EX-13 2 ar-2000.txt 2000 ANNUAL REPORT TO SHAREHOLDERS [The annual report front cover contains a color graphic and the following text:] Annual Report 2000 Community Bancorp, Inc. Parent Company of Community National Bank [The following text appears on the inside front cover.] Table of Contents Selected Consolidated Financial Data - - - - - - - - - - - 1 Message to Stockholders and Friends - - - - - - - - - - - - 2 Consolidated Balance Sheets - - - - - - - - - - - - - - - - 3 Consolidated Statements of Income - - - - - - - - - - - - - 4 Consolidated Statements of Comprehensive Income - - - - - - 5 Consolidated Statements of Stockholders' Equity - - - - - - 6 Consolidated Statements of Cash Flows - - - - - - - - - - - 7 Notes to Consolidated Financial Statements - - - - - - - - 8 Report of Independent Public Accountants - - - - - - - - - 25 Management's Discussion and Analysis of Financial Condition and Results of Operations - - - - - - 26 Directors & Officers - - - - - - - - - - - - Inside back cover Selected Consolidated Financial Data
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Total assets $374,867,511 $327,996,575 $300,886,831 $273,550,527 $250,002,458 Total deposits 307,128,832 276,422,308 254,408,735 232,788,534 217,181,869 Total net loans 173,216,873 161,318,593 137,242,930 136,624,294 126,866,560 Allowance for loan losses 2,812,392 3,041,873 2,981,012 3,215,559 3,481,705 Total interest income 24,964,665 21,840,725 20,659,783 19,169,951 17,761,102 Total interest expense 9,354,592 7,829,668 7,675,112 6,895,222 6,367,758 Net interest income 15,610,073 14,011,057 12,984,671 12,274,729 11,393,344 Gains (losses) on sales of securities -- -- -- 8,587 (9,460) Provision for possible loan losses -- -- -- -- -- Net income 4,532,119 3,915,217 3,805,761 3,429,859 3,152,098 Earnings per share 0.77 0.66 0.65 0.58 0.51 Dividends per share 0.209 0.182 0.162 0.143 0.127
[Five-year bar graphs for the following categories appear in this space. Data for the graphs was obtained from the above table.] Total Assets (in millions) Net Income (in millions) Earnings Per Share (in dollars) Total Deposits (in millions) Total Net Loans (in millions) Net Interest Income (in millions) -1- To Our Stockholders and Friends The year 2000 was the most successful year in the history of Community Bancorp, Inc. and its subsidiary Community National Bank, and we are pleased to present you with our Annual Report. Record earnings were again achieved, during a year in which the Company continued to invest in its future. Net income for the year ended December 31, 2000 rose to $4,532,119, representing an increase of 15.8% over $3,915,217 recorded in 1999. Earnings per share totaled $.77 for the current year, compared to $.66 for 1999. Cash dividends declared were $.209 per share in 2000, up from $.182 in 1999, and the Company's capital ratios at year-end far exceeded all regulatory requirements. The continued strong performance of Community National Bank once again brought us recognition as a "Blue Ribbon" bank by one of the top bank rating firms. After extensive planning, Community National Bank established an Investment Management and Trust Department during the first quarter of 2000. Utilizing the skills of a seasoned investment manager, this new department became well- established during its first year of operation, and we expect it to produce significant fee income in the future while working with customers to help them achieve their financial goals. The Bank's two new branches in Framingham and Sudbury, opened during 1999, continued to grow in 2000 as we strive to expand our penetration in those new markets. Our Internet-based Online Banking program experienced strong growth during the year, serving over 2,600 customers by year-end and generating approximately $900,000 in new consumer loan business. Finally, an upgraded mainframe computer system allowed us to achieve even greater internal efficiency during the year. Additional projects are planned for 2001 that will further streamline our internal operations and enhance our ability to service our customers' needs. Sound, conservative banking practices and effective planning for the future have provided a solid foundation for the Company's continued success as a locally- owned, independent community bank. As the financial services industry continues to evolve, our challenge is to monitor the changes taking place and capitalize on the resulting opportunities they present. We are already building on 2000's accomplishments, performance and momentum, and we look to the future with confidence and enthusiasm. On behalf of the Board of Directors, management and staff, we wish to thank our stockholders for their continued support. 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 -2- Consolidated Balance Sheets December 31, 2000 and 1999
2000 1999 ----------- ----------- ASSETS Cash and due from banks $ 16,472,547 $ 21,010,959 Federal funds sold 31,136,266 6,924,026 Securities available for sale at fair value (Note 3) 50,110,202 41,808,065 Securities held to maturity (fair value $92,302,813 in 2000 and $84,164,551 in 1999) (Note 3) 92,441,522 86,225,017 Mortgage loans held for sale 295,742 332,686 Loans (Notes 4 and 10) 176,029,265 164,360,466 Less allowance for loan losses (Note 4) 2,812,392 3,041,873 ----------- ----------- Total net loans 173,216,873 161,318,593 Bank premises and equipment, net (Note 5) 6,234,641 6,342,891 Other assets, net (Note 1) 4,959,718 4,034,338 ----------- ----------- Total assets $374,867,511 $327,996,575 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 6): Noninterest bearing $ 75,969,408 $ 68,082,062 Interest bearing 231,159,424 208,340,246 ----------- ----------- Total deposits 307,128,832 276,422,308 ----------- ----------- Securities sold under repurchase agreements 33,463,166 21,766,424 Other liabilities (Note 8) 2,460,642 1,496,572 ----------- ----------- Total liabilities 343,052,640 299,685,304 ----------- ----------- Commitments (Notes 9 and 12) -- -- Stockholders' equity: (Note 1) Preferred stock, $2.50 par value, 100,000 shares authorized, none issued or outstanding -- -- Common stock, $2.50 par value, 12,000,000 shares authorized, 6,398,436 shares issued, 5,914,441 shares outstanding, (5,921,824 shares outstanding at December 31, 1999) 15,996,090 7,998,045 Surplus 101,378 638,619 Undivided profits 18,052,893 22,116,681 Treasury stock, at cost, 483,995 shares, (476,612 at December 31, 1999) (2,414,762) (2,217,972) Accumulated other comprehensive income (loss) 79,272 (224,102) ----------- ----------- Total stockholders' equity 31,814,871 28,311,271 ----------- ----------- Total liabilities and stockholders' equity $374,867,511 $327,996,575 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
