[The annual report front cover contains a color graphic
and the following text:]
1998 Annual Report
Community Bancorp, Inc.
Parent Company of Community National Bank
[The following text appears on the inside front cover.]
Table of Contents
Selected Consolidated Financial Data - - - - - - - - - - - 1
Message to Stockholders and Friends - - - - - - - - - - - - 2
Consolidated Balance Sheets - - - - - - - - - - - - - - - - 4
Consolidated Statements of Income - - - - - - - - - - - - - 5
Consolidated Statements of Consolidated Income - - - - - - 6
Consolidated Statements of Stockholders' Equity - - - - - - 7
Consolidated Statements of Cash Flows - - - - - - - - - - - 8
Notes to Consolidated Financial Statements - - - - - - - - 9
Report of Independent Public Accountants - - - - - - - - - 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations - - - - - - 25
Directors & Officers - - - - - - - - - - - Inside back cover
Selected Consolidated Financial Data
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $300,886,831 $273,550,527 $250,002,458 $237,580,796 $219,850,767
Total deposits 254,408,735 232,788,534 217,181,869 207,039,865 186,862,986
Total net loans 137,242,930 136,624,294 126,866,560 123,558,839 118,775,581
Allowance for possible loan losses 2,981,012 3,215,559 3,481,705 3,455,098 3,703,470
Total interest income 20,659,783 19,169,951 17,761,102 16,917,624 14,429,932
Total interest expense 7,675,112 6,895,222 6,367,758 6,284,750 4,525,558
Net interest income 12,984,671 12,274,729 11,393,344 10,632,874 9,904,374
Gains (losses) on sales of securities 0 8,587 (9,460) 0 (29,828)
Provision for possible loan losses 0 0 0 120,000 300,000
Net income 3,805,761 3,429,859 3,152,098 2,643,877 2,105,433
Earnings per share 1.30 1.17 1.01 0.84 0.67
Dividends per share 0.323 0.285 0.253 0.234 0.214
[Five-year bar graphs for the following categories appear in this space.
Data for the graphs was obtained from the above table.]
Total Assets (in millions)
Net Income (in millions)
Earnings Per Share (in dollars)
Total Deposits (in millions)
Total Net Loans (in millions)
Net Interest Income (in millions)
-1-
To Our Stockholders and Friends
It is with great pride that we present the 1998 Annual Report of
Community Bancorp, Inc. and its subsidiary Community National Bank.
The year was marked by solid progress as we again achieved record
earnings while continuing to plan for the future. Net income for the
year was $3,805,761, compared to $3,429,859 recorded in 1997. Earnings
per share of common stock was $1.30, representing an 11.1% increase
over $1.17 in the previous year.
Community Bancorp achieved a return on assets (ROA) of 1.31% and a
return on equity (ROE) of 15.72% during 1998, comparing very favorably
to peer institutions. As a result of our continued strong earnings
during 1998, the Board of Directors increased the cash dividend to
stockholders in each of the four quarters. Total dividends declared
were $.323 per share, representing a 13.3% increase over $.285 declared
in 1997.
As we have indicated in previous reports, conservative, yet innovative,
banking practices provide the foundation for Community National Bank to
thrive as a strong, locally-owned, independent community bank. The Bank's
consistently strong performance has once again resulted in our being
recognized as a "Blue Ribbon" bank by one of the nation's top financial
institution rating services.
Your Board and management team are continuing to pave the way for the
Company's continued success in the future. A new commercial lending
program was introduced in 1998 called Professional Credit Plus. This
program allows professional organizations to obtain lines of credit,
equipment financing, corporate credit cards and a number of other
valuable financial services all in one package and at very competitive
prices.
A branch renovation project was initiated in 1998, designed to enhance
the appearance, efficiency and convenience of the bank's branch offices.
Renovations to the Acton and Boxborough offices were completed during the
year. The Boxborough branch was doubled in size and a drive-up window
was installed to provide easier access for customers in that community,
and the Acton office was modernized to enhance customer service and
efficiency. The Bank expects to complete renovations to several
additional branch offices during 1999.
Diligent efforts continued during the year to prepare the Bank for the
millennium date change. The Bank's Year 2000 Committee has been working
on this project since 1996 so our customers will not be adversely
affected when the clock strikes midnight on December 31, 1999. More
information on the Bank's Year 2000 preparedness program is contained
later in the report.
Representing a major commitment to the future, Community National Bank
is opening two new branch offices during the first half of 1999, the
first in Framingham and the second in Sudbury. The Framingham office is
located at 35 Edgell Road, and the Sudbury office is located at 450
Boston Post Road. These new branches represent excellent opportunities
for the bank to enter two new markets, and they will provide new sources
of deposits, loans and earnings.
In addition to these two new branch offices, the Bank is utilizing the
latest in technology to introduce an electronic "virtual branch" on the
Internet. The virtual branch will allow customers to perform many of
the functions they have previously performed in traditional branch
offices such as opening accounts, applying for loans and accessing their
account information, as well as providing additional features such as
online electronic bill payment, the ability to calculate projected loan
payments or periodic deposits needed to reach savings goals, and online
check ordering. Extensive information about the Bank's entire product
line, including current deposit and loan interest rates, will also be
instantly available, and a direct communication link with the Bank via
e-mail will be provided. Based on the high
-2-
level of success our current HomeBanc and ExecuBanc PC-based banking
systems have achieved, we believe our new virtual branch will prove
to be an additional service delivery system that will provide solid
value and convenience to our customers.
In 1999 we will continue to distinguish ourselves from our competition.
The implementation of a business development sales team will assist us
in introducing new customers to the bank as well as providing even
better service to our many existing commercial customers. Our success
has been based on providing our customers with excellent personal
service and innovative products, and we will continue to do so in the
coming year.
We would like to take a moment to extend our thanks and appreciation
to Argeo R. Cellucci, Jr., who retired from the Company's Board of
Directors this past December. Mr. Cellucci was a director of the
Company and the Bank for thirty years, and over those many years he
has served on the Investment, Branch, Nominating and Proxy Committees.
His guidance and leadership contributed significantly to the success
of the Company, and we wish him well in his retirement.
Community Bancorp is a strong, well-capitalized, community-oriented
financial institution. We intend to continue to do what a community
bank does best - know its customers and provide the best banking
service possible. The Board of Directors, management and staff will
continue to work diligently to enhance shareholder value, and we look
forward to 1999 with enthusiasm.
