid to the CEO and other executive officers whose aggregate compensation exceeded $100,000 by the Company and the Bank for 1996, 1995 and 1994.
Summary Compensation Table -------------------------- Annual Compensation ------------------- (a) (b) (c) (d) (i) (1) Name and All Other Principal Position Year Salary Bonus Compensation - ------------------ ---- ------ ----- ------------ James A. Langway 1996 $194,806 $68,451 $ 8,838 President and CEO 1995 186,261 55,000 2,982 of the Company and 1994 177,392 44,348 2,924 the Bank Donald R. Hughes, Jr. 1996 111,197 27,244 7,825 Treasurer and Clerk of 1995 105,902 26,740 2,062 Company; Executive Vice 1994 100,859 20,172 1,936 President of the Bank Notes: 1. The Company maintains an Employee Stock Ownership Plan (ESOP) for employees age 21 or older who are participants in the Company's Retirement Plan and who meet other requirements. The Company also maintains a 401(k) Savings Plan (401(k) Plan) for employees age 21 or over and who meet other requirements. Messrs. Langway and Hughes are participants in the Company's ESOP and 401(k) Plans. Of the $8,838 reported above for 1996 in column (i) for James A. Langway, $3,416 represents Company ESOP contributions, $4,750 represents Company 401(k) Plan contributions and $672 represents group life insurance premiums paid by the Company. Of the $7,825 reported above for 1996 in column (i) for Donald R. Hughes, Jr., $3,199 represents Company ESOP contributions, $4,153 represents Company 401(k) Plan contributions and $473 represents group life insurance premiums paid by the Company.
Compensation of Directors - ------------------------- The Bank paid its Directors an annual fee of $8,805 in 1996. The Chairman of the Board was paid $14,674 in 1996. Director fees are paid on a monthly basis. The Company pays no compensation to its Directors for their services as Directors. -19- Employment Contracts and Termination of Employment and Change-in-Control - ------------------------------------------------------------------------ Arrangements - ------------ The Company has entered into five-year Employment Agreements with James A. Langway, President and Chief Executive Officer of the Company, and with Donald R. Hughes, Jr., Treasurer and Clerk of the Company, which commenced August 1, 1986 and which specify the employee's duties and minimum compensation during the period of the Employment Agreement. Each Employment Agreement is extended for one additional year, on the anniversary of the commencement date, unless prior notice is given by either party. Employment by the Company shall terminate upon the employee's resignation, death, disability, or for "cause" as defined in the Employment Agreement. If employment is involuntarily terminated by the Company for any reason except for cause, or if the Employment Agreement is not renewed at its expiration, the Company is required to make additional payments to the employees. During the term of the Employment Agreement and for one year afterwards, the employee cannot compete with the Company within its market area. The Company has also entered into Severance Agreements with Mr. Langway and Mr. Hughes regarding termination of employment by the Company or Bank subsequent to a "change in control" of the Company, as defined in the Severance Agreement. Following the occurrence of a change in control, if the employee's employment is terminated (except because of gross dereliction of duty, death, retirement, disability or conviction for criminal misconduct) or is involuntarily terminated for "good reason" as defined in the Severance Agreement, then the employee shall be entitled to a lump sum payment from the Company approximately equal to three times his average annual compensation for the previous five years, plus accrued vacation pay and bonus awards. If Mr. Langway or Mr. Hughes is entitled to receive benefits under both his Employment Agreement and his Severance Agreement, he must choose the agreement under which he will claim benefits. The Company has entered into an Executive Supplemental Income Agreement with James A. Langway, President and Chief Executive Officer of the Company, which commenced July 12, 1988 and which specifies benefits payable to Mr. Langway for a ten (10) year period following the date on which he ceases to be employed by the Company. The Agreement provides that the Company will pay Mr. Langway $40,774 each year, increased by increases in the Consumer Price Index, for a ten (10) year period following the date he ceases to be employed by the Company for any cause whatsoever after attaining age 55. The Agreement was amended on January 26, 1990, increasing the annual base retirement benefit to be paid to Mr. Langway from $40,774 to $60,774 each year, increased by increases in the Consumer Price Index in the same manner as the original Agreement. Mr. Langway attained age 55 during 1994. The Company records annual expense in anticipation of future payments expected to be made under this Agreement. The annual expense amount recorded is determined by an independent actuary based on Mr. Langway's life expectency at the time he begins receiving payments. During 1996, the Company recorded $20,799 in such expense. -20- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table and related notes set forth information regarding stock owned by each of the Directors of the Company and Bank and by all officers and Directors of the Company and Bank as a group at March 20, 1997.
Amount and Nature of Beneficial Ownership Title (Number of shares) (1) Percent of Name of ------------------------------------- of Class Beneficial Owner Sole (2) Shared (3) Total Class - ----- ---------------- -------- ---------- ----- ------- Common Alfred A. Cardoza 12,600 9,886 22,486 0.8% Stock ($2.50 Argeo R. Cellucci 6,728 0 6,728 0.2% par) Antonio Frias 19,858 0 19,858 0.7% I. George Gould 17,564 109,904 (4) 127,468 4.3% Horst Huehmer 18,532 4,100 22,632 0.8% Donald R. Hughes, Jr. 2,000 103,261 (4,5) 105,261 3.6% James A. Langway 90,902 92,739 (4,6,7) 183,641 6.3% Dennis F. Murphy, Jr. 193,724 252,548 446,272 15.2% David L. Parker 22,514 21,784 (8) 44,298 1.5% Mark Poplin 45,428 107,336 152,764 5.2% David W. Webster 750 76,741 (7) 77,491 2.6% All directors and officers of the Company and Bank as a group (20 persons) 431,928 690,161 (4,9) 1,122,089 38.2% (1) Based upon information provided to the Company by the indicated persons. Certain directors may disclaim beneficial ownership of certain of the shares listed beside their names. (2) Indicates sole voting and investment power. (3) Indicates shared voting and investment power. (4) Includes 65,822 shares held by the Company's ESOP for which Messrs. Gould, Hughes and Langway are co-trustees. (5) Includes 7,439 shares held by the Company's 401(k) plan for which Mr. Hughes has voting power in certain circumstances. (6) Includes 13,428 shares held by the Company's 401(k) plan for which Mr. Langway has voting power in certain circumstances. -21- (7) Includes 13,314 shares held in the name of Katherine A. Knight, for whose estate Mr. Langway and Mr. Webster's wife are co-executors. (8) Includes 2,000 shares held by the Unitarian Church of Marlboro and Hudson, MA, for which Mr. Parker is a trustee, and 13,584 shares held in the name of Arline Parker, for whom Mr. Parker has power of attorney. (9) Includes 56,215 shares held by the Company's 401(k) plan for which Grace L. Blunt, Senior Vice President, and Robert E. Leist, Senior Vice President, are co-trustees.
The following persons own beneficially more than five percent of the outstanding stock of the Company as of March 20, 1997:
Amount and Title Name and Address Nature of Percent of of Beneficial Beneficial of Class Owner Ownership Class ----- ---------------- ---------- ------- Common Stock Dennis F. Murphy, Jr. 446,272 shares 15.2% ($2.50 par) 44 Wilder Road Bolton, MA 01740 James A. Langway 183,641 shares (1) 6.3% 1143 Grove Street Framingham, MA 01701 Mark Poplin 152,764 shares 5.2% 108 Barretts Mill Road Concord, MA 01742 (1) Includes 65,822 shares held by the Company's ESOP for which Mr. Langway is a trustee, 13,428 shares held by the Company's 401(k) plan for which Mr. Langway has voting power in certain circumstances, and 13,314 shares held in the name of Katherine A. Knight, for whose estate Mr. Langway is a co-executor.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company, through its wholly-owned bank subsidiary, has had, currently has, and expects to continue to have in the future, banking (including loans and extensions of credit) transactions in the ordinary course of its business with its Directors, Executive Officers, members of their families and associates. Such banking transactions have been and are on substantially the same terms, including interest rates, collateral and repayment conditions, as those prevailing at the same time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. -22- PART IV ITEM 14. EXHIBITS AND FINANCIAL STATEMENTS (a) 1. & 2. Index to Consolidated Financial Statement Schedules --------------------------------------------------- The following consolidated financial statements, which are included in the Annual Report to Shareholders of Community Bancorp, Inc. for the year ended December 31, 1996, are hereby incorporated by reference: Annual Report to Shareholders Description page reference ----------- ---------------- Consolidated balance sheets at December 31, 1996 and 1995 9 Consolidated statements of income for the years ended December 31, 1996, 1995 and 1994 10 Consolidated statements of stockholders' equity for the years ended December 31, 1996, 1995 and 1994 11 Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994 12 - 13 Notes to consolidated financial statements 14 - 23 With the exception of the aforementioned information, and information incorporated by reference in Items 5, 6, 7, and 8, the Annual Report to Shareholders for the year ended December 31, 1996 is not deemed to be filed as part of this Form 10-K. Certain schedules required by Regulation S-X have been omitted as the items are either not applicable or are presented in the notes to the financial statements contained in the Annual Report to Shareholders for the year ended December 31, 1996. 3. Exhibits See accompanying Exhibit Index. (b) The Company did not file a Form 8-K during the quarter ended December 31, 1996. -23-
EXHIBIT INDEX ------------- 3.1 Articles of Organization of Company Amendments to Articles of Organization, (dated prior to April 12, 1988) (a) 3.1.i Amendment to Articles of Organization, dated April 12, 1988 3.2 By-Laws of Company (a) 10.1 Community Bancorp, Inc. Employee Stock Ownership Plan (as amended and restated effective January 1, 1985) (b) 10.2 Employment Agreement dated August 19, 1986 between Community Bancorp, Inc. and James A. Langway (c) 10.3 Severance Agreement dated June 10, 1986 between Community Bancorp, Inc. and James A. Langway (d) 10.4 Employment Agreement dated August 19, 1986 between Community Bancorp, Inc. and Donald R. Hughes, Jr. (c) 10.5 Severance Agreement dated June 10, 1986 between Community Bancorp, Inc. and Donald R. Hughes, Jr. (d) 10.6 Executive Supplemental Income Agreement dated July 12, 1988 between Community Bancorp, Inc. and James A. Langway (e) 10.7 Amendment to Executive Supplemental Income Agreement dated January 26, 1990 between Community Bancorp, Inc. and James A. Langway. (f) 10.8 Stock Purchase Agreement dated March 29, 1993 by and among Community Bancorp, Inc. and certain specific persons. (g) 13. 1996 Annual Report to shareholders 21. Subsidiaries of Company Page 26 27. Financial Data Schedule (a) Incorporated herein by reference to Exhibits 3.1, and 3.2 and filed as part of Company's Amendment No. 1 to the Registration Statement on Form S-18 (File No. 33-12756-B) filed with Commission on April 16, 1987. -24- (b) Incorporated herein by reference to Exhibit 10.1 as part of Company's Registration Statement on Form S-18 (File No. 33-12756-B) filed with the Commission on March 19, 1987. (c) Incorporated herein by reference to Exhibits 5.8 and 5.9 filed as part of Company's Amendment No. 2 to the Offering Statement on Form 1-A (File No. 24B-2076) filed with the Commission on August 14, 1986. (d) Incorporated herein by reference to Exhibits 5.2 and 5.4 filed as part of Company's Offering Statement on Form 1-A (File No. 24B-2076) filed with the Commission on June 24, 1986. (e) Incorporated herein by reference as filed as part of the Company's December 31, 1988 Form 10-K (File No. 33-12756-B), filed with the Commission on March 30, 1989. (f) Incorporated herein by reference as filed as part of the Company's December 31, 1989 Form 10-K (File No. 33-12756-B), filed with the Commission on March 29, 1990. (g) Incorporated herein by reference as filed as part of the Company's December 31, 1992 Form 10-K (File No. 33-12756-B), filed with the Commission on March 30, 1993.