-3- Consolidated Statements of Income Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- Interest income: Interest and fees on loans $15,452,495 $13,947,164 $13,167,815 Interest and dividends on securities: Taxable interest 7,096,447 6,427,831 5,790,375 Nontaxable interest 628,313 566,334 482,473 Dividends 91,360 74,865 64,106 Interest on federal funds sold 1,696,050 824,531 1,155,014 ---------- ---------- ---------- Total interest income 24,964,665 21,840,725 20,659,783 ---------- ---------- ---------- Interest expense: Interest on deposits 7,661,268 6,801,917 6,649,308 Interest on federal funds purchased and securities sold under repurchase agreements 1,693,324 1,027,751 1,025,804 ---------- ---------- ---------- Total interest expense 9,354,592 7,829,668 7,675,112 ---------- ---------- ---------- Net interest income 15,610,073 14,011,057 12,984,671 ---------- ---------- ---------- Provision for loan losses (Note 4) -- -- -- ---------- ---------- ---------- Net interest income after provision for loan losses 15,610,073 14,011,057 12,984,671 ---------- ---------- ---------- Noninterest income: Merchant credit card processing assessments 1,559,355 1,296,041 1,194,584 Service charges 635,823 589,697 590,255 Other charges, commissions and fees 1,110,542 1,169,175 1,107,893 Gains on sales of loans, net 89,458 71,661 224,388 Gains on sales of securities, net -- -- -- Other 92,867 89,172 83,367 ---------- ---------- ---------- Total noninterest income 3,488,045 3,215,746 3,200,487 ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits (Note 8) 6,093,676 5,632,576 5,176,505 Data processing and ATM network 1,113,844 1,010,383 953,841 Occupancy, net 829,817 761,857 609,638 Furniture and equipment 416,133 370,549 385,150 Credit card processing 1,430,434 1,258,102 1,097,664 Printing, stationery and supplies 244,622 280,008 259,901 Professional fees 415,696 420,423 387,635 Marketing and advertising 276,315 326,348 311,551 Other 1,241,280 1,076,763 1,015,040 ---------- ---------- ---------- Total noninterest expense 12,061,817 11,137,009 10,196,925 ---------- ---------- ---------- Income before income tax expense 7,036,301 6,089,794 5,988,233 Income tax expense 2,504,182 2,174,577 2,182,472 ---------- ---------- ---------- Net income $ 4,532,119 $ 3,915,217 $ 3,805,761 ========== ========== ========== Earnings per common share (Note 1) $ 0.77 $ 0.66 $ 0.65 Weighted average number of shares outstanding 5,912,731 5,909,600 5,876,720 ========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
-4- Consolidated Statements of Comprehensive Income Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- Net income $ 4,532,119 $ 3,915,217 $ 3,805,761 ---------- ---------- ---------- Other comprehensive income: Unrealized securities gains (losses) arising during period 513,579 (434,930) (173,276) Income tax (expense) benefit on securities gains (losses) arising during period (210,205) 178,018) 71,390 ---------- ---------- ---------- Net unrealized securities gains (losses) arising during period 303,374 (256,912) (101,886) ---------- ---------- ---------- Less: reclassification adjustment for securities (gains) included in income -- -- -- Income tax expense on securities (gains) included in income -- -- -- ---------- ---------- ---------- Net reclassification adjustment for securities (gains) included in net income -- -- -- ---------- ---------- ---------- Other comprehensive income (loss) 303,374 (256,912) (101,886) ---------- ---------- ---------- Comprehensive income (Note 1) $ 4,835,493 $ 3,658,305 $ 3,703,875 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-5- Consolidated Statements of Stockholders' Equity Years ended December 31, 2000, 1999 and 1998
Accumulated Other Common Undivided Treasury Comprehensive Stock Surplus Profits Stock Income ----- ------- ---------- -------- ------------- Balance, December 31, 1997 $ 7,998,045 $ 414,120 $16,418,790 $(2,529,552) $ 134,696 Net income -- -- 3,805,761 -- -- Cash dividends declared ($.162 per share) -- -- (949,690) -- -- Reissuance of 36,662 shares of treasury stock -- 109,986 -- 164,979 -- Change in accumulated other comprehensive income (Note 1) (101,886) -------------------------- --------- ------- --------- --------- --------- Balance, December 31, 1998 7,998,045 524,106 19,274,861 (2,364,573) 32,810 Net income -- -- 3,915,217 -- -- Cash dividends declared ($.182 per share) -- -- (1,073,397) -- -- Purchase of 70 shares of treasury stock -- -- -- (630) -- Reissuance of 32,718 shares of treasury stock -- 114,513 -- 147,231 -- Change in accumulated other comprehensive income (Note 1) -- -- -- -- (256,912) -------------------------- --------- ------- ---------- --------- ------- Balance, December 31, 1999 7,998,045 638,619 22,116,681 (2,217,972) (224,102) Net income -- -- 4,532,119 -- -- Two-for-one stock split effected in the form of a 100% stock dividend 7,998,045 (638,619) (7,359,426) -- -- Cash dividends declared ($.209 per share) -- -- (1,236,481) -- -- Purchase of 36,348 shares of treasury stock -- -- -- (327,132) -- Reissuance of 28,965 shares of treasury stock -- 101,378 -- 130,342 -- Change in accumulated other comprehensive income (Note 1) 303,374 -------------------------- --------- ------- ---------- --------- ------- Balance, December 31, 2000 $15,996,090 $101,378 $18,052,893 $(2,414,762) $ 79,272 ========== ======= ========== ========= ======= The accompanying notes are an integral part of these consolidated financial statements.
-6- Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- Net income $ 4,532,119 $ 3,915,217 $ 3,805,761 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in mortgage loans held for sale 36,944 997,592 843,044 Depreciation and amortization 974,945 1,063,584 1,027,577 Amortization of investment securities discounts and premiums, net 81,136 (47,149) (101,712) (Prepaid) deferred income taxes (25,646) 91,991 (6,691) Increase (decrease) in other liabilities 643,537 82,050 (192,937) Increase (decrease) in taxes payable 122,817 83,454 (183,595) Increase (decrease)in interest payable 54,196 62,346 (56,143) (Increase) decrease in other assets, net (541,490) (313,921) 125,161 (Increase) in interest receivable (473,882) (365,378) (146,039) ---------- ---------- ---------- Total adjustments 872,557 1,654,569 1,308,665 ---------- ---------- ---------- Net cash provided by operating activities 5,404,676 5,569,786 5,114,426 ---------- ---------- ---------- Cash flows used in investing activities: Purchases of securities held to maturity (19,024,788) (23,815,119) (62,344,812) Purchases of securities available for sale (13,160,212) (22,967,923) (5,482,625) Maturities and principal repayments of securities held to maturity 12,837,780 24,648,691 31,590,326 Maturities and principal repayments of securities available for sale 5,261,021 12,410,077 12,499,965 Net change in federal funds sold (24,212,240) 10,075,974 (2,400,000) Net change in loans (11,944,251) (24,090,657) (564,601) Sales of other real estate owned 45,000 -- 170,000 Acquisition of premises and equipment (866,695) (1,672,117) (1,773,032) ---------- ---------- ---------- Net cash used in investing activities (51,064,385) (25,411,074) (28,304,779) ---------- ---------- ---------- Cash flows from financing activities: Net change in deposits 30,706,524 22,013,573 21,620,201 Net change in securities sold under repurchase agreements 11,696,742 2,018,928 6,110,432 Net change in federal funds purchased -- -- (3,000,000) Purchase of treasury stock (327,132) (630) -- Reissuance of treasury stock 231,720 261,744 274,965 Dividends paid (1,186,557) (1,042,411) (918,869) ---------- ---------- ---------- Net cash provided by financing activities 41,121,297 23,251,204 24,086,729 ---------- ---------- ---------- Net (decrease) increase in cash and due from banks (4,538,412) 3,409,916 896,376 Cash and due from banks at beginning of year 21,010,959 17,601,043 16,704,667 ---------- ---------- ---------- Cash and due from banks at end of year $16,472,547 $21,010,959 $17,601,043 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. Supplemental Disclosures: ------------------------ 1. Cash paid for interest was $9,300,396, $7,767,322 and $7,731,255 in 2000, 1999 and 1998, respectively. 2. Cash paid for income taxes was $2,165,000, $2,091,123 and $2,278,267 in 2000, 1999 and 1998, respectively. 3. Real estate acquired through, or deeds in lieu of, foreclosure was $0, $10,359 and $0 in 2000, 1999 and 1998, respectively.