Sincerely,
/s/ James A. Langway /s/ Dennis F. Murphy, Jr.
- -------------------- -------------------------
James A. Langway Dennis F. Murphy, Jr.
President and Chief Executive Officer Chairman of the Board
-3-
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
----------- -----------
ASSETS
Cash and due from banks $ 17,601,043 $ 16,704,667
Federal funds sold 17,000,000 14,600,000
Securities available for sale at market value (Note 2) 31,685,402 38,880,166
Securities held to maturity (market value $87,832,432
in 1998 and $56,404,323 in 1997) (Note 2) 87,058,589 56,304,224
Mortgage loans held for sale 1,330,278 2,173,322
Loans (Notes 3 and 9) 140,223,942 139,839,853
Less allowance for possible loan losses
(Notes 4 and 12) 2,981,012 3,215,559
----------- -----------
Total net loans 137,242,930 136,624,294
Premises and equipment, net (Note 5) 5,576,789 4,637,965
Other assets, net (Note 13) 3,391,800 3,625,889
----------- -----------
Total assets $300,886,831 $273,550,527
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 10):
Noninterest bearing $ 60,511,257 $ 55,678,794
Interest bearing 193,897,478 177,109,740
----------- -----------
Total deposits 254,408,735 232,788,534
----------- -----------
Securities sold under repurchase
agreements and federal funds purchased 19,747,496 16,637,064
Other liabilities (Note 7) 1,265,351 1,688,830
----------- -----------
Total liabilities 275,421,582 251,114,428
----------- -----------
Commitments (Notes 8 and 12)
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, 3,199,218 shares issued,
2,944,588 shares outstanding, (2,926,257 shares
outstanding at December 31, 1997) 7,998,045 7,998,045
Surplus 524,106 414,120
Undivided profits 19,274,861 16,418,790
Treasury stock, at cost, 254,630 shares,
(272,961 at December 31, 1997) (2,364,573) (2,529,552)
Accumulated other comprehensive income (Note 1) 32,810 134,696
----------- -----------
Total stockholders' equity 25,465,249 22,436,099
----------- -----------
Total liabilities and stockholders'
equity $300,886,831 $273,550,527
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-4-
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Interest income:
Interest and fees on loans $13,167,815 $13,138,908 $12,430,327
Interest and dividends on securities:
Taxable interest 5,790,375 5,181,809 4,565,311
Nontaxable interest 482,473 325,868 120,553
Dividends 64,106 59,350 54,248
Interest on federal funds sold 1,155,014 464,016 590,663
---------- ---------- ----------
Total interest income 20,659,783 19,169,951 17,761,102
---------- ---------- ----------
Interest expense:
Interest on deposits 6,649,308 6,139,134 5,840,445
Interest on federal funds purchased and
securities sold under repurchase
agreements 1,025,804 756,088 527,313
---------- ---------- ----------
Total interest expense 7,675,112 6,895,222 6,367,758
---------- ---------- ----------
Net interest income 12,984,671 12,274,729 11,393,344
---------- ---------- ----------
Provision for possible loan losses
(Note 4) 0 0 0
---------- ---------- ----------
Net interest income after provision
for possible loan losses 12,984,671 12,274,729 11,393,344
---------- ---------- ----------
Noninterest income:
Merchant credit card processing
assessments 1,194,584 1,028,404 855,488
Service charges 590,255 611,089 612,786
Other charges, commissions and fees 1,107,893 883,316 899,481
Gains on sales of loans, net 224,388 41,744 21,105
Gains (losses) on sales of securities, net 0 8,587 (9,460)
Other 83,367 81,488 75,399
---------- ---------- ----------
Total noninterest income 3,200,487 2,654,628 2,454,799
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Note 7) 5,176,505 4,777,520 4,541,551
Data processing 618,438 584,125 582,334
Occupancy 609,638 584,484 580,519
Furniture and equipment 458,120 409,897 362,453
Credit card processing 1,097,664 891,461 738,227
Printing, stationery and supplies 259,901 289,061 198,313
Marketing and advertising 311,551 383,339 223,899
Other 1,665,108 1,525,622 1,442,089
---------- ---------- ----------
Total noninterest expense 10,196,925 9,445,509 8,669,385
---------- ---------- ----------
Income before income tax expense 5,988,233 5,483,848 5,178,758
Income tax expense 2,182,472 2,053,989 2,026,660
---------- ---------- ----------
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
========== ========== ==========
Earnings per common share (Note 1) $ 1.30 $ 1.17 $ 1.01
Weighted average number of shares
outstanding 2,938,360 2,940,158 3,113,388
========== ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-5-
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
---------- ---------- ----------
Other comprehensive income:
Unrealized securities (losses) gains
arising during period (173,276) 255,855 43,642
Income tax benefit (expense) on
securities (losses) gains during period 71,390 (106,103) (18,216)
---------- ---------- ----------
Net unrealized securities (losses)
gains arising during period (101,886) 149,752 25,426
---------- ---------- ----------
Less: reclassification adjustment for
securities (gains) losses included
in income 0 (8,587) 9,460
Income tax expense (benefit) on
securities (gains) losses included
in income 0 3,561 (3,949)
---------- ---------- ----------
Net reclassification adjustment for
securities (gains) losses included
in net income 0 (5,026) 5,511
---------- ---------- ----------
Other comprehensive income (101,886) 144,726 19,915
---------- ---------- ----------
Comprehensive income $ 3,703,875 $ 3,574,585 $ 3,172,013
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-6-
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Accumulated
Other
Common Undivided Treasury Comprehensive
Stock Surplus Profits Stock Income
----- ------- ---------- -------- -------------
Balance, December 31, 1995 $ 7,998,045 $ 290,253 $11,463,544 $ (181,224) $ (29,945)
Net income 3,152,098
Cash dividends declared
($.253 per share) (788,684)
Purchase of 257,665 shares
of treasury stock (2,318,985)
Reissuance of 33,731 shares
of treasury stock 84,327 151,790
Change in accumulated other
comprehensive income (Note 1) 19,915
- -------------------------- --------- ------- --------- --------- ---------
Balance, December 31, 1996 7,998,045 374,580 13,826,958 (2,348,419) (10,030)
Net income 3,429,859
Cash dividends declared
($.285 per share) (838,027)
Purchase of 24,301 shares
of treasury stock (291,612)
Reissuance of 15,546 shares
of treasury stock 39,540 110,479
Change in accumulated other
comprehensive income (Note 1) 144,726
- -------------------------- --------- ------- ---------- ------- -------
Balance, December 31, 1997 7,998,045 414,120 16,418,790 (2,529,552) 134,696
Net income 3,805,761
Cash dividends declared
($.323 per share) (949,690)
Reissuance of 18,331 shares
of treasury stock 109,986 164,979
Change in accumulated other
comprehensive income (Note 1) (101,886)
