[Front cover]
Community Bancorp, Inc.
Annual Report 1997
Selected Consolidated Financial Data
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets $273,550,527 $250,002,458 $237,580,796 $219,850,767 $214,682,682
Total deposits 232,788,534 217,181,869 207,039,865 186,862,986 185,499,065
Total net loans 136,624,294 126,866,560 123,558,839 118,775,581 111,263,480
Allowance for possible loan losses 3,215,559 3,481,705 3,455,098 3,703,470 3,910,195
Total interest income 19,169,951 17,761,102 16,917,624 14,429,932 14,032,506
Total interest expense 6,895,222 6,367,758 6,284,750 4,525,558 4,465,379
Net interest income 12,274,729 11,393,344 10,632,874 9,904,374 9,567,127
Gains (losses) on sales of securities 8,587 (9,460) 0 (29,828) 69,600
Provision for possible loan losses 0 0 120,000 300,000 600,000
Net income 3,429,859 3,152,098 2,643,877 2,105,433 1,505,158
Earnings per share 1.17 1.01 0.84 0.67 0.49
Dividends per share 0.285 0.253 0.234 0.214 0.173
[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)
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Table of Contents
-----------------
Message to Stockholders and Friends - - - - - - - - - - - - 3
Year in Review - - - - - - - - - - - - - - - - - - - - - - 5
Consolidated Balance Sheets - - - - - - - - - - - - - - - - 9
Consolidated Statements of Income - - - - - - - - - - - - - 10
Consolidated Statements of Stockholders' Equity - - - - - - 11
Consolidated Statements of Cash Flows - - - - - - - - - - - 12
Notes to Consolidated Financial Statements - - - - - - - - 14
Report of Independent Public Accountants - - - - - - - - - 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations - - - - - - - 26
Directors & Officers - - - - - - - - - - - - - - - - - - - 30
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To Our Stockholders and Friends:
On behalf of the Board of Directors, management and staff of Community
Bancorp, Inc., we are proud to present you with our 1997 Annual Report.
The overall results of operations for the past year are a very positive
indication of the Company's continued strength, as we again achieved
record earnings. Net income for the year was $3,429,859, compared to
$3,152,098 recorded in 1996. Earnings per share of common stock was
$1.17, representing a 15.8% increase over $1.01 in the previous year.
This continued improvement in earnings was the result of increases in
net interest income and noninterest income.
[A photograph of Dennis F. Murphy, Jr., Chairman of the Board, appears
here.]
For the first time in its history, the Company achieved a return on
assets (ROA) of 1.33% and a return on equity (ROE) of 16.07%, comparing
very favorably to peer institutions. As a result of our continued
strong earnings during 1997, the Board of Directors increased the cash
dividend paid to stockholders in each of the four quarters. Total
dividends declared of $.285 per share represented a 12.6% increase over
$.253 declared in 1996.
[A photograph of James A. Langway, President and Chief Executive Officer,
appears here.]
Sound, conservative, yet innovative banking practices have provided the
foundation for Community National Bank to continue to function effectively
as a locally-owned, independent bank. That foundation is further
strengthened by our continued financial success, as evidenced by the
operating results presented in this report. The Bank's consistently
strong performance has once again brought us recognition as a "Blue
Ribbon" bank by one of the nation's top financial institution rating
services.
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We continually strive to provide friendly, courteous and professional
service to our customers. We also strive to provide our customers with
technologically advanced services and delivery systems that an increasing
number of them desire every year. Community Bancorp, Inc. is committed
to being a leader at providing a full range of diversified financial
services with high quality and innovative technology that will expand our
customer base and improve the quality of life in the communities we
serve. As we have stated in previous letters to our stockholders, we are
a community bank. We know our customers and their needs, and we know how
to provide the financial services they desire. We believe that is the
key to our success.
On behalf of the Board of Directors, management and staff, we thank our
stockholders and customers for their continued support. We are looking
forward to making 1998 another successful year.
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
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Year in Review
In 1881, three businessmen in Hudson, MA recognized the need for a
hometown bank to support the growth of their town. The people of
Hudson strongly supported the project and $100,000 in capital was
easily raised. A national charter was obtained on January 23, 1882,
and the doors of Hudson National Bank were opened for business on
March 7 of that year.
[A drawing of the original Hudson National Bank facility appears here.]
Over the years, as the Bank grew and expanded into surrounding cities
and towns, it maintained a strong commitment to help individuals,
families and businesses grow and prosper. Today, with branch offices
in six communities and customers in many more, the Bank continues to
succeed by offering competitive products and personal service.
On June 2, 1997, the hometown Bank started a new chapter in its history
by changing its name to Community National Bank. This change did not
come about in response to a merger or acquisition, nor did it signal a
change in direction; rather it is a reflection of the strong commitment
of the Bank to the core values that have allowed it to succeed so well
for 116 years - a commitment to the community.
[A photograph of a lobby poster announcing the Bank's change of name to
Community National Bank appears here.]
Preparations for the name change started in early 1997. A new logo was
designed, colors selected, identity standards established and an
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implementation plan developed. The task carried over into the second quarter
when signs, stationery, cards, forms, statements, brochures and checks were
all redesigned and printed with the new name. The Bank's web site was also
redesigned to reflect the new identity and the URL was changed to
http://www.combanc.com. The e-mail address was also changed to
cnb-mail@combanc.com. All of these changes were communicated to customers
through a newly designed quarterly newsletter.
[Photographs of the Bank's "Flexvalue Checking Package" product brochure
and a bilingual services brochure appear here.]
In addition to the name change, a number of activities were undertaken in
1997 to allow the Bank to better serve the needs of the community. A new
checking account was introduced to reward customers who maintain multiple
deposit accounts with CNB and frequent the Bank's ATMs. With a FlexValue
checking account, customers can avoid checking account service charges by
either maintaining a specified minimum balance in their checking account or
by maintaining a specified total deposit relationship. Savings accounts,
Certificates of Deposit and Money Market Deposit Account balances can all
be used to offset minimum balance requirements. In addition to unlimited
check writing, FlexValue checking account benefits include a number of ATM
transactions with a transaction fee, an interest rate bonus on Certificates
of Deposit, an interest rate discount on installment loans and other free
or discounted services.
The benefits of FlexValue and other CNB services are described in our new
bilingual services brochure. This comprehensive brochure provides a
description of products and services in both Portuguese and English, and
has been well received by the Portuguese community.
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In the third quarter, a new off-site ATM was installed at the New England
Sports Center in Marlborough. This new location was added to provide
greater convenience to CNB customers and to generate fee income from
foreign transactions.
Also during the third quarter, CNB entered into a third-party arrangement
with Murphy Brokerage, LTD., an affiliate of Murphy Insurance Agency, to
offer a variety of insurance products to customers. Investment annuities,
long-term care, life and disability insurance are now available to CNB
customers at any branch office. The addition of this new product line,
along with investment products offered by Barrett and Company, provides CNB
customers with choices well beyond those at other area banks.
The Year 2000 issue poses a special challenge to all businesses. CNB
recognized that challenge in 1996, when it began researching the impact
the millennium date change could have on the Bank. In 1997 an official
Year 2000 Committee was created to formalize that process. The Committee's
task is to evaluate all systems at the Bank that are computer operated or
dependent - such as ATMs, security systems, vaults, elevators, heating and
air conditioning, and all communications systems for possible problems when
the calendar changes to the Year 2000. The Year 2000 Committee is charged
with developing a plan to replace file servers, software and workstations
with Year 2000-ready technology, and also to monitor outside vendors with
whom the bank interacts to
[A photograph of the Bank's technology training center appears here.]
