CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Three Months Ended March 31, 1999
Commission File Number 000-16435
COMMUNITY BANCORP.
(Exact Name of Registrant as Specified in its Chapter)
Vermont 03-0284070
(State of Incorporation) (IRS Employer Identification Number)
Derby Road, Derby, Vermont 05829
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number: (802) 334-7915
Not Applicable
Former Name, Former Address and Formal Fiscal Year
(If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
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 for such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
At May 2, 2000 there were 3,415,825 shares outstanding of the Corporation's
common stock.
Total Pages - 22 Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY BANCORP. AND SUBSIDIARIES
Consolidated Balance Sheets
( Unaudited )
March 31 December 31
2000 1999
Assets
Cash and due from banks 6,519,095 9,928,586
Federal funds sold and overnight deposits 2,174,043 2,787,558
Total cash and cash equivalents 8,693,138 12,716,144
Securities held-to-maturity (fair value
$38,066,701 at 03/31/00, and $29,502,766
at 12/31/99 38,584,045 29,887,821
Securities available-for-sale 20,911,875 28,982,188
Restricted equity securities 1,141,650 1,141,650
Loans held-for-sale 671,355 660,423
Loans 155,635,912 152,618,876
Allowance for loan losses (1,827,295) (1,714,763)
Unearned net loan fees (888,120) (891,114)
Net loans 152,920,497 150,012,999
Bank premises and equipment, net 4,209,283 4,322,697
Accrued interest receivable 1,810,769 1,484,192
Other real estate owned, net 536,733 434,694
Other assets 2,830,460 2,572,994
Total assets $232,309,805 $232,215,802
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 25,342,165 25,727,709
NOW and money market accounts 49,689,622 52,094,860
Savings 33,853,663 32,854,357
Time deposits, $100,000 and over 15,579,508 15,894,363
Other time deposits 74,449,755 75,271,591
Total deposits $198,914,713 $201,842,880
Borrowed funds 4,055,000 4,055,000
Repurchase agreements 5,407,641 2,623,282
Accrued interest and other liabilities 1,062,927 1,493,486
Subordinated convertible debentures 20,000 20,000
Total liabilities $209,460,281 $210,034,648
Stockholders' Equity
Common stock - $2.50 par value;
6,000,000 shares authorized and 3,417,069
shares issued at 03/31/00 and 3,388,394
shares issued at 12/31/99 8,542,671 8,470,985
Additional paid-in capital 11,118,314 10,942,510
Retained earnings 3,896,590 3,462,966
Accumulated other comprehensive income (259,791) (247,086)
Less: treasury stock, at cost;
29,891 shares at 03/31/00, and 29,887
shares at 12/31/99 (448,260) (448,221)
Total stockholders' equity $22,849,524 $22,181,154
Total liabilities and
stockholders' equity $232,309,805 $232,215,802
COMMUNITY BANCORP. AND SUBSIDIARIES
Statements of Income
( Unaudited )
For The First Quarter Ended March 31, 2000 1999 1998
Interest income
Interest and fees on loans 3,304,829 3,177,402 3,478,386
Interest and dividends on investment securities
U.S. Treasury securities 471,069 545,279 457,196
U.S. Government agencies 208,533 128,299 20,419
States and political subdivisions 142,745 113,531 143,183
Dividends 20,571 19,722 18,564
Interest on federal funds sold and
overnight deposits 29,476 66,147 106,702
Total interest income $4,177,223 $4,050,380 $4,224,450
Interest expense
Interest on deposits 1,733,293 1,819,944 1,941,022
Interest on borrowed funds 53,488 48,900 46,800
Interest on repurchase agreements 43,296 2,634 0
Interest on subordinated debentures 550 550 2,227
Total interest expense $1,830,627 $1,872,028 $1,990,049
Net interest income 2,346,596 2,178,352 2,234,401
Provision for loan losses (162,000) (150,000) (200,000)
Net interest income after provision $2,184,596 $2,028,352 $2,034,401
Other operating income
Trust department income 71,350 49,479 30,699
Service fees 182,787 164,750 161,511
Security (losses) gains (11,507) 0 0
Other 159,666 159,243 104,553
Total other operating income $402,296 $373,472 $296,763
Other operating expenses
Salaries and wages 719,104 715,459 707,951
Pension and other employee benefits 223,186 177,052 174,314
Occupancy expenses, net 365,384 338,719 321,633
Trust department expenses 23,694 11,289 8,017
Other 677,406 604,956 597,697
Total other operating expenses $2,008,774 $1,847,475 $1,809,612
Income before income taxes 578,118 554,349 521,552
Applicable income taxes (credit) 144,493 143,552 113,873
Net Income $433,625 $410,797 $407,679
Earnings per share on weighted average $0.13 $0.13 $0.13
Weighted average number of common shares
Used in computing earnings per share 3,387,179 3,235,785 3,189,686
Dividends per share $0.16 $0.16 $0.15
Book value per share on shares outstanding $6.75 $6.70 $6.47
Per share data for 1998 restated to reflect a 100% stock dividend paid on
June 1, 1998, and a 5% stock dividend paid on February 1, 1999.