-25- SUBSIDIARIES OF COMPANY ----------------------- 1. Hudson National Bank, a national banking association. -26- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY BANCORP, INC. Date: March 14, 1997 By: /s/ Donald R. Hughes, Jr. -------------------------- Donald R. Hughes, Jr. Treasurer and Clerk - -------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date Name and Capacity ---- ----------------- March 14, 1997 /s/ James A. Langway --------------------------------- James A. Langway, President & CEO Principal Executive Officer March 14, 1997 /s/ Donald R. Hughes, Jr. --------------------------------- Donald R. Hughes, Jr., Treasurer & Clerk, Principal Financial Officer and Principal Accounting Officer March 14, 1997 /s/ James A. Langway --------------------------------- James A. Langway, Director March 14, 1997 /s/ Donald R. Hughes, Jr. --------------------------------- Donald R. Hughes, Jr., Director March 17, 1997 /s/ David W. Webster --------------------------------- David W. Webster - Director March 17, 1997 /s/ Mark Poplin --------------------------------- Mark Poplin - Director March 17, 1997 /s/ Argeo R. Cellucci --------------------------------- Argeo R. Cellucci - Director March 18, 1997 /s/ I. George Gould --------------------------------- I. George Gould - Director -27- SUPPLEMENTAL INFORMATION ------------------------ Copies of the Notice of Annual Meeting of Shareholders, Proxy Statement and Proxy For Annual Meeting of Shareholders for the Registrant's 1997 annual meeting of shareholders, to be held on April 8, 1997, are being submitted separately as an EDGAR Submission Type DEF 14A. Such material is not deemed to be filed with the Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act. -28- EX-13 2 1996 ANNUAL REPORT TO SHAREHOLDERS [The annual report front cover is a color image depicting Hudson National Bank's Internet web site home page.] Community Bancorp, Inc. Annual Report 1996 [The following text appears on the inside front cover.] The image depicted on the cover of this annual report is from the home page of our Internet web site. We hope you will visit us frequently at http://www.hnbank.com. Selected Consolidated Financial Data
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total assets $250,002,458 $237,580,796 $219,850,767 $214,682,682 $199,455,534 Total deposits 217,181,869 207,039,865 186,862,986 185,499,065 174,348,956 Total net loans 128,088,725 124,616,963 119,334,885 125,435,415 122,144,150 Allowance for possible loan losses 3,481,705 3,455,098 3,703,470 3,910,195 4,178,343 Total interest income 17,761,102 16,917,624 14,429,932 14,032,506 15,027,657 Total interest expense 6,367,758 6,284,750 4,525,558 4,465,379 5,696,474 Net interest income 11,393,344 10,632,874 9,904,374 9,567,127 9,058,183 Gains (losses) on sales of securities (9,460) --- (29,828) 69,600 371,436 Provision for possible loan losses --- 120,000 300,000 600,000 1,425,000 Net income (loss) 3,152,098 2,643,877 2,105,433 1,505,158 1,021,986 Earnings (loss) per share 1.01 0.84 0.67 0.49 0.32 Dividends per share 0.253 0.234 0.214 0.173 0.075
[Five-year bar graphs for the following categories appear in this space. Data for the graphs was obtained from the above table.] Total Assets (in millions) Net Income (in millions) Earnings Per Share (in dollars) Total Deposits (in millions) Total Net Loans (in millions) Net Interest Income (in millions) Table of Contents ----------------- 3. Message to Stockholders and Friends 5. Year in Review 9. Consolidated Balance Sheets 10. Consolidated Statements of Income 11. Consolidated Statements of Stockholders' Equity 12. Consolidated Statements of Cash Flows 14. Notes to Consolidated Financial Statements 24. Report of Independent Public Accountants 25. Management's Discussion and Analysis of Financial Condition and Results of Operations 30. Directors & Officers -2- To Our Stockholders and Friends It is always a pleasure to announce good news, which makes this year's letter especially enjoyable to write. Community Bancorp, Inc. and its subsidiary, Hudson National Bank, achieved another record-breaking year in 1996. The Company recorded net income of $3,152,098 for the year, surpassing by 19.2% the $2,643,877 recorded in 1995. Earnings per share of common stock was $1.01 in 1996, compared to $.84 in the previous year. This increase in net income was the combined result of increases in net interest income and noninterest income, and reductions in the provision for possible loan losses and FDIC insurance premiums in 1996. During 1996 the Company achieved a return on assets (ROA) of 1.31%, the highest in its history and considerably above its peer group average. Equally important is the fact that the return on equity (ROE) for the year rose to 15.36%, again the highest in the Company's history. This increase in ROE resulted from higher net income and also from the stock repurchase program implemented in the fall of 1996 which reduced the number of outstanding shares of common stock. [A photograph of the bank's newly-renovated Commercial Banking Department appears here.] -3- The Company's asset quality is very high, and at year-end past due loans represented only 1.6% of total outstanding loans. No provision for loan losses was necessary in 1996, yet the allowance for loan losses actually increased in balance due to recoveries of previously charged-off loans. The banking business is changing, and as a community bank we must now serve two important groups of customers; those who prefer to do their banking in person and those who prefer to do their banking electronically through modern technology. We are striving to provide excellent service to both customer groups. In March of 1996 we introduced HomeBanc, an easy to use PC-based electronic banking system for personal account customers. Within the first six months following the introduction of this new service, over 1,000 customers had registered to use it, representing approximately 10% of our personal account customer base. We believe electronic banking services like HomeBanc, and our PC-based banking system for businesses called ExecuBanc, will appeal to an increasing number of our customers in the future, and we will continue to enhance these services to maximize customer convenience. Community Bancorp is a strong, well-capitalized, community-oriented financial institution. We believe we can continue to distinguish ourselves from the competition by doing what a community bank does best - know its customers and provide the best banking service possible. The Board of Directors, management and staff will continue to work diligently to enhance profitability and shareholder value, and we look forward to 1997 with enthusiasm. Sincerely, /s/ James A. Langway /s/ Dennis F. Murphy, Jr. - -------------------- ------------------------- James A. Langway Dennis F. Murphy, Jr. President and Chief Executive Officer Chairman of the Board -4- Year in Review Hudson National Bank is a strong, independent owned, community-oriented commercial bank with eight branch offices in Middlesex County. The Bank prides itself on its ability to provide quality, personal service as well as a full range of financial products designed to meet various financial needs of both consumers and local businesses. [A photograph of the Bank's Mortgage Officer appears here.] Some people believe you have to sacrifice high quality personal service for banking convenience or that only large banks have sophisticated banking products, but Hudson National Bank proves that customers can have the best of both worlds. In essence, it's a hybrid bank that can deliver all the modern services as well as a level of personal service few larger banks can match. -5- Technology continues to be a driving force in providing alternative methods of banking access as the number of customers who prefer "electronic" over "geographic" convenience grows larger each year. Convenient banking has always been a key consideration when choosing a bank; however, the basis on which convenience is measured has grown to include ATM access, telephone banking, debit cards, direct deposit and now PC banking. Hudson National has recognized this trend and is responding to the changing needs of its customers. [A photo of the Bank's new drive-up ATM at its Hudson South branch appears here.] A number of projects were undertaken during the year to further strengthen the Bank's product line. During the first quarter, Hudson National offered a debit card to complement it's credit card. The FlexCard [TM] is a MasterMoney [TM] debit card that provides account access at ATMs and can also be used to pay for purchases wherever MasterCard [R] is accepted. The Bank is one of the first community banks in the area to offer a full-fledged debit card, demonstrating the Bank's ability to offer a competitive array of services. With ATM links to the NYCE [R] and Cirrus [R] ATM networks, as well as the new MasterMoney feature, customers can use their FlexCards for payment and cash access virtually anywhere in the world. In the second quarter we successfully introduced our PC banking program HomeBanc [TM], and have since added several enhancements. HomeBanc is a state-of-the-art PC-based computer banking service which allows customers to use their PC or laptop computer to access their -6- account information, transfer funds, and pay bills 24 hours a day, 365 days per year. Hudson National is the first community bank in the area to offer this type of service to its customers. We