-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NwZwY5IG3nyI6wpjA7KtxZOTKTDGCdwYYl9EAJctknImiBwcLLtGaDmcoIVTChp9 D4WoNhTwl19iO47evrz5Qg== 0000718413-99-000003.txt : 19990331 0000718413-99-000003.hdr.sgml : 19990331 ACCESSION NUMBER: 0000718413-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANCORP /VT CENTRAL INDEX KEY: 0000718413 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030284070 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16435 FILM NUMBER: 99578367 BUSINESS ADDRESS: STREET 1: DERBY ROAD CITY: DERBY STATE: VT ZIP: 05829 BUSINESS PHONE: 8023347915 MAIL ADDRESS: STREET 1: DERBY ROAD CITY: DERBY STATE: VT ZIP: 05829 10-K 1 CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No. 000-16435 COMMUNITY BANCORP. (Exact name of registrant as specified in its charter) Vermont 03-0284070 (State of Incorporation) (IRS Employer Identification No.) Derby Road, Derby, Vermont 05829 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (802) 334-7915 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock - $2.50 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) As of March 11, 1999, the date of the latest known sale of the registrant's stock, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the per share sale price of the stock on that date, was $36,244,513. There were 3,289,067 shares outstanding of the issuer's class of common stock as of the close of business on March 11, 1999. DOCUMENTS INCORPORATED BY REFERENCE Report of Independent Public Accountants Financial Statements: Consolidated Statements of Condition as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Condensed Financial Information (Parent Company Only) Portions of the Annual Report to Shareholders for fiscal year 1998 incorporated by reference to Part II. Portions of the Proxy Statement for the Annual Meeting to be held May 4, 1999 are incorporated by reference to Part III. Total Number of Pages - 31 Exhibit Index Begins on Page 25 FORM 10-K ANNUAL REPORT Table of Contents PART I Page Item I The Business 4 Organization and Operation 4 Distribution of Assets, Liabilities & Stockholders' Investment 7 Interest Income, Interest Expense and Interest Differential 8 Rate Volume Analysis 9 Investment Portfolio 10 Loan Portfolio 11 Summary of Loan Loss Experience 12 Non-Accrual, Past Due, and Restructured Loans 13 Deposits, Return on Equity and Assets 14 Item 2 Properties 15 Item 3 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8 Financial Statements and Supplementary Data 24 Item 9 Disagreements on Accounting and Financial Disclosures 24 PART III Item 10 Directors and Executive Officers of the Registrant 24 Item 11 Executive Compensation 24 Item 12 Security Ownership of Certain Beneficial Owners and Management 24 Item 13 Certain Relationships and Related Transactions 24 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 Signatures 31 PART I Item 1. The Business Organization and Operation Community Bancorp. (The Corporation) was organized under the laws of the State of Vermont in 1982 and became a registered bank holding company under the Bank Holding Company Act of 1956, as amended, in October 1983 when it acquired all of the voting shares of Community National Bank (the Bank). The Bank is one of two subsidiaries of the Corporation and principally all of the Corporation's business operations are presently conducted through it. Liberty Savings Bank (Liberty), a New Hampshire guaranty savings bank, is the other subsidiary of Community Bancorp., and is presently inactive. On December 31, 1997, Community Bancorp. acquired all of the outstanding stock of Liberty Savings Bank, as well as the assets consisting of a U.S. Treasury Strip and a small amount of cash. Currently, since no building was purchased at the time of acquisition, the main office of Community National Bank serves as the mailing address for this bank. Community National Bank was organized in 1851 as the Peoples Bank, and was subsequently reorganized as the National Bank of Derby Line in 1865. In 1975, after 110 continuous years of operation as the National Bank of Derby Line, the Bank acquired the Island Pond National Bank and changed its name to "Community National Bank." Community National Bank provides a complete range of retail banking services to the residents and businesses in northeastern Vermont. These services include checking, savings and time deposit accounts, mortgage, consumer and commercial loans, safe deposit and night deposit services, automatic teller machine (ATM) facilities, credit card services, 24 hour telephone banking and a full line of personal fiduciary services. The Bank is in the process of testing internet banking. This service was first offered to employees in order for them to become more familiar with it, test the different uses, and work out any potential problems. The Bank plans to extend the service to customers by the end of the first quarter of 1999. Competition The Bank has five offices located in Orleans County, one office in Essex County, and one office in Caledonia County, all in northeastern Vermont. Its primary service area is in the towns of Derby and Newport, Vermont, with approximately 61% of its total deposits as of December 31, 1998 derived from that area. The Bank competes in all aspects of its business with other banks and credit unions in northern Vermont, including two of the largest banks in the state, which maintain branch offices throughout the Bank's service area. Historically, competition in Orleans and Essex Counties has come from The Chittenden Trust Company and The Howard Bank, N.A., a subsidiary of Banknorth Group, Inc., based in Burlington, Vermont. The Chittenden Trust Company maintains a branch office in Newport, and The Howard Bank maintains one office in Barton, one office in Orleans, and one office in St. Johnsbury. Competition in Caledonia County comprises of the Passumpsic Savings Bank and Citizens Savings Bank, both based in St. Johnsbury, Lyndonville Savings Bank and Trust Company, based in Lyndonville, The Merchants Bank based in Burlington, and with two local credit unions for deposits and consumer loans. With recent changes in the regulatory framework of the banking industry, the competition for deposits and loans has broadened to include not only traditional rivals such as the mutual savings banks and stock savings banks, but also several non-traditional rivals such as insurance companies, brokerage firms, mutual funds and consumer finance companies. Employees As of December 31, 1998, the Bank employed 95 full-time employees and 31 part-time employees. Management of the Bank considers its employee relations to be good. Regulation and Supervision As a registered bank holding company, the Corporation is subject to on- going regulation supervision and examination by the Board of Governors of the Federal Reserve System, under the Bank Holding Company Act of 1956, as amended (the "Act"). A bank holding company for example, must obtain the prior approval of the Board before it acquires all or substantially all of the assets of any bank, or acquires ownership or control of more than 5% of the voting shares of a bank. Prior Federal Reserve Board approval is also required before a bank holding company may acquire more than 5% of any outstanding class of voting securities of a company other than a bank or a more than 5% interest in its property. The Act limits the activity in which the Corporation and its subsidiaries may engage to certain specified activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (1) making, and servicing loans that could be made by mortgage, finance, credit card or factoring companies; (2) performing the functions of a trust company; (3) certain leasing of real or personal property; (4) providing certain financial, banking or economic data processing services; (5) except as otherwise prohibited by law, acting as an insurance agent or broker with respect to insurance that is directly related to the extension of credit or the provision of other financial services or, under certain circumstances, with respect to insurance that is sold in certain small communities in which the bank holding company system maintains banking offices; (6) acting as an underwriter for credit life insurance and credit health and accident insurance directly related to extensions of credit by the holding company system; (7) providing certain kinds of management consulting advice to unaffiliated banks and non-bank depository institutions; (8) performing real estate appraisals; (9) issuing and selling money order and similar instruments and travelers checks and selling U.S. Savings Bonds; (10) providing certain securities brokerage and related services for the account of bank customers; (11) underwriting and dealing in certain government obligations and other obligations such as bankers' acceptances and certificates of deposit; (12) providing consumer financial counseling; (13) providing tax planning and preparation services; (14) providing check guarantee services to merchants; (15) operating a collection agency; and (16) operating a credit bureau. The Corporation does not presently engage, directly or indirectly, in any non-banking activities, with the exception of an onsite office occupied by Linsco Private Ledgers, a financial investment company, offering a variety of non-deposit investment and retirement options. A bank holding company must also obtain prior Federal Reserve approval in order to purchase or redeem its own stock if the gross consideration to be paid, when added to the net consideration paid by the company for all purchases or redemptions by the company of its equity securities within the preceding 12 months, will equal 10% or more of the company's consolidated net worth. The Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Board may require pursuant to the Act. The Board may also make examinations of the Corporation and any direct or indirect subsidiary of the Corporation. The Corporation has registered its Common Stock under Section 12(g) of the Securities Exchange Act of 1934 and is required to file annual and periodic reports and proxy statements and other information with the Securities and Exchange Commission. Community Bancorp. and its subsidiaries, Community National Bank and Liberty Savings Bank, are considered "affiliates" for the purposes of Section 18(j) of the Federal Deposit Insurance Act, as amended, and Section 23A of the Federal Reserve Act, as amended. Accordingly, they are subject to limitations with respect to the Bank's ability to make loans and other extensions of credit to or investments in the Corporation or in any other subsidiaries that the Corporation may acquire. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property of the furnishing of services. The Bank is a national banking association and subject to the provisions of the National Bank Act and federal and state statutes and rules and regulations applicable to national banks. The primary supervisory authority for the Bank is the Comptroller of the Currency. The Comptroller's examinations are designed for the protection of the Bank's depositors and not for its shareholders. The Bank is subject to periodic examination by the Comptroller and must file periodic reports with the Comptroller containing a full and accurate statement of its affairs. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank is also subject to regulation by the FDIC. Liberty is subject to similar regulations and provisions in the state of New Hampshire. Effects of Government Monetary Policy The earnings of the Company affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open market operations and United States Government Securities, varying the discount rate on member bank borrowings, setting reserve requirements against member and nonmember bank deposits, and regulating interest rates payable by member banks on time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to continue to do so in the future. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY The following tables summarize various consolidated information and provides a three year comparison relating to the average assets, liabilities, and stockholders' equity. (Dollars in Thousands)
Year ended December 31, 1998 1997 1996 ASSETS Balance % Balance % Balance % Cash and Due from Banks Non-Interest Bearing 4,522 2.05% 4,979 2.37% 4,765 2.31% Taxable Investment Securities(1) 38,784 17.56% 35,649 17.00% 35,754 17.31% Tax-exempt Investment Securities(1) 13,060 5.91% 12,140 5.79% 14,179 6.87% Other Securities(1) 1,270 0.57% 1,168 0.56% 1,168 0.57% Total Investment Securities 53,114 24.04% 48,957 23.35% 51,101 24.74% Overnight Deposits(2) 3,339 1.51% 0 0.00% 0 0.00% Federal Funds Sold 4,928 2.23% 2,583 1.23% 4,711 2.28% Loans, Net 147,830 66.92% 145,778 69.53% 138,635 67.13% Premises and Equipment 3,135 1.42% 3,328 1.59% 3,431 1.66% Other Real Estate Owned 660 0.30% 997 0.48% 767 0.37% Other Assets 3,368 1.53% 3,026 1.45% 3,107 1.50% Total Assets 220,896 100% 209,648 100% 206,517 100% LIABILITIES Demand Deposits 20,857 9.44% 18,694 8.92% 17,493 8.47% Now and Money Market Accounts 44,916 20.33% 39,337 18.76% 41,383 20.04% Savings Accounts 30,840 13.96% 31,907 15.22% 32,320 15.65% Time Deposits 98,181 44.45% 94,751 45.20% 96,227 46.60% Total Deposits 194,794 88.18% 184,689 88.10% 187,423 90.75% Other Borrowed Funds 4,060 1.84% 4,061 1.94% 99 0.05% Repurchase Agreements(3) 93 0.04% 0 0.00% 0 0.00% Other Liabilities 1,020 0.46% 734 0.35% 522 0.25% Subordinated Debentures 48 0.02% 107 0.05% 216 0.10% Total Liabilities 200,015 90.55% 189,591 90.43% 188,260 91.16% STOCKHOLDERS' EQUITY Common Stock 6,174 2.79% 3,814 1.82% 3,466 1.68% Surplus 8,293 3.75% 7,769 3.71% 5,948 2.88% Retained Earnings 6,649 3.01% 8,916 4.25% 9,273 4.49% Less: Treasury Stock (445) -0.20% (445) -0.21% (440) -0.21% Accumulated Other Comprehensive Income(1) 210 0.10% 3 0.00% 10 0.00% Total Stockholders' Equity 20,881 9.45% 20,057 9.57% 18,257 8.84% Total Liabilities and Stockholders' Equity 220,896 100% 209,648 100% 206,517 100% FASB No. 115, an accounting method in which securities classified as Held to Maturity are carried at book value and securities classified as Available for Sale are carried at fair value with the unrealized gain (loss), net of applicable income taxes, reported as a net amount in accumulated other comprehensive income. The Company does not carry, nor does it intend to carry, securities classified as Trading Securities. Overnight deposits refers to the Bank of Boston sweep account established during the first half of 1998 as another means of selling funds overnight. Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers.
AVERAGE BALANCES AND INTEREST RATES The table below presents the following information: average earning assets (including non-accrual loans) and average interest bearing liabilities supporting earning assets; and interest income and interest expense as a rate/yield. (Dollars in Thousands)
1998 1997 1996 AVE. INC./ RATE/ AVE. INC./ RATE/ AVE. INC./ RATE/ BAL. EXP. YIELD BAL. EXP. YIELD BAL. EXP. YIELD EARNING ASSETS Loans(net)(1) 147,830 13,758 9.31% 145,778 13,868 9.51% 138,635 13,376 9.65% Taxable Investment Securities 38,784 2,196 5.66% 35,649 2,117 5.94% 35,754 2,095 5.86% Tax-exempt Investment Securities(2) 13,060 930 7.12% 12,140 929 7.65% 14,179 1,114 7.86% Federal Funds Sold 4,928 237 4.81% 2,583 140 5.42% 4,711 246 5.22% Overnight Deposits(3) 3,339 185 5.54% N/A N/A Other Securities(4) 1,270 82 6.46% 1,168 79 6.76% 1,168 78 6.68% TOTA L 209,211 17,388 8.31% 197,318 17,133 8.68% 194,447 16,909 8.70% INTEREST BEARING LIABILITIES Savings Deposits 30,840 807 2.62% 31,907 877 2.75% 32,320 944 2.92% NOW & Money Market Funds 44,916 1,565 3.48% 39,337 1,397 3.55% 41,383 1,523 3.68% Time Deposits 98,181 5,496 5.60% 94,751 5,304 5.60% 96,227 5,681 5.90% Other Borrowed Funds 4,060 198 4.88% 4,061 245 6.03% 99 7 7.07% Repurchase Agreements(5 ) 93 4 4.30% N/A N/A Subordinated Debentures 48 5 10.42% 107 11 10.28% 216 21 9.72% TOTAL 178,138 8,075 4.53% 170,163 7,834 4.60% 170,245 8,176 4.80% Net Interest Income 9,313 9,299 8,733 Net Interest Spread(6) 3.78% 4.08% 3.90% Interest Differential(7) 4.45% 4.71% 4.49% Included in net loans are non-accrual loans with an average balance of $2,004,438 for 1998, $1,750,037 for 1997, and $1,655,907 for 1996. Income on investment securities of state and political subdivisions is stated on a tax equivalent basis (assuming a 34% rate). The amount of adjustment was $316,232 in 1998, $315,855 in 1997, and $378,873 in 1996. Overnight deposits refers to the Bank of Boston sweep account established during the first half of 1998 as another means of selling funds overnight. Included in other securities are taxable industrial development bonds (VIDA), with income of $7,549 for 1998, $8,440 for 1997, $8,381 for 1996. Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers. Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. Interest differential is net interest income divided by average earning assets.