COMMUNITY BANCORP. AND SUBSIDIARIES
Statement of Cash Flows
For the First Three Months Ended March 31, 2000 1999 1998
Reconciliation of net income to net cash
provided by operating activities:
Net Income $433,625 $410,797 $407,679
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 149,550 114,864 101,258
Provisions for loan losses 162,000 150,000 200,000
Provisions for deferred income taxes (44,522) (25,191) (22,606)
(Gain) loss on sale of loans (7,586) (23,692) 12,490
Securities losses 11,507 0 0
(Gain) loss on sales of OREO (19,169) 0 8,293
OREO writedowns 0 0 6,300
Amortization of bond premium, net 49,566 75,592 (37,498)
Proceeds from sales of loans held for sale 615,781 4,699,807 3,358,192
Originations of loans held for sale (619,127) (4,523,200) (4,545,913)
Increase (decrease) in taxes payable 189,017 169,765 136,478
(Increase) decrease in interest receivable (326,577) (355,240) (116,724)
Decrease (Increase) in mortgage service rights 8,903 (24,179) (2,636)
Decrease (Increase) in other assets (208,953) 203,593 (19,930)
(Decrease) increase in unamortized loan fees (2,994) (14,647) (2,531)
(Decrease) increase in interest payable (26,352) (317) (9,839)
(Decrease) increase in accrued expenses (89,623) (31,794) (58,372)
Increase (decrease) in other liabilities 27,412 55,178 (18,265)
Net cash provided by operating activities $302,458 $881,336 ($603,624)
Cash Flows from investing activities:
Investments - held to maturity
Sales and maturities 2,526,246 4,986,510 3,474,110
Purchases (11,227,404) (11,899,683) (3,759,745)
Investments - available for sale
Sales and maturities 7,994,923 0 0
Purchases 0 (6,225,586) (7,000,000)
Investment in limited partnership 0 0 21,688
Increase in Loans, Net of Payments (3,257,633) 1,575,016 1,671,558
Capital Expenditures (36,136) (1,298,523) (36,124)
Recoveries of loans charged off 42,320 20,730 29,143
Proceeds from sales of OREO 65,939 0 370,939
Net Cash Used in Investing Activities ($3,891,745)($12,841,536) ($5,228,431)
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW,
money mkt. and savings (1,791,476) 1,302,281 1,551,563
Net increase in certificates of deposit (1,136,691) 341,101 2,073,152
Net increase (decrease) in short-term
borrowings and repurchase agreements 2,784,359 172,383 0
Payments to acquire treasury stock (39) (2,642) (28)
Dividends paid (289,872) (266,945) (235,478)
Net cash provided by financing activities (433,719) 1,546,178 3,389,209
Net increase in cash and cash equivalents($4,023,006)($10,414,022) ($2,442,846)
Cash and cash equivalents:
Beginning $12,716,144 $20,424,088 $14,307,610
Ending $8,693,138 $10,010,066 $11,864,764
Supplemental Schedule of Cash Paid During the Year
Interest paid $1,856,979 $1,871,611 $1,997,504
Income Taxes Paid $0 ($1,020) $0
Supplemental schedule of noncash investing
and financing activities:
Net change in securities valuation ($19,251) ($176,067) ($24,908)
OREO acquired in settlements of loans $148,809 $230,931 $84,466
Debentures converted to common stock $0 $0 $11,000
Stock dividends $0 $1,851,338 $0
Dividends paid
Dividends payable $537,362 $497,754 $452,382
Dividends reinvested ($247,490) ($230,809) ($216,904)
$289,872 $266,945 $235,478
</table
AVERAGE BALANCES AND INTEREST RATES
The table below presents the following information:
Average earning assets (including non-accrual loans)
Average interest bearing liabilities supporting earning assets
Interest income and interest expense as a rate/yield
For the First Three Months Ended:
2000 1999
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
EARNING ASSETS
Loans (gross) 154,785,818 3,304,829 8.59% 146,829,523 3,177,402 8.78%
Taxable Investment
Securities 47,778,518 679,602 5.72% 49,890,646 673,578 5.48%
Tax-exempt Investment
Securities(1) 12,059,166 214,452 7.15% 9,888,906 169,824 6.96%
Federal Funds Sold 581,593 7,671 5.30% 3,473,056 32,248 3.77%
Overnight Deposits 1,712,922 21,805 5.12% 2,732,079 33,899 5.03%
Other Securities(2) 1,234,215 21,778 7.10% 1,265,027 21,169 6.79%
TOTAL 218,152,232 4,250,137 7.84% 214,079,237 4,108,120 7.72%
INTEREST BEARING LIABILITIES
Savings Deposits 33,146,649 189,704 2.30% 30,795,370 178,421 2.35%
NOW & Money
Market Funds 49,780,144 415,049 3.35% 48,159,789 378,694 3.19%
Time Deposits 90,335,210 1,128,540 5.02% 96,031,253 1,262,830 5.33%
Other Borrowed Funds 4,131,593 53,488 5.21% 4,060,000 48,900 4.88%
Repurchase Agreements 4,153,053 43,296 4.19% 264,485 2,634 4.04%
Subordinated Debentures 20,000 550 11.06% 20,000 550 11.15%
TOTAL 181,566,649 1,830,627 4.06% 179,330,897 1,872,029 4.20%
Net Interest Income 2,419,510 2,236,091
Net Interest Spread(3) 3.78% 3.52%
Interest Differential(4) 4.46% 4.24%
<FN>
<f01> Income on investment securities of state and political subdivisions is
stated on a tax equivalent basis (assuming a 34% tax rate).
<f02> Included in other securities are taxable industrial development bonds
(VIDA), with income for the first three months of approximately $1,200
for 2000 and $1,500 for 1999.
<f03> Net interest spread is the difference between the yield on earning
assets and the rate paid on interest bearing liabilities.
<f04> Interest differential is net interest income divided by average earning
assets.