will continue to enhance the HomeBanc service during 1997. [A photo of the Bank's Operations Department appears here.] The Bank continues to expand and upgrade its ATM system, with ATMs in service now totalling 12. The two most recent additions include a drive-up ATM at the Hudson South office and a walk-up unit in the Solomon Pond Mall in Marlborough. These new locations have provided our customers with added convenience and have been well received. In addition, Hudson National updated and improved its Internet World Wide Web site to provide a variety of product and organizational information, current deposit and loan rates, and even a simplified loan application. It can be found at http://www.hnbank.com. Hudson National was one of the first banks in the state to begin utilizing the Internet. Additional features being planned include interactive loan calculators to allow customers to determine payments on various types of loans. [A second photo of the Bank's Operations Department appears here.] Hudson National has implemented a new commercial lending program, HNB Small Business Financing, to focus on Small Business Administration (SBA) loans. Loans will be generated for the Bank's portfolio and for sale, depending on market conditions. The Bank's Capital Access Program and SBA 504 program also proved to be very successful in 1996. Hudson National understands small business and can tailor-make financing arrangements to suit the particular needs of each individual firm. An experienced team of lenders works to develop a clear understanding of a business and its needs so a lasting partnership can be built. -7- [A photo of the Bank's Consumer Loan Center appears here.] Banking has traditionally been a very local business. In working with small businesses and commercial customers, the trust and relationships fostered by having local ties to clients plays a major role in the success of Hudson National, as does our ability to customize products and pricing according to local requirements. Today, the challenges that come with change have never been greater. New distribution channels are rapidly developing, and with them come opportunities to provide customers with greater convenience and access to information. These technological and regulatory changes have made it possible for Hudson National to greatly extend the scope of its operations. Yet, we are committed to remaining true to our community banking roots. In addition to providing support for a variety of organizations and community programs through charitable donations, many members of our staff are involved in various community groups. It is through this interaction with the communities we serve that we are able to learn and understand the needs of our customers, allowing us to remain "closer to you". Hudson National Bank is fortunate that its primary market area is in one of the fastest growing regions of the state. Middlesex County's growth rate is double the average growth rate of the state. Personal income growth is also rising faster than the state as a whole. Furthermore, while Hudson National is both a strong and profitable organization, it has a relatively small market share, providing opportunities for future growth. In 1997 we will focus on leveraging some of our core strengths into new lines of business including consulting, SBA 7A lending, asset management, financial planning and insurance and annuity sales. -8- Consolidated Balance Sheets December 31, 1996 and 1995
1996 1995 ----------- ----------- ASSETS Cash and due from banks $ 14,391,567 $ 12,668,446 Federal funds sold 11,300,000 16,700,000 Securities available for sale at market value (Note 2) 29,245,007 24,678,624 Securities held to maturity (market value $58,312,349 in 1996 and $49,745,222 in 1995) (Note 2) 58,828,881 49,937,205 Loans (Notes 3 and 10) 131,570,430 128,072,061 Less allowance for possible loan losses (Notes 4 and 13) 3,481,705 3,455,098 ----------- ----------- Total net loans 128,088,725 124,616,963 Premises and equipment, net (Note 5) 4,848,202 5,126,083 Other assets, net (Note 14) 3,300,076 3,853,475 ----------- ----------- Total assets $250,002,458 $237,580,796 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 11): Noninterest bearing $ 51,358,151 $ 45,383,886 Interest bearing 165,823,718 161,655,979 ----------- ----------- Total deposits 217,181,869 207,039,865 ----------- ----------- Securities sold under repurchase agreements 11,454,687 9,289,963 Other liabilities (Note 8) 1,524,768 1,710,295 ----------- ----------- Total liabilities 230,161,324 218,040,123 ----------- ----------- Commitments (Notes 9 and 13) Stockholders' equity (Note 6): Preferred stock, $2.50 par value, 100,000 shares authorized, none issued or outstanding Common stock, $2.50 par value, 4,000,000 shares authorized, 3,199,218 shares issued, 2,935,012 shares outstanding, (3,158,946 shares outstanding at December 31, 1995) 7,998,045 7,998,045 Surplus 374,580 290,253 Undivided profits 13,826,958 11,463,544 Treasury stock, 264,206 shares, (40,272 at December 31, 1995) (2,348,419) (181,224) Unrealized losses on securities available for sale, net of taxes (Note 2) (10,030) (29,945) ----------- ----------- Total stockholders' equity 19,841,134 19,540,673 ----------- ----------- Total liabilities and stockholders' equity $250,002,458 $237,580,796 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
-9- Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Interest income: Interest and fees on loans $ 12,430,327 $12,363,714 $10,439,354 Interest and dividends on securities: Taxable interest 4,565,311 4,003,765 3,791,167 Nontaxable interest 120,553 91,517 57,826 Dividends 54,248 51,651 79,943 Interest on federal funds sold 590,663 406,977 61,642 ---------- ---------- ---------- Total interest income 17,761,102 16,917,624 14,429,932 ---------- ---------- ---------- Interest expense: Interest on deposits 5,840,445 5,735,554 4,142,705 Interest on federal funds purchased and securities sold under repurchase agreements 527,313 549,196 382,853 ---------- ---------- ---------- Total interest expense 6,367,758 6,284,750 4,525,558 ---------- ---------- ---------- Net interest income 11,393,344 10,632,874 9,904,374 ---------- ---------- ---------- Provision for possible loan losses (Note 4) --- 120,000 300,000 ---------- ---------- ---------- Net interest income after provision for possible loan losses 11,393,344 10,512,874 9,604,374 ---------- ---------- ---------- Noninterest income: Merchant credit card processing assessments 855,488 690,024 599,513 Service charges 774,876 701,824 679,818 Other charges, commissions and fees 697,650 663,827 683,590 Gains (losses) on sales of loans, net 21,105 (31,776) (1,698) Losses on sales of securities, net (9,460) --- (29,828) Other 75,399 60,065 96,534 ---------- ---------- ---------- Total noninterest income 2,415,058 2,083,964 2,027,929 ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits (Note 8) 4,541,551 4,362,821 4,289,900 Data processing 582,334 478,064 380,596 Occupancy 580,519 610,737 601,235 Furniture and equipment 362,453 325,662 310,987 Credit card processing 738,227 621,695 500,094 OREO carrying costs (income), net 51,623 (4,413) 170,143 FDIC insurance premiums 2,000 209,906 394,696 Other 1,770,937 1,668,940 1,672,118 ---------- ---------- ---------- Total noninterest expense 8,629,644 8,273,412 8,319,769 ---------- ---------- ---------- Income before income tax expense and cumulative effect of change in accounting principle 5,178,758 4,323,426 3,312,534 Income tax expense 2,026,660 1,679,549 1,207,101 ---------- ---------- ---------- Net income $ 3,152,098 $ 2,643,877 $ 2,105,433 ========== ========== ========== Earnings per share $ 1.01 $ 0.84 $ 0.67 Weighted average number of shares outstanding 3,113,388 3,148,306 3,138,998 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-10- Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994
Common Undivided Treasury Stock Surplus Profits Stock Other ----- ------- ---------- -------- ----- Balance, December 31, 1993 7,998,045 102,138 8,117,525 200,158 Net income 2,105,433 Cash dividends declared ($.214 per share) (666,190) Purchase of 220,628 shares of treasury stock (Note 6) (992,826) Reissuance of 162,164 shares of treasury stock (Note 6) 161,400 729,738 Change in unrealized loss on securities available for sale, net of taxes (1,010,971) - -------------------------- --------- ------- --------- --------- --------- Balance, December 31, 1994 7,998,045 263,538 9,556,768 (263,088) (810,813) Net income 2,643,877 Cash dividends declared ($.234 per share) (737,101) Purchase of 382 shares of treasury stock (2,865) Reissuance of 18,574 shares of treasury stock 26,715 84,729 Change in unrealized loss on securities available for sale, net of taxes 780,868 - -------------------------- --------- ------- ---------- ------- ------- Balance, December 31, 1995 7,998,045 290,253 11,463,544 (181,224) (29,945) Net income 3,152,098 Cash dividends declared ($.253 per share) (788,684) Purchase of 257,665 shares of treasury stock (Note 6) (2,318,985) Reissuance of 33,731 shares of treasury stock 84,327 151,790 Change in unrealized loss on securities available for sale, net of taxes 19,915 - -------------------------- --------- ------- ---------- --------- ------ Balance, December 31, 1996 $7,998,045 $374,580 $13,826,958 $(2,348,419) $(10,030) ========= ======= ========== ========= ====== The accompanying notes are an integral part of these consolidated financial statements.