-7- Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of consolidation The accompanying consolidated financial statements include the accounts of Community Bancorp, Inc. (the "Company"), a Massachusetts corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and its wholly-owned subsidiary, Community National Bank, (the "Bank"), a national banking association. The Bank has formed Community Securities Corporation and Community Benefits Consulting, Inc. as wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. At present, the Company conducts no activities independent of the Bank. The Bank has ten 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, Internet banking and bill payment services, investment management and trust services and other customary banking services to its customers. Use of estimates The preparation of financial statements in conformity with accounting standards generally accepted in the United States 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. Cash and due from banks Cash and due from banks consists of cash on hand, amounts due from banks and interest-bearing deposits. Included in cash and due from banks as of December 31, 2000 and 1999 is approximately $1,179,000 and $7,588,000, respectively, that is subject to Federal Reserve withdrawal restrictions. 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 accumulated other comprehensive income. Securities held for indefinite periods of time include securities that management may use in conjunction with the Company's asset/ liability 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. Dividend and interest income, including amortization of premiums and discounts, is included in earnings for all categories of investment securities. Discounts and premiums related to debt securities are amortized using a method that approximates the level-yield method, adjusted for estimated prepayments in the case of mortgage-backed securities. Realized gains and losses on security transactions are computed using the specific identification method. Loans Loans are stated at the amount of unpaid principal, net of unearned discounts and unearned net loan origination fees. It is the policy of the Company to discontinue the accrual of interest on loans when, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for 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. -8- Interest on loans is accrued and included in income as earned based upon contractual interest rates applied to outstanding principal balances. Nonrefundable loan origination fees and related costs are deferred and amortized as an adjustment to the related loan yield over the contractual life of the loan. When loans are sold or fully repaid, any unamortized fees, discounts and costs are recognized in income. Mortgage loans held for sale are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgages are recognized at the time of sale. A loan is considered to be impaired when it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are individually evaluated for impairment, except for smaller balance homogenous residential and consumer loans which are evaluated in aggregate, according to the Company's normal loan review process, including overall credit evaluation, nonaccrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment. Impaired loans are measured based on the present value of expected future cash flows, discounted at each loan's effective interest rate, or the fair value of the collateral for certain collateral-dependent loans. For collateral-dependent loans, the extent of impairment is the shortfall, if any, between the collateral value, less costs to dispose of such collateral, and the carrying value of the loan. The allowance for loan losses is based on management's estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. The methodology for assessing the appropriateness of the allowance consists of a review of the following three key elements: - The valuation allowance for loans specifically identified as impaired - The formula allowance for the various loan portfolio classifications - The unallocated allowance The valuation allowance reflects specific estimates of potential losses on individual impaired loans. When each impaired loan is evaluated, if the difference between the net present value of the loan (or fair value of the collateral if the loan is collateral-dependent) is lower than the recorded loan balance, the difference represents the valuation allowance for that loan. The formula allowance is a percentage-based reflection of historical loss experience and assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances and commitments to extend credit. The formula allowance employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. When a loan's credit quality becomes suspect, it is placed on the Company's internal "watch list" and its allowance allocation is increased. For the remainder of the loan portfolio, appropriate allowance levels are estimated based on judgments regarding the type of loan, economic conditions and trends, potential exposure to loss and other factors. In addition to the valuation allowance and the formula allowance, there is an unallocated allowance that recognizes the estimation risks associated with the valuation and the formula allowance calculations, and that reflects management's evaluation of various conditions, the effects of which are not directly measurable in determining the formula and valuation allowances. The unallocated allowance is adjusted for qualitative factors including, among others, general economic and business conditions, credit quality trends, loan volumes and concentrations and specific industry conditions within portfolio segments. There are inherent uncertainties with respect to determining the adequacy of the allowance for loan losses. Because of these inherent uncertainties, actual losses may differ from the amounts reflected in these consolidated financial statements. Factors considered in evaluating the adequacy of the allowance includes previous loss experience, current economic conditions and their effect on borrowers, the performance of individual loans in relation to contract terms, and the estimated fair values of underlying collateral. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", the Company capitalizes the rights to service mortgage loans for others and assesses those rights for impairment based on the fair value of those rights. The loan servicing asset, included in other assets, represents the estimated present value of the interest rate differential resulting from the sale of loans with servicing rights retained. This amount is amortized over the estimated lives of the underlying loans sold. The loan servicing asset totaled $187,066 and $223,795 at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, the Company was servicing mortgage -9- loans for others of approximately $88,944,000 and $96,238,000, respectively. Amortization of these servicing rights totaled $66,475 and $55,591 for the years ended December 31, 2000 and 1999, respectively. Bank premises and equipment Land, buildings, leasehold improvements and furniture and equipment held for banking purposes are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally on the straight-line method over the shorter of the estimated useful lives of the assets or the related lease term. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Premises and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. 