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The following table summarizes the variances in income for the years 1998, 1997, 1996, and 1995 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid. (Dollars in Thousands)
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995 RATE VOLUME Variance(1) Variance(1) Variance(1) Due to Total Due to Total Due to Total Rate Volume Variance Rate Volume Variance Rate Volume Variance Income Earning Assets Loans(2) (305) 195 (110) (197) 689 492 287 638 925 Taxable Investment Securities (107) 186 79 28 (6) 22 45 292 337 Tax-Exempt Investment Securities(3) (69) 70 1 (29)(156) (185) (51) (252) (303) Federal Funds Sold (30) 127 97 9 (115) (106) (20) 86 66 Overnight Deposits 0 185 185 N/A N/A Other Securities (4) 7 3 1 0 1 (4) 0 (4) Total Interest Earnings (515) 770 255 (188) 412 224 257 764 1,021 Interest Bearing Liabilities Savings Deposits (42) (28) (70) (56) (11) (67) (24) (35) (59) NOW & Money Market Funds (30) 198 168 (53) (73) (126) (50) 225 175 Time Deposits 0 192 192 (294) (83) (377) (360) 183 (177) Other Borrowed Funds (47) 0 (47) (42) 280 238 1 (1) 0 Repurchase Agreements 0 4 4 N/A N/A Subordinated Debentures 0 (6) (6) 1 (11) (10) 1 (11) (10) Total Interest Expense (119) 360 241 (444) 102 (342) (432) 361 (71) Items which have shown a year-to-year increase in volume have variances allocated as follows: Variance due to rate = Change in rate x new volume Variance due to volume = Change in volume x old rate Items which have shown a year-to-year decrease in volume have variances allocated as follows: Variance due to rate = Change in rate x old volume Variance due to volume = Change in volume x new rate Total loans are stated net of unearned discount and allowance for loan losses. Interest on non-accrual loans is excluded from income. The principal balances of non-accrual loans are included in calculations of the yield on loans. Income on tax-exempt securities is stated on a tax equivalent basis. The assumed rate is 34%.
INVESTMENT PORTFOLIO The following tables show the classification of the investment portfolio by type of investment security based on book value for Held to Maturity securities and fair value for Available for Sale securities on December 31 for each of the last 3 years. (Dollars in Thousands)
1998 1997 1996 U.S. Treasury Obligations: Available-for-Sale 20,590 8,039 7,974 Held-to-Maturity 15,562 22,491 28,097 U.S. Agency Obligations 4,582 1,631 1,679 Obligations of State & Political Subdivisions 9,734 10,004 8,192 Restricted Equity Securities 1,142 1,100 1,063 Total Investment Securities 51,610 43,265 47,005 The following is an analysis of the maturities and yields of investment securities as defined: (Available for Sale; fair value, Held to Maturity; book value) December 31, 1998 1997 1996 U.S. Treasury & Agency Obligations Fair Ave. Fair Ave. Fair Ave. Available for Sale Value Yield Value Yield Value Yield Due within 1 year 0 0.00% 2,993 6.08% 0 0.00% Due after 1 year within 5 years 20,590 6.16% 5,046 6.12% 7,974 5.79% Total 20,590 6.16% 8,039 6.10% 7,974 5.79% Book Ave. Book Ave. Book Ave. Held to Maturity Value Yield Value Yield Value Yield Due within 1 year 14,634 6.51% 8,965 5.78% 6,956 5.93% Due after 1 year within 5 years 5,510 5.78% 15,157 5.69% 22,820 6.17% Total 20,144 6.31% 24,122 5.72% 29,776 6.12% Obligations of State & Political Subdivisions (1) Book Ave. Book Ave. Book Ave. Value Yield Value Yield Value Yield Due within 1 year 6,473 6.58% 6,624 7.94% 4,468 7.16% Due after 1 year within 5 years 1,522 7.58% 1,543 7.91% 1,718 7.88% Due after 5 years within 10 years 392 8.03% 363 8.03% 458 7.83% Due after 10 years 1,347 0.10% 1,474 9.67% 1,548 9.61% Total 9,734 7.21% 10,004 8.19% 8,192 7.81% Restricted Equity Securities Total Restricted Equity Securities 1,142 6.00% 1,100 6.76% 1,063 6.60% Income on Obligations of State and Political Subdivisions is stated on a tax equivalent basis assuming a 34 percent tax rate. Also included are taxable industrial development bonds (VIDA) with a fair value of $123,546 as of December 31, 1998, and $150,235 as of December 31, 1997, and 1996 with respective yields of 4.76%, 5.55%, and 5.60%.
LOAN PORTFOLIO The following table reflects the composition of the Company's loan portfolio for years ended December 31: (Dollars in Thousands)
1998 1997 1996 1995 1994 TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL Real Estate Loans Construction & Land Development 2,025 1.37% 1,091 0.73% 1,432 0.98% 912 0.66% 587 0.44% Farm Land 2,634 1.78% 2,093 1.39% 2,148 1.48% 1,814 1.32% 1,115 0.84% 1-4 Family Residential 98,407 66.34% 98,743 65.78% 94,393 64.83% 91,104 66.38% 88,967 66.68% Commercial Real Estate 19,555 13.18% 19,992 13.32% 20,602 14.15% 18,646 13.59% 18,094 13.56% Loans to Finance Agricultural Production 829 0.56% 1,354 0.90% 1,222 0.84% 1,127 0.82% 1,305 0.98% Commercial & Industrial 8,767 5.91% 7,759 5.17% 7,084 4.87% 6,749 4.92% 6,719 5.04% Loans to Individuals 16,008 10.79% 18,943 12.62% 18,556 12.74% 16,578 12.08% 16,380 12.28% All Other Loans 110 0.07% 141 0.09% 166 0.11% 310 0.23% 259 0.19% Gross Loans 148,335 100% 150,116 100% 145,603 100% 137,240 100% 133,426 100% Less: Reserve for Loan Losses (1,659)-1.12% (1,502)-1.00% (1,401)-0.96% (1,519)-1.11% (1,708) - -1.28% Deferred Loan Fees (849)-0.57% (867)-0.58% (904)-0.62% (909)-0.66% (924) - -0.69% Net Loans 145,827 98.31% 147,747 98.42% 143,298 98.42% 134,812 98.23% 130,794 98.03%
MATURITY OF LOANS The following table shows the estimated maturity of loans (excluding residential properties of 1 - 4 families, installment loans and other loans) outstanding as of December 31, 1998.
Fixed Rate Loans Maturity Schedule Within 1 - 5 After 1 Year Years 5 years Total Real Estate Construction & Land Development 2,025 0 0 2,025 Secured by Farm Land 12 20 172 204 Commercial Real Estate 157 479 2,172 2,808 Loans to Finance Agricultural Production 67 186 0 253 Commercial & Industrial Loan 298 3,994 453 4,745 Total 2,559 4,679 2,797 10,035 Variable Rate Loans Within 1 - 5 After 1 Year Years 5 years Total Real Estate Construction & Land Development 0 0 0 0 Secured by Farm Land 1,695 735 0 2,430 Commercial Real Estate 10,298 6,449 0 16,747 Loans to Finance Agricultural Production 371 205 0 576 Commercial & Industrial Loans 2,879 1,143 0 4,022 Total 15,243 8,532 0 23,775
SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Company's loan loss experience for each of the last five years. (Thousands of Dollars)
December 31, 1998 1997 1996 1995 1994 Loans Outstanding End of Period 148,335 150,116 145,603 137,240 133,426 Ave. Loans Outstanding During Period 147,830 145,778 138,635 131,879 127,394 Loan Loss Reserve, Beginning of Period 1,502 1,401 1,519 1,708 1,872 Loans Charged Off: Real Estate 177 191 116 198 187 Commercial 41 104 86 17 24 Loans to Individuals 487 436 383 238 250 Total 705 731 585 453 461 Recoveries: Real Estate 65 12 18 5 43 Commercial 17 27 16 20 12 Loans to Individuals 120 133 68 119 62 Total 202 172 102 144 117 Net Loans Charged Off 503 559 483 309 344 Provision Charged to Income 660 660 365 120 180 Loan Loss Reserve, End of Period 1,659 1,502 1,401 1,519 1,708 Net Losses as a Percent of Ave. Loans 0.34% 0.38% 0.35% 0.23% 0.27% Provision Charged to Income as a Percent of Average Loans 0.45% 0.45% 0.26% 0.09% 0.14% At End of Period: Loan Loss Reserve as a Percent of Outstanding Loans 1.12% 1.00% 0.96% 1.11% 1.28%
Factors considered in the determination of the level of loan loss coverage include, but are not limited to historical loss ratios, composition of the loan portfolio, overall economic conditions as well as future potential losses. The following table shows an allocation of the allowance for loan losses, as well as the percent to the total allowance for the last five years (the corporation has no foreign loans, therefore, allocations for this category are not necessary).
December 31, 1998 % 1997 % 1996 % 1995 % 1994 % Domestic Residential Real Estate 559 33% 362 24% 490 35% 265 17% 200 12% Commercial 475 29% 645 43% 307 22% 631 42% 950 56% Loans to Individuals 448 27% 487 32% 395 28% 485 32% 400 23% Unallocated 177 11% 8 1% 209 15% 138 9% 158 9% Total 1,659 100% 1,502 100% 1,401 100% 1,519 100% 1,708 100%
NON-ACCURAL, PAST DUE, AND RESTRUCTURED LOANS The following table summarizes the bank's past due, non-accrual, and restructured loans: (Dollars in Thousands)
December 31, 1998 1997 1996 1995 1994 Accruing Loans Past Due 90 Days or More: Consumer 53 121 36 28 54 Commercial 119 19 5 15 11 Real Estate 246 211 360 249 271 Total Past Due 90 Days or More 418 351 401 292 336 Non-accrual Loans 2,228 1,486 1,255 1,389 1,791 Restructured Loans (incl. non-accrual) 126 136 506 359 347 Total Non-accrual, Past Due and Restructured Loans 2,772 1,973 2,162 2,040 2,474 Other Real Estate Owned 542 1,089 663 761 918 Total Non Performing Loans 3,314 3,062 2,825 2,801 3,392 Percent of Gross Loans 2.23% 2.04% 1.94% 2.04% 2.08% Reserve Coverage of Non performing Loans 50.06% 49.05% 49.59% 54.23% 71.26% When a loan reaches non-accrual status, it is determined that future collection of interest and principal is doubtful. At this point, the Company's policy is to reverse the accrued interest and to discontinue the accrual of interest until the borrower clearly demonstrates the ability to resume normal payments. Our portfolio of non-accrual loans for the years ended 1998, 1997, 1996, 1995, and 1994 are made up primarily of commercial real estate loans and residential real estate loans. Management does not anticipate any substantial effect to future operations if any of these loans are liquidated. Although interest is included in income only to the extent received by the borrower , deferred taxes are calculated monthly, based on the accrued interest of all non- accrual loans. This accrued interest amounted to $363,713 in 1998, $216,770 in 1997, $309,388 in 1996, $256,754 in 1995, and $181,930 in 1994. The Company had total foreign loans of less than one percent in 1998, and has no concentration in any industrial category.
DEPOSITS The average daily amount of deposits and rates paid on such deposits is summarized for the last three years. (Dollars in Thousands)
December 31, 1998 1997 1996 Amount Rate Amount Rate Amount Rate Non-Interest Bearing Demand Deposits 20,857 0.00% 18,694 0.00% 17,493 0.00% NOW & Money Market Funds 44,916 3.48% 39,337 3.55% 41,383 3.68% Savings Deposits 30,840 2.62% 31,907 2.75% 32,320 2.92% Time Deposits 98,181 5.60% 94,751 5.60% 96,227 5.90% Total Deposits 194,794 4.04% 184,689 4.10% 187,423 4.35% Increments of maturity of time certificates of deposit and other time deposits of $100,000 or more issued by domestic offices outstanding on December 31, 1998 are summarized as follows: Time Certificates Maturity Date of Deposit 3 Months or Less 3,452 Over 3 through 6 Months 4,118 Over 6 through 12 Months 5,192 Over 12 Months 5,112 Total 17,874 RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Corporation for each of the last three years. December 31, 1998 1997 1996 Return on Average Assets 0.99% 1.02% 1.07% Return on Average Equity 10.49% 10.69% 12.16% Dividend Payout Ratio 83.69% 77.02% 63.29% Ave. Equity to Ave. Assets Ratio 9.45% 9.57% 8.84%
Item 2. Properties Community Bancorp. does not own or lease real property. The Corporation's offices are located at the main offices of the Bank. All of the Bank's offices are located in Vermont. In addition to the main office in Derby, the Bank maintains facilities located in; City of Newport, Towns of Barton and St. Johnsbury, and Villages of Island Pond, Troy and Derby Line. As mentioned earlier, the newly acquired Liberty Savings Bank shares the same address as the main offices as it does not maintain a facility. The Bank's main offices are located in a two-story brick building on U.S. Route 5 in Derby, Vermont. The main banking lobby and adjacent offices were constructed in 1972, expanded in 1978, and the most recent expansion was completed in July 1993, providing us with a total of 15,000 square feet at this location. The main office is equipped with a drive-up facility as well as an Automated Teller Machine (ATM). Computer and similar support equipment is also located in the main office building. The building previously housing our computer equipment currently houses an office for the Bank's "Special Assets" department, and also serves as a conference center for the Bank as well as various non-profit organizations, free of charge, upon request. The Bank owns the Derby Line office located on Main Street in a renovated bank building. The facility consists of a small banking lobby containing approximately 200 square feet and a walk-up window accessible to pedestrians. Recent renovations to the walk-up window area and updated signs have helped to give this office a fresh new appearance. The Island Pond office is located in the renovated "Railroad Station" acquired by the town of Brighton in 1993. The Bank leases approximately two-thirds of the downstairs including a banking lobby, a drive-up window, and an ATM. The other portion of the downstairs is occupied by an information center, and the upstairs section houses the Island Pond Historical Society. The Barton office is located on Church Street, in a renovated facility. This office is equipped with a banking lobby, a drive-up window, and an ATM, making most deposit and withdrawal transactions possible at this branch 24 hours a day. The facility is leased from Dean M. Comstock, who is a member of the Bank's Barton Advisory Committee. The lease was entered into in 1985 and provides a fifteen-year term. The Bank's Newport office was located in a facility leased from Twin Islands Realty, adjacent to RJ's Friendly Market until mid January 1999. This facility consists of approximately 974 square feet and includes a small banking lobby. This office moved into a condominium space in the state office building on Main Street in Newport during the third week of January. The Bank occupies approximately 3,084 square feet on the first floor of the building for a full service banking facility equipped with a remote drive-up facility and an ATM. In addition, the Bank will own approximately 4,400 square feet on the second floor with immediate plans to house our trust department, marketing department, and an office for our public relations coordinator, with room for future expansion. The Bank's Troy office is located in a new facility, which was leased for a few years and then purchased in 1992 from Tom and Eleanor Watts. The bank currently leases space to one tenant while maintaining approximately 2,200 square feet for their own use. An ATM is available in this office to provide the same type of limited 24-hour accessibility as our Derby, Barton, Island Pond, Newport and St. Johnsbury offices. The St. Johnsbury office is located at the corner of the I-91 Access Road and Route 5 in the town of St. Johnsbury. The Bank occupies approximately 2,250 square feet in the front of the Price Chopper building leased from Murphy Realty of St. Johnsbury. Peter Murphy is President of Murphy Realty, and is a member of the Bank's St. Johnsbury Advisory Committee. Fully equipped with an Automatic Teller Machine and a drive-up window, this office operates as a full service banking facility. Item 3. Legal Proceedings Community National Bank is currently involved in a lawsuit against the State of Vermont. The issue involves OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport. According to a so-called "public trust doctrine", the State of Vermont might have ownership of any lands created by filling any portion of the navigable waters of the state. The result of this is that the Bank has been unable to sell these properties because some attorneys will not clear title to the property. The suit filed is an attempt to clear title to said properties by seeking judicial clarification of the public trust doctrine. The outcome of the suit is not likely to have a material impact on the financial statements of the Bank or consolidated Company. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Bank, and the aforementioned to which the Bank is a party or of which any of its property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II. Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Common Stock Performance by Quarter Incorporated by reference to Page 40 of the Annual Report to Shareholders for fiscal year 1998. Item 6. Selected Financial Data Following pages SELECTED FINANCIAL DATA (Not covered by Report of Independent Public Accountants) (Dollars in thousands, except per share data)
Year Ended December 31, 1998 1997 1996 1995 1994 Total Interest Income 17,072 16,817 16,532 15,406 13,605 Less: Total Interest Expense 8,077 7,834 8,177 8,248 6,807 Net Interest Income 8,995 8,983 8,355 7,158 6,798 Less: Provision for Loan Losses 660 660 365 120 180 Other Operating Income 1,586 1,336 1,281 1,181 1,057 Less: Other Operating Expense 7,021 6,759 6,397 5,943 5,459 Income Before Income Taxes 2,900 2,900 2,874 2,276 2,216 Less: Applicable Income Taxes (1) 710 755 654 324 329 Net Income 2,190 2,145 2,220 1,952 1,887 Per Share Data: (2) Earnings per Share 0.71 0.72 0.78 0.71 0.72 Cash Dividends Declared 0.60 0.56 0.52 0.48 0.44 Weighted Average Number of Common Shares Outstanding 3,075,906 2,976,448 2,862,708 2,744,213 2,629,116 Number of Common Shares Outstanding 3,110,960 3,015,068 2,904,569 2,794,080 2,656,205 Balance Sheet Data: Net Loans 145,827 147,747 143,298 134,812 130,794 Total Assets 225,051 213,001 205,536 197,382 191,315 Total Deposits 197,797 187,580 183,854 178,884 174,676 Total Liabilities 203,049 192,521 186,425 179,801 175,796 Subordinated Debentures 20 104 170 265 551 Total Shareholders' Equity 22,002 20,480 19,111 17,580 15,518 Applicable Income Taxes above includes the income tax effect, assuming a 34% tax rate on securities gains (losses), which totaled $0 in 1998, $0 in 1997, ($656) in 1996, $6,272 in 1995, and $7,021 in 1994. Per share data for the calendar years 1996, 1995, and 1994 restated to reflect 5% stock dividend in first quarter of 1997. Per share data for all calendar years restated to reflect a 100% stock dividend paid on June 1, 1998.