-11- Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Interest received $ 17,803,811 $ 16,739,141 $ 14,155,067 Fees and commissions received 2,514,788 2,068,486 2,109,853 Proceeds from secondary market mortgage sales 14,737,701 8,899,808 31,829,089 Origination of mortgage loans held for sale (14,577,346) (9,320,396) (17,847,022) Interest paid (6,373,350) (6,308,750) (4,341,747) Cash paid to suppliers and employees (8,020,426) (7,084,208) (7,732,757) Income taxes paid (1,941,421) (1,404,520) (1,201,342) ----------- ----------- ---------- Net cash provided by operating activities 4,143,757 3,589,561 16,971,141 ----------- ---------- ------- Cash flows used in investing activities: Purchases of securities held to maturity (22,899,227) (17,362,828) (28,049,573) Proceeds from maturities of securities held to maturity 14,056,633 13,194,982 4,004,738 Purchase of securities held for sale (14,347,861) --- (12,824,946) Proceeds from sales of securities held for sale 3,507,742 --- 13,047,576 Proceeds from maturities of securities held for sale 6,257,701 3,434,457 13,219,324 Net change in federal funds sold 5,400,000 (10,600,000) (3,000,000) Net change in loans and other real estate owned (3,446,092) (4,689,293) (7,769,209) Proceeds from sales of other real estate owned 100,000 178,700 316,350 Acquisition of premises and equipment (488,905) (589,533) (754,005) ----------- ---------- --------- Net cash used in investing activities (11,860,009) (16,433,515) (21,809,745) ---------- ---------- ---------- Cash flows from financing activities: Net change in deposits 10,142,004 20,176,879 1,363,921 Net change in securities sold under repurchase agreements 3,164,724 4,249,163 3,422,141 Net change in federal funds purchased (1,000,000) (9,000,000) --- Purchase of treasury stock (2,318,985) (2,865) (992,826) Reissuance of treasury stock 236,117 111,444 891,138 Dividends paid (784,487) (722,606) (647,835) ---------- ---------- ---------- Net cash provided by financing activities 9,439,373 13,912,015 4,036,539 ---------- ----------- ---------- Net increase (decrease) in cash and due from banks 1,723,121 1,068,061 (802,065) Cash and due from banks at beginning of year 12,668,446 11,600,385 12,402,450 ---------- ---------- ---------- Cash and due from banks at end of year $14,391,567 $12,668,446 $11,600,385 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-12- Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (Continued) Reconciliation of Net Income to Net Cash Provided by Operating Activities
1996 1995 1994 ---- ---- ---- Net income $ 3,152,098 $ 2,643,877 $ 2,105,433 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in mortgage loans held for sale (164,784) (787,488) (13,612,894) Premium on sale of mortgages 325,139 366,900 369,172 Depreciation and amortization 839,476) 747,822 818,632 Provision for possible loan losses --- 120,000 300,000 Write-down of OREO properties --- --- 21,870 Deferred income taxes 25,581 176,043 139,324 Increase (decrease) in other liabilities (230,258) 441,387 (253,490) Increase in taxes payable 85,239 275,029 5,759 Increase (decrease) in interest payable (5,592) (24,000) 183,811 (Increase) decrease in other assets, net 74,150 (191,521) (57,400) (Increase) decrease in interest receivable 42,708 (178,488) (274,864) ----------- ----------- ----------- Total adjustments 991,659 945,684 14,865,708 ----------- ----------- ----------- Net cash provided by operating activities $ 4,143,757 $ 3,589,561 $ 16,971,141 =========== =========== =========== Supplemental Disclosure: Loans transferred to OREO totalled $998,708, $182,958 and $742,136 for the years ended December 31, 1996, 1995 and 1994, respectively. The accompanying notes are an integral part of these consolidated financial statements.
-13- Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of consolidation The accompanying consolidated financial statements include the accounts of Community Bancorp, Inc. (the "Company"), a Massachusetts corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and its wholly-owned subsidiary, Hudson National Bank (the "Bank"), a national banking association. The Company also formed Community Securities Corporation, a wholly-owned subsidiary of the Bank. All inter-company balances and transactions have been eliminated in consolidation. At present, the Company conducts no activities independent of the Bank. The Bank has eight offices and is engaged in substantially all of the business operations normally conducted by an independent commercial bank in Massachusetts. Banking services offered include the acceptance of checking, savings, and time deposits, and the making of commercial, real estate, installment and other loans. The Bank also offers official checks, safe deposit boxes, and other customary banking services to its customers. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost. Securities purchased to be held for indefinite periods of time and not intended to be held until maturity are classified as "available for sale" securities. Securities classified as available for sale are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in a separate component of stockholders' equity. Securities held for indefinite periods of time include securities that management may use in conjunction with the Company's asset/liability in management program and that may be sold in response to changes in interest rates, prepayment risks or other economic factors. When securities classified as available for sale are sold, the adjusted cost of each specific security sold is used to calculate gains or losses on sale, which are included in earnings. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization, which is accumulated depreciation and amortization, which is computed by using both the straight-line and accelerated methods. Estimated useful lives are as follows: Buildings................30 to 40 years Buildings and leasehold improvements.............5 to 25 years Furniture and equipment...3 to 10 years Cash and due from banks Included in cash and due from banks as of December 31, 1996 and 1995 is approximately $4,527,000 and $3,313,000, respectively, that is subject to Federal Reserve withdrawal restrictions. Allowance for possible loan losses Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for possible loan losses. The allowance for possible loan losses is increased through a provision for possible loan losses charged to expense and decreased by charge-offs, net of recoveries. The provision is based on management's estimation of the amount necessary to maintain the allowance at an adequate level. Management's periodic evaluation of the adequacy of the allowance is based on specific credit reviews, past loan loss experience, current economic conditions and trends known and inherent risks in the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and the volume, growth and composition of the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. Effective January 1, 1995, the Company adopted Financial Accounting Standards Board Statement No 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). Under the standard, the allowance for possible loan losses related to loans that are identified as -14- impaired is based on discounted cash flows using the loan's effective interest rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for possible loan losses related to these loans was based on undiscounted cash flows or the fair market value of the collateral for collateral dependent loans. For purposes of this Statement, a loan is considered to be impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Financial Accounting Standards Board also issued SFAS No. 118, which amended SFAS No. 114 by allowing creditors to use their existing methods of recognizing interest income on impaired loans. The Company determined, after reviewing its credit quality monitoring policies and procedures and an analysis of the loan portfolio, that loans recognized by the Company as nonaccrual and restructured troubled debt are equivalent to "impaired" loans as defined by SFAS No. 114. The Company also determined that the allowance for possible loan losses did not require an additional loan loss provision as a result of the adoption of this Statement. Total impaired loans at December 31, 1996 and 1995 that required a related allowance were $373,318 and $214,131, respectively, and the allowance allocated to such loans was $120,000 and $35,000, respectively. In addition, at December 31, 1996 and 1995, the Company had impaired loans of $523,191 and $1,436,214, respectively, that did not require a related allowance. Interest payments on impaired loans are recorded as principal reductions if the remaining loan balance is not expected to be repaid in full. If full collection of the remaining loan balance is expected, interest payments are recognized as interest income on a cash basis. Impaired loans averaged $1,457,388 and $1,010,296 during 1996 and 1995, respectively. The Company recorded interest income on impaired loans of $42,238 during 1996 and $108,279 during 1995. Securities sold under repurchase agreements The Company sells securities under open-ended repurchase agreements with certain customers. The principal balance of the repurchase agreements changes daily. Specific securities are not sold and securities are not transferred to the name of the customers. Instead, the customer has an interest in a portion of the U.S. Government securities held in the Company's investment portfolio. Earnings per share Earnings per share is based on the weighted average number of shares outstanding during the year. Long-lived assets Effective January 1, 1996, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No. 121). SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement also requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at the lower of the carrying amount or fair value less cost to sell. The adoption of SFAS No. 121 by the Company had no impact on the results of its operations or financial condition. Loan sales and loans held for sale Gains and losses on sales of mortgage loans are recognized at the time of sale based on the difference between the selling price and the carrying value of the related loans sold. The gains and losses are increased or decreased by the present value of the difference (generally referred to as "excess servicing)" between the interest rate on the loans sold, adjusted for a normal servicing fee and, in the case of mortgage-backed securities, a guaranty fee, and the agreed-upon yield to the buyer. The present value is computed over the estimated life of the loans sold, taking into account scheduled payments and estimated prepayments. At December 31, 1996 and 1995, loans held for sale totalled $1,222,165 and $1,057,381, respectively. Effective January 1, 1996, the Company adopted Financial Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122). SFAS No. 122, as amended by SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", requires the capitalization of the rights to service mortgage loans for others. In addition, capitalized mortgage servicing rights are required to be assessed for impairment based on the -15- fair value of those rights. The Company adopted SFAS No. 122 on a prospective basis and, as a result, recorded an incremental gain of $46,849 on the sale of mortgage loans with servicing rights retained during 1996. Revenue recognition Interest on loans, securities and other earning assets is accrued and credited to operations based on contractual rates and principal amounts outstanding. Nonrefundable loan fees and certain related costs are deferred and recognized as income over the life of the loan as an adjustment of the yield. It is the policy of the Company to discontinue the accrual of interest on loans when, in the judgement of management, the ultimate collectibility of principal or interest becomes doubtful. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed, and interest accrued in prior years is charged to the allowance for possible loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Otherwise, interest income is subsequently recognized only to the extent cash payments are received. Reclassifications Certain amounts in prior year's financial statements have been reclassified to be consistent with the current year's presentation. The reclassifications have no effect on net income. 2. Securities The book and estimated market values of securities at December 31, 1996 and 1995 were as follows:
1996 -------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government obligations $ 6,040,283 $ 3,747 $ 26,831 $ 6,017,199 U.S. Government agencies and corporations 12,018,820 9,233 90,914 11,937,139 Obligations of states and political subdivisions 4,141,216 595 8,113 4,133,698 Mortgage-backed securities 36,628,562 80,802 485,051 36,224,313 ----------- ---------- ---------- ----------- $ 58,828,881 $ 94,377 $ 610,909 $ 58,312,349 =========== ========== ========== =========== Gross Gross Securities Held Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government obligations $ 9,920,585 $ 44,377 $ 3,866 $ 9,961,096 U.S. Government agencies and corporations 4,989,529 --- 27,652 4,961,877 Mortgage-backed securities 13,463,117 83,447 112,686 13,433,878 Other securities 888,156 --- --- 888,156 ----------- ---------- ---------- ----------- $ 29,261,387 $ 127,824 $ 144,204 $ 29,245,007 =========== ========== ========== =========== 1995 -------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government obligations $ 9,104,865 $ 16,179 $ 20,366 $ 9,100,678 U.S. Government agencies and corporations 12,545,065 --- 23,350 12,521,715 Obligations of states and political subdivisions 1,940,710 --- --- 1,940,710 Mortgage-backed securities 26,346,565 96,131 260,577 26,182,119 ----------- ---------- ---------- ----------- $ 49,937,205 $ 112,310 $ 304,293 $ 49,745,222 =========== ========== ========== =========== Gross Gross Securities Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government obligations $ 8,056,639 $ 20,172 $ 21,501 $ 8,055,310 U.S. Government agencies and corporations 2,021,784 --- 5,676 2,016,108 Mortgage-backed securities 13,761,475 61,673 104,096 13,719,052 Other securities 888,154 --- --- 888,154 ----------- ---------- ---------- ----------- $ 24,728,052 $ 81,845 $ 131,273 $ 24,678,624 =========== ========== ========== ===========
The book and estimated market value of securities at December 31, 1996 by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Held to Maturity Securities Available for Sale --------------------------- ----------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- Within one year $ 5,770,949 $ 5,748,153 $ 4,005,378 $ 4,008,282 One to five years 13,973,407 13,891,438 7,919,579 7,951,252 Five to ten years --- --- 2,985,157 2,963,439 Ten to fifteen years 2,455,963 2,448,445 --- --- Mortgage-backed securities 36,628,562 36,224,313 13,463,117 13,433,878 Other securities --- --- 888,156 888,156 ----------- ---------- ---------- ---------- $58,828,881 $58,312,349 $29,261,387 $29,245,007 ========== =========== ========== ==========
-16- Securities with a book value of $25,861,000 and $22,085,000 at December 31, 1996 and 1995, respectively, were pledged to secure public funds on deposit and for other purposes. Proceeds from sales, purchases, and maturities of securities available for sale during 1996 were $3,507,742, $14,347,861, and $6,257,701, respectively. Gross realized losses on sales of securities during 1996 were $9,460. There were no sales of securities in 1995. Realized gains or losses on sales of securities were determined by specific identification. 3. Loans The composition of the loan portfolio at December 31, 1996 and 1995 was as follows:
1996 1995 ---- ---- Commercial and industrial $ 17,227,165 $ 13,783,644 Real estate - residential 51,012,087 52,036,183 Real estate - commercial 45,104,891 44,983,032 Real estate - residential construction 4,833,291 3,903,267 Loans to individuals 13,221,415 13,177,862 Other 171,581 188,073 ----------- ----------- Total loans $131,570,430 $128,072,061 =========== ===========
Substantially all of the Company's loan portfolio is collateralized by assets in the New England region, especially central Massachusetts. The Company generally requires collateral when extending credit and, with respect to loans secured by real estate, Company policy requires appropriate appraisals and repayment sources. At December 31, 1996 and 1995, accruing loans 90 days or more past due totalled $370,223 and $159,922, respectively, and nonaccruing loans totalled $896,509 and $1,650,345, respectively. There were no troubled debt restructurings at December 31, 1996 or 1995. The reduction of interest income associated with nonaccrual and restructured loans for the years ended December 31, 1996, 1995 and 1994 was as follows:
1996 1995 1994 ---- ---- ---- Interest income per original terms $ 220,029 $ 211,348 $ 357,774 Income recognized 42,411 103,069 216,280 -------- -------- -------- Foregone interest income $ 177,618 $ 108,279 $ 141,494 ======== ======== ========
4. Allowance for Possible Loan Losses Activity in the allowance for possible loan losses for the years ended December 31, 1996, 1995 and 1994 was as follows: Balance, December 31, 1993 $3,910,195 Provision for possible losses 300,000 Charge-offs (838,955) Recoveries 332,230 --------- Balance, December 31, 1994 3,703,470 Provision for possible losses 120,000 Charge-offs (629,306) Recoveries 260,934 --------- Balance, December 31, 1995 3,455,098 Provision for possible losses --- Charge-offs (230,545) Recoveries 257,152 --------- Balance, December 31, 1996 $3,481,705 =========
5. Premises and Equipment The composition of premises and equipment at December 31, 1996 and 1995 was as follows:
1996 1995 ---- ---- Premises $ 5,046,199 $ 5,023,261 Equipment 3,097,098 2,861,731 ---------- ---------- 8,143,297 7,884,992 Less accumulated depreciation and amortization 3,295,095 2,758,909 ---------- ---------- $ 4,848,202 $ 5,126,083 ========== ==========
Total depreciation and amortization expense for the years ended December 31, 1996, 1995 and 1994 was $746,120, $668,526 and $598,018, respectively, and is included in data processing, occupancy and furniture and equipment expense. 6. Stockholders' Equity Pursuant to a Stock Purchase Agreement dated March 29, 1993, the Company and certain individuals agreed to purchase a total of 766,924 shares of common stock from existing stockholders of the Company in two separate transactions. The initial transaction was consummated on April 30, 1993 and involved a total of 546,296 shares. Of these, 379,810 shares were acquired by the Company. The remaining 166,486 shares were acquired by various individuals. The purchase price in the initial transaction was $4.40 per share. The Company received a fairness opinion indicating that such purchase price was fair to the Company from a financial point of view. The total -17- purchase price paid by the Company in the initial transaction was $1,671,164. During 1993, the Company completed a stock offering to reissue the 379,810 shares of treasury stock and sell 35,606 additional shares of common stock. Net proceeds from the stock offering were $1,817,809 after deducting applicable offering expenses. Pursuant to the second transaction, which was consummated on May 6, 1994, the Company purchased 220,628 additional shares of common stock from certain existing stockholders at a price of $4.50 per share. The Company received a fairness opinion indicating that such purchase price was fair to the Company from a financial point of view. The total purchase price paid by the Company in the second transaction was $992,826. Shares acquired by the Company in both the initial and the second transaction were accounted for as treasury stock under the cost method. During 1994, the Company re-issued 162,164 shares of acquired stock, providing net proceeds of $891,138 after deducting applicable expenses. On August 15, 1996, the Company implemented an Offer to Purchase up to 222,222 shares of its outstanding common stock at a price of $9.00 per share. The Offer expired on September 13, 1996, with 257,665 shares tendered. As provided in the Offer, the Company increased the number of shares sought in the Offer by approximately 1.1% of the outstanding shares and purchased all 257,665 shares tendered under the offer. There was no proration of shares. Shares acquired by the Company were accounted for as treasury stock under the cost method. As a result of the repurchase of shares, the Company's capital was reduced by $2,318,985. 7. Income Taxes The components of income tax expense for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- Current: Federal $ 1,508,248 $ 1,160,210 $ 817,474 State 492,831 343,296 250,303 ---------- ---------- ---------- Total current 2,001,079 1,503,506 1,067,777 ---------- ---------- ---------- (Prepaid)/Deferred: Federal 6,430 114,195 194,508 State 19,151 61,848 (55,184) ---------- ---------- ---------- Total (prepaid)/deferred 25,581 176,043 139,324 ---------- ---------- ---------- Total $ 2,026,660 $ 1,679,549 $ 1,207,101 ========== ========== ==========
The difference between the income tax provision computed by applying the statutory federal income tax rate of 34% to income before income taxes and the cumulative effect of a change in accounting principle and the actual income tax provision is summarized as follows:
1996 1995 1994 ---- ---- ---- Income tax expense at statutory rates $ 1,760,833 $ 1,469,965 $ 1,126,262 State income taxes, net of federal income tax benefit 337,908 267,395 207,978 Tax-exempt interest (69,794) (71,828) (62,953) Reversal of valuation allowance --- --- (80,000) Other, net (2,287) 14,017 15,814 ----------- ---------- ---------- $ 2,026,660 $ 1,679,549 $ 1,207,101 ========== ========== ==========
The Company has recorded a net deferred tax asset of $756,290. Realization is dependent on the generation of sufficient taxable income in future years. Although realization is not assured, management believes it is more likely than not that the full amount of the net deferred tax asset will be realized. However, the amount realizable could be reduced if estimates of future taxable income are reduced. At December 31, 1996 and 1995, the Company's net deferred tax asset, as presented in the accompanying consolidated balance sheets, consisted of the following components:
1996 1995 ---- ---- Gross deferred tax asset: Provision for possible loan losses $ 909,466 $ 921,209 Employee benefits and other compensation arrangements 334 663 325,975 OREO write-downs 20,732 21,000 Other 30,319 29,066 --------- --------- 1,295,180 1,297,250 Gross deferred tax liability: Amortization of intangible assets --- (30,529) Accelerated tax depreciation (390,932) (350,807) Other (147,958) (121,060) --------- --------- (538,890) (502,396) --------- --------- Net deferred tax asset $ 756,290 $ 794,854 ========= =========