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income
for the first three months of 2000 and 1999 resulting from
volume changes in assets and liabilities and fluctuations
in rates earned and paid.
RATE VOLUME Variance Variance
Due to Due to Total
Rate(1) Volume(1) Variance
EARNING ASSETS
Loans (gross) (44,748) 172,175 127,427
Taxable Investment Securities 36,067 (30,043) 6,024
Tax-Exempt Investment Securities(2) 7,358 37,270 44,628
Federal Funds Sold 13,560 (38,137) (24,577)
Bank of Boston sweep account 880 (12,974) (12,094)
Other Securities 1,153 (544) 609
Total Interest Earnings 14,270 127,747 142,017
INTEREST BEARING LIABILITIES
Savings Deposits (2,340) 13,623 11,283
NOW & Money Market Funds 23,614 12,741 36,355
Time Deposits (63,130) (71,160) (134,290)
Other Borrowed Funds 3,726 862 4,588
Repurchase Agreements 1,936 38,726 40,662
Subordinated Debentures 0 0 0
Total Interest Expense (36,194) (5,208) (41,402)
<FN>
<f01> Items which have shown a year-to-year increase in volume have
variances allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have
variances allocated as follows:
Variance due to rate = Change in rate x old volume
Variances due to volume = Change in volume x new rate
<f02> Income on tax-exempt securities is stated on a tax equivalent basis.
The assumed rate is 34%.
COMMUNITY BANCORP.
PRIMARY EARNINGS PER SHARE
For the First Three Months Ended March 31, 2000 1999 1998
Net Income $433,625 $410,797 $407,679
Average Number of Common Shares Outstanding. 3,387,179 3,235,785 3,189,686
Earnings Per Common Share $0.13 $0.13 $0.13
FULLY DILUTED EARNINGS PER SHARE
For the First Three Months Ended March 31, 2000 1999 1998
Net Income $433,625 $410,797 $407,679
Adjustments to Net Income (Assuming Conversion
of Subordinated Convertible Debentures). 363 363 1,470
Adjusted Net Income $433,988 $411,160 $409,149
Average Number of Common Shares Outstanding. 3,387,179 3,235,785 3,189,686
Increase in Shares (Assuming Conversion of
Subordinated Convertible Debentures). 8,557 8,557 26,386
Average Number of Common Shares Outstanding
(Fully Diluted). 3,395,736 3,244,342 3,216,072
Earnings Per Common Share Assuming Full Dilution. $0.13 $0.13 $0.13
Per share data for 1998 restated to reflect a 100% stock dividend paid on
June 1, 1998, and a 5% stock dividend paid on February 1, 1999.
PART I.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2000
Community Bancorp. (the "Company") is a bank holding company whose
subsidiaries include Community National Bank and Liberty Savings Bank.
Community National Bank ("the Bank") is a full service institution
operating in the state of Vermont. The Bank has seven offices, five of
which are located in Orleans County, one in Essex County, and one in
Caledonia County. Liberty Savings Bank ("Liberty") is a New Hampshire
guaranty savings bank acquired by Community Bancorp. on December 31, 1997.
Currently this bank is inactive and does not have any offices or deposit
taking authority, and shares the mailing address of Community Bancorp.
Once a suitable location is identified, it is anticipated that Liberty will
initially operate as a lending facility, and may expand in the future into
a full service financial institution. Management is working with the board
of directors to find a suitable location in the northern part of New
Hampshire for this endeavor. Community National Bank has a small customer
base in the state of New Hampshire and hopes to broaden its base through
Liberty Savings Bank. Most of the Bancorp's business is conducted through
the Bank; therefore, the following narrative is based primarily on this
Bank's operations. The Balance Sheet and Statements of Income preceding
this section are consolidated figures for Community Bancorp. and
subsidiaries ("the Company"), and can be used in conjunction with the
other reports following them to provide a more detailed comparison of the
information disclosed in the following narrative.
OVERVIEW
Net income for the first quarter ended March 31, 2000 was $433,625,
representing an increase of 5.6% and 6.4%, respectively, over the net
income figures of $410,797 for the first quarter ended March 31, 1999, and
$407,679 for the same period in 1998. The results of this are earnings per
share of $0.13 for the each of the quarters. The Company declared a cash
dividend of $0.16 per share payable February 1, 2000 to shareholders of
record as of January 15, 2000. A two-for-one stock
split was declared in 1998, to be accomplished by a
GRAPHICS 100% stock dividend, payable June 1, 1998, to
shareholders of record as of May 15, 1998. This
transaction was contingent upon the approval by the
Company's shareholders of a proposal to increase
the number of shares the Company may issue. This proposal was voted on and
passed at the annual shareholders meeting held May 5, 1998. As a result
of the stock split, all per share data has been restated for the first
quarter of 1998. The first quarter of 2000 was better than 1999 and 1998
due in part to an increase in trust department income. The trust department
has been expanding over the last two years, and as a direct result, income
has increased. A decrease in the interest paid on deposit accounts serves
as another reason for the overall increase in net income.
Net interest income, the difference between interest income and expense,
represents the largest portion of the Company's earnings, and is affected by
the volume, mix, rate sensitivity of earning assets as well as interest
bearing liabilities, market interest rates and the amount of non-interest
bearing funds which support earning assets.