- -------------------------- --------- ------- ---------- --------- -------
Balance, December 31, 1998 $7,998,045 $524,106 $19,274,861 $(2,364,573) $ 32,810
========= ======= ========== ========= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-7-
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in mortgage loans held
for sale 843,044 (951,157) (164,784)
Premium on sale of mortgages 193,368 162,766 325,139
Depreciation and amortization 834,209) 802,623 839,476
Deferred income taxes (6,691) 80,729 25,581
(Decrease) increase in other liabilities (192,937) 72,638 (230,258)
(Decrease) increase in taxes payable (183,595) (40,301) 85,239
(Decrease) in interest payable (56,143) (616) (5,592)
Decrease (increase) in other assets, net 23,449 (201,423) 74,150
(Increase) decrease in interest receivable (146,039) (229,236) 42,708
---------- ---------- ----------
Total adjustments 1,308,665 (303,977) 991,659
---------- ---------- ----------
Net cash provided by operating activities 5,114,426 3,125,882 4,143,757
---------- ---------- ----------
Cash flows used in investing activities:
Purchases of securities held to maturity (62,344,812) (16,731,111) (22,899,227)
Purchases of securities available for sale (5,482,625 (17,560,698) (14,347,861)
Maturities and principal repayments of
securities held to maturity 31,590,326 17,174,567 14,056,633
Maturities and principal repayments of
securities available for sale 12,499,965 5,342,727 6,257,701
Sales of securities held to maturity 0 2,000,000 0
Sales of securities available for sale 0 2,913,737 3,507,742
Net change in federal funds sold (2,400,000) (3,300,000) (5,400,000)
Net change in loans and other real estate owned (564,601) (9,910,398) (3,446,092)
Sales of other real estate owned 170,000 15,600 100,000
Acquisition of premises and equipment (1,773,032) (592,386) (488,905)
---------- ---------- ----------
Net cash used in investing activities (28,304,779) (20,647,962) (11,860,009)
---------- ---------- ----------
Cash flows from financing activities:
Net change in deposits 21,620,201 15,606,665 10,142,004
Net change in securities sold under
repurchase agreements 6,110,432 2,182,377 3,164,724
Net change in federal funds purchased (3,000,000) 3,000,000 (1,000,000)
Purchase of treasury stock 0 (291,612) (2,318,985)
Reissuance of treasury stock 274,965 150,019 236,117
Dividends paid (918,869) (812,269) (784,487)
---------- ---------- ----------
Net cash provided by financing activities 24,086,729 19,835,180 9,439,373
---------- ---------- ----------
Net increase in cash and due from banks 896,376 2,313,100 1,723,121
Cash and due from banks at beginning of year 16,704,667 14,391,567 12,668,446
---------- ---------- ----------
Cash and due from banks at end of year $17,601,043 $16,704,667 $14,391,567
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
-8-
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Community Bancorp, Inc. (the "Company"), a Massachusetts corporation
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended, and its wholly-owned subsidiary, Community National Bank,
(the "Bank"), a national banking association. The Bank has also formed
Community Securities Corporation and Community Benefits Consulting, Inc. as
wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
At present, the Company conducts no activities independent of the Bank. The
Bank has 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, 1998 and 1997 is
approximately $7,611,000 and $5,341,000, respectively, that is subject to
Federal Reserve withdrawal restrictions.
Allowance for possible loan losses
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for possible
loan losses. The allowance for possible loan losses is increased through a
provision for possible loan losses charged to expense and decreased by
charge-offs, net of recoveries. The provision is based on management's
estimation of the amount necessary to maintain the allowance at an adequate
level. Management's periodic evaluation of the adequacy of the allowance is
based on specific credit reviews, past loan loss experience, current
economic conditions and trends, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and the volume,
growth and composition of the loan port-
-9-
folio. 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). 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, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(SFAS No. 118), which amended SFAS No. 114 by allowing creditors to use their
existing methods of recognizing interest income on impaired loans.
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 1998, 1997 and 1996, as
there is no dilution effect. Earnings per share is based on the weighted
average number of shares outstanding during the year.
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, 1998 and
1997, loans held for sale totaled $1,330,278 and $2,173,322, respectively.
In accordance with Financial Accounting Standards Board Statement No. 122,
"Accounting for Mortgage Servicing Rights" (SFAS No. 122) and No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS No. 125), the Company capitalizes the
rights to service mortgage loans for others and assesses those rights for
impairment based on the fair value of those rights.
Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), effective January 1, 1998.
Components of comprehensive income are net income and all other non-owner
changes in equity. The Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in the financial statement
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in the Consolidated
Statements of Comprehensive Income. Prior year data has been restated to
conform to the requirements of SFAS No. 130.
Operating Segments
The Company adopted Financial Accounting Standards Board Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
No. 131), during 1998. SFAS No. 131 established standards for reporting
information about operating segments in annual financial statements and
requires selected information about operating seg-
-10-
ments in interim financial reports issued to the stockholders. It also
established standards for related disclosures about products and services,
and geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company has one reportable segment: community banking. At present, the
Company conducts no activities independent of the Bank. The Bank is engaged
in substantially all of the business operations customarily conducted by an
independent commercial bank in Massachusetts. Banking services offered
include acceptance of checking, savings and time deposits, and the making of
consumer, commercial, real estate and other loans. The Bank also offers
official checks, traveler's checks, safe deposit boxes, electronic banking
and bill payment services and other customary banking services to its
customers.
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.