QUARTERLY RESULTS OF OPERATIONS The following is an unaudited summary of the quarterly results of Operations for the years ended December 31, 1998, 1997 and 1996. (Dollars in thousands, except per share data)
1998 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 Interest Income 4,225 4,207 4,325 4,315 Interest Expense 1,990 2,053 2,045 1,989 Net Interest Income 2,235 2,154 2,280 2,326 Provisions For Loan Losses 200 160 150 150 Other Operating Expenses 1,802 1,742 1,758 1,719 Income Before Taxes 522 747 744 888 Applicable Income Taxes 114 189 182 226 Net Income 408 558 562 662 Net Income Per Share(1): 0.14 0.18 0.18 0.21 1997 Interest Income 4,040 4,172 4,253 4,352 Interest Expense 1,897 1,924 1,999 2,014 Net Interest Income 2,143 2,248 2,254 2,338 Provisions For Loan Losses 205 105 215 135 Other Operating Expenses 1,523 1,679 1,804 1,752 Income Before Taxes 695 832 576 798 Applicable Income Taxes 175 220 125 236 Net Income 520 612 451 562 Net Income Per Share(1): 0.18 0.21 0.15 0.18 1996 Interest Income 4,032 4,145 4,163 4,192 Interest Expense 2,092 2,094 2,041 1,949 Net Interest Income 1,940 2,051 2,122 2,243 Provisions For Loan Losses 38 122 80 125 Securities Gains(Losses) 0 (2) 0 0 Other Operating Expenses 1,546 1,630 1,643 1,578 Income Before Taxes 607 662 721 884 Applicable Income Taxes 140 149 182 184 Net Income 467 513 539 700 Net Income Per Share (1): 0.17 0.18 0.19 0.24 Per share data for 1996 restated to reflect 5% stock dividend in first quarter of 1997. Per share data for all quarters restated to reflect 100% stock dividend paid on June 1, 1998.
CAPITAL RATIOS Community Bancorp. and Subsidiaries (Dollars in Thousands)
ANNUAL GROWTH RATE At December 31, 1998 1997 1996 '98/'97 '97/'96 Total Assets 225,051 213,001 205,536 5.66% 3.63% LESS: Goodwill(3) 320 343 0 Allowance for Possible Loan Losses 1,659 1,502 1,401 10.45% 7.21% Total Adjusted Assets 226,390 214,160 206,937 5.71% 3.49% Gross Risk-Adjusted Assets 107,450 106,298 102,922 1.08% 3.28% Allowance for Loan Loss over limit(2) 316 173 114 82.66% 51.75% Total Risk-Adjusted Assets 107,134 106,125 102,808 0.95% 3.23% Shareholders' Equity 22,002 20,480 19,111 7.43% 7.16% LESS: Valuation Allowance for Securities 236 34 8 Intangible Assets(3) 339 352 6 Total Adjusted Tier 1 Capital (1) 21,427 20,094 19,097 6.63% 5.22% Eligible Discounted Subordinated Debt 16 42 85-61.90% -50.59% Max. Allowance for Possible Loan Losses (2) 1,343 1,329 1,287 1.05% 3.26% Total Capital (Tier II) 22,786 21,465 20,469 6.15% 4.87% 1998 1997 1996 Tier l Capital/Total Adjusted Assets 9.46% 9.38% 9.23% Tier ll Capital/Total Adjusted Assets 10.06% 10.02% 9.89% Tier l Capital/Total Risk-Adjusted Assets 20.00% 18.93% 18.58% Tier ll Capital/Total Risk-Adjusted Assets 21.27% 20.23% 19.91% Net unrealized holding gains and losses on available-for-sale securities are excluded from common stockholders' equity for regulatory capital purposes. However, National Banks continue to deduct unrealized losses on equity securities in their computation of Tier I Capital. The maximum allowance for possible loan losses used in calculating primary (Tier ll)capital is the lower of the period end allowance for possible loan losses or 1.25% of gross risk-adjusted assets, as implemented by regulatory capital guidelines in 1992. Included in the 1998 and 1997 balance of intangible assets is $319,818 and $342,662, respectively, in goodwill associated with the acquisition of Liberty Savings Bank. Excess mortgage servicing rights totaling $18,706, $9,452, and $5,808 for 1998, 1997, and 1996, respectively, comprise the balance of intangible assets.
The following table shows the repricing opportunities of the various interest earning assets and interest bearing liabilities of the bank. We assume that all payments on loans will be made as agreed, and that all deposits will mature on schedule. The most important factor in assuring liability liquidity is maintenance of confidence in the Bank by depositors of funds. Such confidence, in turn, is based on performance and reputation. The Company believe that its reputation, its financial strength and numerous long-term customer relationships, should enable it to raise funds as needed in many markets. To that end, the Bank does not place all of it's "core" deposits in the earliest time period presented as suggested, but places more emphasis on the historical experience of the Bank. Funds are primarily generated locally and regionally and the Bank has no brokered deposits. The following table shows the interest sensitivity gaps for four different time intervals as of December 31, 1998. The figures shown are reported in thousands.
0 - 3 Months 4 - 12 Months 1 - 5 Years Over 5 Years Total Rate Sensitive Assets: Loans $31,750 $62,715 $46,773 $7,097 $148,335 Investments - Taxable 3,000 11,634 26,224 0 40,858 Investments - Tax-exempt 2,822 3,651 1,407 1,730 9,610 Other Investments 0 0 0 1,142 1,142 Federal funds Sold 15,527 0 0 0 15,527 Total $42,684 $73,605 $74,404 $9,969 $199,705 Rate Sensitive Liabilities: NOW & super NOW accounts $ 0 $ 0 $ 0 $19,122 $ 19,122 Savings deposits 0 2,512 0 28,000 30,512 Time deposits(1) 40,471 42,822 18,042 0 101,335 Variable rate time deposits 12,758 12,308 19 0 25,085 Repurchase agreements 288 0 0 0 288 Other borrowed Funds 4,000 5 15 40 4,060 Total $57,517 $57,647 $18,076 $47,162 $180,402 Interest sensitivity Gap $(4,418) $20,353 $56,328 $(37,193) GAP Ratio -2.05% 9.44% 26.14% -17.26% Cumulative interest sensitivity gap $(4,418) $15,935 $72,263 $35,070 Cumulative GAP Ratio -2.05% 7.39% 33.54% 16.27% Included in the time deposits category of 0 - 3 months are money market accounts totaling almost $31 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated by reference to Pages 28-35 of the Annual Report to Shareholders for fiscal year 1998. YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 (Y2K) on the processing of date-sensitive information by the Company's computerized information systems. The Y2K problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's systems that have date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 which could result in miscalculations or systems failures. The Federal Reserve Board and other federal banking regulators (together known as the Federal Financial Institutions Examination Council, or "FFEIC") have developed joint guidelines and benchmarks for assessing Y2K risk, remediation of non-compliant systems and components and post- remediation testing and implementation. In an effort to correctly assess the effect of Y2K on the financial position of the Company and assess our readiness for Y2K, a Y2K committee was organized which meets on a regular basis to keep executive management and the Board of Directors informed of our progress towards Y2K compliance. The committee has developed strategic, customer awareness, customer risk assessment, test and contingency plans. In accordance with FFEIC guide- lines, the Y2K committee has defined five phases in the Y2K project management: Phase I - Awareness Phase In this phase we defined the problem and gained executive level commitment. The Y2K committee developed an overall strategy. This phase has been completed. Phase II - Assessment Phase During this phase, we assessed the size and complexity of the Y2K issues and identified both information technology (IT) and non-IT systems that could be affected by the change. At this time, we also identified systems which were mission-critical and non-mission-critical. We define mission-critical systems as vital to the successful continuation of our core business activities. Our core business activities include servicing deposits, servicing loans, item processing and accounting, originating deposits, originating loans, investments, and trust. The mission-critical systems that support our core business activities include our AS/400 (mainframe computer) and operating system; check processing software; check sorters; loan, deposit and account origination software; Fedline (interface to the Federal Reserve Bank); and trust accounting software. Other systems not deemed mission-critical, but important, include human resources; payroll; ATM networks; voice banking system; heating and faxes. We also evaluated the Y2K effect on strategic business initiatives. We assessed the risk exposure of our customers as funds providers, funds takers, and capital market/asset counter-parties. This phase has been completed, however, we continue to monitor our exposure on an on-going basis. Phase III - Renovation Phase This phase includes hardware and software upgrades or replacements and other changes. No mission-critical hardware or software needed to be replaced. All our software applications are provided by vendors and these applications were already Y2K compliant when we began the renovation phase. We are however replacing several PCs which support non-mission critical applications. This will be complete by 6/30/99. Phase IV - Validation Phase This is the testing phase. During this phase, the systems identified in Phase II (Assessment) are tested for Y2K compliance. Systems that were deemed mission-critical were tested first. We have now started testing the remaining systems. All mission-critical systems were tested by 12/31/98 and were in compliance. Non-mission-critical systems will be tested by 6/30/99. Phase V - Implementation Phase January 1, 2000 will be a processing day. If we detect any failures of our mission-critical systems, we will implement our contingency plans as appropriate. The Company does not write any source programming code and is therefore dependent upon external vendors and service providers to alter their programs to become Y2K compliant. We have received certification from our vendors as to their product compliance, however, we will still test all mission-critical and non-mission-critical systems identified in Phase II. We have identified the following timetable for the testing phase: 12/31/98 testing of internal mission-critical systems was completed 03/31/99 testing with service providers for mission-critical systems should be complete 06/30/99 testing of non-mission-critical systems should be complete.
As of 12/31/98, we had completed the testing of all mission-critical systems and noted only a few minor date formatting errors in loan documentation for which we have received corrections, which will be installed during the first quarter of 1999. These minor errors do not affect any calculations and do not affect our ability to process loans. We will begin testing of the non-mission-critical systems during the first quarter of 1999 and anticipate testing to be completed by 3/31/99. At this time, we expect to have all our mission-critical and non-mission- critical systems Y2K compliant by 6/30/99. We do not anticipate any major upgrades to existing systems before year 2000. The costs involved in addressing potential problems are not currently expected to have a material impact on the Company's financial position, results of operations, or cash flows in future periods. During 1998, we budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades. The costs included testing of our contingency site, replacement of 10 PCs which were not Y2K compliant, and proxy testing of some of our mission- critical systems. We have not calculated the personnel costs relating to Y2K, however, we did not have to hire additional personnel in our Y2K efforts. For 1999, we have budgeted $77,000. Projected expenses include the replacement of additional PCs, PC software upgrades, consulting services, testing, travel and education. Y2K costs are expensed from current earnings. No new projects have been deferred due to the Y2K effort. The yearly software update to our core system provided by one of our vendors has been postponed by the vendor until 2000 in an effort to minimize changes to an already compliant system. This will not have an effect on our operations. We have reviewed the credit risk our commercial borrowers may pose to us if they are not Y2K compliant. At this time, we have identified only a small number of customers deemed as high risk customers, and their inability or failure to repay their loans as scheduled would not have a material impact on the Company. The worst case scenario relating to Y2K is that we would not have electrical power. If this were the case, our contingency plan is to operate in a manual mode. We have plans for hiring temporary help in this situation. The next worst case scenario is that telephones would be unavailable. If this were the case, the Derby branch could be fully operational. Other branches would need to service deposits in an off-line mode. Requests for account and loan origination could be directed to the Derby branch. Assuming we have electricity and telephones, we anticipate our core systems to be functional. Our Y2K contingency plan is based on our disaster recovery plan which is written to respond to a complete core system outage. Our contingency plan also outlines manual processes in the event of individual component failures. During the first quarter of 1999, outside consultants will review and validate our contingency plans. Item 8. Financial Statements and Supplementary Data The financial statements and related notes of Community Bancorp. and Subsidiaries are incorporated herein by reference from the Company's annual report to shareholders for the year ended December 31, 1998, Page 12 through Note 23 on Page 28. Item 9. Disagreements on Accounting and Financial Disclosures Inapplicable. PART III. Item 10. Directors and Executive Officers of the Registrant Incorporated by reference to Pages 4-5 of the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999.
Position with Has Served As Name, Age and Community Officer/Director Principal Occupation Bancorp. Since Stephen P. Marsh, 51 Vice President 07/01/73 Senior VP & Cashier & Treasurer Community National Bank Rosemary M. Rowe, 57 Secretary 09/08/80 Vice President, Community National Bank Alan A. Wing, 54 Vice President 09/01/71 Sr. Vice President Community National Bank
Item 11. Executive Compensation Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999, and incorporated by reference to the Annual Report to the shareholders for the year ended December 31, 1998, Page 25, Note 16. PART IV. Item 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K (a)(1) and (2) Financial Statements Financial statements are incorporated by reference to the Annual Report to the shareholders for the year ended December 31, 1998. (a)(3) Exhibits The following exhibits are incorporated by reference: Exhibit 3 - Articles of Association and By-laws of Community Bancorp. are incorporated by reference to Community Bancorp.'s Registration Statement dated May 20, 1983 (Registration No.2-83166). Exhibit 4 - Indenture dated August 1, 1984 between Community Bancorp. and Community National Bank as trustee, relating to $750,000 in principal amount of 11% Convertible Subordinated Debentures due 2004 is incorporated by reference to Community Bancorp.'s Registration Statement dated July 11, 1984 (Registration No. 2-92147). Exhibit 5 - Indenture dated August 1, 1986, relating to $500,000 in principal amount of 9% Convertible Subordinated Debentures due 1998 is incorporated by reference to Community Bancorp.'s Registration Statement dated April 15, 1986 (Registration No. 33-4924). Exhibit 13 - Portions of the Annual Report to Shareholders of Community Bancorp. for Year Ended December 31, 1998, specifically mentioned in this report, incorporated by reference. The following exhibits are filed as part of this report: Exhibit 10(i) - Directors Deferred Compensation Plan* Exhibit 10(ii) - Description of Supplemental Retirement Plan* Exhibit 11 - Computation of Per Share Earnings Exhibit 21 - Subsidiaries of Community Bancorp. Exhibit 23 - Consent from A.M. Peisch & Company (b) Reports on Form 8-K None [FN] Denotes compensatory plan or arrangement. Exhibit 10(i) Directors' Deferred Compensation Plan Under the terms of the Corporation's Deferred Compensation Plan for Directors, directors of the Corporation and/or the Bank may elect to defer current receipt of some or all of their director fees. Deferrals are credited to a cash account, which bears interest at the rate in effect for the Bank's three-year certificate of deposit, as adjusted from time to time. Payments are deferred until the participant's retirement, death or disability, or at an earlier or later date elected by the participant. Amounts deferred and accumulated interest represent a general unsecured obligation of the Corporation and no assets of the Corporation or the Bank have been segregated to satisfy the Corporation's obligations under the Plan. Exhibit 10(ii) Description of Supplemental Retirement Plan In 1998 the Board of Directors authorized the adoption of a Supplemental Retirement Plan for Mr. White and the other Executive Officers of the Bank to replace estimated benefits lost as a result of the previous termination of the Bank's defined benefit pension plan. The plan is intended to provide an annual benefit at retirement approximating 75% of the average annual bonus received by the officer. It is estimated that this benefit, combined with the projected benefits under the Bank's 401(k) plan, will be approximately equal to the benefit that would have been provided to the Executive Officers under the terminated defined benefit pension plan. Benefit payments will be funded by annual contributions to a rabbi trust. Exhibit 11 COMMUNITY BANCORP. PRIMARY EARNINGS PER SHARE
For the Fourth Quarter Ended December 31, 1998 1997 1996 Net Income $662,615 $562,499 $700,246 Average Number of Common Shares Outstanding. 3,110,961 3,014,935 2,901,980 Earnings Per Common Share $0.21 $0.19 $0.24 For The Twelve Months Ended December 31, 1998 1997 1996 Net Income $2,190,374 $2,145,395 $2,219,804 Average Number of Common Shares Outstanding. 3,075,906 2,976,448 2,862,708 Earnings Per Common Share $0.71 $0.72 $0.78 Per share data restated to reflect 100% stock dividend paid on June 1, 1998.