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ensure that any problems that may impact CNB customers will be addressed
well in advance of the date change.
A variety of projects are planned for 1998 which will continue to enhance
CNB's position as a small community with big bank services. Late in the
first quarter of 1998, the Bank will introduce Community Benefit Consulting,
Inc. to provide an affordable human resource consulting program for small
businesses. An expansion project is being planned for the Boxborough
office to provide additional space at the teller line and a drive up window.
The corporate identity standards introduced with the new name are to be
incorporated into the branch merchandising displays to create a unified
brand for all CNB offices. A corporate debit card program will be
introduced to meet the purchasing needs of our commercial customers. And,
new commercial loan packages are being developed to meet the specified
needs of targeted groups of business customers.
[A photograph of the front of the Bank's Boxboro, MA branch office appears
here.]
Since 1881, Community National Bank has built its reputation on
professionalism, strength and customer service. Today, we compete and hold
our own with the biggest and best in our market area. But we maintain one
decided advantage: a sense of community.
[A photograph of two of the Bank's Main Office tellers appears here.]
-8-
Consolidated Balance Sheets
December 31, 1997 and 1996
1997 1996
----------- -----------
ASSETS
Cash and due from banks $ 16,704,667 $ 14,391,567
Federal funds sold 14,600,000 11,300,000
Securities available for sale at market value (Note 2) 38,880,166 29,245,007
Securities held to maturity (market value $56,404,323
in 1997 and $58,312,349 in 1996) (Note 2) 56,304,224 58,828,881
Mortgage loans held for sale 2,173,322 1,222,165
Loans (Notes 3 and 10) 139,839,853 130,348,265
Less allowance for possible loan losses
(Notes 4 and 13) 3,215,559 3,481,705
----------- -----------
Total net loans 136,624,294 126,866,560
Premises and equipment, net (Note 5) 4,637,965 4,848,202
Other assets, net (Note 14) 3,625,889 3,300,076
----------- -----------
Total assets $273,550,527 $250,002,458
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 11):
Noninterest bearing $ 55,678,794 $ 51,358,151
Interest bearing 177,109,740 165,823,718
----------- -----------
Total deposits 232,788,534 217,181,869
----------- -----------
Securities sold under repurchase agreements 16,637,064 11,454,687
Other liabilities (Note 8) 1,688,830 1,524,768
----------- -----------
Total liabilities 251,114,428 230,161,324
----------- -----------
Commitments (Notes 9 and 13)
Stockholders' equity (Note 6):
Preferred stock, $2.50 par value, 100,000 shares
authorized, none issued or outstanding
Common stock, $2.50 par value, 12,000,000 shares
authorized, (4,000,000 shares authorized at
December 31, 1996), 3,199,218 shares issued,
2,926,257 shares outstanding, (2,935,012 shares
outstanding at December 31, 1996) 7,998,045 7,998,045
Surplus 414,120 374,580
Undivided profits 16,418,790 13,826,958
Treasury stock, 272,961 shares, (264,206 at
December 31, 1996) (2,529,552) (2,348,419)
Unrealized losses on securities available for sale,
net of taxes (Note 2) 134,696 (10,030)
----------- -----------
Total stockholders' equity 22,436,099 19,841,134
----------- -----------
Total liabilities and stockholders'
equity $273,550,527 $250,002,458
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-9-
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Interest and fees on loans $ 13,138,908 $12,430,327 $12,363,714
Interest and dividends on securities:
Taxable interest 5,181,809 4,565,311 4,003,765
Nontaxable interest 325,868 120,553 91,517
Dividends 59,350 54,248 51,651
Interest on federal funds sold 464,016 590,663 406,977
---------- ---------- ----------
Total interest income 19,169,951 17,761,102 16,917,624
---------- ---------- ----------
Interest expense:
Interest on deposits 6,139,134 5,840,445 5,735,554
Interest on federal funds purchased and
securities sold under repurchase
agreements 756,088 527,313 549,196
---------- ---------- ----------
Total interest expense 6,895,222 6,367,758 6,284,750
---------- ---------- ----------
Net interest income 12,274,729 11,393,344 10,632,874
---------- ---------- ----------
Provision for possible loan losses
(Note 4) 0 0 120,000
---------- ---------- ----------
Net interest income after provision
for possible loan losses 12,274,729 11,393,344 10,512,874
---------- ---------- ----------
Noninterest income:
Merchant credit card processing
assessments 1,028,404 855,488 690,024
Service charges 611,089 612,786 592,002
Other charges, commissions and fees 883,316 899,481 807,717
Gains (losses) on sales of loans, net 41,744 21,105 (31,776)
Gains (losses) on sales of securities, net 8,587 (9,460) 0
Other 81,488 75,399 60,065
---------- ---------- ----------
Total noninterest income 2,654,628 2,454,799 2,118,032
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Note 8) 4,777,520 4,541,551 4,362,821
Data processing 584,125 582,334 478,064
Occupancy 584,484 580,519 610,737
Furniture and equipment 409,897 362,453 325,662
Credit card processing 891,461 738,227 621,695
OREO carrying costs (income), net 20,138 51,623 (4,413)
FDIC insurance premiums 0 2,000 209,906
Other 2,177,884 1,810,678 1,703,008
---------- ---------- ----------
Total noninterest expense 9,445,509 8,669,385 8,307,480
---------- ---------- ----------
Income before income tax expense 5,483,848 5,178,758 4,323,426
Income tax expense 2,053,989 2,026,660 1,679,549
---------- ---------- ----------
Net income $ 3,429,859 $ 3,152,098 $ 2,643,877
========= ========== ==========
Earnings per common share (Note 1) $ 1.17 $ 1.01 $ 0.84
Weighted average number of shares
outstanding 2,940,158 3,113,388 3,148,306
========== ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-10-
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Common Undivided Treasury
Stock Surplus Profits Stock Other
----- ------- ---------- -------- -----
Balance, December 31, 1994 7,998,045 263,538 9,556,768 (263,088) (810,813)
Net income 2,643,877
Cash dividends declared
($.234 per share) (737,101)
Purchase of 382 shares
of treasury stock (2,865)
Reissuance of 18,574 shares
of treasury stock 26,715 84,729
Change in unrealized loss
on securities available
for sale, net of taxes 780,868
- -------------------------- --------- ------- --------- --------- ---------
Balance, December 31, 1995 7,998,045 290,253 11,463,544 (181,224) (29,945)
Net income 3,152,098
Cash dividends declared
($.253 per share) (788,684)
Purchase of 257,665 shares
of treasury stock (2,318,985)
Reissuance of 33,731 shares
of treasury stock 84,327 151,790
Change in unrealized loss
on securities available
for sale, net of taxes 19,915
- -------------------------- --------- ------- ---------- ------- -------
Balance, December 31, 1996 7,998,045 374,580 13,826,958 (2,348,419) (10,030)
Net income 3,429,859
Cash dividends declared
($.285 per share) (838,027)
Purchase of 24,301 shares
of treasury stock (Note 6) (291,612)
Reissuance of 15,546 shares
of treasury stock 39,540 110,479
Change in unrealized loss
on securities available
for sale, net of taxes 144,726
- -------------------------- --------- ------- ---------- --------- -------
Balance, December 31, 1997 $7,998,045 $414,120 $16,418,790 $(2,529,552) $134,696
========= ======= ========== ========= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Interest received $ 18,940,716 $ 17,803,811 $ 16,739,141
Fees and commissions received 2,533,938 2,514,788 2,068,486
Secondary market mortgage sales 11,422,325 14,737,701 8,899,808
Origination of mortgage loans for
secondary market sale (12,596,278) (14,577,346) (9,320,396)
Interest paid (6,895,838) (6,373,350) (6,308,750)
Cash paid to suppliers and employees (8,570,253) (8,020,426) (7,084,208)