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. The Company also sells term repurchase agreements that generally mature within 365 days from the transaction date. Income taxes The Company records income taxes under the liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities. Deferred taxes are measured using enacted tax rates that are expected to be in effect when the amounts related to such temporary differences are realized or settled. The Company's deferred tax asset is reviewed quarterly and adjustments are recognized in the provision for income taxes based on management's judgments related to its realizability. Earnings per share The Company adopted SFAS No. 128, "Earnings Per Share", effective December 31, 1997. SFAS No. 128 requires the presentation of "basic" earnings per share, which excludes the effect of dilution, and "diluted" earnings per share, which includes the effect of dilution. The Company's "basic" and "diluted" earnings per share computations are identical in 2000, 1999 and 1998, as there are no securities outstanding that are potentially dilutive. Earnings per share is based on the weighted average number of shares outstanding during the year. Common stock split On April 4, 2000 the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend, which was distributed on April 28, 2000 to stockholders of record as of April 3, 2000. As a result of the stock split, the accompanying consolidated financial statements reflect an increase in the number of outstanding shares of common stock and the transfer of the par value of the additional shares from surplus and undivided profits. All share and per-share amounts have been restated to reflect the retroactive effect of the stock split. Comprehensive income The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective January 1, 1998. Components of comprehensive income are net income and all other non-owner changes in equity. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial position. -10- 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. Recent accounting pronouncements The Company adopted American Institute of Certified Public Accountants ("AICPA") Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), effective January 1, 1999. SOP 98-1 requires computer software costs associated with internal-use software to be expensed as incurred until certain capitalization criteria are met. The adoption of SOP 98-1 did not have any material impact on the Company's financial statements or results of operations. The Company adopted AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), effective January 1, 1999. SOP 98-5 requires all costs associated with pre-opening, pre-operating and organizational activities to be expensed as incurred. The adoption of SOP 98-5 did not have any material impact on the Company's financial statements or results of operations. In March 2000, the Emerging Issues Task Force reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs," ("EITF Issue No. 00-2") to be applicable to all Web site development costs incurred for fiscal quarters beginning after June 30, 2000. The consensus states that for specific Web site development costs, the accounting for such costs should be based generally on a model consistent with AICPA SOP 98-1. The adoption of EITF Issue No. 00-2 did not have any material effect on the Company's financial statements or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualified hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has adopted SFAS No. 133 as of January 1, 2001 and there was no material impact on the Company's financial statements or results of operations upon adoption. 2. Business segments The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which established standards for reporting information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. The adoption of SFAS No. 131 did not have any material effect on the Company's primary financial statements or results of operations. The Company has identified its reportable operating business segment as "Community Banking". The Company's community banking segment consists of commercial and retail banking. The community banking segment is managed as a single strategic unit and derives its revenues from a wide range of banking services, including investing and lending activities and the acceptance of demand, savings and time deposits. Nonreportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the thresholds requiring separate disclosure are included in the "Other" category in the disclosure of business segments below. The nonreportable segment represents the holding company financial information. (Note 11) -11- The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (Note 1). The consolidation adjustments reflect certain eliminations of intersegment revenue, cash and investments in the subsidiary. Reportable segment-specific information, and the reconciliation to consolidated financial information, are as follows (dollars are in thousands):
Community Other Adjustments Banking Other and Eliminations Consolidated --------- ---------- ----------------- ------------ December 31, 2000 Investment securities $142,552 $ -- $ -- $ 142,552 Net loans 173,217 -- -- 173,217 Total assets 374,868 32,098 (32,098) 374,868 Total deposits 307,656 -- (527) 307,129 Total liabilities 343,628 283 (858) 343,053 Net interest income 15,599 11 -- 15,610 Provision for loan losses -- -- -- -- Total noninterest income 3,488 1,597 (1,597) 3,488 Total noninterest expense 12,061 366 (365) 12,062 Net income 4,527 4,532 (4,527) 4,532 December 31, 1999 Investment securities $128,033 $ -- $ -- $ 128,033 Net loans 161,319 -- -- 161,319 Total assets 327,997 28,558 (28,558) 327,997 Total deposits 277,053 -- (631) 276,422 Total liabilities 300,351 247 (913) 299,685 Net interest income 14,000 11 -- 14,011 Provision for loan losses -- -- -- -- Total noninterest income 3,216 1,420 (1,420) 3,216 Total noninterest expense 11,136 352 (351) 11,137 Net income 3,910 3,915 (3,910) 3,915 December 31, 1998 Investment securities $118,744 $ -- $ -- $ 118,744 Net loans 137,243 -- -- 137,243 Total assets 300,887 25,683 (25,683) 300,887 Total deposits 254,775 -- (366) 254,409 Total liabilities 275,821 218 (617) 275,422 Net interest income 12,978 7 -- 12,985 Provision for loan losses -- -- -- -- Total noninterest income 3,200 1,284 (1,284) 3,200 Total noninterest expense 10,187 343 (333) 10,197 Net income 3,808 3,806 (3,808) 3,806
-12- 3. Securities The amortized cost and fair values of securities at December 31, 2000 and 1999 were as follows:
2000 -------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government obligations $ -- $ -- $ -- $ -- U.S. Government agencies and corporations 41,315,639 15,009 199,275 41,131,373 Obligations of states and political subdivisions 16,273,263 244,910 24,242 16,493,931 Mortgage-backed securities 34,852,620 60,814 235,925 34,677,509 ------------ ---------- ---------- ---------- $ 92,441,522 $ 320,733 $ 459,442 $ 92,302,813 ============ ========== ========== =========== Gross Gross Securities Held Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government obligations $ -- $ -- $ -- $ -- U.S. Government agencies and corporations 29,871,868 309,898 4,904 30,176,862 Mortgage-backed securities 18,834,380 89,566 260,362 18,663,584 Other securities 1,269,756 -- -- 1,269,756 ------------ ---------- ---------- ---------- $ 49,976,004 $ 399,464 $ 265,266 $ 50,110,202 ============ ========== ========== =========== 1999 -------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government obligations $ -- $ -- $ -- $ -- U.S. Government agencies and corporations 34,464,097 -- 814,076 33,650,020 Obligations of states and political subdivisions 12,579,893 5,623 322,109 12,263,408 Mortgage-backed securities 39,181,027 20 929,924 38,251,123 ------------ ---------- ---------- ---------- $ 86,225,017 $ 5,643 $ 2,066,109 $ 84,164,551 ============ ========== ========== =========== Gross Gross Securities Held Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government obligations $ 3,997,985 $ 11,395 $ -- $ 4,009,380 U.S. Government agencies and corporations 25,805,725 138 191,819 25,614,044 Mortgage-backed securities 11,158,381 48,651 247,747 10,959,285 Other securities 1,225,356 -- -- 1,225,356 ------------ ---------- ---------- ----------- $ 42,187,447 $ 60,184 $ 439,566 $ 41,808,065 ============ ========== ========== ===========
-13- The amortized cost and fair value of securities at December 31, 2000 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 $ 3,160,235 $ 3,175,220 $11,984,710 $11,995,191 One to five years 34,464,327 34,265,673 17,887,158 18,181,671 Five to ten years 7,621,751 7,610,086 -- -- Ten to fifteen years 12,342,589 12,574,325 -- -- Mortgage-backed securities 34,852,620 34,677,509 18,834,380 18,663,584 Other securities -- -- 1,269,756 1,269,756 ----------- ---------- ---------- ---------- $92,441,522 $92,302,813 $49,976,004 $50,110,202 ========== =========== ========== ==========
Securities with a book value of $53,387,000 and $38,587,000 at December 31, 2000 and 1999, respectively, were pledged to secure public funds on deposit and for other purposes. There were no sales of securities in 2000 or 1999. 4. Loans The composition of the loan portfolio at December 31, 2000 and 1999 was as follows:
2000 1999 ---- ---- Commercial and industrial $ 24,206,232 $ 23,418,982 Real estate - residential 76,945,192 66,788,010 Real estate - commercial 57,869,786 58,484,839 Real estate - residential construction 2,076,838 1,454,210 Loans to individuals 14,165,381 13,544,009 Other 765,836 670,416 ----------- ----------- Total loans $176,029,265 $164,360,466 ============ ===========
The Company's lending activities are conducted primarily in central Massachusetts, where commercial loans, commercial real estate loans, single family and multifamily residential loans and a variety of consumer loans are originated. 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. The ability and willingness of the Company's borrowers to honor their repayment commitments are impacted by many factors, including the level of overall economic activity within the borrowers' geographic areas. A summary of changes in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998 ------ ------ ------ Balance at beginning of year $3,041,873 $2,981,012 $3,215,559 Provision for possible losses -- -- -- Charge-offs (470,934) (112,538) (303,525) Recoveries 241,453 173,399 68,978 ---------- --------- --------- Balance at end of year $2,812,392 $3,041,873 $2,981,012 ========= ========= =========
Total impaired loans at December 31, 2000 and 1999 that required a related allowance were $143,000 and $91,695, respectively, and the allowance allocated to such loans was $30,000 and $41,250 respectively. In addition, at December -14- 31, 2000 and 1999, the Company had impaired loans of $415,354 and $592,954, 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 $685,623 and $858,968 during 2000 and 1999, respectively. The Company recorded interest income on impaired loans of $37,370, $100,081 and $82,456 during 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, accruing loans 90 days or more past due totaled $1,940 and $0, respectively, and nonaccruing loans totaled $558,354 and $684,649, respectively. Troubled debt restructurings were $57,611 and $0 at December 31, 2000 and 1999, respectively, and were included in impaired loans. The reduction of interest income associated with nonaccrual and restructured loans for the years ended December 31, 2000, 1999 and 1998 was as follows:
2000 1999 1998 ---- ---- ---- Interest income per original terms $ 83,654 $ 154,141 $ 146,326 Income recognized 37,370 100,081 82,456 -------- -------- -------- Foregone interest income $ 46,284 $ 54,060 $ 63,870 ======== ======== ========
5. Bank Premises and Equipment
A summary of bank premises and equipment at December 31, 2000 and 1999 follows: Estimated 2000 1999 Useful Life ---------- ---------- ----------- Land $ 1,069 062 $ 1 069 062 Buildings 5,008,907 4,832,435 30 - 40 years Land and leasehold improvements 664,901 634,377 1 - 15 years Furniture and equipment 3,723,277 4,057,775 3 - 10 years ---------- ----------- 10,466,147 10,593,649 Less accumulated depreciation and amortization 4,231,506 4,250,758 ---------- ----------- $ 6,234,641 $ 6,342,891 ========== ===========
Total depreciation and amortization expense for the years ended December 31, 2000, 1999 and 1998 was $974,945, $906,015 and $834,209, respectively. 6. Deposits A summary of deposits at December 31, 2000 and 1999 follows:
2000 1999 ---- ---- Demand deposits $ 75,969,408 $ 68,082,062 Money-market deposits 34,688,800 32,523,219 NOW and FlexValue deposits 43,511,182 32,372,157 Cash management investment deposits 27,839,064 17,444,396 Savings deposit 38,470,706 36,672,396 Time certificates of deposit in denominations of $100,000 or more 30,611,400 25,347,341 Other time deposits 56,038,272 63,980,737 ----------- ----------- $307,128,832 $276,422,308 =========== ============
-15- The following is a summary of original maturities of time deposits as of December 31, 2000:
2001 $ 69,794,592 2002 7,170,541 2003 3,750,479 2004 1,301,163 2005 4,632,897 ----------- $ 86,649,672 ============
7. Income Taxes The components of income tax expense for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 ---- ---- ---- Current: Federal $ 2,050,453 $ 1,644,242 $ 1,713,257 State 479,375 438,344 475,906 ---------- ---------- ---------- Total current 2,529,828 2,082,586 2,189,163 ---------- ---------- ---------- Deferred: Federal (19,067) 68,392 (10,307) State (6,579) 25,599 3,616 ---------- ---------- ---------- Total (prepaid) deferred (25,646) 91,991 (6,691) ---------- ---------- ---------- Total $ 2,504,182 $ 2,174,577 $ 2,182,472 ========== ========== ==========
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 actual income tax provision is summarized below:
2000 1999 1998 ---- ---- ---- Income tax expense at statutory rates $ 2,392,342 $ 2,070,524 $ 2,035,999 State income taxes, net of federal income tax benefit 312,045 304,883 316,485 Tax-exempt interest (209,009) (206,274) (175,993) Other, net 8,804 5,444 5,981 ---------- ---------- ---------- $ 2,504,182 $ 2,174,577 $ 2,182,472 ========== ========== ==========
The Company has recorded in other assets a net deferred tax asset of $553,328. 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. -16- At December 31, 2000 and 1999, the Company's net deferred tax asset, included in other assets in the accompanying consolidated balance sheets, consisted of the following components:
2000 1999 ---- ---- Gross deferred tax asset: Provision for possible loan losses $ 874,255 $ 893,647 Employee benefits and other compensation arrangements 327,280 323,512 Other 19,883 14,197 --------- --------- 1,221,418 1,231,356 Gross deferred tax liability: Accelerated tax depreciation (133,516) (181,020) Other (534,574) (312,446) --------- --------- (668,090) (493,466) --------- --------- Net deferred tax asset $ 553,328 $ 737,890 ========= =========
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 amounts recognized in the Company's consolidated balance sheets at December 31, 2000 and 1999:
2000 1999 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $(3,315,486) $(3,751,742) Service cost (230,182) (249,962) Interest cost (251,629) (233,992) Actuarial (loss) gain (265,815) 636,872 Benefits paid 230,725 283,338 --------- --------- Benefit obligation at end of year (3,832,387) (3,315,486) --------- --------- Change in plan assets: Fair value of assets at beginning of year 3,317,895 2,998,392 Actual return on plan assets 78,121 194,640 Employer contributions 312,508 408,201 Benefits paid (230,725) (283,338) --------- --------- Fair value of plan assets at end of year 3,477,799 3,317,895 --------- --------- Funded status (354,588) 2,409 Unrecognized net loss 745,348 288,507 Unrecognized prior service cost 8,276 9,656 Unrecognized net asset (26,861) (35,814) --------- --------- Prepaid benefit cost $ 372,175 $ 264,758 ========= =========
-17- The following weighted-average assumptions were used in accounting for the Company's pension plan for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ---- ---- ---- Discount rate 7.25% 7.50% 6.50% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.00% 4.00% 4.00%
Net periodic benefit cost for the years ended December 31, 2000, 1999 and 1998 included the following components:
2000 1999 1998 ---- ---- ---- Service cost $ 230,182 $ 249,962 $ 247,666 Interest cost 251,629 233,992 226,980 Expected return on plan assets (272,190) (244,119) (228,798) Amortization of prior service cost 1,380 1,380 1,380 Amortization of transition obligation (8,953) (8,953) (8,954) Recognized net loss 3,043 26,977 -- --------- --------- --------- Net periodic benefit cost $ 205,091 $ 259,239 $ 238,274 ========= ========= =========