Exhibit 11 (Cont'd) COMMUNITY BANCORP. FULLY DILUTED EARNINGS PER SHARE
For The Fourth Quarter Ended December 31, 1998 1997 1996 Net Income $662,615 $562,499 $700,246 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 363 1,639 2,857 Adjusted Net Income $662,978 $564,138 $703,103 Average Number of Common Shares Outstanding. 3,110,961 3,014,935 2,901,980 Increase in Shares(Assuming Conversion of Subordinated Convertible Debentures). 8,150 26,825 50,266 Average Number of Common Share Outstanding (Fully Diluted). 3,119,111 3,041,760 2,952,246 Earnings Per Common Share Assuming Full Dilution. $0.21 $0.19 $0.24 For The Twelve Months Ended December 31, 1998 1997 1996 Net Income $2,190,374 $2,145,395 $2,219,804 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 3,034 7,583 13,746 Adjusted Net Income $2,193,408 $2,152,978 $2,233,550 Average Number of Common Shares Outstanding. 3,075,906 2,976,448 2,862,708 Increase in Shares(Assuming Conversion of Subordinated Convertible Debentures). 15,896 32,317 55,659 Average Number of Common Share Outstanding (Fully Diluted). 3,091,802 3,008,765 2,918,367 Earnings Per Common Share Assuming Full Dilution. $0.71 $0.72 $0.77 Per share data restated to reflect 100% stock dividend paid on June 1, 1998.
Exhibit 21 Community Bancorp.'s subsidiaries include Community National Bank, a banking corporation incorporated under the Banking Laws of The United States, and Liberty Savings Bank, a New Hampshire guaranty savings bank. Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Community Bancorp. of our report dated January 6, 1999, included in the 1998 Annual Report to Shareholders of Community Bancorp. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-18535) pertaining to the Community Bancorp. Dividend Reinvestment Plan and in the Registration Statement (Form S-8 No. 33-44713) pertaining to the Community Bancorp. Retirement Savings Plan of our report dated January 6, 1999, with respect to the consolidated financial statements incorporated herein by reference of Community Bancorp. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ A.M. Peisch & Company March 25, 1999 St. Johnsbury, Vermont VT Reg. No. 92-0000102 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY BANCORP. BY: /s/ Richard C. White Date: March 25, 1999 Richard C. White, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY: /s/ Stephen P. Marsh Date: March 25, 1999 Stephen P. Marsh, Treasurer and Chief Financial and Accounting Officer COMMUNITY BANCORP. DIRECTORS /s/ Thomas E. Adams Date: March 25, 1999 Thomas E. Adams /s/ Jacques R. Couture Date: March 25, 1999 Jacques R. Couture /s/ Elwood G. Duckless Date: March 25, 1999 Elwood G. Duckless /s/ Michael H. Dunn Date: March 25, 1999 Michael H. Dunn /s/ Rosemary M. Lalime Date: March 25, 1999 Rosemary M. Lalime /s/ Marcel Locke Date: March 25, 1999 Marcel Locke /s/ Stephen P. Marsh Date: March 25, 1999 Stephen P. Marsh /s/ Anne T. Moore Date: March 25, 1999 Anne T. Moore /s/ Dale Wells Date: March 25, 1999 Dale Wells /s/ Richard C. White Date: March 25, 1999 Richard C. White EX-13 2 PORTIONS OF ANNUAL REPORT INCORPORATED BY REFERENCE The power of community initiatives. Full Circle 1998 Community Bancorp. Annual Report If in a local community a citizen becomes aware of a human need which is not being met,... Community Bancorp. Newport-Derby Road PO Box 259 Derby, Vermont 05829 (802) 334-7915 ...he thereupon discusses the situation with his neighbors... Going back 150 years or so... Alexis de Tocqueville, the French observer of our culture, described us so well: These Americans are peculiar people. If, in a local community, a citizen becomes aware of a human need which is not being met, he thereupon discusses the situation with his neighbors. Suddenly, a committee comes into existence. The committee thereupon begins to operate on behalf of the need and a new community function is established. It is like watching a miracle, because these citizens perform this act without a single reference to any bureaucracy, or any official agency. There is not a bank in the country that does not, at least to some extent, boast about its community service. For many it's merely a matter of making the appropriate contributions to favored organizations and causes on an annual basis. Some encourage their employees to become involved in community organizations. Still others insist upon it. All of these are laudable activities and speak well for the banking industry as a whole. The country would be a better place if all corporate entities were so civic-minded. Our intent, however, is to assert the notion that Community National Bank goes well beyond community service to something better defined as "community initiative." De Tocqueville's description of how that works in American society is more than apt, though even he would not suspect that such initiatives might be generated within a community bank. Jacques Couture A dairy farmer, maple producer and member of our Board of Directors, Jacques is also committee chairman for Troop 821 of Westfield, Troy and Jay; Selectman for the town of Westfield; Treasurer of the Sacred Heart School; and President of the Sacred Heart Educational Trust. This "Jacques of all trades" also serves on the Northeast Dairy Compact Commission and is President of the International Maple Syrup Institute. ......Suddenly, a committee comes into existence.... ...The committee thereupon begins to operate on behalf of the need... ...and a new community function is established... Seeing a need and filling it is also akin to what happens when a stone is tossed into a pond. The rings extend outward almost to infinity. Take our Community Circle program for example. Back in 1988 we saw the need for an organization that would bring the senior citizens in our area together to socialize and be involved in recreational activities, including travel. We reasoned that many seniors remained lonely at home simply because there were few alternatives. Fearful of traveling alone, lacking companionship for a trip to the mall or a movie, they opted for inactivity. The Community Circle program changed all that. Today some 2,800 area citizens are members of Community Circle. Groups of them have traveled to Australia; Branson, Missouri; Greece; England; and Hawaii, to name but a handful of destinations. Suzanne Cartee Serving spaghetti at community meals is only part of what this energetic Derby Credit Administration Clerk brings to the table. As a leader of the Newport Baptist Church Youth Group, Suzanne shows teens how they can work together to help themselves-and the community as a whole. She also finds time to organize Newport Baptist's weekly children's church program. They get out to the movies each month under the auspices of the bank and the local Hoyts and Star Cinemas. Perhaps most importantly, they have forged a network of new friends within Community Circle which has resulted in countless informal get-togethers apart from officially sponsored activities. By initiating Community Circle we have obviously achieved a substantial business benefit. The collective membership has over $75 million on deposit with the bank. The point, however, is that the business resulted from taking the community initiative and accepting responsibility for its full implementation. In the past couple of years, we have been made aware through our connections in the schools that financial illiteracy was becoming a significant problem. Many of today's youngsters have little concept of credit, borrowing or even costs. They have not been taught how to balance a checkbook, how to use credit and debit cards wisely, how to invest or what is involved in arranging a loan. To meet this problem head on, the bank again took the initiative. We started our Totally Kids ClubTM, which gets us involved with area youngsters at the earliest possible age. It also has helped us establish strong relationships with the schools, and we are now able to send our people into the classroom so that they can directly attack the problem. I am happy to report that good progress is being made and that financial illiteracy in our area is being addressed. We will also be launching a financial education course for teens and young adults in conjunction with America's Promise-the Alliance for Youth. Working closely with high school teachers, CNB employees will make classroom presentations on credit and financial responsibility and cover topics like managing credit, budgeting wisely and understanding electronic banking. Not only do we try to meet community needs ourselves, we also reward the efforts of others. Our Community Service Award program salutes the unsung efforts of community volunteers. Qualified candidates are nominated by the community and selected by a committee comprised of CNB employees. A donation of $250 is made in honor of each award recipient to the charitable organization of his/her choice. In this annual report you will meet a number of our employees who are not only involved in community activities but also working with us as we take initiatives to fill community needs before they become community problems. It is a mission we find rewarding in every possible way. ...It is like watching a miracle." Alexis de Tocqueville Janet Cartee The Newport-based Trust Officer is Secretary and President-elect of the Newport Rotary Club which provides scholarships to local youth and sponsors an annual basketball tournament and the Northeast Music Festival. Janet has also served as Chairperson of the American Heart Association's "Cardiac Arrest." Dear Shareholders and Friends of Community Bancorp. and Community National Bank Community Bancorp. ended the year with total assets of $225 million, up 5.6% from 12/31/97, a reasonable rate of growth in an economy that has been growing at a somewhat slower rate. Earnings for the year were $2,190,374, or $.71 per share, compared to $2,145,395, or $.72 per share for 1997. Our return on average assets was 1.0%. Deposit growth was quite strong this year, with the result that our market share of deposits in Orleans County increased to 49.74% after a small dip in 1997. We believe this growth in market share is attributable to competitive rates, friendly service, convenient hours and locations, our commitment to our communities and the success of our special programs. Our earnings were affected by two primary factors: loan losses and declining spreads. We again experienced a high level of loan losses in the consumer portfolio as many of our customers continue to have difficulty making ends meet. We have found that the proliferation of "easy credit" from many bank and non-bank lenders and a record number of consumer bankruptcies have exacerbated the perennial problem of underemployment in the Northeast Kingdom. Although we originated more loans this year than last, our loan portfolio actually went down because so many customers have been refinancing their loans at the bank and elsewhere into fixed rate loans sold into the secondary market. As a result, our loan portfolio decreased from $150 million to $148.3 million. On the other hand, the number of loans originated and sold into the secondary market went from $6.8 million in 1997 to $19.4 million in 1998. The result of this is that we have a higher percentage of assets in our investment portfolio, which affects our spreads because we earn less on investments than we do on loans. One of the highlights of 1998 was the tenth anniversary celebration of Community Circle. On August 23, more than 1,200 Community Circle members gathered at Jay Peak for an afternoon of good food, entertainment and good fellowship. We continue to marvel at the success of this program which now has over 2,800 members and more than $75 million in the bank. Clearly we have identified and met a strong demand for this kind of program in the Northeast Kingdom. Community Service is an important part of community banking, which is why it is the theme of this year's annual report. We are proud of the role our directors, officers and employees play in the communities we serve and of the role we play as an institution. We received some important recognition for this work this year, as the bank was awarded the Vermont Council on the Arts Chair's Business Award "for exemplary support of the arts in Vermont," and Steve Marsh was recognized as the Vermont Bankers Association Community Service Banker of the Year, the second time a CNB officer has been so honored. Our regulators have recognized our efforts as well, as we again achieved an "outstanding" rating under the Community Reinvestment Act. As we look forward to 1999, there are several exciting developments to report. First, we relocated our Newport office into the new state office building in January, followed by our trust department in March. Second, we are kicking off the new year with our third Community Booster Loan program, with a loan pool of $5 million set aside at very attractive rates to stimulate the local economy. Third, we will be introducing PC banking so that our customers, businesses and individuals alike will have access to their accounts via their computers and the internet. It's one more way that we are trying to make banking even more convenient for our customers. Fourth, we have just joined America's Promise-the Alliance for Youth, the first bank in the state to do so. America's Promise is a national not- for-profit organization headed by General Colin Powell that is dedicated to improving the lives of our nation's youth. America's Promise aims to provide young people across the country with access to the following five fundamental resources: an ongoing relationship with a caring adult, like a mentor, tutor or coach safe places and structured activities during non-school hours a healthy start a marketable skill through effective education, and an opportunity to give back to the community through community service. In 1998 America's Promise and the American Bankers' Association announced a partnership to establish and promote a national volunteer campaign in the banking industry to reach out to youth across the country. For Community National Bank this effort is a logical extension of our award-winning Totally Kids ClubTM, and something we are proud to be a part of. Because of our early support for this important program, our bank was featured in a promotional video with General Powell. Finally, 1999 is the last year of the millennium. Look for regular Y2K updates in the "Community Bank Notes" and on our website, www.communitynationalbank.com. We want to make sure that our customers are fully informed about Y2K issues and are prepared for the date change so that they can avoid becoming victims of scare tactics and outright scams. Throughout the year we will be reminding our customers that the safest place for their money is in the bank (and not in some speculative investment or under the proverbial mattress) and offering tips on handling their own Y2K preparedness. This is an exciting time to be in the financial services industry. We look forward to meeting the challenges ahead with the continued support of our shareholders, customers and the communities we serve. Richard C. White President and CEO Community Bancorp. and Community National Bank ...an important part of community banking... Craig Buchanan As a Loan Review Officer, Craig knows a thing or two about crossing the i's and dotting the t's. So it probably comes as no surprise that he takes that same thorough approach to community service. As Secretary/Treasurer of the Glover Trailwinders Snowmobile Club, Craig ensures that safe, well-maintained trails are made available to area snowmobile enthusiasts of all ages. Operating Principles Community National Bank's success-both in terms of its own profitability and the positive impact it makes on the communities it serves-comes from its ability to stay true to its original mission as a community bank. In order to ensure long-term adherence to this guiding mission, we have agreed to be bound by the following general operating principles: We will be fair, sensitive, honest, trusting and trustworthy in all our dealings among ourselves, with customers, with vendors and with the community at large. We will obey all laws, in fact and in spirit, and we will always strive to do the right thing, in every situation, to the best of our abilities. And if we fail, we will do whatever is required to make amends. Specifically, we will work together to ensure that we: 1. Affirm our obligation to our shareholders to provide them with a reasonable return on their investment while honoring our obligation to our depositors and the community to maintain the safety and soundness of the bank. 2. Refuse to engage in practices that are discriminatory, unethical or illegal. 3. Always conduct our business in good faith. 4. Think like a customer. 