Income taxes paid (2,094,290) (1,941,421) (1,404,520)
----------- ----------- ----------
Net cash provided by operating activities 2,740,320 4,143,757 3,589,561
----------- ---------- ----------
Cash flows used in investing activities:
Purchases of securities held to maturity (16,731,111) (22,899,227) (17,362,828)
Purchases of securities available for sale (17,560,698 (14,347,861) 0
Maturities and principal repayments of
securities held to maturity 17,174,567 14,056,633 13,194,982
Maturities and principal repayments of
securities available for sale 5,342,727 6,257,701 3,434,457
Sales of securities held to maturity 2,000,000 0 0
Sales of securities available for sale 2,913,737 3,507,742 0
Net change in federal funds sold (3,300,000) 5,400,000 (10,600,000)
Net change in loans and other real estate owned (9,524,836) (3,446,092) (4,689,293)
Sales of other real estate owned 15,600 100,000 178,700
Acquisition of premises and equipment (592,386) (488,905) (589,533)
---------- ---------- ----------
Net cash used in investing activities (20,262,400) (11,860,009) (16,433,515)
---------- ---------- ----------
Cash flows from financing activities:
Net change in deposits 15,606,665 10,142,004 20,176,879
Net change in securities sold under
repurchase agreements 2,182,377 3,164,724 4,249,163
Net change in federal funds purchased 3,000,000 (1,000,000) (9,900,000)
Purchase of treasury stock (291,612) (2,318,985) (2,865)
Reissuance of treasury stock 150,019 236,117 111,444
Dividends paid (812,269) (784,487) (722,606)
---------- ---------- ----------
Net cash provided by financing activities 19,835,180 9,439,373 13,912,015
---------- ---------- ----------
Net increase in cash and due from banks 2,313,100 1,723,121 1,068,061
Cash and due from banks at beginning of year 14,391,567 12,668,446 11,600,385
---------- ---------- ----------
Cash and due from banks at end of year $16,704,667 $14,391,567 $12,668,446
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-12-
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 (Continued)
Reconciliation of Net Income to Net Cash Provided by Operating Activities
1997 1996 1995
---- ---- ----
Net income $ 3,429,859 $ 3,142,098 $ 2,643,877
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) in mortgage loans held for sale (1,336,719) (164,784) (787,488)
Premium on sale of mortgages 162,766 325,139 366,900
Depreciation and amortization 802,623) 839,476 747,822
Provision for possible loan losses 0 0 120,000
Deferred income taxes 80,729 25,581 176,043
Increase (decrease) in other liabilities 72,638 (230,258) 441,387
(Decrease) increase in taxes payable (40,301) 85,239 275,029
(Decrease) in interest payable (616) (5,592) (24,000)
(Increase) decrease in other assets, net (201,423) 74,150 (191,521)
(Increase) decrease in interest receivable (229,236) 42,708 (178,488)
------------ ----------- -----------
Total adjustments (689,539) 991,659 945,684
------------ ----------- -----------
Net cash provided by operating activities $ 2,740,320 $ 4,143,757 $ 3,589,561
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-13-
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements include the accounts of
Community Bancorp, Inc. (the "Company"), a Massachusetts corporation
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended, and its wholly-owned subsidiary, Community National Bank,
formerly Hudson National Bank, (the "Bank"), a national banking association.
The Company has also formed Community Securities Corporation, a wholly-owned
subsidiary of the Bank. All intercompany balances and transactions have been
eliminated in consolidation.
At present, the Company conducts no activities independent of the Bank. The
Bank has eight offices and is engaged in substantially all of the business
operations normally conducted by an independent commercial bank in
Massachusetts. Banking services offered include the acceptance of checking,
savings, and time deposits, and the making of commercial, real estate,
installment and other loans. The Bank also offers official checks, safe
deposit boxes, electronic banking and bill payment services and other
customary banking services to its customers.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities
Debt securities that the Company has the positive intent and ability to hold
to maturity are reported at amortized cost. Securities purchased to be held
for indefinite periods of time and not intended to be held until maturity
are classified as "available for sale" securities. Securities classified as
available for sale are reported at fair value with unrealized gains and
losses excluded from earnings and reported net of taxes in a separate
component of stockholders' equity. Securities held for indefinite periods
of time include securities that management may use in conjunction with the
Company's asset/liability in management program and that may be sold in
response to changes in interest rates, prepayment risks or other economic
factors. When securities classified as available for sale are sold, the
adjusted cost of each specific security sold is used to calculate gains or
losses on sale, which are included in earnings.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization, which is computed by using both the straight-line and
accelerated methods. Estimated useful lives are as follows:
Buildings................30 to 40 years
Buildings and leasehold
improvements.............5 to 25 years
Furniture and equipment...3 to 10 years
Cash and due from banks
Included in cash and due from banks as of December 31, 1997 and 1996 is
approximately $5,341,000 and $4,527,000, respectively, that is subject to
Federal Reserve withdrawal restrictions.
Allowance for possible loan losses
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for possible
loan
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losses. The allowance for possible loan losses is increased through a
provision for possible loan losses charged to expense and decreased by
charge-offs, net of recoveries. The provision is based on management's
estimation of the amount necessary to maintain the allowance at an adequate
level. Management's periodic evaluation of the adequacy of the allowance is
based on specific credit reviews, past loan loss experience, current
economic conditions and trends known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and the volume,
growth and composition of the loan portfolio. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary.
Effective January 1, 1995, the Company adopted Financial Accounting
Standards Board Statement No 114, "Accounting by Creditors for Impairment of
a Loan" (SFAS No. 114). Under the standard, the allowance for possible loan
losses related to loans that are identified as impaired in accordance with
SFAS No. 114 is based on discounted cash flows using the loan's effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. Prior to 1995, the allowance for possible loan losses
related to these loans was based on undiscounted cash flows or the fair
market value of the collateral for collateral dependent loans.
For purposes of this Statement, a loan is considered to be impaired when it
is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Financial
Accounting Standards Board also issued SFAS No. 118, which amended SFAS No.
114 by allowing creditors to use their existing methods of recognizing
interest income on impaired loans.
The Company determined, after reviewing its credit quality monitoring
policies and procedures and an analysis of the loan portfolio, that loans
recognized by the Company as nonaccrual and restructured troubled debt are
equivalent to "impaired" loans as defined by SFAS No. 114. The Company also
determined that the allowance for possible loan losses did not require an
additional loan loss provision as a result of the adoption of this Statement.