The Company has an Employee Stock Ownership Plan ("ESOP") that enables eligible employees to own common stock. Annual cash contributions of $70,000 were made to the ESOP in 2000, 1999 and 1998. The Company has a 401(k) Plan that covers all eligible employees. The Company matches a percentage of each participant's annual contribution to the plan as determined by the Board of Directors each year. Compensation expense recorded in 2000, 1999 and 1998 related to this plan was approximately $81,400 $85,800 and $81,400, respectively. The Company has a post-retirement medical plan covering all eligible employees, for which an accrued liability of $30,775 and $18,811 was recorded at December 31, 2000 and 1999, respectively. The net periodic benefit cost of this plan was $13,890 in 2000 and $12,397 in 1999. 9. Commitments The Company leases branch offices and equipment under noncancelable agreements expiring at various dates through 2008 that require various minimum annual rentals. Rental expense totaled approximately $262,000, $246,000 and $185,000, for 2000, 1999 and 1998, respectively. The total future minimum rental commitments at December 31, 2000 aggregate $1,198,346. Rental commitments for each of the next five fiscal years and thereafter are as follows: 2001 $252,654 2002 235,220 2003 195,872 2004 166,400 2005 126,800 Thereafter 221,400 The Company is not party to any legal proceedings. The Bank is involved in various routine legal actions arising in the normal course of business, none of which is believed by management, based on its knowledge of the pertinent facts and opinions of legal counsel, to be material to the financial condition or operations of the Company. -18- 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 ---------- --------- ---------- ----------- 1999 $ 5,540,830 $2,039,431 $ 1,706,514 $ 5,873,747 2000 $ 5,873,747 $2,906,641 $ 1,262,575 $ 7,517,813
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. Condensed Financial Information of Community Bancorp, Inc. The following tables disclose certain parent-company-only financial information at December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000:
Balance Sheets 2000 1999 ---- ---- Assets: Cash and cash equivalents $ 527,417 $ 631,460 Investment in subsidiary, at equity 31,239,102 27,645,540 Other assets 331,209 281,306 ---------- ---------- Total assets $ 32,097,728 $ 28,558,306 =========== ========== Liabilities and stockholders' equity: Other liabilities $ 282,857 $ 247,035 ---------- ---------- Total liabilities 282,857 247,035 ---------- ---------- Stockholders' equity: Preferred stock, $2.50 par value, 100,000 shares authorized, none issued or outstanding -- -- Common stock, $2.50 par value, 12,000,000 shares authorized, 6,398,436 shares issued, 5,914,441 shares outstanding, (5,921,824 shares outstanding at December 31, 1999) 15,996,090 7,998,045 Surplus 101,378 638,619 Undivided profits 18,052,893 22,116,681 Treasury stock at cost, 483,995 shares (476,612 shares at December 31, 1999) (2,414,762) (2,217,972) Accumulated other comprehensive income (loss) 79,272 (224,102) ---------- ---------- Total stockholders' equity 31,814,871 28,311,271 ---------- ---------- Total liabilities and stockholders' equity $32,097,728 $28,558,306 =========== ==========
-19-
Statements of Income Years ended December 31, ------------------------------------------ 2000 1999 1998 ---- ---- ---- Income: Dividends from subsidiary bank $ 1,236,481 $ 1,073,397 $ 949,690 Other income 371,680 357,592 341,027 ----------- ----------- ---------- Total income 1,608,161 1,430,989 1,290,717 ----------- ----------- ---------- Expenses: Other 366,231 352,237 343,499 ----------- ----------- ---------- Total expenses 366,231 352,237 343,499 ----------- ----------- ---------- Income before undistributed net income of subsidiary bank 1,241,930 1,078,752 947,218 Equity in undistributed net income of subsidiary bank 3,290,189 2,836,465 2,858,543 ----------- ----------- ---------- Net income $ 4,532,119 $ 3,915,217 $ 3,805,761 =========== =========== ===========
Statements of Cash Flows Years ended December 31, ----------------------------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $ 4,532,119 $ 3,915,217 $ 3,805,761 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary bank (3,290,189) (2,836,465) (2,858,543) Increase in other assets (49,903) (30,996) (30,821) Increase in other liabilities 35,823 29,356 32,538 ---------- ---------- ---------- Total adjustments (3,304,269) (2,838,105) (2,856,826) ---------- ---------- ---------- Net cash provided by operating activities 1,227,850 1,077,112 948,935 ---------- ---------- ---------- Cash flows from financing activities: Purchase of treasury stock (327,132) (630) -- Reissuance of treasury stock 231,720 261,744 274,965 Dividends declared (1,236,481) (1,073,397) (949,690) ---------- ---------- ---------- Net cash used in financing activities (1,331,893) (812,283) (674,725) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (104,043) 264,829 274,210 Cash and cash equivalents at beginning of year 631,460 366,631 96,421 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 527,417 $ 631,460 $ 366,631 ========== ========== ===========
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 2001, Community National Bank can, under this formula, declare dividends to Community Bancorp, Inc. of approximately $6,127,000, plus an additional amount equal to the Bank's net profit for 2001, up to the date of any such dividend declaration, without the approval of the Comptroller of the Currency. -20- 12. Financial Instruments With Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments primarily consist of commitments to extend credit and standby letters of credit. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They are primarily issued to guarantee other customer obligations. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral typically is obtained based on management's credit assessment of the customer. Loan commitments and standby letters of credit usually have fixed expiration dates or other termination clauses. Some commitments and letters of credit expire without being drawn upon. Accordingly, the total commitment amounts do not necessarily represent future cash requirements of the Company. 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, 2000 and 1999 was as follows:
2000 1999 ---- ---- Commitments to extend credit: Fixed-rate (6.99% to 10.50%) $ 504,621 $ 1,378,747 Adjustable rate 46,344,615 40,544,958 Standby letters of credit $ 469,287 $ 246,693 =========== ===========
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, 2000 and 1999, the outstanding balance of such mortgages totaled approximately $47,818 and $194,000, respectively. Fees associated with the Company's off-balance-sheet financial instruments are minimal; therefore, the fair value of off-balance-sheet financial instruments is not material. 13. 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, 2000, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2000 and 1999, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios at December 31, 2000 and 1999 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 ------ ----- ------ ----- ------ ----- December 31, 2000: Company (consolidated): Total capital (to risk-weighted > assets) $34,213 17.16% $15,947 - 8.00% N/A N/A Tier 1 capital (to risk-weighted > assets) 31,717 15.91% 7,974 - 4.00% N/A N/A Tier 1 capital > (to average assets) 31,717 9.12% 13,915 - 4.00% N/A N/A Bank: Total capital (to risk-weighted > > assets) 33,637 16.87% 15,947 - 8.00% $19,934 - 10.00% Tier 1 capital (to risk-weighted > > assets) 31,141 15.62% 7,974 - 4.00% 11,960 - 6.00% Tier 1 capital > > (to average assets) 31,141 8.95% 13,915 - 4.00% 17,394 - 5.00% December 31, 1999: Company (consolidated): Total capital (to risk-weighted > assets) $30,815 16.80% $14,676 - 8.00% N/A N/A Tier 1 capital (to risk-weighted > assets) 28,513 15.54% 7,338 - 4.00% N/A N/A Tier 1 capital > (to average assets) 28,513 9.07% 12,571 - 4.00% N/A N/A Bank: Total capital (to risk-weighted > > assets) 30,157 16.43% 14,676 - 8.00% $18,345 - 10.00% Tier 1 capital (to risk-weighted > > assets) 27,847 15.18% 7,338 - 4.00% 11,007 - 6.00% Tier 1 capital > > (to average assets) 27,847 8.86% 12,571 - 4.00% 15,713 - 5.00%