Net interest income for the first quarter comparison period started at
$2.23 million for 1998 and decreased to $2.18 million for 1999, and then
increased to $2.35 million for 2000, resulting in an increase of 7.7% for
2000 versus 1999, and a decrease of 2.5% for 1999 versus 1998. Total
interest income for the first quarter of 2000 increased $126,843 or 3.13%
compared to 1999, while a decrease of $174,070 or 4.12% is noted for the
first quarter of 1999 compared to 1998. Interest expense decreased for the
first quarter of 2000 compared to the first quarter of 1999 by $41,401 or
2.2%, and a decrease of $118,021 or 5.9% is noted for 1999 versus 1998. A
review of the first quarter figures for interest earned on loans, the major
source of interest income, reveals an increase of 4% for the first quarter
of 2000 compared to the same quarter of 1999, and a decrease of 8.7% for
1999 compared to 1998. In comparison, interest paid on deposits, the
major source of interest expense, shows a decrease of 4.8% and 6.2%
respectively. As the loan portfolio matures or reprices, decreases are
noted in the rates for these earning assets. Interest bearing deposit
accounts are also repricing at a lower rate creating less expense on these
liabilities. The result is a tax equivalent spread for the first quarter
equaling 3.78% for 2000 versus 3.52% for 1999 and 3.86% for 1998.
CHANGES IN FINANCIAL CONDITION
The Company had total average assets of $227.6 million at March 31, 2000
and $229.5 million at December 31, 1999. Average earning assets were $218.2
million for the first three months ended March 31, 2000, including average
loans of almost $155 million and average investment securities of
approximately $61 million. Average earning assets were $220.2 million for
the year ended December 31, 1999 including average loans just under $150
million and average investment securities of $65 million.
Over the past year, the Company has been offering very competitive
interest rates in an effort to increase its loan portfolio. As a result,
the average volume of loans increased steadily from $146.8 million as of
March 31, 1999 to $149.7 million as of December 31, 1999 and then
increased $5 million to end the first three months of 2000 at an average
volume of almost $155 million. Taxable investments, which include available
for sale securities decreased from an average volume of $49.8 million as of
year end 1999 to $47.8 million as of the end of the first three months of
2000, a decrease of $2 million or 4%. Available for sale securities
averaged $26.4 million and $27.8 million, respectively, as of March 31,
2000 and December 31, 1999, accounting for most of the $2 million decrease.
The average volume of federal funds sold has decreased from $2.9 million at
year end 1999 to $581,593 as of the end of the first three months of 2000,
a decrease of approximately $2.3 million or 80%.
Average interest bearing liabilities at March 31, 2000 were $181.6
million, with average time deposits reported totaling $90.3 million and
NOW & money market funds of $49.8 million. At December 31, 1999, average
interest bearing liabilities of $184.7 million were reported including
average time deposits of $94.7 million and NOW & money market funds at an
average volume just under $52 million.
Repurchase agreements have experienced a steady increase starting at
an average volume of $1.3 million at December 31, 1999 increasing 2.9
million to end at a three-month average balance of $4.2 million. The
Company has been offering these accounts for almost two years. The success
rate is overwhelming, attracting new business customers, and helping to
retain current business customers.
RISK MANAGEMENT
Liquidity Risk - Liquidity management refers to the ability of the Company
to adequately cover fluctuations in assets and liabilities. Meeting loan
demand (assets) and covering the withdrawal of deposit funds (liabilities)
are two key components of the liquidity management process. The
repayment of loans and growth in deposits are two of the major sources of
liquidity. Our time deposits greater than $100,000 decreased $314,855 or
2% to end the first three months of 2000 at a volume of $15.6 million
compared to $15.9 million at the end of the 1999 calendar year. Other time
deposits decreased $821,836 from December 31, 1999 to March 31, 2000. A
review of these deposits, primarily the time deposits over $100,000
indicates that they are primarily generated locally and regionally and are
established customers of the Company. The Company has no brokered
deposits. Now and money market funds decreased $2.4 million from December
31, 1999 to end the first three months of 2000 at $49.7 million. This
decrease in volume is a result of the discontinuance of super now accounts,
as well as the increase in volume of repurchase agreements. The repurchase
agreements offer more favorable rates than the now and money market
accounts, thereby causing customers to switch to this account. Savings
accounts reported the only increase for interest bearing deposits, reporting
$32.9 million at the end of 1999 compared to $33.9 million for the end of
the first three months of 2000. Unfavorable rates on time deposit generated
a stronger demand for savings accounts as customers wait for more favorable
rates on these funds. Our gross loan portfolio increased 2% from $152.6
million at the end of 1999 to $155.6 million at the end of the first three
months of 2000. As of the end of the first three months of 2000, the Company
held in it's investment portfolio treasuries classified as "Available for
Sale" at a market price of $20.9 million, compared to $29 million as of
December 31, 1999, a decrease of $8.1 million or 27.9%. Securities
classified as "Held to Maturity" ended the first three months of 2000
at a balance of $38.6 million compared to almost $30 million as of the
end of the 1999 calendar year. Both of these types of investments mature
at monthly intervals as shown on the gap report at the end of this
section. Securities classified as "Restricted Equity Securities" are made
up of equity securities the Company is required to maintain in the form of
Federal Home Loan Bank of Boston (FHLB) and Federal Reserve stock. These
securities remain at a balance totaling $1.14 million as of March 31, 2000.
The Company currently has an advance of just over $4 million against an
available line of $105.6 million, with an additional $2 million and $4.3
million, respectively, at First Boston and FHLB.