Securities sold under repurchase agreements
The Company sells securities under open-ended repurchase agreements with
certain customers. The principal balance of the repurchase agreements
changes daily. Specific securities are not sold and securities are not
transferred to the name of the customers. Instead, the customer has an
interest in a portion of the U.S. Government securities held in the
Company's investment portfolio.
Earnings per share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" (SFAS No. 128), effective December 31, 1997. This
Statement 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 1997, 1996 and 1995, as
there is no dilution effect. Earnings per share is based on the weighted
average number of shares outstanding during the year.
-15-
Long-lived assets
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No.
121). SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Statement also requires that
certain long-lived assets and identifiable intangibles to be disposed of be
reported at the lower of the carrying amount or fair value less cost to
sell. The adoption of SFAS No. 121 by the Company had no impact on the
results of its operations or financial condition.
Loan sales and loans held for sale
Gains and losses on sales of mortgage loans are recognized at the time of
sale based on the difference between the selling price and the carrying
value of the related loans sold. The gains and losses are increased or
decreased by the present value of the difference (generally referred to as
"excess servicing") between the interest rate on the loans sold, adjusted for
a normal servicing fee and, in the case of mortgage-backed securities, a
guaranty fee, and the agreed-upon yield to the buyer. The present value is
computed over the estimated life of the loans sold, taking into account
scheduled payments and estimated prepayments. At December 31, 1997 and
1996, loans held for sale totaled $2,173,322 and $1,222,165, respectively.
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS No. 122). SFAS No. 122, as amended by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", requires the capitalization of the rights
to service mortgage loans for others. In addition, capitalized mortgage
servicing rights are required to be assessed for impairment based on the
fair value of those rights. The Company adopted SFAS No. 122 on a
prospective basis and, as a result, recorded an incremental gain of
$46,849 on the sale of mortgage loans with servicing rights retained
during 1996.
Revenue recognition
Interest on loans, securities and other earning assets is accrued and
credited to operations based on contractual rates and principal amounts
outstanding. Nonrefundable loan fees and certain related costs are deferred
and recognized as income over the life of the loan as an adjustment of the
yield.
It is the policy of the Company to discontinue the accrual of interest on
loans when, in the 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 possible loan losses.
Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral is sufficient to cover the principal
balance and accrued interest. Otherwise, interest income is subsequently
recognized only to the extent cash payments are received.
-16-
Reclassifications
Certain amounts in prior year's financial statements have been reclassified
to be consistent with the current year's presentation. The
reclassifications have no effect on net income.
2. Securities
The book and estimated market values of securities at December 31, 1997 and
1996 were as follows:
1997
-----------------------------------------------------------
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
to Maturity Cost Gains Losses Value
--------------- --------- ---------- ---------- -----
U.S. Government obligations $ 4,008,114 $ 1,403 $ 5,357 $ 4,004,160
U.S. Government agencies
and corporations 9,970,706 7,021 80,955 9,896,772
Obligations of states and
political subdivisions 8,414,205 131,412 0 8,545,617
Mortgage-backed securities 33,911,199 127,021 80,446 33,957,774
------------ ---------- ---------- -----------
$ 56,304,224 $ 266,857 $ 166,758 $ 56,404,323
============ ========== ========== ===========
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
U.S. Government obligations $ 17,004,822 $ 120,818 $ 0 $ 17,125,640
U.S. Government agencies
and corporations 3,987,259 11,892 701 3,998,450
Mortgage-backed securities 16,685,383 112,686 11,349 16,786,720
Other securities 969,356 0 0 969,356
------------ ---------- ---------- -----------
$ 38,646,820 $ 245,396 $ 12,050 $ 38,880,166
============ ========== ========== ===========
1996
-----------------------------------------------------------
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
to Maturity Cost Gains Losses Value
--------------- --------- ---------- ---------- -----
U.S. Government obligations $ 6,040,283 $ 3,747 $ 26,831 $ 6,017,199
U.S. Government agencies
and corporations 12,018,820 9,233 90,914 11,937,139
Obligations of states and
political subdivisions 4,141,216 595 8,113 4,133,698
Mortgage-backed securities 36,628,562 80,802 485,051 36,224,313
---------- ---------- ---------- -----------
$ 58,828,881 $ 94,377 $ 610,909 $ 58,312,349
============ ========== ========== ===========
Gross Gross
Securities Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
U.S. Government obligations $ 9,920,585 $ 44,377 $ 3,866 $ 9,961,096
U.S. Government agencies and
corporations 4,989,529 0 27,652 4,961,877
Mortgage-backed securities 13,463,117 83,447 112,686 13,433,878
Other securities 888,156 0 0 888,156
------------ ---------- ---------- -----------
$ 29,261,387 $ 127,824 $ 144,204 $ 29,245,007
============ ========== ========== ===========
The book and estimated market value of securities at December 31, 1997 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 Market Amortized Market
Cost Value Cost Value
--------- ----- --------- -----
Within one year $ 5,734,844 $ 5,735,601 $ 7,967,873 $ 7,990,650
One to five years 5,660,488 5,655,630 13,024,223 13,133,440
Five to ten years 4,978,488 4,904,700 0 0
Ten to fifteen years 6,019,205 6,150,618 0 0
Mortgage-backed securities 33,911,199 33,957,774 16,685,368 16,786,720
Other securities 0 0 969,356 969,356
----------- ---------- ---------- ----------
$56,304,224 $56,404,323 $38,646,820 $38,880,166
========== =========== ========== ==========
Securities with a book value of $33,718,000 and $25,861,000 at December 31,
1997 and 1996, respectively, were pledged to secure public funds on deposit
and for other purposes.
Proceeds from sales of securities were $4,913,737 and $3,507,742 in 1997 and
1996, respectively. Gross realized gains on sales of securities were $25,839
in 1997 and $0 in 1996. Gross realized losses on sales of securities were
$17,252 in 1997 and $9,460 in 1996. Realized gains or losses on sales of
securities were determined by specific identification.
3. Loans
The composition of the loan portfolio at December 31, 1997 and 1996 was as
follows:
1997 1996
---- ----
Commercial and industrial $ 18,065,586 $ 17,227,165
Real estate - residential 54,211,465 49,789,922
Real estate - commercial 48,328,565 45,104,891
Real estate - residential
construction 4,868,265 4,833,291
Loans to individuals 13,571,431 13,221,415
Other 794,541 171,581
----------- -----------
Total loans $139,839,853 $130,348,265
============ ===========
Substantially all of the Company's loan portfolio is collateralized by assets
in the New England region, especially central Massachusetts. The Company
generally requires collateral when extending credit and, with respect to loans
secured by real estate, Company policy requires appropriate appraisals and
repayment sources.
-17-
Total impaired loans at December 31, 1997 and 1996 that required a related
allowance were $0 and $373,318, respectively, and the allowance allocated to
such loans was $0 and $120,000, respectively. In addition, at December 31,
1997 and 1996, the Company had impaired loans of $632,569 and $523,191,
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 $649,075 and
$1,457,388 during 1997 and 1996, respectively. The Company recorded interest
income on impaired loans of $19,475 during 1997 and $42,238 during 1996.