5. Work to earn our customers' loyalty every day. 6. Remember that our customers are doing us a favor by banking with us; we are not doing them a favor by providing the service. 7. Treat our customers and fellow employees with dignity and respect. 8. Support our local communities and recognize our special role as the only bank with offices in all three counties of the Northeast Kingdom. 9. Invest our resources substantially in the communities we serve. 10. Work cooperatively with our internal and external auditors and examiners. Joanne Guyette It's not often you'll find a Loan Officer that also doubles as a biology teacher, but that's not a big leap for Joanne. As an active volunteer at Sacred Heart School, she has assisted with health screenings, provided after school care-even organized the most recent Kindergarten graduation. So whether she's lending money or a helping hand, you can always count on Joanne. Directors,Officers and Advisory Boards Board of Directors Community Bancorp. and Community National Bank Thomas E. Adams, President, NPC Realty, Inc. Jacques R. Couture, Dairy Farmer Elwood G. Duckless, Past President, Newport Electric Co. Michael H. Dunn, Book Dealer Rosemary M. Lalime, Principal Broker and Owner, All Seasons Realty Marcel M. Locke, Proprietor, Parkview Garage Stephen P. Marsh, Vice President and Treasurer, Community Bancorp.; Senior Vice President and Cashier, Community National Bank Anne T. Moore, Principal Broker, The Taylor Moore Agency Dale Wells, President, Dale Wells Building Contractor, Inc. Richard C. White, President and Chief Executive Officer, Community Bancorp. and Community National Bank Executive Officers Community Bancorp. and Community National Bank Richard C. White, President and Chief Executive Officer, Community Bancorp. and Community National Bank Stephen P. Marsh, Vice President and Treasurer, Community Bancorp.; Senior Vice President and Cashier, Community National Bank Alan A. Wing, Vice President, Community Bancorp.; Senior Vice President, Community National Bank Rosemary M. Rowe, Secretary, Community Bancorp.; Senior Vice President, Community National Bank Other Officers Community National Bank Kathryn M. Austin, Vice President and Human Resources Officer Mark C. Belanger, Assistant Cashier Jeanne L. Bonnell, Community Circle Director Louise M. Bonvechio, Loan Officer Wanda J. Boomer, Assistant Vice President and Troy Office Manager Beckie A. Bremseth, Island Pond Office Manager Timothy B. Bronson, Vice President and Loan Officer Craig D. Buchanan, Loan Review Officer Theresa P. Carpenter, Loan Underwriting Officer Janet H. Cartee, Trust Officer Hope K. Colburn, Loan Officer Bonnie J. Currier, Vice President and Barton Office Manager Joanne M. Guyette, Loan Officer Richard L. Isabelle, Vice President and St. Johnsbury Office Manager Rosemary M. Lalime, Vice President France B. Lambert, Assistant Operations Officer Carmi M. Marsh, Vice President and Loan Officer Theresa B. Morin, Special Asset Officer Terrie L. Paul, Assistant Vice President and Credit Administration Officer Deborah S. Tetreault, Vice President and Loan Officer Michael H. Venuti, Senior Trust Officer Joanne M. Williams, Loan Underwriting Officer Thomas R. Zuppe, Vice President and E.D.P. Department Manager Island Pond Advisory Board Theodore J. Firestine, Craig Goulet, Dale R. Lamere and Adrien R. Thibeault Barton Advisory Board John F. Brown, Rene Desmarais, Alicia Marcotte, John C. Ruggles and Fernand J. Tanguay Troy Advisory Board Roland Denton, Roland Laliberty, Roger A. Morin and Gary R. Taylor St. Johnsbury Advisory Board Ernest Begin, Marty Feltus, Robert Ide, Richard Lawrence, Bernier Mayo, Peter Murphy and Allan Rodgers The Officers Stephen Marsh, Alan Wing, Rosemary Rowe, Richard White The Directors Seated: Marcel Locke, Elwood Duckless, Richard White, Dale Wells. Standing: Thomas Adams, Rosemary Lalime, Stephen Marsh, Michael Dunn. Missing from photo: Jacques Couture, Anne T. Moore. Meeting community needs. It's one thing to say you care. It's quite another to actually do something about it. To us, the Northeast Kingdom is a unique and special place. It's where we all live and we're proud to call it our home. So the next time you see a CNB employee or board member performing community service, remember one thing: they don't have to do it. They just want to. And we couldn't be prouder. Paul Chandler He may not be Michael Jordan, but aspiring hoop players in Glover think Paul's an all-star. As a volunteer with the Glover Eaglets, an instructional basketball clinic for children, the Mortgage Counselor teaches fundamentals and emphasizes fair play, sportsmanship and teamwork-characteristics that are essential both on and off the court. Marcel Locke As proprietor of Parkview Garage in Orleans and member of the CNB Board of Directors, Marcel is more than just mechanically inclined. He's community inclined. In addition to teaching auto mechanics to young people, Marcel is a selectman in Albany; Director of the Coutts Moriarty 4-H camp; Director of the Orleans County Fair; Chairman of the trustees at Albany United Church; and a member of the Orleans County Farm Bureau. Solving community problems. Tracy Roberts When this Newport Office Supervisor isn't serving her customers, she's cooking up a lot of great ideas for the community. Like coordinating the Newport Office's participation in the Newport Chili Festival. Throwing a sugar on snow party for kids. Or organizing a caroling event for Troy School parents and their children this past holiday season. She's also actively involved in CNB's Totally Kids ClubTM. Rick Isabelle As our Vice President at CNB's four-year-old office in St. Johnsbury, Rick's record of community involvement is a mile long. Whether it's joining forces with the Vermont State Police at the Annual Safety Fair or lending his time and support to cultural treasures like the St. Johnsbury Athenaeum, Rick is sure to be involved in one way or another. Holly Pepin When it comes to community service, Holly runs circles around the competition. And in some cases, marathons. Just ask the Derby Teller's fellow road runners, who each agreed to run a grueling leg of the Vermont City Marathon this past May in Burlington to raise money for local charity. Norene Roberts It's safe to say that you don't have to light a fire under Norene to get her involved in community service. Because her first inclination would be to put it out. A volunteer firefighter with the Newport Fire Department since 1989, this Derby Loan Processor is well-versed at putting out fires. And responding to a call for help from the community. Community Bancorp. and Subsidiaries 1998 Financial Statements Financial Reporting Responsibility The management of Community Bancorp. acknowledges its responsibility for the preparation of the consolidated financial statements and other financial information contained in this annual report. The accompanying consolidated financial statements have been prepared by the management of Community Bancorp. in conformity with generally accepted accounting principles appropriate in the circumstances. Where amounts must be based on estimates and judgments, they represent the best estimates and judgments of management. The financial information appearing throughout this annual report is consistent with that in the consolidated financial statements. The management of Community Bancorp. is also responsible for establishing and maintaining a system of internal controls which we believe is adequate to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are protected against loss from unauthorized use or disposition. The system in use at Community Bancorp. provides such reasonable assurance, supported by the careful selection and training of staff, the establishment of organizational structures providing an appropriate and well-defined division of responsibilities, and the communication of policies and standards of business conduct throughout the institution. The accounting policies and system of internal accounting controls are under the general oversight of Community Bancorp. and Community National Bank's Board of Directors, acting through the Risk Management and Audit Committees. The Internal Auditor of Community National Bank, who reports directly to the Risk Management and Audit Committees, conducts an extensive program of audits and risk asset reviews. In addition, A.M. Peisch & Company, independent auditors, are engaged to audit our consolidated financial statements. A.M. Peisch & Company obtain and maintain an understanding of our accounting and financial controls and conduct such tests and other auditing procedures as they consider necessary in the circumstances to express the opinion in their report that follows. A.M. Peisch & Company have free access to the Board of Directors, with no members of management present, to discuss their audit and their findings as to the integrity of Community Bancorp.'s financial reporting and the adequacy of the system of internal accounting controls. Community Bancorp. /s/Richard C. White Richard C. White Chairman Independent Auditor's Report To the Board of Directors and Stockholders Community Bancorp. and Subsidiaries Derby, Vermont We have audited the accompanying consolidated balance sheets of Community Bancorp. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 consolidated financial position of Community Bancorp. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/A.M. Peisch & Company January 6, 1999 St. Johnsbury, Vermont VT Reg. No. 92-0000102 Joan Hamblett It isn't always our employees and board members who make a difference in the communities. Sometimes, it's our financial support along with friends of the community. Friends like Joan, a retired teacher who volunteers her time in the newly-created after school program at the United Church in Newport. CNB donated $2,500 to this program in 1998 as part of its commitment to America's Promise. Consolidated Balance Sheets Community Bancorp. and Subsidiaries
December 31, 1998 1997 Assets Cash and due from banks (Note 17) $ 4,896,947 $ 10,657,610 Federal funds sold and overnight deposits 15,527,141 3,650,000 Cash and cash equivalents 20,424,088 14,307,610 Securities held-to-maturity (approximate fair value $30,038,323 and $34,125,823 at December 31, 1998 and 1997) (Note 2) 29,877,851 34,125,802 Securities available-for-sale (Note 2) 20,590,000 8,039,063 Restricted equity securities (Note 2) 1,141,650 1,099,750 Loans (Note 3) 148,335,346 150,115,852 Allowance for loan losses (Note 4) (1,658,967) (1,502,202) Unearned net loan fees (848,963) (866,589) Net loans 145,827,416 147,747,061 Bank premises and equipment, net (Note 5) 3,010,041 3,285,661 Accrued interest receivable 1,460,671 1,460,298 Other real estate owned, net (Note 6) 541,903 1,088,867 Other assets (Notes 7 and 12) 2,177,043 1,847,292 Total assets $225,050,663 $213,001,404 Liabilities and stockholders' equity LIABILITIES Deposits: Demand, non-interest bearing $ 21,743,065 $ 20,297,137 NOW and money market accounts 49,939,162 40,562,693 Savings 30,512,230 30,053,422 Time, $100,000 and over (Note 8) 17,874,124 18,182,338 Other time (Note 8) 77,728,713 78,484,811 197,797,294 187,580,401 Repurchase agreements and other borrowings (Note 10) 288,241 -0- Borrowed funds (Note 9) 4,060,000 4,060,000 Accrued interest and other liabilities 883,069 776,646 Subordinated debentures (Note 11) 20,000 104,000 203,048,604 192,521,047 Commitments and contingent liabilities (Notes 5, 13, 14 and 15) STOCKHOLDERS' EQUITY Common stock, $2.50 par value; 6,000,000 shares authorized 3,140,606 shares issued at 12/31/98 and 3,044,697 shares issued at 12/31/97 7,851,516 3,842,907 Additional paid-in capital 8,756,453 7,978,435 Retained earnings (Note 18) 5,604,096 9,070,443 Accumulated other comprehensive income 235,375 33,709 Less treasury stock, at cost (1998: 29,646 shares; 1997: 29,629 shares) (445,381) (445,137) 22,002,059 20,480,357 Total liabilities and stockholders' equity $225,050,663 $213,001,404
See accompanying notes. Consolidated Statements of Income Community Bancorp. and Subsidiaries
Years Ended December 31, 1998 1997 1996 Interest income Interest and fees on loans $13,758,226 $13,867,588 $13,376,352 Interest and dividends on investment securities U.S. Treasury securities 2,058,981 2,033,179 2,016,787 U.S. Government agencies 137,074 84,194 78,177 States and political subdivisions 621,411 621,571 743,847 Dividends 74,046 70,899 70,229 Interest on federal funds sold and overnight deposits 421,972 140,163 246,405 17,071,710 16,817,594 16,531,797 Interest expense Interest on deposits 7,868,323 7,577,571 8,148,012 Interest on borrowed funds and securities sold under agreements to repurchase 203,702 245,103 7,586 Interest on subordinated debentures 4,597 11,489 20,828 8,076,622 7,834,163 8,176,426 Net interest income 8,995,088 8,983,431 8,355,371 Provision for possible loan losses (Note 4)(660,000) (660,000) (365,000) Net interest income after provision for possible loan losses 8,335,088 8,323,431 7,990,371 Other income Trust Department income 137,678 87,412 113,187 Service fees 676,558 695,260 604,449 Security (losses) gains (Note 2) -0- -0- (1,928) Other (Note 23) 771,947 553,027 564,894 1,586,183 1,335,699 1,280,602 Other expenses Salaries and wages 2,795,987 2,795,732 2,618,632 Pension and other employee benefits (Note 13) 744,715 681,030 653,690 Occupancy expenses 1,250,077 1,240,165 1,221,080 Other operating expenses (Note 23) 2,229,772 2,041,704 1,903,675 7,020,551 6,758,631 6,397,077 Income before income taxes 2,900,720 2,900,499 2,873,896 Income taxes (Note 12) 710,346 755,104 654,092 Net income $2,190,374 $2,145,395 $2,219,804 Earnings per common share on weighted average $0.71 $0.72 $0.78 Weighted average number of common shares used in computing earnings per share 3,075,906 2,976,448 2,862,708 Book value per share on shares outstanding at December 31 $7.07 $6.79 $6.58
See accompanying notes. Consolidated Statements of Stockholders' Equity Community Bancorp. and Subsidiaries Years ended December 31, 1998, 1997 and 1996
Accumulated Additional other Total -Common Stock- paid-in Retained comprehensive Treasury stockholders' Shares Amount capital earnings income stock equity Balances, December 31, 1995 1,330,514 $3,399,674 $5,513,703 $9,056,562 $ 50,501 $(440,023) $17,580,417 Comprehensive income, net of taxes Net income -0- -0- -0- 2,219,804 -0- -0- 2,219,804 Net unrealized holding loss on securities available-for-sale, net of tax, $21,914 -0- -0- -0- -0- (42,538) -0- (42,538) Comprehensive income 2,177,266 Dividends paid -0- -0- -0- (1,404,957) -0- -0- (1,404,957) Issuance of stock 52,624 131,559 627,259 -0- -0- -0- 758,818 Purchase of treasury stock (10) -0- -0- -0- -0- (189) (189) Balances, December 31, 1996 1,383,128 3,531,233 6,140,962 9,871,409 7,963 (440,212) 19,111,355 Comprehensive income, net of taxes Net income -0- -0- -0- 2,145,395 -0- -0- 2,145,395 Net unrealized holding gain on securities available-for-sale, net of tax, ($13,263) -0- -0- -0- -0- 25,746 -0- 25,746 Comprehensive income 2,171,141 Dividends paid -0- -0- -0- (1,652,355) -0- -0- (1,652,355) 5% stock dividend 69,161 172,903 1,121,103 (1,294,006) -0- -0- -0- Issuance of stock 55,509 138,771 716,370 -0- -0- -0- 855,141 Purchase of treasury stock (264) -0- -0- -0- -0- (4,925) (4,925) Balances, December 31, 1997 1,507,534 3,842,907 7,978,435 9,070,443 33,709 (445,137) 20,480,357 Comprehensive income, net of taxes Net income -0- -0- -0- 2,190,374 -0- -0- 2,190,374 Net unrealized holding gain on securities available-for-sale, net of tax ($103,889) -0- -0- -0- -0- 201,666 -0- 201,666 Comprehensive income 2,392,040 Dividends paid -0- -0- -0- (1,833,146) -0- -0- (1,833,146) 100% stock split effected in the form of a dividend 1,529,430 3,823,575 -0- (3,823,575) -0- -0- -0- Issuance of stock 74,013 185,034 778,018 -0- -0- -0- 963,052 Purchase of treasury Stock (17) -0- -0- -0- -0- (244) (244) Balances, December 31, 1998 3,110,960 $7,851,516 $8,756,453 $5,604,096 $235,375 $(445,381) $22,002,059
See accompanying notes. Consolidated Statements of Cash Flows Community Bancorp. and Subsidiaries