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, 1998 and
1997 were as follows:
1998
-----------------------------------------------------------
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
to Maturity Cost Gains Losses Value
--------------- --------- ---------- ---------- -----
U.S. Government obligations $ 1,000,458 $ 483 $ 0 $ 1,000,941
U.S. Government agencies
and corporations 28,446,008 165,426 0 28,611,434
Obligations of states and
political subdivisions 11,571,113 407,267 0 11,978,380
Mortgage-backed securities 46,041,010 222,979 22,312 46,241,677
------------ ---------- ---------- -----------
$ 87,058,589 $ 796,155 $ 22,312 $ 87,832,432
============ ========== ========== ===========
Gross Gross
Securities Held Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
U.S. Government obligations $ 13,011,174 $ 154,136 $ 0 $ 13,165,310
U.S. Government agencies
and corporations 2,990,631 38,919 0 3,029,550
Mortgage-backed securities 14,573,840 70,439 207,693 14,436,586
Other securities 1,053,956 0 0 1,053,956
------------ ---------- ---------- -----------
$ 31,629,601 $ 263,494 $ 207,693 $ 31,685,402
============ ========== ========== ===========
-11-
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 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
============ ========== ========== ===========
The book and estimated market value of securities at December 31, 1998 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 $ 1,415,360 $ 1,415,940 $ 9,007,990 $ 9,067,800
One to five years 25,176,040 25,325,408 6,993,815 7,127,060
Five to ten years 5,246,875 5,295,896 0 0
Ten to fifteen years 9,179,236 9,553,511 0 0
Mortgage-backed securities 46,041,078 46,241,677 14,573,840 14,436,586
Other securities 0 0 1,053,956 1,053,956
----------- ---------- ---------- ----------
$87,058,589 $87,832,432 $31,629,601 $31,685,402
========== =========== ========== ==========
Securities with a book value of $42,410,000 and $33,718,000 at December 31,
1998 and 1997, respectively, were pledged to secure public funds on deposit
and for other purposes.
There were no sales of securities in 1998. Proceeds from sales of securities
in 1997 were $4,914,737. Gross realized gains and losses on sales of securities
in 1997 were $25,839 and $17,252, respectively. Realized gains or losses on
sales of securities were determined by specific identification.
-12-
3. Loans
The composition of the loan portfolio at December 31, 1998 and 1997 was as
follows:
1998 1997
---- ----
Commercial and industrial $ 21,127,456 $ 18,065,586
Real estate - residential 55,054,776 54,211,465
Real estate - commercial 47,398,631 48,328,565
Real estate - residential
construction 2,794,688 4,868,265
Loans to individuals 13,196,604 13,571,431
Other 651,787 794,541
----------- -----------
Total loans $140,223,942 $139,839,853
============ ===========
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.
Total impaired loans at December 31, 1998 and 1997 that required a related
allowance were $120,728 and $0, respectively, and the allowance allocated to
such loans was $41,250 and $0, respectively. In addition, at December 31, 1998
and 1997, the Company had impaired loans of $792,423 and $632,569, 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 $813,447 and $649,075 during 1998 and 1997,
respectively. The Company recorded interest income on impaired loans of
$82,456 during 1998 and $19,475 during 1997.
At December 31, 1998 and 1997, accruing loans 90 days or more past due totaled
$1,404 and $239,050, respectively, and nonaccruing loans totaled $913,151
and $632,569, respectively. There were no troubled debt restructurings at
December 31, 1998 or 1997. The reduction of interest income associated with
nonaccrual and restructured loans for the years ended December 31, 1998, 1997
and 1996 was as follows:
1998 1997 1996
---- ---- ----
Interest income per original terms $ 146,326 $ 143,869 $ 220,029
Income recognized 89,456 19,475 42,411
-------- -------- --------
Foregone interest income $ 63,870 $ 124,394 $ 177,618
======== ======== ========
-13-
4. Allowance for Possible Loan Losses
Activity in the allowance for possible loan losses for the years ended
December 31, 1998, 1997 and 1996 was as follows:
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
Provision for possible losses 0
Charge-offs (303,525)
Recoveries 68,978
---------
Balance, December 31, 1998 $2,981,012
=========
5. Premises and Equipment
The composition of premises and equipment at December 31, 1998 and 1997 was as
follows:
1998 1997
---- ----
Premises $ 5,985,628 $ 5,057,478
Equipment 2,961,737 2,935,940
---------- -----------
8,947,365 7,993,418
Less accumulated depreciation and
amortization 3,370,576 3,355,453
---------- -----------
$ 5,576,789 $ 4,637,965
========== ===========
Total depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $834,209, $802,623 and $746,120, respectively, and is
included in data processing, occupancy and furniture and equipment expense. In
December of 1998 the Bank purchased a branch office in Framingham, Massachusetts
which is expected to open in the spring of 1999.
6. Income Taxes
The components of income tax expense for the years ended December 31, 1998,
1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Current:
Federal $ 1,713,257 $ 1,531,216 $ 1,508,248
State 475,906 442,044 492,831
---------- ---------- ----------
Total current 2,189,163 1,973,260 2,001,079
---------- ---------- ----------
Deferred:
Federal (10,307) 54,614 6,430
State 3,616 26,115 19,151
---------- ---------- ----------
Total deferred (6,691) 80,729 25,581
---------- ---------- ----------
Total $ 2,182,472 $ 2,053,989 $ 2,026,660
========== ========== ==========
-14-
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:
1998 1997 1996
---- ---- ----
Income tax expense
at statutory rates $ 2,035,999 $ 1,864,508 $ 1,760,833
State income taxes, net of
federal income tax benefit 316,485 308,984 337,908
Tax-exempt interest (175,993) (132,117) (69,794)
Other, net 5,981 12,614 (2,287)
---------- ---------- ----------
$ 2,182,472 $ 2,053,989 $ 2,026,660
========== ========== ==========
The Company has recorded a net deferred tax asset of $652,980. 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, 1998 and 1997, the Company's net deferred tax asset, as
presented in the accompanying consolidated balance sheets, consisted of the
following components:
1998 1997
---- ----
Gross deferred tax asset:
Provision for possible loan losses $ 899,555 $ 899,555
Employee benefits and other
compensation arrangements 328,752 381,227
OREO write-downs 0 20,600
Other 20,003 14,491
--------- ---------
1,248,310 1,315,873
Gross deferred tax liability:
Accelerated tax depreciation (228,531) (377,005)
Other (366,799) (366,948)
--------- ---------
(595,330) (743,953)
--------- ---------
Net deferred tax asset $ 652,980 $ 571,920
========= =========
7. 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.