At December 31, 1997 and 1996, accruing loans 90 days or more past due totaled
$239,050 and $370,223, respectively, and nonaccruing loans totaled $632,569
and $896,509, respectively. There were no troubled debt restructurings at
December 31, 1997 or 1996. The reduction of interest income associated with
nonaccrual and restructured loans for the years ended December 31, 1997, 1996
and 1995 was as follows:
1997 1996 1995
---- ---- ----
Interest income per original terms $ 143,869 $ 220,029 $ 211,348
Income recognized 19,475 42,411 103,069
-------- -------- --------
Foregone interest income $ 124,394 $ 177,618 $ 108,279
======== ======== ========
4. Allowance for Possible Loan Losses
Activity in the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 was as follows:
Balance, December 31, 1994 $3,703,470
Provision for possible losses 120,000
Charge-offs (629,306)
Recoveries 260,934
---------
Balance, December 31, 1995 3,455,098
Provision for possible losses 0
Charge-offs (230,545)
Recoveries 257,152
---------
Balance, December 31, 1996 3,481,705
Provision for possible losses 0
Charge-offs (366,139)
Recoveries 99,993
---------
Balance, December 31, 1997 $3,215,559
=========
5. Premises and Equipment
The composition of premises and equipment at December 31, 1997 and 1996 was as
follows:
1997 1996
---- ----
Premises $ 5,057,478 $ 5,046,199
Equipment 2,935,940 3,097,098
---------- -----------
7,993,418 8,143,297
Less accumulated depreciation and
amortization 3,355,453 3,295,095
---------- -----------
$ 4,637,965 $ 4,848,202
========== ===========
Total depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 was $802,623, $746,120 and $668,526, respectively, and is
included in data processing, occupancy and furniture and equipment expense.
6. Stockholders' Equity
At the Company's 1997 Annual Meeting, the stockholders voted to increase the
authorized common stock from 4,000,000 shares to 12,000,000 shares. On
September 15, 1997, the Company implemented an Offer to Purchase up to
125,000 shares of its outstanding common stock at a price of $12.00 per
share. The Offer expired on October 15, 1997, with 24,301 shares tendered.
The Company purchased all 24,301 shares
-18-
tendered under the offer. Shares acquired by the Company were accounted for
as treasury stock under the cost method. As a result of the repurchase of
shares, the Company's capital was reduced by $291,612.
7. Income Taxes
The components of income tax expense for the years ended December 31, 1997,
1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current:
Federal $ 1,531,216 $ 1,508,248 $ 1,160,210
State 442,044 492,831 343,296
---------- ---------- ----------
Total current 1,973,260 2,001,079 1,503,506
---------- ---------- ----------
Deferred:
Federal 54,614 6,430 114,195
State 26,115 19,151 61,848
---------- ---------- ----------
Total deferred 80,729 25,581 176,043
---------- ---------- ----------
Total $ 2,053,989 $ 2,026,660 $ 1,679,549
========== ========== ==========
The difference between the income tax provision computed by applying the
statutory federal income tax rate of 34% to income before income taxes and
the cumulative effect of a change in accounting principle and the actual
income tax provision is summarized as follows:
1997 1996 1995
---- ---- ----
Income tax expense
at statutory rates $ 1,864,508 $ 1,760,833 $ 1,469,965
State income taxes, net of
federal income tax benefit 308,984 337,908 267,395
Tax-exempt interest (132,117) (69,794) (71,828)
Other, net 12,614 (2,287) 14,017
---------- ---------- ----------
$ 2,053,989 $ 2,026,660 $ 1,679,549
========== ========== ==========
The Company has recorded a net deferred tax asset of $571,920. Realization
is dependent on the generation of sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely
than not that the full amount of the net deferred tax asset will be realized.
However, the amount realizable could be reduced if estimates of future taxable
income are reduced.
At December 31, 1997 and 1996, the Company's net deferred tax asset, as
presented in the accompanying consolidated balance sheets, consisted of the
following components:
1997 1996
---- ----
Gross deferred tax asset:
Provision for possible loan losses $ 899,555 $ 909,466
Employee benefits and other
compensation arrangements 381,227 334,663
OREO write-downs 20,600 20,732
Other 14,491 30,319
--------- ---------
1,315,873 1,295,180
Gross deferred tax liability:
Accelerated tax depreciation (377,005) (390,932)
Other (366,948) (147,958)
--------- ---------
(743,953) (538,890)
--------- ---------
Net deferred tax asset $ 571,920 $ 756,290
========= =========
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, 1997 and 1996:
1997 1996
---- ----
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $2,038,508 ($1,597,121
in 1996) $(2,083,921) $(1,678,366)
========= =========
Projected benefit obligation for service
rendered to date $(3,161,057) $(2,732,471)
Plan assets at fair value (funds held in
mutual funds, Community Bancorp, Inc.
stock and deposit accounts at
Community National Bank) 2,831,044 2,277,087
---------- ----------
Funded status of plan (330,013) (455,384)
Prior service cost not yet recognized
in net periodic pension cost 12,416 13,796
Unrecognized net asset at transition
being recognized over 17 years (53,721) (62,675)
Unrecognized net loss from past experience
different from that assumed 242,267 401,786
---------- ----------
Accrued pension cost $ (129,051) $ (102,477)
========= ==========
-19-
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components:
1997 1996 1995
---- ---- ----
Service cost-benefits earned
during the period $ 213,920 $ 210,421 $ 174,826
Interest cost on projected
benefit obligation 202,397 179,213 149,673
Actual return on plan assets (419,388) (210,676) (209,069)
Net amortization and deferral 230,041 90,728 103,634
---------- ---------- -----------
Net periodic pension cost $ 226,970 $ 269,686 $ 219,064
========== ========== ===========
The weighted-average discount rate and annual rate of increase in the future
compensation levels used in determining the actuarial present value of the
projected benefit obligation at December 31, 1997 were 7.25% and 5.00%,
respectively. Those rates as of December 31, 1996 were 7.50% and 5.50%,
respectively. The expected annual long-term rate of return on assets was 8.0%
for the years ended December 31, 1997 and 1996.
The Company has an Employee Stock Ownership Plan (ESOP) that enables eligible
employees to own common stock. Cash contributions of $70,000 were made to the
ESOP in 1997 and 1996. No cash contribution was made to the ESOP in 1995.
The Company implemented a 401(k) plan in 1989, covering all eligible employees.
Compensation expense recorded in 1997, 1996 and 1995 related to this plan was
approximately $78,900, $61,400 and $22,800, respectively.
9. Commitments
The Company leases branch offices and equipment under noncancelable agreements
expiring at various dates through 2002 that require various minimum annual
rentals. The total future minimum rental commitments at December 31, 1997
aggregate $568,991. Rental commitments for each of the next five fiscal years
and thereafter are as follows:
1998 $169,774
1999 132,209
2000 111,134
2001 77,412
2002 78,462
Thereafter 0
Rental expense totaled approximately $170,000, $149,000 and $146,000, for
1997, 1996 and 1995, respectively.
10. Loans to Related Parties
The schedule below discloses indebtedness of certain parties related to the
Company:
Balance Balance
January 1 New Loans Repayments December 31
---------- --------- ---------- -----------
1996 $ 5,994,289 $ 319,636 $ 695,356 $ 5,618,569
1997 $ 5,618,569 $ 787,285 $ 625,805 $ 5,780,049
These loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than normal risk of
collectibility.