Years Ended December 31, 1998 1997 1996 Cash flows from operating activities: Net income $ 2,190,374 $ 2,145,395 $ 2,219,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 407,226 407,238 392,775 Provision for possible loan losses 660,000 660,000 365,000 Provision for deferred income taxes (75,246) 37,392 110,709 Gain on sale of loans (153,699) (19,680) (22,281) Securities losses -0- -0- 1,928 Losses(gains) on sales of OREO 4,448 (225,343) (41,297) OREO writedowns 26,592 173,496 38,712 Amortization of bond premium, net 48,621 19,962 53,626 Proceeds from sales of loans held for sale 18,780,207 6,547,719 7,949,649 Originations of loans held for sale (19,658,705) (6,308,539) (7,862,161) (Increase) decrease in interest receivable (373) 78,339 (14,462) Increase in mortgage service rights (92,544) (36,438) (38,529) (Increase) decrease in other assets (261,297) (159,114) 67,100 Decrease in unamortized loan fees (17,626) (37,714) (4,428) Increase in taxes payable 20,628 19,947 65,337 (Decrease) increase in interest payable (10,694) 41,597 (29,119) Increase (decrease) in accrued expenses 950 17,080 (2,858) Increase (decrease) in other liabilities 55,359 (2,849) 119,956 Net cash provided by operating activities 1,924,221 3,358,488 3,369,461 Cash flows from investing activities Securities held-to-maturity Maturities and paydowns 26,602,459 22,663,019 20,893,071 Purchases (22,365,543)(18,866,987)(26,292,738) Securities available-for-sale Sales and maturities 3,000,000 -0- 10,004,844 Purchases (15,282,969) -0- (4,998,437) Purchase of restricted equity securities (41,900) (36,700) (23,300) Decrease (increase) in loans, net 1,758,500 (6,304,459) (9,421,187) Capital expenditures, net (108,756) (271,540) (550,968) Investments in limited partnership, net 12,779 (29,106) (69,723) Premium paid on purchase of subsidiary -0- (342,662) -0- Proceeds from sales of OREO 864,835 466,850 508,880 Recoveries of loans charged off 202,057 172,523 101,914 Net cash used in investing activities (5,358,538) (2,549,062) (9,847,644) (continued) 1998 1997 1996 Cash flows from financing activities Net increase in demand, NOW, savings and money market accounts 11,281,205 908,511 8,381,093 Net (decrease)increase in certificates of deposit (1,064,312) 2,817,414 (3,410,139) Net increase(decrease) in short-term borrowings and repurchase agreement 288,241 (1,600,000) 1,600,000 Net increase in borrowed funds -0- 3,995,000 -0- Payments to acquire treasury stock (244) (4,925) (189) Dividends paid (954,095) (863,214) (741,139) Net cash provided by financing activities 9,550,795 5,252,786 5,829,626 Net increase(decrease) in cash and cash equivalents 6,116,478 6,062,212 (648,557) Cash and cash equivalents Beginning 14,307,610 8,245,398 8,893,955 Ending $20,424,088 $14,307,610 $8,245,398 Supplemental schedule of cash paid during the year Interest $ 8,087,316 $ 7,792,566 $8,205,545 Income taxes $ 764,964 $ 697,765 $ 444,351 Supplemental schedule of noncash investing and financing activities: Unrealized gain(loss) on securities available-for-sale $ 305,555 $ 39,009 $ (64,452) Other Real Estate Owned acquired in settlement of loans $ 348,911 $ 1,592,401 $ 723,596 Debentures converted to common stock $ 84,000 $ 66,000 $ 95,000 Stock dividends $ 3,823,575 $ 1,294,006 $ -0- Dividends paid: Dividends payable $ 1,833,146 $ 1,652,355 $1,404,957 Dividends reinvested (879,051) (789,141) (663,818) $ 954,095 $ 863,214 $ 741,139
See accompanying notes. Notes to Consolidated Financial Statements Community Bancorp. and Subsidiaries Note 1. Significant Accounting Policies The accounting policies of Community Bancorp. and Subsidiaries ("company") are in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. Basis of consolidation-The consolidated financial statements include the accounts of Community Bancorp. and its wholly-owned subsidiaries, Community National Bank and Liberty Savings Bank. All significant intercompany accounts and transactions have been eliminated. Nature of operations-The Company provides a variety of financial services to individuals and corporate customers through its branches in northeastern Vermont, which is primarily a small business and agricultural area. The Company's primary deposit products are checking and savings accounts and certificates of deposit. Its primary lending products are commercial, real estate and consumer loans. Concentration of risk-The Company's operations are affected by various risk factors, including interest-rate risk, credit risk and risk from geographic concentration of lending activities. Management attempts to manage interest- rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although the Company has a diversified loan portfolio and economic conditions are stable, most of its lending activities are conducted within the geographic area where it is located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy. In addition, a substantial portion of the Company's loans are secured by real estate. 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. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Presentation of cash flows-For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one-day periods) and overnight deposits. Trust assets-Assets of the Trust Department, other than trust cash on deposit at the Company, are not included in these consolidated financial statements because they are not assets of the Company. Investment securities-Debt securities the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt and equity securities purchased and held primarily for resale in the near future are classified as trading. Trading securities are carried at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses net of applicable income taxes reported as a net amount in other comprehensive income. The specific identification method is used to determine realized gains and losses on sales of securities available-for-sale. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Restricted equity securities-Restricted equity securities are comprised of Federal Reserve Bank stock and Federal Home Loan Bank stock. These securities are carried at cost. As a member of the Federal Reserve Bank (FRB), the Company is required to invest in FRB stock in an amount equal to 3% of Community National Bank's capital stock and surplus. As a member of the Federal Home Loan Bank, the Company is required to invest in $100 par value stock of the Federal Home Loan Bank. The stock is nonmarketable, and when redeemed, the Company would receive from the Federal Home Loan Bank an amount equal to the par value of the stock. Loans-Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan interest income is accrued daily on the outstanding balances. Accrual of interest is discontinued when a loan is specifically determined to be impaired or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loan origination and commitment fees and certain direct loan origination costs are being deferred and amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life. Allowance for loan losses-The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Bank premises and equipment-Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the following estimated useful lives:
Years Buildings and improvements 8 - 40 Furniture and equipment 3 - 10
The cost of assets sold or otherwise disposed of, and the related allowance for depreciation, is eliminated from the accounts and the resulting gains or losses are reflected in the income statement. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments are capitalized. Other real estate owned-Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Company's carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Income taxes-The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company's deferred tax assets are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. Foreign currency transactions-Foreign currency (principally Canadian) amounts are translated to U.S. dollars in accordance with FASB Statement No. 52, "Foreign Currency Translation." The U.S. dollar is the functional currency and therefore translation adjustments are recognized in income. Total translation adjustments, including adjustments on foreign currency transactions, are immaterial. Mortgage servicing-The Company recognizes as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. When the Company acquires mortgage servicing rights through either the purchase or origination of mortgage loans (originated mortgage loan servicing rights) and sells or securitizes those loans with servicing rights retained, it allocates the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage loan servicing rights) based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sales contracts. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. Pension costs-Pension costs are charged to salaries and employee benefits expense and are funded as accrued. Advertising costs-The Company expenses advertising costs as incurred. Stock split effected in the form of a dividend-Effective June 1, 1998, the shareholders authorized a two-for-one stock split of the Company's $2.50 par value common stock. The stock split was effected in the form of a dividend. All references in the accompanying financial statements to the number of common shares and per-share amounts have been restated to reflect the stock split. Comprehensive income-As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. Comprehensive income includes the reported net income of a company adjusted for items that are currently accounted for as direct entries to equity, such as the mark-to-market adjustment on securities available-for-sale, foreign currency items and minimum pension liability adjustments. The December 31, 1998, and December 31, 1997, financial statements have been reclassified to conform to the requirements of SFAS No. 130. Earnings per common share-The FASB issued Statement No. 128, "Earnings per Share," which became effective for the Company during December 1997. The statement applies prospectively; earlier application is not permitted. The adoption of this statement did not have a material effect on the Company's financial statements. Earnings per common share amounts are computed based on the weighted average number of shares of common stock outstanding during the period (retroactively adjusted for stock splits and stock dividends) and reduced for shares held in treasury. The assumed conversion of subordinated debentures does not result in material dilution. Off-balance-sheet financial instruments-In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Fair values of financial instruments-The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment securities: Fair values for investment 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. Restricted equity securities: The carrying amounts of these securities approximate their fair values. Loans and loans held for sale: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Deposits and long-term debt: The fair values disclosed for demand deposits (for example, checking and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and the long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and debt to a schedule of aggregated contractual maturities on such time deposits and debt. Short-term borrowings: The carrying amounts reported in the balance sheets for federal funds purchased approximate their fair values. These borrowings are short-term and due on demand. Other liabilities: Commitments to extend credit were evaluated and fair value was 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 the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Accrued interest: The carrying amounts of accrued interest approximates their fair values. Changes in accounting policies-The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which became effective for such transactions occurring after December 31, 1996 and supersedes FASB No. 122. (The effective date of certain provisions of the statement was delayed one year until, January 1, 1998 by the subsequent issuance of FASB Statement No. 127). The statement applies prospectively; earlier or retroactive application is not permitted. Under this statement, after a transfer of financial assets an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings and includes standards for measuring and amortizing servicing assets and liabilities. The adoption of Statement No. 125 (as amended by Statement No. 127) did not have a material effect on the Company's financial statements. In 1998, the FASB issued SFAS No.131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards relative to public companies for the reporting of certain information about operating segments within their financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Company does not have reportable segments as defined within the Statement. In June, 1998, the FASB issued Statement No.133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement is effective for the fiscal years beginning after June 15,1999. Reclassification-Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the current year presentation. Note 2. Investment Securities Securities available-for-sale (AFS), held-to-maturity (HTM) and restricted equity securities consist of the following at December 31, 1998 and 1997:
Securities AFS, December 31, 1998 Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government and agency securities $20,233,371 $357,237 $ 608 $20,590,000 Securities AFS, December 31, 1997 Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government and agency securities $ 7,987,988 $ 51,075 $ -0- $ 8,039,063 Securities HTM, December 31, 1998 Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government and agency securities $20,143,530 $160,472 $ -0- $20,304,002 States and political Subdivisions 9,734,321 -0- -0- 9,734,321 $29,877,851 $160,472 $ -0- $30,038,323 Securities HTM, December 31, 1997 Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government and agency securities $24,121,910 $ 38,282 $38,261 $24,121,931 States and political subdivisions 10,003,892 -0- -0- 10,003,892 $34,125,802 $ 38,282 $38,261 $34,125,823 Restricted equity securities, December 31, 1998 Amortized Unrealized Unrealized Fair Cost Gains Losses Value Federal Home Loan Bank stock $ 1,003,500 $ -0- $ -0- $ 1,003,500 Federal Reserve Bank stock 138,150 -0- -0- 138,150 $ 1,141,650 $ -0- $ -0- $ 1,141,650 Restricted equity securities, December 31, 1997 Amortized Unrealized Unrealized Fair Cost Gains Losses Value Federal Home Loan Bank stock $ 961,600 $ -0- $ -0- $ 961,600 Federal Reserve Bank stock 138,150 -0- -0- 138,150 $ 1,099,750 $ -0- $ -0- $ 1,099,750
Investment securities with a carrying amount of $6,036,736 and $5,046,607 and a market value of $6,097,500 and $5,076,875 at December 31, 1998 and 1997, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Proceeds from the sale of securities available-for-sale amounted to $-0-, $-0- and $2,004,844 in 1998, 1997 and 1996, respectively. Realized gains from sales of investments available-for-sale were $-0-, $-0- and $909, with realized losses of $-0-, $-0- and $2,837 for the years 1998, 1997 and 1996, respectively. The carrying amount and estimated fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The maturities of securities available-for-sale at December 31, 1998, were as follows:
Amortized Fair Cost Value Due from one to five years $20,233,371 $20,590,000 The maturities of securities held-to-maturity at December 31, 1998, were as follows: Amortized Fair Cost Value Due in one year or less $21,107,083 $21,166,559 Due from one to five years 7,031,351 7,132,347 Due from five to ten years 392,179 392,179 Due after ten years 1,347,238 1,347,238 $29,877,851 $30,038,323
Included in the caption "States and Political Subdivisions" are securities of local municipalities carried at $9,610,774 and $9,853,657 at December 31, 1998 and 1997, respectively, which are attributable to private financing transactions arranged by the Company. There is no established trading market for these securities and, accordingly, the carrying amount of these securities has been reflected as their market value. The Company anticipates no losses on these securities and expects to hold them until their maturity. Note 3. Loans The composition of net loans at December 31 is as follows:
1998 1997 Commercial $ 9,596,168 $ 9,021,928 Real estate - Construction 2,024,545 1,090,612 Real estate - Mortgage 120,595,977 120,816,761 Installment and other 16,118,656 19,186,551 148,335,346 150,115,852 Deduct: Allowance for possible loan losses 1,658,967 1,502,202 Unearned net loan fees 848,963 866,589 2,507,930 2,368,791 $145,827,416 $147,747,061
Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of commercial and mortgage loans serviced for others were $44,821,268 and $34,039,031 at December 31, 1998 and 1997, respectively. Mortgage servicing rights of $122,533 and $43,211 were capitalized in 1998 and 1997, respectively. The total recorded investment in impaired loans as determined in accordance with FASB Statements No. 114 and No. 118 approximated $1,102,661 and $1,000,973 at December 31, 1998 and 1997, respectively. These loans were subject to allowances for loan losses of approximately $30,512 and $58,019 which represented the total allowance for loan losses related to impaired loans at December 31, 1998 and 1997, respectively. The average recorded investment in impaired loans amounted to approximately $1,065,049 and $1,078,509 for the years ended December 31, 1998 and 1997, respectively. Cash receipts on impaired loans amounted to $173,694 and $621,293 in 1998 and 1997, respectively, of which $186,703 and $592,379 were applied to the principal balances of the loans. In addition, the Company had other nonaccrual loans of approximately $1,250,961 and $485,100 at December 31, 1998 and 1997, respectively, for which impairment had not been recognized. If interest on these loans had been recognized at the original interest rates, interest income would have increased approximately $91,458 and $77,724 for the years ended December 31, 1998 and 1997, respectively. The Company is not committed to lend additional funds to debtors with impaired, nonaccrual or modified loans. Residential real estate loans aggregating $1,327,195 and $1,882,450 at December 31, 1998 and 1997, respectively, were pledged as collateral on deposits of municipalities. Note 4. Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31 are as follows:
1998 1997 1996 Balance, beginning $1,502,202 $1,401,042 $1,519,247 Provision charged to operating expense 660,000 660,000 365,000 Recoveries of amounts charged off 202,057 172,523 101,914 2,364,259 2,233,565 1,986,161 Amounts charged off (705,292) (731,363) ( 585,119) Balance, ending $1,658,967 $1,502,202 $1,401,042
Note 5. Bank Premises and Equipment The major classes of bank premises and equipment and the total accumulated depreciation at December 31 are as follows:
1998 1997 Land $ 80,747 $ 80,747 Buildings and improvements 2,455,707 2,452,267 Furniture and equipment 4,089,860 3,984,544 Leasehold improvements 408,187 408,187 7,034,501 6,925,745 Less accumulated depreciation (4,024,460) (3,640,084) $ 3,010,041 $ 3,285,661
Depreciation included in occupancy and equipment expense amounted to $384,376, $407,238 and $392,775 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company occupies leased quarters at four branch office locations under operating leases expiring in various years through 2013 with options to renew. Minimum future rental payments under non-cancelable operating leases having original terms in excess of one year as of December 31, 1998, for each of the next five years and in aggregate are: 1999 $ 98,425 2000 79,575 2001 66,110 2002 66,110 2003 66,110 Subsequent to 2003 252,170 $628,500
Note 6. Other Real Estate Owned Total rental expense amounted to $293,784, $293,560 and $307,885 for the years ended December 31, 1998, 1997 and 1996, respectively. A summary of foreclosed real estate at December 31 is as follows:
1998 1997 Other real estate owned $ 793,449 $1,391,593 Less allowance for losses on OREO (251,546) (302,726) Other real estate owned, net $ 541,903 $1,088,867
Changes in the allowance for losses on OREO for the years ended December 31 were as follows:
1998 1997 1996 Balance, beginning $302,726 $152,098 $113,386 Provision for losses 26,592 173,496 38,712 Charge-offs, net (77,772) (22,868) -0- Balance, ending $251,546 $302,726 $152,098
Note 7. Investments Carried at Equity The Company purchased various partnership interests in limited partnerships. These partnerships were established to acquire, own and rent residential housing for low- and moderate- income Vermonters located in northeastern Vermont. The investments are accounted for under the equity method of accounting. These equity investments, which are included in other assets, are recorded at cost and adjusted for the Company's proportionate share of the partnership's undistributed earnings or losses. The carrying values of these investments were $301,936 and $314,715 at December 31, 1998 and 1997, respectively. The provision for undistributed net (gains) and losses of the partnerships charged to earnings were $74,779, $24,000 and ($16,126) for 1998, 1997 and 1996, respectively. Note 8. Deposits The following is a maturity distribution of time certificates of deposit at December 31, 1998: Maturing in 1999 $66,871,262 Maturing in 2000 18,001,893 Maturing in 2001 9,428,291 Maturing in 2002 223,508 Maturing in 2003and after 1,077,883 $95,602,837
Note 9. Borrowed Funds FHLB borrowings for the years ended December 31, were as follows:
1998 1997 Community Investment Program borrowings, fixed rate (vary 6.73% to 7.67%), payable at maturities $ 60,000 $ 60,000 FHLB term borrowing, 5.71% fixed rate, payable February 13, 1998 -0- 4,000,000 FHLB term borrowing, 4.89% fixed rate, payable February 25, 2003 4,000,000 -0- $4,060,000 $4,060,000
Principal maturities of borrowed funds as of December 31, 1998, are as follows: 1999 $ 5,000 2000 -0- 2001 -0- 2002 15,000 2003 -0- Thereafter 4,040,000 $4,060,000
The Company also maintains a $4,110,000 IDEAL Way Line of Credit with the Federal Home Loan Bank of Boston. Outstanding advances under this line were $-0- at both December 31, 1998 and 1997. Interest on these borrowings is chargeable at a rate determined daily by the Federal Home Loan Bank and payable monthly. Collateral on these borrowings consists of Federal Home Loan Bank stock purchased by the Company, all funds placed in deposit with the Federal Home Loan Bank, qualified first mortgages held by the Company and any additional holdings which may be pledged as security. Note 10. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $288,241 as of December 31, 1998. These agreements are collateralized by a U. S. Treasury note with a carrying value of $1,008,393 and a fair value of $1,012,188. This security pays interest at 6.875% and matures July 31, 1999. The average daily balance of this repurchase agreement approximated $93,282 during 1998. The maximum borrowings outstanding on this agreement at any month-end reporting period of the Bank was $367,459 in 1998. These repurchase agreements mature daily. The securities underlying these agreements are held in safekeeping by the Institution. Note 11. Subordinated Debentures On September 1, 1984, the Company issued $750,000 of 11% convertible debentures due August 1, 2004. The notes are subordinated to all other indebtedness of the Company. At December 31, 1998 and 1997, $20,000 and $27,000, respectively, remained outstanding. These debentures are convertible prior to maturity in whole or in part, at the option of the holder, into common stock of the Company at a conversion price of $2.45 per share. The debentures are redeemable, in whole or in any part, at the option of the Company at any time after July 31, 1996, and prior to maturity, on not less than 30 days prior notice to holders. The redemption price shall be equal to the percentage set forth below: August 1, 1998 - July 31, 2000 103% August 1, 2000 - July 31, 2002 102% August 1, 2002 - July 31, 2004 101%
On August 1, 1986, the Company issued $500,000 of 9% convertible debentures due August 1, 1998. The notes are subordinated to all other indebtedness of the Company. At December 31, 1998 and 1997, $-0- and $77,000, respectively, remained outstanding. These debentures are convertible prior to maturity in whole or in part, at the option of the holder, into common stock of the Company at a conversion price of $4.91 per share. Note 12. Income Taxes The Company prepares its federal income tax return on a consolidated basis (see Note 1). Federal income taxes are allocated to members of the consolidated group based on taxable income. Federal income tax expense for the years ended December 31 was as follows:
1998 1997 1996 Currently paid or payable $785,592 $717,712 $543,383 Deferred (75,246) 37,392 110,709 $710,346 $755,104 $654,092
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rates of 34% to income before income taxes as a result of the following at December 31:
1998 1997 1996 Computed "expected" tax expense $986,170 $986,170 $977,125 Tax exempt interest (208,713) (208,465) (250,140) Disallowed interest 32,786 30,893 38,412 Partnership tax credits (64,405) (66,300) (69,000) Other (35,492) 12,806 (42,305) $710,346 $755,104 $654,092
The deferred income tax provision consisted of the following items at December 31:
1998 1997 1996 Depreciation ($16,003) ($9,040) $ 14,515 Loan fees 30,689 28,523 37,180 Mortgage servicing 31,465 12,389 13,100 Deferred compensation (23,984) (22,542) (19,429) Bad debts (53,300) (34,394) 40,190 Limited partnerships 42,958 16,248 21,000 Nonaccrual loan interest (49,960) 31,490 17,135 OREO 17,401 (51,214) (13,162) Other (54,512) 65,932 180 ($75,246) $37,392 $110,709
Listed below are the significant components of the net deferred tax asset at December 31:
1998 1997 Components of the deferred tax asset: Bad debts $426,882 $373,582 Unearned loan fees 102,454 133,143 Nonaccrual loan interest 123,662 73,702 OREO writedowns 85,526 102,927 Deferred compensation 74,732 50,748 Other 125 561 Total deferred tax asset 813,381 734,663 Valuation allowance -0- -0- Total deferred tax asset, net of valuation allowance 813,381 734,663
Components of the deferred tax liability: 1998 1997 Depreciation 157,228 173,231 Limited partnerships 124,206 81,248 Mortgage servicing rights 63,600 32,135 Other 12,307 14,743 Unrealized gain on securities available-for-sale 121,254 17,365 Total deferred tax liability 478,595 318,722 Net deferred tax asset $334,786 $415,941
FASB Statement No. 109 allows for recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized. Note 13. Pension Plan The Company has a discretionary defined contribution plan covering all employees who meet certain age and service requirements. Due to the nature of the plan, defined contribution, there is no unfunded past service liability. The provisions for pension expense were $287,788, $240,000 and $188,000 for 1998, 1997 and 1996, respectively. Note 14. Financial Instruments with Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, interest rate caps and floors written on adjustable rate loans, and commitments to sell loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of their interest rate cap agreements through credit approvals, limits and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
Contract or -Notional Amount- 1998 1997 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $11,593,014 $7,519,854 Standby letters of credit and commercial letters of credit $ 869,746 $ 538,629 Credit card arrangements $ 2,912,747 $3,802,931
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income- producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company enters into a variety of interest rate contracts, including interest rate caps and floors written on adjustable rate loans, in managing its interest rate exposure. Interest rate caps and floors on loans written by the Company enables customers to transfer, modify or reduce their interest rate risk. Note 15. Commitments and Contingencies In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of the Company's management, after consulting with the Company's legal counsel, any liabilities resulting from such proceedings would not have a material adverse effect on the Company's financial statements. Note 16. Transactions with Related Parties-The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Aggregate loan transactions with related parties as of December 31 were as follows:
1998 1997 Balance, beginning $906,811 $1,044,294 New loans 448,280 302,579 Repayments (778,182) (440,062) Other (32,145) -0- Balance, ending $544,764 $ 906,811
Other loan activity consists of borrowings related to a director who has retired. Total deposits with related parties approximated $920,194 and $556,814 at December 31, 1998 and 1997, respectively. Note 17. Restrictions on Cash and Due from Banks The Company is required to maintain reserve balances in cash with Federal Reserve Banks. The totals of those reserve balances were approximately $992,000 and $825,000 at December 31, 1998 and 1997, respectively. In addition, the Company was required to maintain contracted clearing balances of $275,000 at December 31, 1998 and 1997. Note 18. Regulatory Matters The Bank (Community National Bank) is 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 classification 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 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 Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the OCC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum 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 Bank's actual capital amounts and ratios (000's omitted) are also presented in the table.
Minimum to be Well Capitalized Under Minimum For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998: Total capital (to risk-weighted assets) $21,021 19.62% $8,570 8.0% $10,713 10.0% Tier I capital (to risk-weighted assets) $19,678 18.37% $4,285 4.0% $ 6,428 6.0% Tier I capital (to average assets) $19,678 8.72% $9,028 4.0% $11,286 5.0% As of December 31, 1997: Total capital (to risk-weighted assets) $19,727 18.59% $8,490 8.0% $10,612 10.0% Tier I capital (to risk-weighted assets) $18,398 17.34% $4,245 4.0% $ 6,367 6.0% Tier I capital (to average assets) $18,398 8.58% $8,575 4.0% $10,719 5.0%
The Bank is restricted as to the amount of dividends which can be paid. Dividends declared by national banks that exceed net income for the preceding two years must be approved by the OCC. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. Note 19. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows:
December 31, 1998 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 20,424,088 $ 20,424,088 Securities held-to-maturity 29,877,851 30,038,323 Securities available-for-sale 20,590,000 20,590,000 Restricted equity securities 1,141,650 1,141,650 Loans, net of allowance 145,827,416 147,709,582 Accrued interest receivable 1,460,671 1,460,671 Financial liabilities: Deposits 197,797,294 198,544,164 Repurchase agreements 288,241 288,241 Borrowed funds 4,080,000 3,967,755 Accrued interest payable 325,122 325,122 December 31, 1997 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 14,307,610 $ 14,307,610 Securities held-to-maturity 34,125,802 34,125,823 Securities available-for-sale 8,039,063 8,039,063 Restricted equity securities 1,099,750 1,099,750 Loans, net of allowance 147,747,061 147,781,745 Accrued interest receivable 1,460,298 1,460,298 Financial liabilities: Deposits 187,580,401 187,698,307 Borrowed funds 4,164,000 4,166,660 Accrued interest payable 335,817 335,817
The estimated fair values of deferred fees on commitments to extend credit and letters of credit were immaterial at December 31, 1998 and 1997. The carrying amounts in the preceding table are included in the balance sheet under the applicable captions, except for long-term debt which consists of borrowed funds and subordinated debentures. Note 20. Acquisition On December 31, 1997, the Company purchased 100% of the stock of Liberty Savings Bank, a New Hampshire guaranty savings bank, for $1,746,538. The assets of the Bank, principally a U. S. government security, have been included in the consolidated financial statements. The excess of the purchase price over the assets of the Bank is being amortized on a straight- line basis over 15 years. Unamortized goodwill amounted to $342,662 and $319,817 as of December 31, 1998 and 1997, respectively, and is included in "Other Assets" on the balance sheet. Amortization expense was $22,845 and $-0- for the years ended December 31, 1998 and 1997, respectively. Liberty Savings Bank does not currently maintain any branches and does not have authority to take bank deposits. The Company is planning to acquire full deposit-taking capabilities for Liberty Savings Bank. Note 21. Condensed Financial Information (Parent Company Only) The following financial statements are for Community Bancorp. (Parent Company Only), and should be read in conjunction with the consolidated financial statements of Community Bancorp. and Subsidiaries.
Community Bancorp. (Parent Company Only) Condensed Balance Sheets December 31, Assets 1998 1997 Cash $ 276,634 $ 386,277 Investment in subsidiary - Community National Bank 19,932,481 18,441,126 Investment in subsidiary - Liberty Savings Bank 1,789,822 1,746,538 Other assets 23,489 12,066 Total assets $22,022,426 $20,586,007 Liabilities and stockholders' equity Liabilities Other liabilities $ 367 $ 1,650 Subordinated convertible debentures 20,000 104,000 Total liabilities 20,367 105,650 Stockholders' equity 1998 1997 Common stock, $2.50 par value: 6,000,000 shares authorized, 3,140,606 shares issued at 12/31/98 and 3,044,697 shares issued at 12/31/97 7,851,516 3,842,907 Additional paid-in capital 8,756,453 7,978,435 Retained earnings (Note 17) 5,604,096 9,070,443 Accumulated other comprehensive income 235,375 33,709 Less treasury stock, at cost (1998: 29,646 shares; 1997: 29,629 shares) (445,381) (445,137) Total stockholders' equity 22,002,059 20,480,357 Total liabilities and stockholders' equity $22,022,426 $20,586,007
The investment in the subsidiary banks is carried under the equity method of accounting. The investment and cash, which is on deposit with the Bank, has been eliminated in consolidation.