Credit Risk - Management follows strict underwriting guidelines, and has
established a thorough loan-by-loan review policy. These measures help to
insure the adequacy of the loan loss coverage. The Executive Officers and
the Board of Directors conduct an ongoing review of the loan portfolio,
which meets to discuss, among other matters, potential exposures. Factors
considered are each borrower's financial condition, the industry or sector
for the economy in which the borrower operates, and overall economic
conditions. Existing or potential problems are noted and addressed by
senior management in order to assess the risk of probable loss or
delinquency. A variety of loans are reviewed periodically by an independent
firm in order to assure accuracy and compliance with various policies and
procedures set by the regulatory authorities. The Company also employs a
Credit Administration Officer whose duties include, among others, a review
of the loan portfolio including delinquent and non-performing loans.
Specific Allocations are made in situations management feels are at a
greater risk for loss. A quarterly review of the Qualitative Factors,
which among others are "Levels of, and Trends in, Delinquencies and Non-
Accruals" and "National and Local Economic Trends and Conditions", helps
to ensure that areas with potential risk are noted and coverage increased
or decreased to reflect the trends in delinquencies and non-accruals.
Residential first mortgage loans make up the largest part of the loan
portfolio and have the lowest historical loss ratio helping to alleviate
the overall risk.
Allowance for loan losses and provisions - The valuation allowance for
loan losses increased to $1.8 million as of March 31, 2000 composing 1.2%
of the total gross loan portfolio. A primary concern of management is to
reduce the exposure of credit loss within the portfolio. The Company
maintains a residential loan portfolio of approximately $98 million and a
commercial real estate portfolio of approximately $28.4 million accounting
for 63% and 18.2%, respectively, of the total loan portfolio. This large
loan volume together with the low historical loan loss experience
helps to support our basis for loan loss coverage.
Non-Performing assets for the company are made up of three different types
of loans, "90 Days or More Past Due", "Other Real Estate Owned" (OREO),
and "Non-Accruing Loans". A comparison of these non-performing assets
reveals a decrease in non-accruing loans of $374,867 or 21.3% as well as
a decrease of $121,929 or 19.3% in loans 90 days or more past due, and an
increase of $102,039 or 23.5% in our OREO portfolio. The portfolio of
non-accruing loans makes up the biggest portion of the non-performing
assets and consists of $1.3 million or 92.4% of real estate secured
mortgage loans for the first three months of 2000, thereby reducing our
exposure to loss. Additionally, included in the loans past due 90 days
or more is a loan totaling $118,879 carrying a 90% guarantee, further
decreasing the exposure to loss by $106,991.
GRAPHICS GRAPHICS
Non-performing assets as of March 31, 2000 and December 31, 1999 were as
follows:
03/31/2000 12/31/1999
Non-Accruing loans $1,383,682 $1,758,549
Loans past due 90 day or more and still accruing 510,529 632,458
Other real estate owned 536,733 434,694
Total $2,430,944 $2,825,701
Other real estate owned is made up of property that the Company owns in
lieu of foreclosure or through normal foreclosure proceedings, and property
that the Company does not hold title to but is in actual control of, known
as in-substance foreclosure. The value of the property is determined
prior to transferring the balance to other real estate owned. The balance
transferred to OREO is the lesser of the appraised value of the property,
or book value of the loan. A write-down may be deemed necessary to bring
the book value of the loan equal to the appraised value. Appraisals are
then done periodically thereafter charging any additional write-downs to
the appropriate expense account.
Market Risk and Asset and Liability Management - Market risk is the risk of
loss in a financial instrument arising from adverse changes in market prices
and rates, foreign currency exchange rates, commodity prices and equity
prices. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure.
The Company does not have any market risk sensitive instruments acquired
for trading purposes. The Company attempts to structure its balance sheet
to maximize net interest income while controlling its exposure to interest
rate risk. The Company's Asset/Liability Committee formulates strategies
to manage interest rate risk by evaluating the impact on earnings and capital
of such factors as current interest rate forecasts and economic indicators,
potential changes in such forecasts and indicators, liquidity, and various
business strategies. The Asset/Liability Committee's methods for evaluating
interest rate risk include an analysis of the Company's interest rate
sensitivity "gap", which provides a static analysis of the maturity and
repricing characteristics of the entire balance sheet, and a simulation
analysis which calculates projected net interest income based on alternative
balance sheet and interest rate scenarios, including "rate shock" scenarios
involving immediate substantial increases or decreases in market rates of
interest.
Interest Rate Sensitivity "Gap" Analysis - An interest rate sensitivity
"gap" is defined as the difference between the interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates,
a negative gap would tend to result in an increase in net interest income,
while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market interest
rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly
matched in each maturity category.
The following tables set forth the estimated maturity or repricing of the
Company's interest earning assets and interest-bearing liabilities at March
31, 2000, and December 31, 1999. The Company prepares its interest rate
sensitivity "gap" analysis by scheduling assets and liabilities into periods
based upon the next date on which such assets and liabilities could mature
or reprice. The amounts of assets and liabilities shown within a particular
period were determined in accordance with the contractual term of the assets
and liabilities, except that:
* Adjustable-rate loans and certificates of deposit are included in the
period when they are first scheduled to adjust and not in the period in
which they mature;
* Fixed-rate loans reflect scheduled contractual amortization, with no
estimated prepayments;
and
* NOW, money markets, and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on
detailed studies by the Company of the sensitivity of each such category
of deposit, to changes in interest rates.
Management believes that these assumptions approximate actual experience
and considers them reasonable. However, the interest rate sensitivity of
the Company's assets and liabilities in the tables could vary substantially
if different assumptions were used or actual experience differs from the
historical experiences on which the assumptions are based.