11. Deposits
Deposits consisted of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Demand deposits $ 55,678,794 $ 51,358,151
Money-market deposits 25,721,390 24,183,300
NOW and FlexValue deposits 30,079,576 27,341,479
Cash management investment deposits 15,580,137 13,007,808
Savings deposit 34,813,944 33,304,686
Time certificates of deposit in
denominations of $100,000 or more 21,183,954 19,144,157
Other time deposits 49,730,739 48,842,288
----------- -----------
$232,788,534 $217,181,869
=========== ============
-20-
12. Condensed Financial Information of Community Bancorp, Inc.
The following discloses certain parent-company-only financial information at
December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997:
Balance Sheets
1997 1996
---- ----
Assets:
Cash and cash equivalents $ 92,421 $ 122,186
Investment in subsidiary, at equity 22,309,350 19,696,253
Other assets 219,469 216,534
---------- ----------
Total assets $ 22,621,240 $ 20,034,973
=========== ==========
Liabilities and stockholders' equity:
Other liabilities $ 185,141 $ 193,839
---------- ----------
Total liabilities 185,141 193,839
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 (4,000,000 shares authorized at
December 31, 1996), 3,199,218 shares issued,
2,926,257 shares outstanding, (2,935,012 shares
outstanding at December 31, 1996) 7,998,045 7,998,045
Surplus 414,120 374,580
Undivided profits 16,418,790 13,826,958
Treasury stock (2,529,552) (2,348,419)
Unrealized losses on securities
available for sale, net of taxes 134,696 (10,030)
---------- ----------
Total stockholders' equity 22,436,099 19,841,134
---------- ----------
Total liabilities and stockholders'
equity $22,621,240 $20,034,973
=========== ==========
Statements of Income
Years ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Income:
Dividends from subsidiary bank $ 979,641 $ 2,407,668 $ 737,101
Other income 326,669 322,048 307,939
----------- ----------- ----------
Total income 1,306,310 2,729,716 1,045,040
----------- ----------- ----------
Expenses:
Other 344,822 324,478 299,756
----------- ----------- ----------
Total expenses 344,822 324,478 299,756
----------- ----------- ----------
Income before undistributed net income of
subsidiary bank 961,488 2,405,238 745,284
Equity in undistributed net income of
subsidiary bank 2,468,371 746,860 1,898,593
----------- ----------- ----------
Net income $ 3,429,859 $ 3,152,098 $ 2,643,877
=========== =========== ===========
Statements of Cash Flows
Years ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 3,429,859 $ 3,152,098 $ 2,643,877
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiary bank (2,468,371) (746,860) (1,898,593)
Increase in other assets (2,935) (26,997) (1,718)
(Decrease) increase in other liabilities (8,698) 21,441 (1,685)
---------- ---------- ----------
Total adjustments (2,480,004) (752,416) (1,901,996)
---------- ---------- ----------
Net cash provided by operating activities 949,855 2,399,682 741,881
---------- ---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (291,612) (2,318,985) (2,865)
Reissuance of treasury stock 150,019 236,117 111,444
Dividends declared (838,027) (788,684) (737,101)
---------- ---------- ----------
Net cash used in financing activities (979,620) (2,871,552) (628,522)
---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents (29,765) (471,870) 113,359
Cash and cash equivalents at beginning of year 122,186 594,056 480,697
---------- ---------- ----------
Cash and cash equivalents at end of year $ 92,421 $ 122,186 $ 594,056
========== ========== ===========
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 1998,
Community National Bank can, under this formula, declare dividends to
Community Bancorp, Inc. of approximately $4,976,000, plus an additional
amount equal to the Bank's net profit for 1998, up to the date of any such
dividend declaration, without the approval of the Comptroller of the Currency.
13. Financial Instruments With Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business. These financial instruments primarily consist
of commitments to extend credit and standby letters of credit. Loan
commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. They are
primarily issued to guarantee other 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
-21-
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, 1997 and 1996 was as follows:
1997 1996
---- ----
Commitments to extend credit:
Fixed-rate (6.99% to 10.00%) $ 1,394,116 $ 703,687
Adjustable rate 38,754,983 31,820,455
Standby letters of credit $ 629,086 $ 742,338
=========== ===========
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, 1997 and 1996, the
outstanding balance of such mortgages totaled approximately $272,000 and
$421,000, respectively.
Fees associated with the Company's off-balance-sheet financial instruments are
minimal; therefore, the fair value of off-balance-sheet financial instruments
is not material.
14. Loan Servicing Asset
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 is
also reduced by a charge to earnings if actual prepayments exceed estimated
prepayments. The loan servicing asset totaled $350,937 and $513,703 at
December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the Company was servicing mortgage loans for
others of approximately $118,137,000 and $127,258,000, respectively.
15. Regulatory Capital
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, that the Company and the Bank met all capital adequacy requirements
to which they are subject.
-22-
As of December 31, 1997 and 1996, 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,
1997 are presented in the following table (dollars are in thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company (consolidated):
Total capital
(to risk-weighted >
assets) $24,234 15.75% $12,312 - 8.0% N/A N/A
Tier 1 capital
(to risk-weighted >
assets) 22,295 14.49% 6,156 - 4.0% N/A N/A
Tier 1 capital >
(to average assets) 22,295 8.67% 10,283 - 4.0% N/A N/A
Bank:
Total capital
(to risk-weighted > >
assets) $24,108 15.66% $12,312 - 8.0% $15,390 - 10.0%
Tier 1 capital
(to risk-weighted > >
assets) 22,168 14.40% 6,156 - 4.0% 9,234 - 6.0%
Tier 1 capital > >
(to average assets) 22,168 8.62% 10,283 - 4.0% 12,853 - 5.0%
16. Disclosures about Fair Value of Financial Instruments
In December 1991, the FASB issued Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107).
This statement requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The following
methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and due from banks and federal funds sold: The carrying amounts reported
in the balance sheet for cash and due from banks and federal funds sold
approximate those assets' fair values.
Securities (including mortgage-backed securities, securities held to maturity
and securities available for sale): Fair values for securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for certain one-to-four family residential mortgages are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for credit card loans and other consumer loans are based on carrying
values, as the loans reprice frequently at current market rates. The fair
values
-23-
for other loans (e.g., commercial real estate and rental property mortgage
loans, and commercial and industrial loans) are estimated using discounted
cash flow analysis, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest receivable approximates its fair value.
Off-balance-sheet instruments: The fair value of lending commitments
discussed in Note 13 is not considered material nor has it been reflected in
the estimation of the fair value of the related loans.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Commitments to extend credit/sell loans: The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of customers. For fixed-rate loan commitments and obligations
to deliver fixed-rate loans, fair value also considers the difference between
committed rates and current levels of interest rates.
Values not determined: SFAS No. 107 excludes certain financial instruments
from its disclosure requirements, including real estate included in banking
premises and equipment, the intangible value of the Bank's portfolio of loans
serviced (both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e. core
deposits) among others. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1997 and 1996 are as follows:
1997
-----------------------------
Carrying Estimated
Amount Fair Value
------------ -----------
Financial instrument assets:
Cash and cash equivalents $ 31,304,667 $ 31,304,667
Securities 95,184,390 95,284,489
Loans, including held for sale, net 138,797,615 140,905,729
Financial instrument liabilities:
Deposits 232,788,534 232,248,046
Short-term borrowings 16,637,064 16,637,064
1996
------------------------------
Carrying Estimated
Amount Fair Value
------------ -----------
Financial instrument assets:
Cash and cash equivalents $ 25,691,567 $ 25,691,567
Securities 88,073,888 87,557,356
Loans, including held for sale, net 128,088,725 132,035,766
Financial instrument liabilities:
Deposits 217,181,869 216,345,523
Short-term borrowings 11,454,687 11,454,687
-24-
[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,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the three years ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Community Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 23, 1998
-25-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary
The Company recorded net income of $3,429,859 for the year ended December 31,
1997, representing an increase of $277,761 over $3,152,098 recorded in 1996.