-15-
In accordance with Financial Accounting Standards Board Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132), which the Company adopted during 1998, the following table
sets forth the Plan's funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 1998 and 1997:
1998 1997
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $(3,161,057) $(2,732,471)
Service cost (247,666) (213,920)
Interest cost (226,980) (202,397)
Actuarial gain (265,151) (78,096)
Benefits paid 149,112 65,827
--------- ---------
Benefit obligation at end of year (3,751,742) (3,161,057)
--------- ---------
Change in plan assets:
Fair value of assets at beginning of year 2,831,044 2,277,087
Actual return on plan assets (166,661) 419,388
Employer contributions 483,121 200,396
Benefits paid (149,112) (65,827)
--------- ---------
Fair value of plan assets at end of year $ 2,998,392 $ 2,831,044
========= =========
The following weighted-average assumptions were used in accounting for the
Company's pension plan for the years ended December 31, 1998 and 1997:
1998 1997
---- ----
Discount rate 6.50% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 5.00%
Net periodic benefit cost for the years ended December 31, 1998 and 1997
included the following components:
1998 1997
---- ----
Service cost $ 247,666 $ 213,920
Interest cost 226,980 202,397
Expected return on plan assets (228,798) (188,254)
Amortization of prior service cost 1,380 1,380
Amortization of transition obligation (8,954) (8,954)
Amortization of unrecognized gain 0 6,481
--------- ---------
Net periodic benefit cost $ 238,274 $ 226,970
========= =========
-16-
The Company has an Employee Stock Ownership Plan (ESOP) that enables eligible
employees to own common stock. Annual cash contributions of $70,000 were
made to the ESOP in 1998, 1997 and 1996.
The Company implemented a 401(k) plan in 1989, covering all eligible employees.
The Company matches a percentage of each participant's annual contribution to
the plan as determined by the Board of Directors each year. Compensation
expense recorded in 1998, 1997 and 1996 related to this plan was approximately
$81,400, $78,900 and $61,400, respectively.
8. Commitments
The Company leases branch offices and equipment under noncancelable agreements
expiring at various dates through 2008 that require various minimum annual
rentals. The total future minimum rental commitments at December 31, 1998
aggregate $1,146,502. Rental commitments for each of the next five fiscal
years and thereafter are as follows:
1999 $210,404
2000 199,004
2001 164,982
2002 144,162
2003 66,150
Thereafter 361,800
Rental expense totaled approximately $185,000, $170,000 and $149,000, for
1998, 1997 and 1996, respectively. The Bank has contracted to lease a
branch office in Sudbury, Massachusetts beginning in the second quarter
of 1999. The rental commitment for that branch is included in the figures
above.
9. 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
---------- --------- ---------- -----------
1997 $ 5,618,569 $ 787,285 $ 625,805 $ 5,780,049
1998 $ 5,780,049 $1,373,994 $ 1,613,213 $ 5,540,830
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.
10. Deposits
Deposits consisted of the following at December 31, 1998 and 1997:
1998 1997
---- ----
Demand deposits $ 60,511,257 $ 55,678,794
Money-market deposits 25,419,293 25,721,390
NOW and FlexValue deposits 36,319,201 30,079,576
Cash management investment deposits 22,238,050 15,580,137
Savings deposit 36,059,685 34,813,944
Time certificates of deposit in
denominations of $100,000 or more 19,130,242 21,183,954
Other time deposits 54,731,007 49,730,739
----------- -----------
$254,408,735 $232,788,534
=========== ============
-17-
11. Condensed Financial Information of Community Bancorp, Inc.
The following tables disclose certain parent-company-only financial
information at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998:
Balance Sheets
1998 1997
---- ----
Assets:
Cash and cash equivalents $ 366,631 $ 92,421
Investment in subsidiary, at equity 25,066,007 22,309,350
Other assets 250,290 219,469
---------- ----------
Total assets $ 25,682,928 $ 22,621,240
=========== ==========
Liabilities and stockholders' equity:
Other liabilities $ 217,679 $ 185,141
---------- ----------
Total liabilities 217,679 185,141
---------- ----------
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, 3,199,218 shares issued,
2,944,588 shares outstanding, (2,926,257 shares
outstanding at December 31, 1997) 7,998,045 7,998,045
Surplus 524,106 414,120
Undivided profits 19,274,861 16,418,790
Treasury stock at cost, 254,630 shares
(272,961 shares at December 31, 1997) (2,364,573) (2,529,552)
Accumulated other comprehensive income 32,810 134,696
---------- ----------
Total stockholders' equity 25,465,249 22,436,099
---------- ----------
Total liabilities and stockholders' equity $25,682,928 $22,621,240
=========== ==========
Statements of Income
Years ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Income:
Dividends from subsidiary bank $ 949,690 $ 979,641 $ 2,407,668
Other income 341,027 326,669 322,048
----------- ----------- ----------
Total income 1,290,717 1,306,310 2,729,716
----------- ----------- ----------
Expenses:
Other 343,499 344,822 324,478
----------- ----------- ----------
Total expenses 343,499 344,822 324,478
----------- ----------- ----------
Income before undistributed net income of
subsidiary bank 947,218 961,488 2,405,238
Equity in undistributed net income of
subsidiary bank 2,858,543 2,468,371 746,860
----------- ----------- ----------
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
=========== =========== ===========
-18-
Statements of Cash Flows
Years ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 3,805,761 $ 3,429,859 $ 3,152,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiary bank (2,858,543) (2,468,371) (746,860)
Increase in other assets (30,821) (2,935) (26,997)
Increase (decrease) in other liabilities 32,538 (8,698) 21,441
---------- ---------- ----------
Total adjustments (2,856,826) (2,480,004) (752,416)
---------- ---------- ----------
Net cash provided by operating activities 948,935 949,855 2,399,682
---------- ---------- ----------
Cash flows from financing activities:
Purchase of treasury stock 0 (291,612) (2,318,985)
Reissuance of treasury stock 274,965 150,019 236,117
Dividends declared (949,690) (838,027) (788,684)
---------- ---------- ----------
Net cash used in financing activities (674,725) (979,620) (2,871,552)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 274,210 (29,765) (471,870)
Cash and cash equivalents at beginning of year 92,421 122,186 594,056
---------- ---------- ----------
Cash and cash equivalents at end of year $ 366,631 $ 92,421 $ 122,186
========== ========== ===========
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 1999,
Community National Bank can, under this formula, declare dividends to
Community Bancorp, Inc. of approximately $5,469,000, plus an additional
amount equal to the Bank's net profit for 1999, up to the date of any such
dividend declaration, without the approval of the Comptroller of the Currency.