GAP ANALYSYS
Community Bancorp. & Subsidiaries
March 31, 2000
Cumulative repriced within:
Dollars in thousands, 3 Months 4 to 12 1 to 3 3 to 5 Over 5
by repricing date or less Months Years Years Years Total
Interest sensitive assets:
Federal funds sold 1,025 0 0 0 0 1,025
Overnight deposits 1,149 0 0 0 0 1,149
Investments -
Available for Sale(1) 0 4,969 15,943 0 0 20,912
Held to Maturity 4,888 5,531 14,885 1,491 11,788 38,583
Restricted equity securities 0 0 0 0 1,142 1,142
Loans(2) 25,153 51,032 41,201 8,775 28,762 154,923
Total interest
sensitive assets 32,215 61,532 72,029 10,266 41,692 217,734
Interest sensitive liabilities:
Certificates of deposit 23,748 50,118 14,704 1,459 0 90,029
Money markets 33,406 0 0 0 0 33,406
Regular savings 0 2,854 0 0 31,000 33,854
Now accounts 0 0 0 0 16,283 16,283
Borrowed funds 0 0 15 0 4,040 4,055
Repurchase agreements 5,408 0 0 0 0 5,408
Subordinated debentures 0 0 0 20 0 20
Total interest
sensitive liabilities 62,562 52,972 14,719 1,479 51,323 183,055
Net interest rate
sensitivity gap (30,347) 8,560 57,310 8,787 (9,631)
Cumulative net interest
rate sensitivity gap (30,347) (21,787) 35,523 44,310 34,679
Cumulative net interest
rate sensitivity gap
as a percentage of
total assets -13.06% -9.38% 15.29% 19.07% 14.93%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets -13.94% -10.01% 16.31% 20.35% 15.93%
Cumulative interest
earning assets as a
percentage of cumulative
interest-bearing
liabilities 51.49% 81.14% 127.27% 133.64% 118.94%
<FN>
<f01> The Company may sell investments available for sale with a fair value
of $20,911,875 at any time.
<f02> Loan totals exclude non-accruing loans amounting to $1,383,682.
GAP ANALYSYS
Community Bancorp. & Subsidiaries
December 31, 1999
Cumulative repriced within:
Dollars in thousands, 3 Months 4 to 12 1 to 3 3 to 5 Over 5
by repricing date Or less Months Years Years Years Total
Interest sensitive assets:
Federal funds sold 600 0 0 0 0 600
Overnight deposits 2,188 0 0 0 0 2,188
Investments -
Available for Sale(1) 0 9,993 18,989 0 0 28,982
Held to Maturity 3,057 6,680 14,910 1,426 3,814 29,887
Restricted equity securities 0 0 0 0 1,142 1,142
Loans(2) 23,254 51,250 41,673 8,317 27,027 151,521
Total interest
sensitive asset 29,099 67,923 75,572 9,743 31,983 214,320
Interest sensitive liabilities:
Certificates of deposit 13,405 65,237 11,072 1,452 0 91,166
Money markets 32,299 0 0 0 0 32,299
Regular savings 0 2,854 0 0 30,000 32,854
Now accounts 0 0 0 0 19,796 19,796
Borrowed funds 0 0 15 0 4,040 4,055
Repurchase agreements 2,623 0 0 0 0 2,623
Subordinated debentures 0 0 0 20 0 20
Total interest
sensitive liabilities 48,327 68,091 11,087 1,472 53,836 182,813
Net interest rate
sensitivity gap (19,228) (168) 64,485 8,271 (21,853)
Cumulative net interest
rate sensitivity gap (19,228) (19,396) 45,089 53,360 31,507
Cumulative net interest
rate sensitivity gap
as a percentage of
total assets -8.28% -8.35% 19.42% 22.98% 13.57%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets -8.97% -9.05% 21.04% 24.90% 14.70%
Cumulative interest
earning assets as a
percentage of cumulative
interest-bearing
liabilities 60.21% 83.34% 135.36% 141.37% 117.23%
<FN>
<f01> The Company may sell investments available for sale with a fair value
of $28,982,188 at any time.
<f02> Loan totals exclude non-accruing loans amounting to $1,758,549.
OTHER OPERATING INCOME AND EXPENSES
Total other operating income for the first quarter of 2000 was $402,296
compared to $373,472 for the first quarter of 1999 and $296,763 for the
first quarter of 1998, an increase of $28,824 or 7.7% for 2000 versus 1999
and $76,709 or 25.9% for 1999 versus 1998. Trust department income reported
the biggest increase at $21,871 for the first quarter of 2000 versus 1999.
Other income reported the biggest increase for the 1999 versus 1998
comparison period reporting an increase of $54,690 or 52.3%. Income from
sold loans for the first quarter of 1999 was $23,692 compared to a $12,490
loss as of the end of the first quarter for 1998, contributing to the
increase in other income for the first quarter of 1999 versus 1998.
Total other operating expenses followed a different the same path for
the first quarter comparisons with figures of $2 million for 2000, an
increase of $161,299 over the 1999 figure of $1.8 million which increased
$37,863 over the 1998 figure of $1.8 million. Other expenses reported
the biggest increase for 2000 versus 1999 with an increase of $72,450 or
12%, followed by an increase of $46,134 or 26% for pension and other
employee benefits. ATM expenses accounts for the biggest increase in
other expense due in part to the installation an ATM in the Company's Derby
Line office. All branches of the Company now offer the ATM service. An
increase of $31,316 is noted in the Company's insurance premiums, due to
an increase in claims for 2000 versus 1999. Occupancy expense accounts for
the biggest increase for the first quarter of 1999 compared to the same
quarter in 1998, contributing $17,086 to the increase in other expenses
for this comparison period. No major increases were noted in any of the
components of occupancy expenses, other than an increase of approximately
$10,000 in furniture and equipment depreciation. More equipment than
anticipated was bought during the first quarter of 1999, creating this
increase in depreciation.