-22- 14. Disclosures about Fair Value of Financial Instruments In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". This statement requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets' fair values. Securities (including mortgage-backed securities, securities held to maturity and securities available for sale): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain one-to-four family residential mortgages are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for credit card loans and other consumer loans are based on carrying values, as the loans reprice frequently at current market rates. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value. Off-balance-sheet instruments: The fair value of lending commitments discussed in Note 12 is not considered material nor has it been reflected in the estimation of the fair value of the related loans. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Commitments to extend credit/sell loans: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of customers. For fixed-rate loan commitments and obligations to deliver fixed-rate loans, fair value also considers the difference between committed rates and current levels of interest rates. Values not determined: SFAS No. 107 excludes certain financial instruments from its disclosure requirements, including real estate included in banking premises and equipment, the intangible value of the Bank's portfolio of loans serviced (both for itself and for others) and related servicing network and the intangible value inherent in the Bank's deposit relationships (i.e. core deposits) among others. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. -23- The carrying amount and estimated fair values of the Bank's financial instruments at December 31, 2000 and 1999 are as follows:
2000 ----------------------------- Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and due from banks $ 16,472,547 $ 16,472,547 Federal funds sold 31,136,266 31,136,266 Securities 142,551,724 142,413,015 Loans, including held for sale, net 173,512,615 176,915,858 Financial instrument liabilities: Deposits 307,128,832 307,295,190 Short-term borrowings 33,463,166 33,463,166 1999 ----------------------------- Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and due from banks $ 21,010,959 $ 21,010,959 Federal funds sold 6,924,026 6,924,026 Securities 128,033,082 125,972,616 Loans, including held for sale, net 161,651,279 163,282,691 Financial instrument liabilities: Deposits 276,422,308 276,851,881 Short-term borrowings 21,766,424 21,766,424
-24- Report of Independent Public Accountants [The following report appears on Arthur Andersen LLP letterhead] Report of Independent Public Accountants To the Board of Directors and Stockholders of Community Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Community Bancorp, Inc. (a Massachusetts corporation) and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the three years then ended. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years then ended, in conformity with accounting principals generally accepted in the United States. /s/ Arthur Andersen LLP Boston, Massachusetts January 18, 2001 -25- Management's Discussion and Analysis of Financial Condition and Results of Operations Summary The Company recorded net income of $4,532,119 for the year ended December 31, 2000, representing an increase of $616,902 or 15.8% over $3,915,217 recorded in 1999. Earnings per share of $.77 for the current year compared to $.66 for the year ended December 31, 1999. The improvement in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest expense. Deposits of $307,128,832 at December 31, 2000 increased by $30,706,524 or 11.1% from $276,422,308 at December 31, 1999. The increase occurred in both interest bearing and noninterest bearing deposit categories. Loans of $176,029,265 at December 31, 2000 increased by $11,668,799 or 7.1% from $164,360,466 at December 31, 1999. The increase took place primarily in the residential mortgage and installment loan categories. Noncurrent loans (nonaccrual loans, troubled debt restructurings and loans 90 days or more past due but still accruing) totaled $560,294 and $684,649 at December 31, 2000 and 1999, respectively. Assets of $374,867,511 at December 31, 2000 represented a $46,870,936 or 14.3% increase over $327,996,575 at December 31, 1999. 2000 Compared to 1999 Interest income for the year ended December 31, 2000 was $24,964,665, representing an increase of $3,123,940 or 14.3% over $21,840,725 for the year ended December 31, 1999, primarily due to a $33,309,935 or 11.5% increase in average earning assets, and higher average interest rates, during 2000. The weighted average taxable equivalent yield on net earning assets was 7.82% and 7.61% in 2000 and 1999, respectively. Interest expense of $9,354,592 in 2000 represented an increase of $1,524,924 or 19.5% from $7,829,668 in 1999, primarily due to a $23,599,941 or 10.4% increase in average interest bearing liabilities, and higher average interest rates, during 2000. The weighted average cost of interest bearing liabilities was 3.75% in 2000 and 3.46% in 1999. Net interest income for 2000 was $15,610,073, representing an increase of $1,590,016 or 11.4% compared to $14,011,057 recorded in 1999. Noninterest income for the year ended December 31, 2000 was $3,488,045, representing an increase of $272,299 or 8.5% from $3,215,746 in 1999. This increase resulted primarily from increases in merchant credit card processing assessments, service charges and gains on sales of loans, partially offset by a reduction in other charges, commissions and fees. Noninterest expense for the year ended December 31, 2000 of $12,061,817 represented an increase of $924,808 or 8.3% from $11,137,009 recorded during 1999. This increase was the result of increases in salaries and employee benefits, data processing and ATM network, occupancy, credit card processing and other expense, partially offset by reductions in printing, stationery and supplies, professional fees and marketing and advertising expense. Many of the non-inflationary increases in noninterest expense were the result of costs associated with the operation of two new Community National Bank offices opened during the second quarter of 1999, the establishment by the Bank of an Investment Management and Trust Department during the second quarter of 2000, and the continued investment in technology to enhance customer service and product delivery systems. There was no provision for loan losses in 2000 or 1999, reflecting management's continuing evaluation of the adequacy of the allowance for loan losses and its belief that the allowance is adequate. Management will continue its ongoing assessment of the adequacy of the allowance for loan losses during 2001 and may adjust the provision for loan losses if necessary. Income tax expense of $2,504,182 for the year ended December 31, 2000 compared to $2,174,577 for 1999, resulting from an increase in taxable income during the current period. The Company's effective tax rate declined slightly to 35.6% in 2000 from 35.7% in 1999 due to favorable tax rates on certain investment income. Net income of $4,532,119 for the year ended December 31, 2000 represented an increase of $616,902 or 15.8% over $3,915,217 recorded in 1999. Earnings per share of $.77 in 2000 represented an increase of $.11 from $.66 in 1999. -26- 1999 Compared to 1998 Interest income for the year ended December 31, 1999 was $21,840,725, representing an increase of $1,180,942 or 5.7% over $20,659,783 for the year ended December 31, 1998, primarily due to a $22,224,584 or 8.3% increase in average earning assets, partially offset by lower average interest rates, during 1999. The weighted average taxable equivalent yield on net earning assets was 7.61% and 7.81% in 1999 and 1998, respectively. Interest expense of $7,829,668 in 1999 represented an increase of $154,556 or 2.0% from $7,675,112 in 1998, primarily due to a $17,199,159 or 8.2% increase in average interest bearing liabilities, partially offset by lower average interest rates, during 1999. The weighted average cost of interest bearing liabilities was 3.46% in 1999 and 3.67% in 1998. Net interest income for 1999 was $14,011,057, representing an increase of $1,026,386 or 7.9% compared to $12,984,671 recorded in 1998. Noninterest income for the year ended December 31, 1999 was $3,215,746, representing an increase of $15,259 or .5% from $3,200,487 in 1998. This increase resulted primarily from increases in merchant credit card processing assessments and other charges, commissions and fees, much of which was offset by a reduction in gains on sales of loans. The decrease in gains on sales of loans resulted from a significant reduction in the volume of residential mortgages originated for sale in the secondary market during 1999 as compared to 1998. Noninterest expense for the year ended December 31, 1999 of $11,137,009 represented an increase of $940,084 or 9.2% from $10,196,925 recorded during 1998. This increase was the result of increases in all primary noninterest expense categories. There was no provision for loan losses in 1999 or 1998, reflecting management's continuing evaluation of the adequacy of the allowance for loan losses and its belief that the allowance is adequate. Income tax expense of $2,174,577 for the year ended December 31, 1999 compared to $2,182,472 for 1998, resulting from an increase in nontaxable income and decrease in taxable income during the current period. The Company's effective tax rate declined to 35.7% in 1999 from 36.4% in 1998 due to favorable tax rates on certain investment income. Net income of $3,915,217 for the year ended December 31, 1999 represented an increase of $109,456 or 2.9% over $3,805,761 recorded in 1998. Earnings per share of $.66 in 1999 represented an increase of $.01 from $.65 in 1998. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed by management to be adequate to absorb inherent losses in the loan portfolio, including commitments to extend credit (i.e. lines of credit). The allowance is charged when management determines that the repayment of the principal on a loan is in doubt. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at an adequate level through the provision for loan losses, which is a charge to operating income. At December 31, 2000 the allowance was $2,812,392, representing 1.6% of total loans, compared to $3,041,873, representing 1.9% of total loans at December 31, 1999. Securities The Company's securities portfolio consists primarily of obligations of the U.S. Treasury, U.S. Government sponsored agencies, mortgage-backed securities and obligations of various municipalities. These assets are used in part to secure public deposits and as collateral for repurchase agreements. Total securities were $142,551,724 at December 31, 2000, representing an increase of $14,518,642 or 11.3% from $128,033,082 at December 31, 1999. Total securities averaged $127.6 million for 2000, representing an increase of $8.4 million or 7.0% over $119.2 million for 1999. All mortgage-backed securities in the Company's 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. There were no sales of securities during 2000. -27- Liquidity and Capital Resources The Company's principal sources of liquidity are customer deposits, amortization and pay-offs of loan principal and the 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, 2000 and 1999, deposits were $307.1 million and $276.4 million, respectively. Management anticipates that deposits will increase moderately during 2001. Of the Company's $142.6 million in securities at December 31, 2000, $15.2 million or 10.6% 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 of Boston which provides additional borrowing opportunities. There were no borrowings from the Federal Home Loan Bank of Boston at December 31, 2000 or 1999. 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, 2000 and 1999, the Company's Tier 1 leverage capital ratio was 8.46% and 8.69%, respectively. Regulatory authorities have also implemented risk-based capital guidelines requiring a minimum ratio of Tier 1 capital to risk-weighted assets of 4.00% and a minimum ratio of total capital to risk- weighted assets of 8.00%. At December 31, 2000, the Company's Tier 1 and total risk-based capital ratios were 15.91% and 17.16%, respectively. At December 31, 1999, the Company's Tier 1 and total risk-based capital ratios were 15.54% and 16.80%, respectively. The Bank is categorized as "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). Effective April 28, 2000, the Company's Board of Directors approved a two-for- one stock split of the Company's common stock, par value $2.50, effected in the form of a 100% stock dividend. 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 its interest rate sensitive assets in response to such changes. The Company's positive one year cumulative gap position at December 31, 2000, which represents the excess of repricing assets versus repricing liabilities, was 2.11% expressed as a percentage of total assets. Year 2000 As of December 31, 2000, the Company had experienced no Year 2000 related problems. All mission critical and non-mission critical systems have performed correctly. The Company is aware of no credit problems on the part of its borrowers, no deposit balance reductions, and no disruptions of utility or other third-party services related to the Year 2000 issue, and the Company experienced no Year 2000 related loss of revenue. -28- [The following text appears on the inside back cover] DIRECTORS & OFFICERS -------------------- COMMUNITY BANCORP, INC. AND COMMUNITY NATIONAL BANK --------------------------------------------------- Chairman of the Board --------------------- Dennis F. Murphy, Jr. President and Treasurer of D. Francis Murphy Insurance Agency, Inc. Directors: --------- Alfred A. Cardoza Retired Jennie Lee Colosi President and Treasurer of E. T. & L. Construction, Inc. Antonio Frias President and Treasurer of S & F Concrete Contractors, Inc. I. George Gould Chairman of the Board of Gould's, Inc. Horst Huehmer Retired Donald R. Hughes, Jr. Treasurer and Clerk of Community Bancorp, Inc., Executive Vice President of Community National Bank James A. Langway President and Chief Executive Officer of Community Bancorp, Inc. and Community National Bank David L. Parker Chairman of the Board of Larkin Lumber Company Mark Poplin President and Treasurer of Poplin Supply Company David W. Webster President of Knight Fuel Company, Inc. Officers: -------- James A. Langway President and Chief Executive Officer Donald R. Hughes, Jr. Treasurer and Clerk COMMUNITY NATIONAL BANK ----------------------- Officers -------- President and Chief Executive Officer James A. Langway Executive Vice President Donald R. Hughes, Jr. Auditor Patricia North-Martino Administrative Officer Joy A. Pare' Commercial Banking ------------------ Senior View President John P. Galvani Vice Presidents Christal M. Bjork Daniel L. Heney Anton Lahnston Assistant Vice President Gregory A. Pauplis Commercial Loan Officer Jennifer D. Vasquezi Compliance/Legal/Personnel -------------------------- Senior Vice President Grace L. Blunt, Esq. Assistant Vice President Diane L. LeBlanc Financial Control ----------------- Senior Vice President Robert E. Leist Investment Management & Trust ----------------------------- V.P. & Investment Officer R. Richard Wilson Investment Officer Paul Travis Operations/EDP/Electronic Banking ------------------------------------- Senior Vice President Janet A. Lyman Vice President James P. Vasquezi Assistant Vice President Margaret M. Vasquezi Loan Servicing Officer Michelle M. Temple Operations Officer Susan B. Gillespie Retail Banking -------------- Senior Vice President Richard K. Bennett Vice Presidents Jeffrey C. Barske Rocco A. Vallande Assistant Vice Presidents Linda Benway Kelli Mason Branch Officers Joan Brigham Sean English Rita M. Janeiro M. Jean Mickle Gail A. Plank Lois A. Seymour Nicole L. Sousa Consumer Loan Officer Suzanne Polagruto Credit Officer AnnMarie Callahan Facilities Officer Raymond A. Murphy Mortgage Officer Lynda L. D'Orlando Mortgage Underwriting Officer Sandra M. Borella Security Officer Clark Hooper The Company's Securities and Exchange Commission filing on Form 10-K is available to our stockholders upon request. [The following text appears on the back cover.] Community Bancorp, Inc. Parent company of Community National Bank [Community National Bank's logo appears in this space] 17 Pope Street Hudson, Massachusetts 01749 tel 978-568-8321 fax 978-568-7129 877-CNB-DIRECT Acton 270 Great Road tel 978-263-8376 fax 978-266-2610 Boxborough 629 Massachusetts Avenue tel 978-264-9092 fax 978-266-2600 Concord 1134 Main Street tel 978-369-5421 fax 978-371-6600 Framingham 39 Edgell Road tel 508-875-1333 fax 508-370-3885 Hudson South 177 Broad Street tel 978-568-8813 fax 978-568-2610 Internet Branch www.combanc.com cnb-mail@combanc.com Loan Center 12 Pope Street, Hudson tel 978-568-2468 fax 978-562-9984 Marlborough Center 96 Bolton Street tel 508-485-5003 fax 508-229-4602 Marlborough East 500 Boston Post Road tel 508-485-3599 fax 508-229-4601 Stow 159 Great Road tel 978-461-1600 fax 978-461-1610 Sudbury 450 Boston Post Road tel 978-443-1620 fax 978-443-1626 ATM LOCATIONS: New England Sports Center Donald Lynch Blvd., Marlborough Solomon Pond Mall Donald Lynch Blvd., Marlborough Washington Square Plaza Rt. 85, Hudson Equal Opportunity Lender Member FDIC