Earnings per share of $1.17 for the current period compared to $1.01 for the
year ended December 31, 1996. The improvement in net income resulted
primarily from increases in net interest income and noninterest income.
Deposits of $232,788,534 at December 31, 1997 increased by $15,606,665 or
7.2% from $217,181,869 at December 31, 1996. The increase occurred primarily
in interest bearing categories and secondarily in noninterest bearing
categories.
Loans of $139,839,853 at December 31, 1997 increased by $9,491,588 or 7.3%
from $130,348,265 at December 31, 1996. The increase occurred in the
commercial and consumer loan categories. Noncurrent loans (nonaccrual loans
and loans 90 days or more past due but still accruing) totaled $871,619 and
$1,266,732 at December 31, 1997 and 1996, respectively. There were no
accruing troubled debt restructurings at December 31, 1997 or 1996. Other
real estate owned of $170,000 at December 31, 1997 compared to $25,000 at
December 31, 1996. The 1997 increase represented one foreclosed property.
Assets of $273,550,527 at December 31, 1997 represented a $23,548,069 or 9.4%
increase over $250,002,458 at December 31, 1996.
1997 Compared to 1996
Interest income for the year ended December 31, 1997 was $19,169,951,
representing an increase of $1,408,849 or 7.9% over $17,761,102 for the year
ended December 31, 1996, primarily due to a $15,878,574 or 7.2% increase in
average earning assets during 1997. The weighted average taxable equivalent
yield on net earning assets was 8.14% and 8.06% in 1997 and 1996,
respectively. Interest expense of $6,895,222 in 1997 represented an increase
of $527,464 or 8.3% from $6,367,758 in 1996, primarily due to an $11,658,028 or
6.7% increase in average interest bearing liabilities during 1997. The weighted
average cost of interest bearing liabilities was 3.73% in 1997 and 3.68% in
1996. Net interest income for 1997 was $12,274,729, representing an increase
of $881,385 or 7.7% compared to $11,393,344 recorded in 1996.
Noninterest income for the year ended December 31, 1997 was $2,654,628,
representing an increase of $199,829 or 8.1% from $2,454,799 in 1996. This
increase resulted primarily from increases in merchant credit card
processing, gains on sales of loans and gains on sales of securities.
Noninterest expense for the year ended December 31, 1997 of $9,445,509
represented an increase of $776,124 or 9.0% from $8,669,385 recorded during
1996. This increase was primarily the result of increases in salaries and
employee benefits, furniture and equipment, credit card processing and other
expense.
The provision for possible loan losses was $0 in 1997 and 1996, resulting
from management's continuing evaluation of the adequacy of the allowance
for possible loan losses and its belief that the allowance is
-26-
adequate. Management will continue its ongoing assessment of the adequacy of
the allowance for possible loan losses during 1998 and may adjust the provision
for possible loan losses if necessary.
Income tax expense of $2,053,989 for the year ended December 31, 1997
compared to $2,026,660 for 1996, the result of an increase in taxable income
during the current period.
Net income of $3,429,859 for the year ended December 31, 1997 represented an
increase of $277,761 or 8.8% over $3,152,098 recorded in 1996. The
foregoing discussion summarized the primary components of this increase in
earnings.
1996 Compared to 1995
Interest income for the year ended December 31, 1996 was $17,761,102,
representing an increase of $843,478 or 5.0% over $16,917,624 for the year
ended December 31, 1995, primarily due to a $16,551,450 or 8.1% increase in
average earning assets during 1996, partially offset by slightly lower
interest rates as compared to 1995. The weighted average taxable equivalent
yield on net earning assets was 8.06% and 8.30% in 1996 and 1995, respectively.
Interest expense of $6,367,758 in 1996 represented an increase of $83,008 or
1.3% from $6,284,750 in 1995, primarily due to a $9,865,224 or 6.0% increase in
average interest bearing liabilities during 1996, partially offset by slightly
lower interest rates as compared to 1995. The weighted average cost of interest
bearing liabilities was 3.68% in 1996 and 3.85% in 1995. Net interest income
for 1996 was $11,393,344, representing an increase of $760,470 or 7.2% compared
to $10,632,874 recorded in 1995.
Noninterest income for the year ended December 31, 1996 was $2,454,799,
representing an increase of $336,767 or 15.9% from $2,118,032 in 1995. This
increase resulted primarily from increases in merchant credit card processing,
service charge income, other charges, commissions and fees, gains on sales of
loans and other income, slightly offset by an increase in losses on sales of
securities.
Noninterest expense for the year ended December 31, 1996 of $8,669,385
represented an increase of $361,905 or 4.4% from $8,307,480 recorded during
1995. This increase was primarily the result of increases in salaries
and employee benefits, data processing, furniture and equipment, credit card
processing, OREO carrying costs and other expense, partially offset by
reductions in occupancy expense and FDIC insurance premiums.
The provision for possible loan losses for 1996 was $0, representing a
$120,000 or 100.0% decrease from $120,000 for 1995. This decrease was the
result of management's continuing evaluation of the adequacy of the allowance
for possible loan losses and its belief that the allowance is adequate.
Management continued its ongoing assessment of the adequacy of the allowance
for possible loan losses during 1997.
Income tax expense of $2,026,660 for the year ended December 31, 1996
compared to $1,679,549 for 1995, the result of an increase in taxable income
during the current period.
Net income of $3,152,098 for the year ended December 31, 1996 represented an
increase of $508,221 or 19.2% over $2,643,877 recorded in 1995. The
foregoing discussion summarized the primary components of this increase in
earnings.
-27-
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level believed by
management to be adequate to absorb potential losses in the loan portfolio.
Management's methodology in determining the adequacy of the allowance
considers specific credit reviews, past loan loss experience, current
economic conditions and trends, known and inherent risks in the loan
portfolio, adverse situations that may affect a borrower's ability to repay,
the estimated value of any underlying collateral and the volume, growth and
composition of the loan portfolio. Each loan on the Company's internal Watch
List is evaluated periodically to estimate potential loss. For loans with
potential losses, the bank sets aside or allocates a portion of the allowance
against such potential losses. For the remainder of the loan portfolio,
unallocated allowance amounts are determined based on judgments regarding
the type of loan, economic conditions and trends, potential exposure to loss
and other factors. When specific loans, or portions thereof, are deemed to
be uncollectible, those amounts are charged off against the allowance.
Subsequent recoveries, if any, are credited to the allowance. At December
31, 1997 the allowance was $3,215,559, representing 2.3% of total loans,
compared to $3,481,705, representing 2.7% of total loans at December 31, 1996.
Securities
The Company's securities portfolio consists of obligations of the U.S.