Management monitors all components of other operating expenses; however,
a quarterly review is performed on crucial components to assure that the
accruals for these expenses are accurate. This helps alleviate the need to
make drastic adjustments to these accounts that in turn effect the net
income of the Company.
APPLICABLE INCOME TAXES
Income before taxes increased from $521,552 for the first quarter of
1998 to $554,349 for the first quarter of 1999, and then increased to
$578,118 for the same quarter of 2000, an increase of $32,797 or 6.3%
for 1999 versus 1998 and $23,769 or 4.3% for 2000 versus 1999. As a result,
provisions for income taxes increased $29,679 for the first quarter of 1999
compared to the first quarter of 1998 and $941 or just under 1% for the
2000 versus 1999 comparison period ending the first quarter period of 2000
at $144,493.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results
of operations of all industries, including the banking industry. The effect
of monetary inflation is generally magnified in bank financial and operating
statements. As costs and prices rise during periods of monetary inflation,
cash and credit demands of individuals and businesses increase, and the
purchasing power of net monetary assets declines. The Company depends
primarily on a strong net interest income to enable their purchasing power
to remain aggressive.
CAPITAL RESOURCES
The Company's stockholders' equity, which started the year at $22,181,154,
was increased through earnings of $433,625 and sales of common stock of
$247,490 through dividend reinvestment. It was decreased for the purchase
of treasury stock of $39 and adjustment of $12,706 for valuation of allowance
for securities. The Company declared a dividend in December of 1999, payable
in February of 2000. As a result, the Company had to accrue the dividend,
decreasing stockholders' equity by $537,361 as of December 31, 1999.
Stockholders' equity ended the first three months of 2000 at $22,849,524 with
a book value of $6.75 per share. All stockholders' equity is unrestricted.
Additionally, it is noted that the net unrealized loss on valuation allowance
for securities has increased since December 31, 1999. A review of this
activity shows that as the maturity date of the investments gets closer, the
market price becomes favorably better, therefore, material loss is greatly
reduced.
The Company is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by the banking regulators. The minimum
requirements for Tier I and Total Capital are 4% and 8%, respectively. As
of March 31, 2000, the Company continued to maintain ratios far above the
minimum requirements with reported ratios of approximately 19.8% for Tier I
and 21% for Total Capital.
The Company intends to continue maintaining a strong capital resource
position to support its asset size and level of operations. Consistent
with that policy, management will continue to anticipate the Company's
future capital needs.
From time to time the Company may make contributions to the capital of
its subsidiaries, Community National Bank and Liberty Savings Bank. At
present, regulatory authorities have made no demand on the Company to
make additional capital contributions to either Bank's capital.
YEAR 2000
Now that the century (and millennium) date change has come and gone, we
are pleased to report that we experienced no significant difficulties as
the new year began. The power stayed on, the phone lines worked, our ATMs
were operable, and our computer systems worked fine. Furthermore, no
unusual demands were placed on us for large cash withdrawals. Apparently
our customers fully realized that the safest place for their money was in
the bank.
There are some key dates to watch throughout the year 2000, including
February 29th (leap year day), March 31 (the end of the first quarter) and
of course December 31st. February 29th came and went without incident as
did March 31st. We will continue to monitor our systems on these dates
and throughout the year, but we expect no real problems to develop.
The Company worked to resolve the potential impact of the year 2000
(Y2K) on the processing of date-sensitive information by the Company's
computerized information systems. The Y2K problem is the result of
computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's systems that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000 which could result in miscalculations or systems
failures. The Federal Reserve Board and other federal banking regulators
(together known as the Federal Financial Institutions Examination Council,
or "FFEIC") have developed joint guidelines and benchmarks for assessing
Y2K risk, remediation of non-compliant systems and components and post-
remediation testing and implementation.
In an effort to correctly assess the effect of Y2K on the financial
position of the Company and assess our readiness for Y2K, a Y2K committee
was organized which met on a regular basis to keep executive management
and the Board of Directors informed of our progress towards Y2K compliance.
The committee developed strategic, customer awareness, customer risk
assessment, test and contingency plans. In accordance with FFEIC guide-
lines, the Y2K committee defined five phases in the Y2K project management:
Phase I - Awareness Phase
In this phase we defined the problem and gained executive level commitment.
The Y2K committee developed an overall strategy.
This phase has been completed.
Phase II - Assessment Phase
During this phase, we assessed the size and complexity of the Y2K issues
and identified both information technology (IT) and non-IT systems that
could be affected by the change. At this time, we also identified mission-
critical and non-mission-critical systems.
We defined mission-critical systems as vital to the successful contin-
uation of our core business activities. Our core business activities
include servicing deposits, servicing loans, item processing and accounting,
originating deposits, originating loans, investments, and trust. The
mission-critical systems that support our core business activities include
our AS/400 (mainframe computer) and operating system; check processing
software; check sorters; loan, deposit and account origination software;
Fedline (interface to the Federal Reserve Bank); and trust accounting
software. Other systems not deemed mission-critical, but important,
include human resources; payroll; ATM networks; voice banking system;
heating and faxes.
We also evaluated the Y2K effect on strategic business initiatives.
We assessed the risk exposure of our customers as funds providers, funds
takers, and capital market/asset counter-parties.