12. Financial Instruments With Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business. These financial instruments primarily consist
of commitments to extend credit and standby letters of credit. Loan
commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. They are
primarily issued to guarantee other customer obligations. Both arrangements
have credit risk essentially the same as that involved in extending loans to
customers and are subject to the Company's normal credit policies. Collateral
typically is obtained based on management's credit assessment of the
customer. Loan commitments and standby letters of credit usually have fixed
expiration dates or other termination clauses. Some commitments and letters of
credit expire without being drawn upon. Accordingly, the total commitment
amounts do not necessarily represent future cash requirements of the Company.
-19-
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, 1998 and 1997 was as follows:
1998 1997
---- ----
Commitments to extend credit:
Fixed-rate (6.99% to 10.00%) $ 1,241,424 $ 1,394,116
Adjustable rate 36,125,831 38,754,983
Standby letters of credit $ 615,530 $ 629,086
=========== ===========
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, 1998 and 1997, the
outstanding balance of such mortgages totaled approximately $254,000 and
$272,000, respectively.
Fees associated with the Company's off-balance-sheet financial instruments are
minimal; therefore, the fair value of off-balance-sheet financial instruments
is not material.
13. 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 $157,569 and $350,937 at
December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the
Company was servicing mortgage loans for others of approximately $108,181,000
and $118,137,000, respectively.
14. 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, 1998, that the Company and the Bank met all capital adequacy requirements
to which they are subject.
As of December 31, 1998 and 1997, 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.
-20-
The Company's and the Bank's actual capital amounts and ratios at December 31,
1998 and 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
------ ----- ------ ----- ------ -----
As of December 31, 1998:
Company (consolidated):
Total capital
(to risk-weighted >
assets) $27,434 17.08% $12,850 - 8.00% N/A N/A
Tier 1 capital
(to risk-weighted >
assets) 25,414 15.82% 6,425 - 4.00% N/A N/A
Tier 1 capital >
(to average assets) 25,414 8.78% 11,584 - 4.00% N/A N/A
Bank:
Total capital
(to risk-weighted > >
assets) 27,035 16.83% 12,850 - 8.00% $16,063 - 10.00%
Tier 1 capital
(to risk-weighted > >
assets) 25,015 15.57% 6,425 - 4.00% 9,638 - 6.00%
Tier 1 capital > >
(to average assets) 25,015 8.64% 11,584 - 4.00% 14,480 - 5.00%
As of December 31, 1997:
Company (consolidated):
Total capital
(to risk-weighted >
assets) $24,234 15.75% $12,312 - 8.00% N/A N/A
Tier 1 capital
(to risk-weighted >
assets) 22,295 14.49% 6,156 - 4.00% N/A N/A
Tier 1 capital >
(to average assets) 22,295 8.67% 10,283 - 4.00% N/A N/A
Bank:
Total capital
(to risk-weighted > >
assets) 24,108 15.66% 12,312 - 8.00% $15,390 - 10.00%
Tier 1 capital
(to risk-weighted > >
assets) 22,168 14.40% 6,156 - 4.00% 9,234 - 6.00%
Tier 1 capital > >
(to average assets) 22,168 8.62% 10,283 - 4.00% 12,853 - 5.00%
-21-
15. Disclosures about Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments" (SFAS No. 107). This statement requires disclosure of
fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and due from banks and federal funds sold: The carrying amounts reported
in the balance sheet for cash and due from banks and federal funds sold
approximate those assets' fair values.
Securities (including mortgage-backed securities, securities held to maturity
and securities available for sale): Fair values for securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for certain one-to-four family residential mortgages are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for credit card loans and other consumer loans are based on carrying
values, as the loans reprice frequently at current market rates. The fair
values for other loans (e.g., commercial real estate and rental property
mortgage loans, and commercial and industrial loans) are estimated using
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
Off-balance-sheet instruments: The fair value of lending commitments discussed
in Note 12 is not considered material nor has it been reflected in the
estimation of the fair value of the related loans.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Commitments to extend credit/sell loans: The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of customers. For fixed-rate loan commitments and obligations
to deliver fixed-rate loans, fair value also considers the difference between
committed rates and current levels of interest rates.
Values not determined: SFAS No. 107 excludes certain financial instruments
from its disclosure requirements, including real estate included in banking
premises and equipment, the intangible value of the Bank's portfolio of loans
serviced (both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e. core
deposits) among others. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
-22-
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1998 and 1997 are as follows:
1998
-----------------------------
Carrying Estimated
Amount Fair Value
------------ -----------
Financial instrument assets:
Cash and cash equivalents $ 34,601,043 $ 34,601,043
Securities 118,743,991 119,517,834
Loans, including held for sale, net 138,573,208 141,091,987
Financial instrument liabilities:
Deposits 254,408,735 254,796,482
Short-term borrowings 19,747,496 19,747,496
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
-23-
[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,
1998 and 1997, and the related consolidated statements of income,
comprehensive income, shareholders' investment and cash flows for the three
years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 25, 1999
-24-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary
The Company recorded net income of $3,805,761 for the year ended December 31,
1998, representing an increase of $375,902 or 11.1% over $3,429,859 recorded
in 1997. Earnings per share of $1.30 for the current period compared to
$1.17 for the year ended December 31, 1997. The improvement in net income
resulted primarily from increases in net interest income and noninterest
income, partially offset by an increase in noninterest expense.
Deposits of $254,408,735 at December 31, 1998 increased by $21,620,201 or
9.3% from $232,788,534 at December 31, 1997. The increase occurred primarily
in interest bearing categories and secondarily in noninterest bearing
categories.
Loans of $140,223,942 at December 31, 1998 increased by $384,089 or .3%
from $139,839,853 at December 31, 1997. Noncurrent loans (nonaccrual loans
and loans 90 days or more past due but still accruing) totaled $914,555 and
$871,619 at December 31, 1998 and 1997, respectively. There were no
accruing troubled debt restructurings at December 31, 1998 or 1997. Other
real estate owned of $0 at December 31, 1998 compared to $170,000 at
December 31, 1997.