8. Employee Benefits The Company has a defined benefit pension plan covering all eligible employees. The benefits are based on years of service and the employees' compensation as defined in the Plan agreement. The Company's funding policy is to make annual contributions to the Plan equal to at least the minimum amount required for actuarial purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those to be earned in the future. The following table sets forth the Plan's funded status and -18- amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995:
1996 1995 ---- ---- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,597,121 ($1,422,106 in 1995) $(1,678,366) $(1,497,943) ========= ========= Projected benefit obligation for service rendered to date $(2,732,471) $(2,443,171) Plan assets at fair value (funds held in mutual funds, Community Bancorp, Inc. stock and deposit accounts at Hudson National Bank) 2,277,087 1,514,977 ---------- ---------- Funded status of plan (455,384) (928,194) Prior service cost not yet recognized in net periodic pension cost 13,796 15,176 Unrecognized net asset at transition being recognized over 17 years (62,675) (71,629) Unrecognized net loss from past experience different from that assumed 401,786 547,906 ---------- ---------- Accrued pension cost $ (102,477) $ (436,741) ========== ==========
Net periodic pension cost for the years ended December 31, 1996, 1995 and 1994 included the following components:
1996 1995 1994 ---- ---- ---- Service cost-benefits earned during the period $ 210,421 $ 174,826 $ 208,151 Interest cost on projected benefit obligation 179,213 149,673 149,088 Actual return on plan assets (210,676) (209,069) 98,961 Adjustment to reflect amount expensed by plan sponsor --- --- (1,000) Net amortization and deferral 90,728 103,634 (204,260) ---------- ---------- ---------- Net periodic pension cost $ 269,686 $ 219,064 $ 250,940 ========== ========== ==========
The weighted-average discount rate and annual rate of increase in the future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 5.5% at December 31, 1996 and 1995, respectively. The expected annual long-term rate of return on assets was 8.0% for the years ended December 31, 1996 and 1995. The Company has an Employee Stock Ownership Plan (ESOP) that enables eligible employees to own common stock. A cash contribution of $70,000 was made to the ESOP in 1996. No cash contributions were made to the ESOP in 1995 or 1994. The Company implemented a 401(k) plan in 1989, covering all eligible employees. Compensation expense recorded in 1996, 1995 and 1994 related to this plan was approximately $61,400, $22,800 and $26,900, respectively. 9. Commitments The Company leases branch offices and equipment under noncancelable agreements expiring at various dates through 2001 that require various minimum annual rentals. The total future minimum rental commitments at December 31, 1996 aggregate $435,936. Rental commitments for each of the next five fiscal years and thereafter are as follows: 1997 158,837 1998 88,674 1999 62,039 2000 42,962 2001 41,712 Thereafter 41,712 Rental expense totalled approximately $149,000, $146,000 and $146,000, for 1996, 1995 and 1994, respectively. 10. Loans to Related Parties The schedule below discloses indebtedness of certain parties related to the Company:
Balance Balance January 1 New Loans Repayments December 31 ---------- --------- ---------- ----------- 1995 $ 5,684,454 $1,707,252 $2,479,504 $ 4,912,202 1996 $ 4,912,202 $ 319,636 $3,194,000 $ 2,037,838
These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. 11. Deposits Deposits consisted of the following at December 31, 1996 and 1995:
1996 1995 ---- ---- Demand deposits $ 51,358,151 $ 42,074,618 Money-market and Flex Value deposits 28,306,881 26,791,018 NOW deposits 23,217,898 20,977,338 Cash management investment deposits 13,007,808 5,773,655 Savings deposit 33,304,686 33,180,044 Time certificates of deposit in denominations of $100,000 or more 19,144,157 14,360,287 Other time deposits 48,842,288 43,706,026 ----------- ----------- $217,181,869 $186,862,986 =========== ===========
-19- 12. Condensed Financial Information of Community Bancorp, Inc. The following discloses certain parent-company-only financial information at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996: Balance Sheets
1996 1995 ---- ---- Assets: Cash and cash equivalents $ 122,186 $ 594,056 Investment in subsidiary, at equity 19,696,253 18,929,479 Other assets 216,534 189,536 ---------- ---------- Total assets $ 20,034,973 $ 19,713,071 ========== ========== Liabilities and stockholders' equity: Other liabilities $ 193,839 $ 172,398 ---------- ---------- Total liabilities 193,839 172,398 Stockholders' equity: Preferred stock, $2.50 par value, 100,000 shares authorized, none issued or outstanding Common stock, $2.50 par value, 4,000,000 shares authorized, 3,199,218 shares issued, 2,935,012 shares outstanding, (3,158,946 shares outstanding at December 31, 1995) 7,998,045 7,998,045 Surplus 374,580 290,253 Undivided profits 13,826,958 11,463,544 Treasury stock (2,348,419) (181,224) Unrealized losses on securities available for sale, net of taxes (10,030) (29,945) ---------- ---------- Total stockholders' equity 19,841,134 19,540,673 ---------- ---------- Total liabilities and stockholders' equity $20,034,973 $19,713,071 ========== ==========
Statements of Income
Years ended December 31, ------------------------------------------ 1996 1995 1994 ---- ---- ---- Income: Dividends from subsidiary bank $ 2,407,668 $ 737,101 $ 666,190 Other income 322,048 307,939 288,806 ----------- ----------- ---------- Total income 2,729,716 1,045,040 954,996 ----------- ----------- ---------- Expenses: Other 324,478 299,756 285,821 ----------- ----------- ---------- Total expenses 324,478 299,756 285,821 ----------- ----------- ---------- Income before undistributed net income of subsidiary bank 2,405,238 745,284 669,175 Equity in undistributed net income of subsidiary bank 746,860 1,898,593 1,436,258 ----------- ----------- ---------- Net income $ 3,152,098 $ 2,643,877 $ 2,105,433 =========== =========== ===========
Statements of Cash Flows
Years ended December 31, ----------------------------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 3,152,098 $ 2,643,877 $ 2,105,433 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary bank (746,860) (1,898,593) (1,436,258) Increase in other assets (26,997) (1,718) (22,289) Increase (decrease) in other liabilities 21,441 (1,685) 21,273 ---------- ---------- ---------- Total adjustments (752,416) (1,901,996) (1,437,274) ---------- ---------- ---------- Net cash provided by operating activities 2,399,682 741,881 668,159 ---------- ---------- ---------- Cash flows from financing activities: Purchase of treasury stock (2,318,985) (2,865) (992,826) Reissuance of treasury stock 236,117 111,444 891,138 Dividends declared (788,684) (737,101) (666,190) ---------- ---------- ---------- Net cash used in financing activities (2,871,552) (628,522) (767,878) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (471,870) 113,359 (99,719) Cash and cash equivalents at beginning of year 594,056 480,697 580,416 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 122,186 $ 594,056 $ 480,697 ========== ========== ==========
Cash and cash equivalents consist of a money market demand deposit account on deposit with the subsidiary bank. The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. During 1997, Hudson National Bank can, under this formula, declare dividends to Community Bancorp, Inc. of approximately $4,264,000, plus an additional amount equal to the Bank's net profit for 1997, up to the date of any such dividend declaration, without the approval of the Comptroller of the Currency. 13. Financial Instruments With Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments primarily consist of commitments to extend credit and standby letters of credit. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They are primarily issued to guarantee other -20- customer obligations. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral typically is obtained based on management's credit assessment of the customer. Loan commitments and standby letters of credit usually have fixed expiration dates or other termination clauses. Some commitments and letters of credit expire without being drawn upon. Accordingly, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company's maximum exposure to credit loss for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding at December 31, 1996 and 1995 was as follows:
1996 1995 ---- ---- Commitments to extend credit: Fixed-rate (6.99% to 12.00%) $ 703,687 $ 465,582 Adjustable rate 31,820,455 28,212,387 Standby letters of credit $ 742,338 $ 704,368 =========== ===========
Commitments to extend credit on a fixed-rate basis expose the Company to a certain amount of interest rate risk if market rates of interest substantially increase during the commitment period. The Company has also sold mortgage loans with recourse in the event of the default of the borrower. Loans sold with recourse are accounted for as sales in the accompanying financial statements, with provisions made for anticipated losses under the recourse provisions. At December 31, 1996 and 1995, the outstanding balance of such mortgages totalled approximately $421,000 and $434,000, respectively. Fees associated with the Company's off-balance-sheet financial instruments are minimal; therefore, the fair value of off-balance-sheet financial instruments is not material. 14. Excess Servicing Asset The excess servicing asset, included in other assets, represents the estimated present value of the interest rate differential resulting from the sale of loans with servicing rights retained. This amount is amortized over the estimated lives of the underlying loans sold. The excess servicing asset is also reduced by a charge to earnings if actual prepayments exceed estimated prepayments. The activity in the excess servicing asset is summarized as follows:
Years ended December 31, ------------------------------ 1996 1995 ---- ---- Balance, beginning of period $ 838,841 $ 1,205,742 Additions, related to current year loan sales --- --- Amortization (325,138) (366,901) ----------- ----------- Balance, end of period $ 513,703 $ 838,841 =========== ===========
At December 31, 1996 and 1995, the Company was servicing mortgage loans for others of approximately $127,258,000 and $135,518,000, respectively. 15. Regulatory Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 1996 and 1995, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must -21- maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios at December 31, 1996 are presented in the following table (dollars are in thousands):
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Company (consolidated): Total capital (to risk-weighted > assets) $21,644 15.27% $11,341 - 8.0% N/A N/A Tier 1 capital (to risk-weighted > assets) 19,851 14.00% 5,670 - 4.0% N/A N/A Tier 1 capital > (to average assets) 19,851 8.06% 9,852 - 4.0% N/A N/A Bank: Total capital (to risk-weighted > > assets) $21,499 15.17% $11,341 - 8.0% $14,176 - 10.0% Tier 1 capital (to risk-weighted > > assets) 19,706 13.90% 5,670 - 4.0% 8,506 - 6.0% Tier 1 capital > > (to average assets) 19,706 8.00% 9,852 - 4.0% 12,316 - 5.0%