This phase has been completed, however, we continue to monitor our
exposure on an on-going basis.
Phase III - Renovation Phase
This phase includes hardware and software upgrades or replacements and
other changes.
No mission-critical hardware or software needed to be replaced. All
our software applications are provided by vendors and these applications
were already Y2K compliant when we began the renovation phase. We
replaced several PCs supporting non-mission critical applications.
This phase has been completed.
Phase IV - Validation Phase
This is the testing phase. During this phase, the systems identified in
Phase II (Assessment) were tested for Y2K compliance. Systems that were
deemed mission-critical were tested first. We have finished testing the
remaining systems.
All mission-critical systems were tested by 12/31/98 and were in
compliance. Non-mission-critical systems were tested by 6/30/99 and
were in compliance.
Phase V - Implementation Phase
January 1, 2000 was a processing day. We detected no failures in our
mission-critical systems.
The Company does not write any source programming code and is there-
fore dependent upon external vendors and service providers to alter
their programs to become Y2K compliant. We have received certification
from our vendors as to their product compliance; however, we tested all
mission-critical and non-mission-critical systems identified in Phase II.
The following timetable identifies the testing phases:
12/31/98 testing of internal mission-critical systems completed
03/31/99 testing with service providers for mission-critical systems
completed
06/30/99 testing of non-mission-critical systems completed
During 1999, we did not install any major upgrades to our systems after
testing was completed.
The costs involved in addressing potential problems did not have a
material impact on the Company's financial position or cash flows. During
1998, we budgeted $63,750 and actually spent $67,000 for Y2K testing and
upgrades. The costs included testing of our contingency site, replacement
of 10 PCs not Y2K compliant and proxy testing of some of our mission-
critical systems. We did not calculate the personnel costs relating to
Y2K, however, we did not have to hire additional personnel in our Y2K
efforts.
For 1999, we budgeted and spent $77,000. Expenses included the
replacement of additional PCs, PC software upgrades, consulting services,
testing, travel and education. Y2K costs were expensed from current
earnings. Management did not feel that any expenditures were necessary
for the calendar year 2000.
No new projects were deferred due to the Y2K effort. The yearly
software update to our core system provided by one of our vendors was
postponed by the vendor until 2000 in an effort to minimize changes to an
already compliant system. This did not have an effect on our operations.
We have reviewed the credit risk our commercial borrowers may pose to
us if they are not Y2K compliant. At this time, we have no customers deemed
as high risk. It may be that some of our small business customers may yet
experience Y2K related difficulties, but none has appeared so far, and we
believe our exposure to these kinds of problems is minimal.
The worst case scenario relating to Y2K would have been the loss of
electrical power. In an effort to mitigate this risk, as well as to protect
us in the event of other power outages, a generator was purchased and
installed at our main office in Derby.
The next worst case scenario would have been the loss of our telephones.
If this had happened, the Derby branch would have been fully operational.
Other branches would have had to service deposits in an off-line mode.
Requests for account and loan origination would have been directed to the
Derby branch.
Our Y2K contingency plan was based on our disaster recovery plan written
to respond to a complete core system outage. Our contingency plan also out-
lines manual processes in the event of individual component failures.
During the second quarter of 1999, outside consultants reviewed the
feasibility of our contingency plans. This review did not constitute a
third-party review as outlined by the FFIEC guidelines. After reviewing
our plan, they made recommendations that, if implemented, would further
enhance our Business Resumption Contingency Plan (BRCP).
The third-party review as outlined by the FFIEC guidelines was
performed by an officer of Community National Bank who was not involved
with developing the plan.
FORWARD-LOOKING STATEMENTS
When used herein, the terms "expect, plan, anticipate, believe" or
similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements.
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash Flow
and Financial Condition. These statements are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and various assumptions made by
management which are difficult to predict. Among the factors that could
affect the outcome of the statements are general industry and market
conditions and growth rates. Therefore, actual outcomes and their impact
on the Company may differ materially from what is expressed or forecasted.
The Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
PART II.
Item 1
Legal Proceedings
Community National Bank is currently involved in a lawsuit filed on
March 23, 1998, in the Orleans Superior Court against the State of Vermont.
The issue involves OREO property that is on "filled land" on the shores of
Lake Memphremagog in the City of Newport. According to a so-called "public
trust doctrine", the State of Vermont might have ownership of any lands
created by filling any portion of the navigable waters of the state. The
result of this is that the Bank has been unable to sell these properties
for fair value because some attorneys will not clear title to the property.
The suit filed is an attempt to clear title to said properties by seeking
judicial clarification of the public trust doctrine. The Bank received
documents in mid April pertaining to the ruling of the lawsuit. The
judgement was not in the Bank's favor. Currently, management is meeting
with council to discuss all viable options. Regardless of the outcome of
the suit, is not likely to have a material impact on the financial
statements of the Bank or consolidated Company.
There are no other pending legal proceedings to which the Company is
a party or of which any of its property is the subject, other than
routine litigation incidental to its banking business.
Item 4
Submission of Matters to a Vote of Security Holders
NONE
Item 5
Other Information
NONE
Item 6
Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27 - Financial Data Schedule is incorporated by reference to the
EDGAR version of the Form 10-Q for the quarter ended March 31, 2000.
Reports - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMUNITY BANCORP.
DATED: May 11, 2000 By: /s/ Richard C. White
Richard C. White, President
DATED: May 11, 2000 By: /s/ Stephen P. Marsh
Stephen P. Marsh,
Vice President & Treasurer