Assets of $300,886,861 at December 31, 1998 represented a $27,336,304 or 10.0%
increase over $273,550,527 at December 31, 1997.
1998 Compared to 1997
Interest income for the year ended December 31, 1998 was $20,659,783,
representing an increase of $1,489,832 or 7.8% over $19,169,951 for the year
ended December 31, 1997, primarily due to a $30,001,910 or 12.6% increase in
average earning assets during 1998. The weighted average taxable equivalent
yield on net earning assets was 7.81% and 8.14% in 1998 and 1997,
respectively. Interest expense of $7,675,112 in 1998 represented an increase
of $779,890 or 11.3% from $6,895,222 in 1997, primarily due to a $24,209,917 or
13.1% increase in average interest bearing liabilities during 1998. The weighted
average cost of interest bearing liabilities was 3.67% in 1998 and 3.73% in
1997. Net interest income for 1998 was $12,984,671, representing an increase
of $709,942 or 5.8% compared to $12,274,729 recorded in 1997.
Noninterest income for the year ended December 31, 1998 was $3,200,487,
representing an increase of $545,859 or 20.6% from $2,654,628 in 1997. This
increase resulted primarily from increases in merchant credit card
processing, gains on sales of loans and other charges, commissions and fees,
partially offset by reductions in service charges and gains on sales of
securities.
Noninterest expense for the year ended December 31, 1998 of $10,196,925
represented an increase of $751,416 or 8.0% from $9,445,509 recorded during
1997. This increase was the result of increases in all primary noninterest
expense categories.
There was no provision for possible loan losses in 1998 or 1997, reflecting
management's continuing evaluation of the adequacy of the allowance for
possible loan losses and its belief that the allowance is adequate.
Management will continue its ongoing assessment of the adequacy of the
allowance for possible loan losses during 1999 and may adjust the provision
for possible loan losses if necessary.
Income tax expense of $2,182,472 for the year ended December 31, 1998
compared to $2,053,989 for 1997, the result of an increase in taxable income
during the current period.
Net income of $3,805,761 for the year ended December 31, 1998 represented an
increase of $375,902 or 11.0% over $3,429,859 recorded in 1997. The
foregoing discussion summarized the primary components of this increase in
earnings.
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
-25-
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.
There was no provision for possible loan losses in 1997 or 1996, reflecting
management's continuing evaluation of the adequacy of the allowance for
possible loan losses and its belief that the allowance is adequate.
Income tax expense of $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.
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, 1998 the allowance was $2,981,012, representing 2.1% of total loans,
compared to $3,215,559, representing 2.3% of total loans at December 31, 1997.
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 various municipalities. These assets are used in part to
secure public deposits and as collateral for repurchase agreements.
Securities averaged $107.9 million for 1998, an increase of $15.3 million or
16.5% over $92.6 million for 1997. There were no sales of securities in 1998.
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, 1998 and 1997, deposits
were $254.4 million and $232.8 million, respectively. Management anticipates
that deposits will increase moderately during 1999.
Of the Company's $118.7 million in securities at December 31, 1998, $10.5
million or 8.8% mature within one year. As a
-26-
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.
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, 1998 and 1997, the Company's Tier 1 leverage
capital ratio was 8.45% and 8.15%, 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, 1998, the Company's
Tier 1 and total risk-based capital ratios were 15.82% and 17.08%, respectively.
At December 31, 1997 the Company's Tier 1 and total risk-based capital ratios
were 14.49% and 15.75%, respectively. The Bank is categorized as "well
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991 (F.D.I.C.I.A.).
Year 2000
The following Year 2000 statements constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act
of 1998.
The Company, like most users of computers, computer software, and equipment
utilizing embedded microcontrollers, may be affected by the Year 2000 date
change. The Company recognized the importance of this issue in 1996 and
formally established an internal Year 2000 Committee in 1997, chaired by
a member of the Company's senior management team, to assess all systems to
ensure that they will function properly. This process involves five
separate phases: awareness, assessment, renovation, validation and
implementation.
The Company's Year 2000 Committee established a schedule specifying the
completion dates for each of the process's five phases. During 1997,
the Committee completed the systems assessment phase, identifying each
internal system that could potentially be affected by the Year 2000 issue.
Those systems were then designated as either mission-critical or non-
mission-critical. Mission-critical systems are defined by the Company as
being vital to the successful continuance of core business activities.
The Company has determined that its only mission-critical system is its
mainframe data processing system. The mainframe system has been certified
by its respective hardware and software vendors as being Year 2000 compliant.
In addition, the Company contracted with a qualified consulting firm to
independently test the mainframe system for Year 2000 compatibility. That
testing has verified that the mainframe system is Year 2000 compliant.
For all non-mission-critical systems that could be affected by the Year 2000
issue, action plans have been designed which set forth the process for
determining whether or not those systems are compliant. Those
determinations involve obtaining compliance certifications from vendors wherever
possible and by validation testing conducted by the Company. A similar
procedure is being followed for external systems and services the bank
obtains from third parties. Testing of those third party systems for Year
2000 compliance began during fourth quarter of 1998 and is expected to be
completed by March 31, 1999.
When the results of the Company's validation testing reveals that a
particular system or service is not Year 2000 compliant, a specific
deadline is established by which time that system or service must be
brought into compliance. Contingency plans have been formulated to either
upgrade such systems in order to meet Year 2000 compliance requirements,
replace them with systems that are certified as compliant, or establish
alternative processing arrangements. Those contingency plans document the
action the Company will take for each such non-compliant system. At
December 31, 1998, the Company was in the "validation" and "implementation"
phases of this process.
In certain cases, however, such as the potential loss of electrical power
or telecommunications services due to Year 2000 problems, testing by the
Company is either not practical or not possible. In those cases, detailed
contingency plans have been designed that specify how the Company will deal
with each such potential situation.
The Year 2000 issue presents several potential risks to the Company. The
banking transactions of the Company's customers are processed by its
internal mainframe data processing system. The failure of that system to
function as a result of the millennium date change could result in the
Company's inability to process customer transactions in the usual manner.