Treasury, U.S. Government sponsored agencies, mortgage backed securities and
obligations of municipalities in the Company's market area. These assets are
used in part to secure public deposits and as collateral for repurchase
agreements. Securities for 1997 averaged $92.6 million, an increase of $11.4
million or 14.0% over $81.2 million for 1996. Proceeds from sales of
securities were $4,913,737 in 1997. All mortgage-backed securities in the
securities portfolio have been issued by U.S. Government sponsored agencies.
Management believes no other-than-temporary impairment has occurred with
regard to any security in the securities portfolio. The Company's adequate
liquidity position provides the ability to hold all currently owned
securities to maturity.
Liquidity and Capital Resources
The Company's principal sources of liquidity are customer deposits,
amortization and pay-offs of loan principal and amortization and maturities
of securities. These sources provide funds for loan originations, the
purchase of securities and other activities. Deposits are considered a
relatively stable source of funds. At December 31, 1997 and 1996, deposits
were $232.8 million and $217.2 million, respectively. Management anticipates
that deposits will increase moderately during 1998.
Of the Company's $95.2 million in securities at December 31, 1997, $36.9
million or 38.7% mature within one year. As a nationally chartered member of
the Federal Reserve System, the Bank has the ability to borrow funds from the
Federal Reserve Bank of Boston by pledging certain of its investment
securities as collateral. Also, the Bank is a member of the Federal Home
Loan Bank which provides additional borrowing opportunities.
On September 15, 1997, the Company implemented an Offer to Purchase up to
125,000 shares of its outstanding shares of common stock at a price of $12.00
per share. The Offer was designed to reposition
-28-
the Company's balance sheet to increase return on equity by redeploying that
portion of equity capital that was not necessary for the Company's core
banking business. The Offer expired at 5:00 P.M. on October 15, 1997, with
24,301 shares tendered. The Company purchased all 24,301 shares tendered in
the Offer. As a result of the repurchase of the shares, the Company's capital
was reduced by $291,612.
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, 1997 and 1996, the Company's Tier 1 leverage
capital ratio was 8.15% and 7.94%, 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, 1997, the Company's
Tier 1 and total risk-based capital ratios were 14.49% and 15.75%, respectively.
At December 31, 1996 the Company's Tier 1 and total risk-based capital ratios
were 14.00% and 15.27%, respectively. The Bank is categorized as "well
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991 (F.D.I.C.I.A.).
The Year 2000 Issue
The Company, like most users of computers and computer software, will be
affected by the year 2000 date change. An internal Year 2000 Committee has
been established to assess all bank systems to ensure that they will function
properly in the year 2000. The Committee has completed the systems assessment,
identified those that could be affected by the Year 2000 issue, and developed
an implementation plan. Maintenance or modification costs will be expensed as
incurred, while the cost of new hardware or software will be capitalized and
amortized over its useful life. Those costs will be incurred during 1998 and
1999, and they are not expected to have a material effect on the Company's
financial statements or results of operations.
Asset/Liability Management and Interest Rate Risk
The Company has an asset/liability management committee which oversees all
asset/liability management activities. The committee establishes general
guidelines each year and meets regularly to review the Company's operating
results, to measure and monitor interest rate risk and to make strategic
changes when necessary.
It is the Company's general policy to reasonably match the rate sensitivity
of its assets and liabilities in an effort to prudently manage interest rate
risk. A common benchmark of this sensitivity is the one year gap position,
which is a reflection of the difference between the speed and magnitude of
rate changes of interest rate sensitive liabilities as compared with the
Bank's ability to adjust the rates of it's interest rate sensitive assets in
response to such changes. The Company's positive one-year cumulative gap
position at December 31, 1997, which represents the excess of repricing
assets versus repricing liabilities, was 3.2% expressed as a percentage of
total assets.
-29-
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
Argeo R. Cellucci
President of Cellucci Hudson Corp.
Antonio Frias
President and Treasurer of S & F Concrete Contractors, Inc.
I. George Gould
Chairman of the Board of Gould's, Inc.
Horst Huehmer
Retired
Donald R. Hughes, Jr.
Treasurer and Clerk of Community Bancorp, Inc.,
Executive Vice President of 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
Secretary of Poplin Furniture 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
- --------
James A. Langway
President and Chief Executive Officer
Donald R. Hughes, Jr.
Executive Vice President
Robert P. Converse
Auditor
Barbara M. Masciarelli
Administrative Officer
Compliance/Personnel/Legal
- --------------------------
Grace L. Blunt, Esq.
Senior Vice President
Diane L. LeBlanc
Human Resources Officer
Retail Banking/Mortgage Division
- --------------------------------
Richard K. Bennett
Senior Vice President
Nanci J. Pisani
Vice President
Ana M. Czapkowski
Assistant Vice President
Shereen A. Fahey
Assistant Vice President
Jane B. Karlson
Assistant Vice President
Elizabeth M. Brooks
Branch Officer
Andrea E. A. Cope
Branch Officer
Lynda L. D'Orlando
Mortgage Officer
Cynthia M. Farrah
Marketing Officer
Clark Hooper
Security Officer
M. Jean Mickle
Branch Officer
Raymond A. Murphy III
Facilities Officer
Lois A. Seymour
Branch Officer
Peter Shinas
Branch Officer
Kathleen E. Texeira
Merchant Plan Officer
Financial Control
- -----------------
Robert E. Leist
Senior Vice President
Commercial Banking Division
- ---------------------------
John P. Galvani
Senior View President
Christal M. Bjork
Vice President
Daniel L. Heney
Assistant Vice President
Linda Glaser
Commercial Loan Officer
Jennifer D. Vasquezi
Junior Commercial Officer/Credit Analyst
Operations/Data Processing and Electronic Banking
- -------------------------------------------------
Janet A. Lyman
Senior Vice President
James P. Vasquezi
Assistant Vice President
Margaret M. Vasquezi
Assistant Vice President
Susan B. Gillespie
Operations Officer
Michelle M. Temple
Loan Servicing Officer
The Company's Securities and Exchange Commission filing on Form 10-K is
available to our stockholders upon request.
-30-
[The following text appears on the back cover.]
Community Bancorp, Inc.
Parent company of Community National Bank
17 Pope Street
Hudson, Massachusetts 01749
Telephone 978-568-8321
Community National Bank - Branch Offices
- ----------------------------------------
Hudson Main Office
17 Pope Street
Phone: 978-568-8321
Fax: 978-562-7129
Acton
270 Great Road
Phone: 978-263-8376
Fax: 978-266-2610
Boxborough
629 Massachusetts Avenue
Phone: 978-264-9092
Fax: 978-266-2600
Concord
1134 Main Street
Phone: 978-369-5421
Fax: 978-371-6600
Hudson South
177 Broad Street
Phone: 978-568-8813
Fax: 978-568-2610
Marlborough Center
96 Bolton Street
Phone: 978-485-5003
Fax: 978-229-4602
Marlborough East
500 Boston Post Road
Phone: 508-485-3599
Fax: 508-229-4601
Stow
159 Great Road
Phone: 978-461-1600
Fax: 978-461-1610
Loan Center
12 Pope Street, Hudson
Phone: 978-568-8321
Fax: 978-562-9984
Additional ATM Locations
Shaw's Supermarket - Hudson
Solomon Pond Mall - Marlborough
New England Sports Center - Marlborough
Internet Web site:
http://www.combank.com
E-mail:
cnb-mail@combank.com
Member FDIC
Equal Opportunity Lender