16. Disclosures about Fair Value of Financial Instruments In December 1991, the FASB issued Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107). This statement requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets' fair values. Securities (including mortgage-backed securities, securities held to maturity and securities available for sale): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain one-to-four family residential mortgages are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for credit card loans and other consumer loans are based on carrying values, as the loans reprice frequently at current market rates. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value. Off-balance-sheet instruments: The fair value of lending commitments discussed in Note 13 is not considered material nor has it been reflected in the estimation of the fair value of the related loans. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a -22- discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Commitments to extend credit/sell loans: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of customers. For fixed-rate loan commitments and obligations to deliver fixed-rate loans, fair value also considers the difference between committed rates and current levels of interest rates. Values not determined: SFAS No. 107 excludes certain financial instruments from its disclosure requirements, including real estate included in banking premises and equipment, the intangible value of the Bank's portfolio of loans serviced (both for itself and for others) and related servicing network and the intangible value inherent in the Bank's deposit relationships (i.e. core deposits) among others. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. The carrying amount and estimated fair values of the Bank's financial instruments at December 31, 1996 and 1995 are as follows:
1996 ----------------------------- Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and cash equivalents $ 25,691,567 $ 25,691,567 Securities 88,073,888 87,557,356 Loans, including held for sale, net 128,088,725 132,035,766 Financial instrument liabilities: Deposits 217,181,869 216,345,523 Short-term borrowings 11,454,687 11,454,687
1995 ------------------------------ Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and cash equivalents $ 29,368,446 $ 29,368,446 Securities 74,615,829 74,423,848 Loans, including held for sale, net 124,616,963 128,494,633 Financial instrument liabilities: Deposits 207,039,865 206,194,823 Short-term borrowings 9,289,963 9,289,963
-23- Report of Independent Public Accountants - ---------------------------------------- To the Board of Directors and Stockholders of Community Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Community Bancorp, Inc. (a Massachusetts corporation) and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the three years ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Community Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the three years ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts January 23, 1997 -24- Management's Discussion and Analysis of Financial Condition and Results of Operations Summary The Company recorded net income of $3,152,098 for the year ended December 31, 1996, representing an increase of $508,221 over $2,643,877 recorded in 1995. Earnings per share of $1.01 for the current period compared to $.84 for the year ended December 31, 1995. The improvement in net income resulted primarily from an increase in net interest income and noninterest income, and reductions in the provision for possible loan losses and FDIC insurance premiums during 1996. Deposits of $217,181,869 at December 31, 1996 increased by $10,142,004 or 4.9% from $207,039,865 at December 31, 1995. The increase occurred primarily in noninterest bearing categories and secondarily in interest bearing categories. Loans of $131,570,430 at December 31, 1996 increased by $3,498,369 or 2.7% from $128,072,061 at December 31, 1995. The increase occurred in the commercial and consumer loan categories. Noncurrent loans (nonaccrual loans and loans 90 days or more past due but still accruing) totaled $1,266,732 and $1,810,267 at December 31, 1996 and 1995, respectively. There were no accruing troubled debt restructurings at December 31, 1996 or 1995. Other real estate owned of $25,000 at December 31, 1996 was unchanged from December 31, 1995. Assets of $250,002,458 at December 31, 1996 represented a $12,421,662 or 5.2% increase over $237,580,796 at December 31, 1995. 1996 Compared to 1995 Interest income for the year ended December 31, 1996 was $17,761,102, representing an increase of $843,478 or 5.0% over $16,917,624 for the year ended December 31, 1995, primarily due to a $16,551,450 or 8.1% increase in average earning assets during 1996, partially offset by slightly lower interest rates as compared to 1995. The weighted average taxable equivalent yield on net earning assets was 8.06% and 8.30% in 1996 and 1995, respectively. Interest expense of $6,367,758 in 1996 represented an increase of $83,008 or 1.3% from $6,284,750 in 1995, primarily due to an $9,865,224 or 6.0% increase in interest bearing liabilities during 1996, partially offset by slightly lower interest rates as compared to 1995 The weighted average cost of interest bearing liabilities was 3.68% in 1996 and 3.85% in 1995. Net interest income for 1996 was $11,393,344, representing an increase of $760,470 or 7.2% compared to $10,632,874 recorded in 1995. Noninterest income for the year ended December 31, 1996 was $2,415,058, representing an increase of $331,094 or 15.9% from $2,083,964 in 1995. This increase resulted primarily from increases in merchant credit card processing, service charge income, other charges, commissions and fees, gains on sales of loans and other income, slightly offset by an increase in losses on sales of securities. Noninterest expense for the year ended December 31, 1996 of $8,629,644 represented an increase of $356,232 or 4.3% from $8,273,412 recorded during 1995. This increase was primarily the result of increases in salaries and employee benefits, data processing, furniture and equipment, credit card processing, OREO carrying costs and other expense, partially offset by reductions in occupancy expense and FDIC insurance premiums. As a result of the recapitalization of the FDIC Bank Insurance Fund (BIF) during 1995, the FDIC established deposit insurance premiums of $500 per quarter in 1996 for well capitalized banks. This resulted in a significant savings by Hudson National Bank. The provision for possible loan losses for 1996 was $0, representing a $120,000 or 100.0% decrease from $120,000 in 1995. This decrease was the result of management's continuing evaluation of the adequacy of the allowance for possible loan losses and its belief that the allowance is adequate. Management will continue its ongoing assessment of the adequacy of the allowance for possible loan losses during 1997 and may adjust the provision for possible loan losses if necessary. -25- Income tax expense of $2,026,660 for the year ended December 31, 1996 compared to $1,679,549 for 1995, the result of an increase in taxable income during the current period. Net income of $3,152,098 for the year ended December 31, 1996 represented an increase of $508,221 or 19.2% over $2,543,877 recorded in 1995. The foregoing discussion summarized the primary components of this increase in earnings. 1995 Compared to 1994 Interest income for the year ended December 31, 1995 was $16,917,624, representing an increase of $2,487,692 or 17.2% over $14,429,932 for the year ended December 31, 1994, primarily due to a $13,368,104 or 7.0% increase in average earning assets and higher average interest rates in 1995 as compared to 1994. The weighted average taxable equivalent yield on net earning assets was 8.30% and 7.57% in 1995 and 1994, respectively. Interest expense of $6,284,750 in 1995 represented an increase of $1,759,192 or 38.9% from $4,525,558 in 1994, primarily due to an $8,560,705 or 5.5% increase in interest bearing liabilities and higher average interest rates in 1995. The weighted average cost of interest bearing liabilities was 3.85% in 1995 and 2.93% in 1994. Net interest income for 1995 was $10,632,874, representing an increase of $728,500 or 7.4% compared to $9,904,374 recorded in 1994. Noninterest income for the year ended December 31, 1995 was $2,083,964, representing an increase of $56,035 or 2.8% from $2,027,929 in 1994. This increase resulted primarily from increases in merchant credit card processing and service charge income, partially offset by reductions in other charges, commissions and fees and other income and by losses on sales of residential real estate loans sold in the secondary mortgage market, resulting from the refinancing of a number of mortgages originated in prior periods and the associated write-down of unamortized excess servicing fee income on those loans. Noninterest expense for the year ended December 31, 1995 of $8,273,412 represented a decrease of $46,357 or .6% from $8,319,769 recorded during 1994. This decrease was primarily the result of reductions in FDIC insurance premiums and OREO carrying costs, partially offset by increases in salaries and employee benefits, data processing, occupancy, furniture and equipment, and credit card processing. As a result of the recapitalization of the FDIC's Bank Insurance Fund (BIF) during the second quarter of 1995, a significant reduction in FDIC deposit insurance premiums was announced in September, retroactive to June 1, 1995. As a result, Hudson National Bank received a refund of approximately $113,000 from the FDIC during September, representing the return of previously assessed insurance premiums plus interest. That refund was recorded as a reduction of previously expensed premiums. FDIC deposit insurance expense during the fourth quarter of the year was based on an assessment of $.04 per $100 of insured deposits, compared to $.23 per $100 of insured deposits during 1994 and the first five months of 1995. During the fourth quarter of 1995 the FDIC announced that the Bank's deposit insurance premium would be a flat $1,000 for the first six months of 1996. The provision for possible loan losses for 1995 was $120,000, representing a $180,000 or 60.0% decrease from $300,000 for 1994. This decrease was the result of management's continuing evaluation of the adequacy of the allowance for possible loan losses and its belief that the allowance is adequate. Income tax expense of $1,679,549 for the year ended December 31, 1995 compared to $1,207,101 for 1994, the result of an increase in taxable income during the current period. Net income of $2,643,877 for the year ended December 31, 1995 represented an increase of $538,444 or 25.6% over $2,105,433 recorded in 1994. The foregoing discussion summarized the primary components of this increase in earnings. -26- Allowance for Possible Loan Losses The allowance for possible loan losses is maintained at a level believed by management to be adequate to absorb potential losses in the loan portfolio. Management's methodology in determining the adequacy of the allowance considers specific credit reviews, past loan loss experience, current economic conditions and trends, known and inherent risks in the loan portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral and the volume, growth and composition of the loan portfolio. Each loan on the Company's internal Watch List is evaluated periodically to estimate potential loss. For loans with potential losses, the bank sets aside or allocates a portion of the allowance against such potential losses. For the remainder of the loan portfolio, unallocated allowance amounts are determined based on judgements regarding the type of loan, economic conditions and trends, potential exposure to loss and other factors. When specific loans, or portions thereof, are deemed to be uncollectible, those amounts are charged off against the allowance. Subsequent recoveries, if any, are credited to the allowance. At December 31, 1996 