In that event, the Company could potentially lose customers to other financial
institutions, resulting in a loss of revenue. A number of the Company's
borrowers utilize computers and computer software to varying degrees in
conjunction with the operation of their
-27-
businesses. The customers and suppliers of those businesses may utilize
computers as well. Should the Company's borrowers, or the businesses on
which they depend, experience Year 2000 related computer problems, such
borrowers' cash flow could be disrupted, adversely affecting their ability
to repay their loans with the Company. As of December 31, 1998, the Company
had assessed its Year 2000 exposure to credit customers through the use of
questionnaires and personal interviews. Management's determination of the
potential impact the Year 2000 issue could have on those customers' ability
to continue servicing their debt in a satisfactory manner is factored into
the Company's credit risk rating system.
Similar problems could affect certain of the Company's business depositors,
potentially causing interruptions in their cash flow that could result in
their inability to maintain historical deposit balance levels in their
accounts. Such an event could result in the reduction of deposit balances
available to the Company for loans, investments, etc. Concern on the
part of some depositors that Year 2000 related problems could impair access
to their deposit balances following the millennium date change could result
in the Company experiencing a deposit outflow prior to December 31, 1999.
The potential increase in cash requirements has been estimated and
factored into the Company's analysis of projected future liquidity needs.
Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Year 2000
related problems. Also, should Year 2000 related problems occur which
cause any of the Company's systems, or the systems of certain third
parties upon which the Company depends, to become inoperative, increased
personnel costs could be incurred if additional staff is required to perform
functions that the inoperative systems would have otherwise performed. The
Company has designed contingency plans to address such potential occurrences.
As a nationally chartered financial institution, the Company and its subsidiary,
Community National Bank, are regulated by agencies of the federal government.
Federal bank regulators have established specific guidelines and timetables for
all nationally chartered financial institutions to follow in addressing the
Year 2000 issue. The Company's Year 2000 contingency plans follow those
requirements. As of December 31, 1998, the Company is in compliance with all
Year 2000 guidelines and timetables mandated by the banking regulators, and it
is on schedule with its own internal preparedness efforts.
The Company believes it is not possible to estimate the potential lost revenue
due to the Year 2000 issue, as the extent and longevity of such potential
problems cannot be predicted. However, the Company believes it will be able
to modify or replace any affected systems in time to minimize any detrimental
effects on its operations. A number of Year 2000 compliant systems have already
been installed or are in the process of being installed. The Company's
estimated total cost to replace computer equipment, software programs, or
other equipment containing embedded microprocessors that were not Year 2000
compliant is approximately $200,000. As of December 31, 1998, approximately
$57,500 of that amount has been incurred. System maintenance or modification
costs are being expensed as incurred, while the cost of new hardware, software,
or other equipment will be capitalized and amortized over their useful lives.
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 negative one-year cumulative gap
position at December 31, 1998, which represents the excess of repricing
liabilities versus repricing assets, was 1.7% expressed as a percentage of
total assets.
-28-
[The following text appears on the inside back cover]
DIRECTORS & OFFICERS
- --------------------
COMMUNITY BANCORP, INC. AND COMMUNITY NATIONAL BANK
- ----------------------------------------------------
Chairman of the Board
- ---------------------
Dennis F. Murphy, Jr.
President and Treasurer of D. Francis Murphy Insurance Agency, Inc.
Directors:
- ---------
Alfred A. Cardoza
Retired
Antonio Frias
President and Treasurer of S & F Concrete Contractors, Inc.
I. George Gould
Chairman of the Board of Gould's, Inc.
Horst Huehmer
Retired
Donald R. Hughes, Jr.
Treasurer and Clerk of Community Bancorp, Inc.,
Executive Vice President of Community National Bank
James A. Langway
President and Chief Executive Officer
of Community Bancorp, Inc. and Community National Bank
David L. Parker
Chairman of the Board of Larkin Lumber Company
Mark Poplin
President and Treasurer of Poplin Supply Company
David W. Webster
President of Knight Fuel Company, Inc.
Officers:
- --------
James A. Langway
President and Chief Executive Officer
Donald R. Hughes, Jr.
Treasurer and Clerk
COMMUNITY NATIONAL BANK
- -----------------------
Officers
- --------
James A. Langway
President and Chief Executive Officer
Donald R. Hughes, Jr.
Executive Vice President
Robert P. Converse
Auditor
Joy A. Pare'
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
Elizabeth M. Tewksbary
Assistant Vice President
M. Jean Mickle
Branch Officer
Lois A. Seymour
Branc Officer
Nancy C. Tobin
Branch Officer
Peter Shinas
Business Development Officer
Raymond A. Murphy III
Facilities Officer
Cynthia M. Farrah
Marketing Officer
Lynda L. D'Orlando
Mortgage Officer
Sandra M. Borella
Mortgage Underwriting Officer
Clark Hooper
Security 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
Vice President
Linda Glaser
Assistant Vice President
Jennifer D. Vasquezi
Commercial Loan Officer
Operations/Data Processing and Electronic Banking
- -------------------------------------------------
Janet A. Lyman
Senior Vice President
James P. Vasquezi
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.
[The following text appears on the back cover.]
Community Bancorp, Inc.
Parent company of Community National Bank
17 Pope Street
Hudson, Massachusetts 01749
tel 978-568-8321
fax 978-568-7129
[Community National Bank's logo appears in this space]
17 Pope Street
Hudson, Massachusetts 01749
tel 978-568-8321
fax 978-562-7129
cnb-mail@combanc.com
www.combanc.com
877-CNB-DIRECT
Acton
270 Great Road
tel 978-263-8376
fax 978-266-2610
Boxborough
629 Massachusetts Avenue
tel 978-264-9092
fax 978-266-2600
Concord
1134 Main Street
tel 978-369-5421
fax 978-371-6600
Hudson South
177 Broad Street
tel 978-568-8813
fax 978-568-2610
Loan Center
12 Pope Street, Hudson
tel 978-568-8321
fax 978-562-9984
Marlborough Center
96 Bolton Street
tel 978-485-5003
fax 978-229-4602
Marlborough East
500 Boston Post Road
tel 508-485-3599
fax 508-229-4601
Stow
159 Great Road
tel 978-461-1600
fax 978-461-1610
OPENING 1999:
Framingham
39 Edgell Road
tel 508-875-1333
fax 508-370-3885
Sudbury
450 Boston Post Road
flex24 LOCATIONS:
New England Sports Center
Donald Lynch Blvd., Marlborough
Shaw's Supermarket
Route 85, Hudson
Solomon Pond Mall
Donald Lynch Blvd., Marlborough
Member FDIC
Equal Opportunity Lender