the allowance was $3,481,705, representing 2.6% of total loans, compared to $3,455,098, representing 2.7% of total loans at December 31, 1995. Securities The Company's securities portfolio consists of obligations of the U.S. Treasury, U.S. Government sponsored agencies, mortgage backed securities and obligations of municipalities in the Company's market area. These assets are used in part to secure public deposits and as collateral for repurchase agreements. Securities for 1996 averaged $81.2 million, an increase of $9.8 million or 13.7% over $71.4 million for 1995. Proceeds from sales of securities was $3,507,742 in 1996. All mortgage-backed securities in the securities portfolio have been issued by U.S. Government sponsored agencies. Management believes no other-than-temporary impairment has occurred with regard to any security in the securities portfolio. The Company's adequate liquidity position provides the ability to hold all currently owned securities to maturity. Liquidity and Capital Resources The Company's principal sources of liquidity are customer deposits, amortization and pay-offs of loan principal and amortization and maturities of securities. These sources provide funds for loan originations, the purchase of securities and other activities. Deposits are considered a relatively stable source of funds. At December 31, 1996, 1995 and 1994, deposits were $217.2 million, $207.0 million and $186.9 million, respectively. Management anticipates that deposits will increase moderately during 1997. Of the Company's $88.1 million in securities at December 31,1996, $21.4 million or 24.3% mature within one year. As a nationally chartered member of the Federal Reserve System, the Bank has the ability to borrow funds from the Federal Reserve Bank of Boston by pledging certain of its investment securities as collateral. Also, the Bank is a member of the Federal Home Loan Bank which provides additional borrowing opportunities. On August 15, 1996, the Company implemented an Offer to Purchase up to 222,222 shares of its outstanding shares of common stock at a price of $9.00 per share. The Offer expired at 5:00 P.M. on September 13, 1996, with 257,665 shares tendered. As provided in the Offer, the Company increased the number of shares sought in the Offer by approximately 1.1% of the outstanding shares and purchased all 257,665 shares tendered in the Offer. There was no proration of shares. As a result of the repurchase of the shares, the Company's capital was reduced by $2,318,985. Bank regulatory authorities have established a capital measurement tool called Tier 1 leverage capital. A 4.00% ratio of Tier 1 leverage capital to assets now constitutes the minimum capital standard for most banking organizations. At December 31, 1996 and 1995, the Company's Tier 1 leverage capital ratio was 7.94% and 8.23%, respectively. Regulatory -27- authorities have also implemented risk-based capital guidelines requiring a minimum ratio of Tier 1 capital to risk-weighted assets of 4.00% and a minimum ratio of total capital to risk-weighted assets of 8.00%. At December 31, 1996, the Company's Tier 1 and total risk-based capital ratios were 14.00% and 15.27%, respectively. At December 31, 1995 the Company's Tier 1 and total risk-based capital ratios were 14.30% and 15.57%, respectively. The Bank is categorized as "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). Asset/Liability Management and Interest Rate Risk The Company has an asset/liability management committee which oversees all asset/liability management activities. The committee establishes general guidelines each year and meets regularly to review the Company's operating results, to measure and monitor interest rate risk and to make strategic changes when necessary. It is the Company's general policy to reasonably match the rate sensitivity of its assets and liabilities in an effort to prudently manage interest rate risk. A common benchmark of this sensitivity is the one year gap position, which is a reflection of the difference between the speed and magnitude of rate changes of interest rate sensitive liabilities as compared with the Bank's ability to adjust the rates of it's interest rate sensitive assets in response to such changes. The Company's positive one-year cumulative gap position at December 31, 1996, which represents the excess of repricing assets versus repricing liabilities, was 3.7% expressed as a percentage of total assets. -28- The following table presents rate-sensitive assets and rate-sensitive liabilities as of December 31, 1996:
(Dollars in thousands) December 31, 1996 -------------------------------------------------------------------------- 1 to 6 7 to 12 1 to 2 2 to 5 Over 5 Months Months Years Years Years Total ---------- --------- ---------- --------- --------- ---------- RATE-SENSITIVE ASSETS Federal funds sold $ 11,300 $ $ $ $ $ 11,300 Securities 12,035 9,337 27,888 28,351 10,463 88,074 Adjustable-rate loans 48,765 17,325 9,540 20,795 908 97,333 Fixed-rate loans 11,096 1,962 7,003 7,099 7,077 34,237 --------- --------- ---------- ---------- -------- --------- Total $ 83,196 $ 28,624 $ 44,431 $ 56,245 $ 18,448 $ 230,944 --------- --------- ---------- --------- -------- --------- RATE-SENSITIVE LIABILITIES Demand deposits $ $ $ $ $ 51,358 $ 51,358 NOW accounts* 23,218 23,218 Money market accounts 28,307 28,307 Savings accounts 11,000 22,305 33,305 Cash management accounts 13,008 13,008 Certificates of deposit 39,179 18,177 3,913 6,678 39 67,986 Repurchase agreements 11,455 11,455 --------- --------- ---------- --------- -------- --------- Total $ 102,949 $ 18,177 $ 3,913 $ 6,678 $ 96,920 $ 228,637 --------- --------- ---------- --------- -------- --------- Gap $ (19,753) $ 10,447 $ 40,518 $ 49,567 $ (78,472) $ 2,307 ========== ========= ========= ========= ========= ========= Cumulative Gap $ (19,753) $ (9,306) $ 31,212 $ 80,779 $ 2,307 ========== ========= ========= ========= ========= Gap as a percent of total assets (7.90%) 4.18% 16.20% 19.83% (31.39%) Cumulative gap as a percent of total assets (7.90%) (3.72) 12.48% 32.31% 0.89% * Cumulative gap as a percent of total assets if NOW accounts are considered immediately withdrawable (17.19%) (13.00%) 3.20% 23.00% 0.89% Whenever possible, maturity dates or contractual repricing dates were used in preparation of the above table. In addition to these factors, certain assumptions were utilized in two of the balance categories based on the current interest rate environment. In the savings account category, $11.0 million is considered rate sensitive. This represents the approximate drop in certificate of deposit balances and the concurrent growth in savings balances that took place between June 1991, when interest rates began to fall significantly, and December 1995. It is assumed that these funds will be immediately rate sensitive if rates begin to rise. The remaining savings, demand deposit and NOW account balances are considered rate insensitive.
-29- [Photographs of the following Directors appear on this page:] Dennis F. Murphy, Jr. Alfred A. Cardoza Argeo R. Cellucci Antonio Frias I. George Gould Horst Huehmer Donald R. Hughes, Jr. James A. Langway David L. Parker Mark Poplin David W. Webster -30- DIRECTORS & OFFICERS - -------------------- COMMUNITY BANCORP, INC. AND HUDSON NATIONAL BANK - ------------------------------------------------- Chairman of the Board - --------------------- Dennis F. Murphy, Jr. President and Treasurer of D. Francis Murphy Insurance Agency, Inc. Directors: - --------- Alfred A. Cardoza Retired Argeo R. Cellucci President of Cellucci Hudson Corp. Antonio Frias President and Treasurer of S & F Concrete Contractors, Inc. I. George Gould Chairman of the Board of Gould's, Inc. Horst Huehmer Retired Donald R. Hughes, Jr. Treasurer and Clerk of Community Bancorp, Inc., Executive Vice President of Hudson National Bank James A. Langway President and Chief Executive Officer of Community Bancorp, Inc. and Hudson National Bank David L. Parker Chairman of the Board of Larkin Lumber Company Mark Poplin President and Treasurer of Poplin Supply Company David W. Webster President of Knight Fuel Company Officers: - -------- James A. Langway President and Chief Executive Officer Donald R. Hughes, Jr. Treasurer and Clerk HUDSON NATIONAL BANK - -------------------- Officers - -------- James A. Langway President and Chief Executive Officer Donald R. Hughes, Jr. Executive Vice President Robert P. Converse Auditor Barbara M. Masciarelli Administrative Officer Compliance/Personnel/Legal - -------------------------- Grace L. Blunt, Esq. Senior Vice President Retail Banking/Mortgage Division - -------------------------------- Richard K. Bennett Senior Vice President Nanci J. Pisani Vice President Ana M. Czapkowski Assistant Vice President Jane B. Karlson Assistant Vice President Elizabeth M. Brooks Branch Officer Kristen A. Cappello Branch Officer Lynda L. D'Orlando Mortgage Officer Cynthia M. Farrah Marketing Officer Clark Hooper Security Officer M. Jean Mickle Branch Officer Lois A. Seymour Branch Officer Peter Shinas Branch Officer Kathleen E. Texeira Merchant Plan Officer Financial Control - ----------------- Robert E. Leist Senior Vice President Commercial Banking - ------------------ John P. Galvani Senior View President Christal M. Bjork Vice President Daniel Heney Assistant Vice President Peter S. Fletcher Commercial Loan Officer Linda Glaser Commercial Loan Officer Operations/Data Processing and Electronic Banking - ------------------------------------------------- Janet A. Lyman Senior Vice President James P. Vasquezi Assistant Vice President Margaret M. Vasquezi Assistant Vice President The Company's Securities and Exchange Commission filing on Form 10-K is available to our stockholders upon request. -31- [A photo of James A. Langway, Dennis F. Murphy, Jr. and Donald R. Hughes, Jr. appears here.] -32- [The following text appears on the back cover.] Community Bancorp, Inc. Parent company of Hudson National Bank 17 Pope Street Hudson, Massachusetts 01749 Telephone (508) 568-8321 Hudson National Bank - Branch Offices - ------------------------------------- Hudson Main Office 17 Pope Street Phone: (508) 568-8321 Fax: (508) 562-7129 Hudson South 177 Broad Street Phone: (508) 568-8813 Fax: (508) 568-2610 Acton 270 Great Road Phone: (508) 263-8376 Fax: (508) 266-2610 Concord 1134 Main Street Phone: (508) 369-5421 Fax: (508) 371-6600 Marlborough Center 96 Bolton Street Phone: (508) 485-5003 Fax: (508) 229-4602 Marlborough East 500 Boston Post Road Phone: (508) 485-3599 Fax: (508) 229-4601 Boxborough 629 Massachusetts Avenue Phone: (508) 264-9092 Fax: (508) 266-2600 Stow 159 Great Road Phone: (508) 461-1600 Fax: (508) 461-1610 Loan Center 12 Pope Street, Hudson Phone: (508) 568-8321 Fax: (508) 562-9984 Shaw's Supermarket Washington Street, Hudson (ATM only) Solomon Pond Mall Donald Lunch Blvd., Marlborough (ATM only) Internet web site: http://www.hnbank.com E-mail: hnb-mail@hnbank.com Member FDIC Equal Opportunity Lender EX-27 3
9 This schedule contains summary financial information extracted from the December 31, 1996 consolidated financial statements of Community Bancorp, Inc., and it is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 14391567 0 11300000 0 29245007 58828881 58312349 131570430 3481705 250002458 217181869 11454687 1524768 0 0 0 7998045 11843089 250002458 12430327 4740112 590663 17761102 5840445 6367758 11393344 0 (9) 8629644 5178758 5178758 0 0 3152098 1.01 1.01 5.19 896509 370223 0 0 3455098 230545 257152 3481705 1701123 0 1780582
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