Community Bancorp. (Parent Company Only) Condensed Statements of Income Years ended December 31, 1998 1997 1996 Revenues Dividends Bank subsidiaries $ 903,000 $2,913,800 $ 711,200 Total revenues 903,000 2,913,800 711,200 Expenses Interest on long-term debt 4,597 11,489 20,828 Administrative and other 64,490 24,000 22,522 Total expenses 69,087 35,489 43,350 Income before applicable income tax and equity in undistributed net income of subsidiaries 833,913 2,878,311 667,850 Applicable income tax (benefit) (23,489) (12,066) (14,739) Income before equity in undistributed net income of subsidiaries 857,402 2,890,377 682,589 Equity (deficit) in undistributed net income - subsidiaries 1,332,972 (744,982) 1,537,215 Net income $2,190,374 $2,145,395 $2,219,804
Community Bancorp. (Parent Company Only) Condensed Statements of Cash Flows Cash flows from operating activities Net income $2,190,374 $2,145,395 $2,219,804 Adjustments to reconcile net income to net cash provided by operating activities (Equity) deficit in undistributed net income of subsidiaries (1,332,972) 744,982 (1,537,215) (Increase) decrease in income taxes receivable (11,423) 2,673 5,806 Decrease in other liabilities (1,283) (1,114) (525) Net cash provided by operating activities 844,696 2,891,936 687,870 Cash flows from investing activities Purchase of stock in subsidiary - Liberty Savings Bank -0- (1,746,538) -0- Net cash used for investing activities -0- (1,746,538) -0- Cash flows from financing activities Purchase of treasury stock (244) (4,925) (189) Dividends paid (954,095) (863,214) (741,139) Net cash used for financing activities (954,339) (868,139) (741,328) Net (decrease) increase in cash (109,643) 277,259 (53,458) Cash Beginning 386,277 109,018 162,476 Ending $ 276,634 $ 386,277 $ 109,018 Supplemental schedule of cash paid (received) during the year Interest $ 5,880 $ 12,602 $ 21,353 Income taxes $ (12,066) $ (14,739) $ (20,543) Supplemental schedule of noncash investing and financing activities Unrealized gain (loss) on securities available-for-sale $ 305,555 $ 39,009 $ (64,452) Debentures converted to common stock $ 84,000 $ 66,000 $ 95,000 Stock dividends $3,823,575 $1,294,006 $ -0- Dividends paid Dividends payable $1,833,146 $1,652,355 $1,404,957 Dividends reinvested (879,051) (789,141) (663,818) $ 954,095 $ 863,214 $ 741,139
Note 22. Quarterly Financial Data (Unaudited) A summary of financial data for the four quarters of 1998, 1997 and 1996 is presented below:
Community Bancorp. and Subsidiaries Quarters in 1998 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,224,450 $4,207,422 $4,324,448 $4,315,390 Interest expense 1,990,049 2,053,030 2,044,945 1,988,598 Provision for loan losses 200,000 160,000 150,000 150,000 Securities gains (loss) -0- -0- -0- -0- Other operating expenses 1,801,595 1,741,842 1,758,325 1,718,789 Net income 407,679 557,942 562,139 662,614 Earnings per common share $ .14 $.18 $.18 $.21 Quarters in 1997 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,040,469 $4,171,803 $4,252,823 $4,352,499 Interest expense 1,897,836 1,923,757 1,998,488 2,014,082 Provision for loan losses 205,000 105,000 215,000 135,000 Securities gains (loss) -0- -0- - 0- -0- Other operating expenses 1,523,389 1,932,122 1,803,984 1,752,261 Net income 520,088 611,639 451,169 562,499 Earnings per common share $.18 $.21 $.15 $.18 Quarters in 1996 ended March 31 June 30 Sept. 30 Dec. 31 Interest income $4,032,136 $4,144,762 $4,162,822 $4,192,077 Interest expense 2,092,138 2,094,188 2,041,045 1,949,055 Provision for loan losses 37,500 122,500 80,000 125,000 Securities gains (loss) -0- ( 1,928) -0- -0- Other operating expenses 1,546,063 1,630,449 1,642,657 1,577,908 Net income 467,218 512,855 539,485 700,246 Earnings per common share $.17 $.18 $.19 $.24
Note 23. Other Income and Other Expenses The components of other income and other expenses which are in excess of 1% of total revenues in any of the three years disclosed are as follows:
1998 1997 1996 Income Other $ 771,947 $ 553,027 $ 564,894 Expenses Printing and supplies $ 198,008 225,318 $ 183,831 State deposit tax 205,354 145,000 91,795 Other 1,826,410 1,671,386 1,628,049 $2,229,772 $2,041,704 $1,903,675
Management's Discussion and Analysis of the results of operations For the Year Ended December 31, 1998 Community Bancorp. is a holding company whose subsidiaries include Community National Bank ("The Bank") and Liberty Savings Bank ("Liberty"). Community National Bank is a full service institution operating in the state of Vermont, with seven offices located throughout three counties in northern Vermont. Liberty Savings Bank is a New Hampshire guaranty savings bank which Community Bancorp. acquired on December 31, 1997. Acquired were the assets; primarily a U.S. Treasury Strip with a fair value of approximately $1.4 million, and all of the outstanding stock of Liberty Savings Bank. Presently, since no building was involved in the transaction, the address for Liberty Savings Bank is c/o Community Bancorp., Derby, Vermont. The future goal of Community Bancorp. is to operate Liberty as a lending facility primarily serving the north country of New Hampshire. Management is working closely with the Board of Directors to find a suitable location for this endeavor. Once an ideal location is found, the goal of expanding the operations of Community Bancorp and subsidiaries ("The Company") to include the northern portion of the state of New Hampshire will be achieved. As mentioned above, this transaction occurred on December 31, 1997, resulting in no business activity for the 1997 fiscal year and moderate income for the 1998 fiscal year. With that in mind, the following discussion refers primarily to the operations of the Bank, with consolidated balance sheet and income statement figures of the Company. On March 13,1998, the Company announced a two-for-one stock split to be accomplished by a 100% stock dividend payable on June 1, 1998 to shareholders of record as of May 15, 1998, contingent upon the approval by the Company's shareholders of a proposal to increase the number of shares the Company may issue. This proposal was voted on and approved at the annual shareholders meeting held on May 5, 1998. To that end, all per share data disclosed throughout this discussion and in the accompanying tables has been restated to reflect this dividend. At the end of this narrative are several financial tables relating to the information disclosed throughout this discussion. These tables, when used in conjunction with the following facts and figures, should give a better understanding of the overall performance and condition of Community Bancorp. and subsidiaries. Liquidity-Liquidity refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The repayment of loans and growth in deposits are two of the major sources of liquidity. Our time deposits greater than $100,000 decreased from $18.2 million at the end of 1997 to $17.9 million at the end of 1998, a decrease of $308,214 or 1.7%. Other time deposits decreased to $77.7 million from $78.5 million for the same time period, a decrease of just under 1%. A review of these deposits indicates that any change is generated locally and regionally by established customers of the Company. The Company has no brokered deposits. Our gross loan portfolio decreased $1.8 million, or by 1.2%, to end the 1998 year at $148.3 million compared to $150.1 million a year ago. Of this total loan portfolio of $158.3 million, $78.9 million or 53%, is scheduled to reprice or mature within one year. The Company has two credit lines with available balances totaling $6.1 million and additional borrowing capacity of approximately $105 million through the Federal Home Loan Bank of Boston, which is secured by the Company's qualifying 1-4-family residential loan portfolio. As of December 31, 1998, the Company had borrowed $4 million against the $105 million at Federal Home Loan Bank of Boston. As of year-end 1998, the Company maintained short-term investments of almost $30 million. Of this total, approximately $20.6 million or 69% are treasuries classified as "available-for-sale." As of December 31, 1998, the Company had $18.6 million in "held-to-maturity" treasuries, less $5 million pledged, netting $13.6 million compared to $19.1 million, less $5 million pledged, netting $14.1 million a year ago. These treasuries are not considered short-term investments under new regulations governing the classification of securities. All other interest-bearing accounts in total increased by $9.8 million, or 24.7%, in 1998, and demand deposit accounts increased to $21.7 million from $20.3 million for the same time period, an increase of 7.12%. Investment Securities-The adoption of FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities," has had an impact on our investment portfolio. This new accounting standard, effective for 1994 statements, requires banks to recognize all appreciation or depreciation of the investment portfolio either on the balance sheet or through the income statement even though a gain or loss had not been realized. These changes require securities classified as "trading securities" to be marked to market with any gain or loss charged to income. Securities classified as "available- for-sale" are marked to market with any gain or loss after taxes charged to the equity portion of the balance sheet. Securities classified as "held-to- maturity" are to be held at book value. The Company does not own any trading securities as our investment policy prohibits active trading in our investment account. At the end of 1998 the Company had $1.14 million in equity securities classified as available-for- sale compared to $1.1 million at the end of 1997. In addition, at December 31, 1998, the Company had $20.6 million in U.S. Government securities available-for-sale, compared to $8.04 million at December 31, 1997. These securities have been marked to market, with a resulting gain after taxes of $235,375 for 1998 compared to $33,709 for 1997. These figures are presented in the equity section of our financial statement as "Accumulated other comprehensive income." As adjusted for this item, our investment portfolios at the respective years' ends were as follows:
December 31, 1998: Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and agency securities Available-for-sale $20,233,371 $357,237 $ 608 $20,590,000 Held-to-maturity (1) 20,143,530 160,472 -0- 20,304,002 States and political subdivisions Held-to-maturity 9,734,321 -0- -0- 9,734,321 Restricted equity securities Available-for-sale 1,141,650 -0- -0- 1,141,650 $51,252,872 $517,709 $ 608 $51,769,973 December 31, 1997: Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and agency securities Available-for-sale $ 7,987,988 $ 51,075 $ -0- $ 8,039,063 Held-to-maturity (1) 24,121,910 38,282 38,261 24,121,931 States and political subdivisions Held-to-maturity 10,003,892 -0- -0- 10,003,892 Other Securities Available-for-sale 1,099,750 -0- -0- 1,099,750 $43,213,540 $ 89,357 $38,261 $43,264,636 Included in this portfolio is the U.S. Treasury Strip for Liberty Savings Bank with an amortized cost and fair value of $1,392,338 as of December 31, 1997, and an amortized cost of $1,480,767 and a fair value of $1,519,752 as of December 31, 1998.
Gross realized gains and gross realized losses on actual sales of securities were:
1998 1997 1996 Gross realized gains: U.S. Government and agency securities -0- -0- $ 909 Other securities -0- -0- -0- -0- -0- $ 909 Gross realized losses: U.S. Government and agency securities -0- -0- $2,837 Other securities -0- -0- -0- -0- -0- $2,837
Allowance for possible losses on loans-Management believes that the policies and procedures established for the underwriting of its loan portfolio are both accurate and up-to-date, helping to alleviate many of the problems that could exist within the portfolio in a changing environment. Loans are typically reviewed on a loan-by-loan basis with more emphasis placed on larger loans and loans that have the potential for a higher level of risk. These measures also help to ensure the adequacy of the allowance. An ongoing review of the loan portfolio is performed by the executive officers and the Board of Directors, who meet to discuss, among other matters, potential exposures. Factors considered include, but are not limited to, historical loss ratios, each borrower's financial condition, the industry or sector of the economy in which the borrower operates, if applicable, and overall economic conditions. Existing or potential problems are noted and reviewed by senior management to ensure that adequate loan-to-value ratios exist to help cover any cost associated with these loans. The Company employs both a full-time loan review and credit administration officer staffed with a department whose duties include, but are not limited to, a review of the loan portfolio including delinquent and non-accrual loans. Also on staff are personnel whose primary duties are to monitor non-performing loans. Included in the duties of this department are the tracking of payments by delinquent loan customers and management of the Company's OREO portfolio. A quick review of the OREO portfolio shows positive results since the establishment of this department. Results from both departments mentioned are reported to senior management for further review and additional action if necessary. Specific allocations are made in situations management feels are at a greater risk for loss. A quarterly review of certain qualitative factors, which include "Levels of, and Trends in, Delinquencies and Non-Accruals" and "National and Local Economic Trends and Conditions," helps to ensure that areas with potential risk are noted and coverage adjusted to reflect current trends in delinquencies and non-accruals. First mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio that helps to alleviate overall risk. The valuation allowance for loan losses as of December 31, 1998, of $1.66 million constitutes just over 1% of the total loan portfolio compared to $1.5 million or 1% a year ago. In management's opinion this is both adequate and reasonable in light of the fact that $122.6 million of the total loan portfolio, or 82.7%, consists of real estate mortgage loans. These figures are higher than the year-end figures for last year of $121.9 million, or 81.2%. Included in the 1998 total are $98.4 million, or 66.3% of loans secured by 1-4-family residences. This volume of home loans, together with the low historic loan loss experience, helps to support our basis for loan loss coverage. If the Company were to reduce its loan portfolio by the residential mortgage loan portfolio, the valuation allowance of $1.66 million would comprise 3.3% of eligible loans, compared to 2.9% a year ago. In management's opinion a loan portfolio consisting of 82.7% in residential and commercial real estate secured mortgage loan is more stable and less vulnerable than a portfolio with a higher concentration of unsecured commercial and industrial loans or personal loans. A comparison of non-performing assets for 1998 and 1997 reveals an overall increase of $429,956 or almost 15% from a figure of $2.9 million to $3.3 million. A decrease of 50.23% is noted in the Company's OREO portfolio, while increases are recognized in non-accrual loans and loans 90 days or more past due and still accruing of 58.4% and 37.5%, respectively. Of the total non-accrual loan portfolio of $2.4 million, approximately $2.1 million, or 90%, are real estate secured mortgage loans on which the Company has suffered relatively few losses. Loans 90 days or more past due and still accruing ended the 1998 calendar year at a balance of $401,301 compared to $291,931 for the prior calendar year. The portfolio of Other Real Estate Owned (OREO) notes the only decrease, ending 1998 at a figure of $541,903 compared to $1.1 million for the same period in 1997. Non-performing assets as of December 31, 1998 and 1997, were made up of the following:
1998 1997 Non-accruing loans $ 2,353,623 $1,486,073 Loans past due 90 days or more and still accruing 401,301 291,931 Other real estate owned 541,903 1,088,867 Total $3,296,827 $2,866,871
In summary, non-performing assets increased 15% from the December 31, 1997, figure of $2.87 million. In light of this increase, management continues to monitor the allowance for loan and lease losses very carefully and maintain the reserve at a level of approximately 1% of total eligible loans. The Northeast Kingdom is known for being on the lower end of the economic scale, and as such suffers greatly in times of economic uncertainty. In view of this, the Company will always maintain its conservative approach to the review process for reserve requirements and adjust accordingly for any changes. Other real estate owned consists of properties that the Company has acquired in lieu of foreclosure or through normal foreclosure proceedings. The policy of the Company is to value property in other real estate owned at the lesser of appraised value or book value. An appraisal is necessary to determine the value of the property. If the book value of the property is less than the appraised value, a "write-down" is necessary to bring the loan balance to a level equal to the appraised value prior to including it in OREO. Any such write-down is charged to the reserve for loan losses. Once the property is in OREO, any additional write-downs are charged to earnings. Our current portfolio of other real estate owned consists of $87,300 in properties deeded in lieu with the remaining $454,603 acquired through the normal foreclosure process. All properties are located in Vermont, and are as follows: land in Jay; two commercial condominium units in Newport; two commercial buildings in Newport; an apartment building in Newport Center and one in Orleans; two single-family residences in Newport; and land in Island Pond. The Company is actively attempting to sell all of these properties and expects no material loss on any of them. Other real estate owned is by definition a non-earning asset, and as such does have a negative impact on the Company's earnings. Financial Accounting Standards Board (FASB) has issued Statement #114, "Accounting by Creditors for Impairment of a Loan." This accounting standard was effective for fiscal years beginning after December 15, 1994, and is considered the primary source of authoritative guidance for determining allowances relating to specific loans. The Company adopted this standard as required for calendar year 1995. In the opinion of our Credit Administration Department, the impact of this accounting standard continues to have little effect on the Company's bottom line. Bank premises and Equipment-The major classes of bank premises and equipment and the total accumulated depreciation is as follows:
December 31, 1998 1997 > Land $ 80,747 $ 80,747 Buildings and improvements 2,455,707 2,452,267 Furniture and equipment 4,089,860 3,984,544 Leasehold improvements 408,187 408,187 7,034,501 6,925,745 Less accumulated depreciation (4,024,460) (3,640,084) $ 3,010,041 $ 3,285,661
Depreciation included in occupancy and equipment expense amounted to $384,376, $407,238 and $392,775 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company currently leases four of the seven offices it occupies. These leased offices are in Island Pond, Newport, Barton and St. Johnsbury, Vermont. The lease for the Newport office was extended until March 31, 1999. The company is in the process of moving this office to a condominium space of approximately 3,084 square feet in the new state office building at the opposite end of Main Street from the Company's current office. The operating leases for the three other locations expire in various years through 2013 with options to renew. In addition, the Company leases certain computer hardware under an operating lease that expires in the first quarter of 1999. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year, as of December 31, 1998, for each of the next five years and in aggregate are: 1999 $ 98,425 2000 79,575 2001 66,110 2002 66,110 2003 66,110 Subsequent to 2003 252,170 Total $628,500
Financial Condition-The financial condition of the Corporation should be examined in light of its sources and uses of funds. The table entitled "Average Balances and Interest Rates" is a comparison of daily average balances and is indicative of how sources and uses of funds have been managed. The average volume of earning assets grew from $194.4 million at year- end 1996 to $197.3 million at the end of 1997 to $209.2 million at December 31, 1998, an increase of $2.9 million for 1996 to 1997, and $11.9 million for 1997 to 1998. The average volume of loans grew from $138.6 million at year-end 1996 to $145.8 million at year-end 1997 to $147.8 million at year- end 1998. The results are increases of $7.2 million or 5.2% for 1996 versus 1997 and $2.1 million or 1.4% for 1997 versus 1998. Taxable investment securities decreased slightly from $35.75 million at the end of 1996 to $35.65 million at the end of the same comparison period in 1997 and then increased to $38.78 million as of December 31, 1998, resulting in a decrease of $105 thousand or .3% and an increase of $3.14 million or 8.8%, respectively. Tax exempt securities started at $14.2 million at the end of 1996 and decreased to $12.2 million at year-end 1997 and then increased to $13.1 million as of December 31, 1998. The decrease of $2.1 million or 14.4% for 1996 versus 1997 is attributable in part to a decrease in non-arbitrage borrowing. Federal funds sold started the comparison period at $4.7 million as of December 31, 1996, and decreased $2.1 million or 45.2% to $2.6 million as of December 31, 1997, and then increased almost $2.4 million or 90.8% to $4.9 million as of December 31, 1998. The Bank of Boston sweep account, which was established during the first half of 1998, ended at an average volume of $3.34 million with an average yield of 5.54%. The average volume of other securities ended the 1996 and 1997 comparison periods at $1.17 million and then increased slightly to $1.27 million with an average yield of 6.46% as of the end of the 1998 fiscal year. Loans make up most of the total earning assets at 70.7% for 1998, a decrease from the 1997 portion of 73.9 %, which is an increase from the 1996 portion of 71.3%. Other securities count for the smallest percentage at .61%, .59% and .60%, respectively, for the years ended 1998, 1997 and 1996. Average interest-bearing liabilities decreased from $170.25 million in 1996 to $170.16 million for 1997 and then increased to $178.14 million as of December 31, 1998. A review of the areas that comprise this total shows a steady decrease in savings deposits. These funds started at $32.3 million as of year-end 1996, then decreased to $31.9 million or by 1.28% as of year-end 1997 and closed year-end 1998 at an average volume of $30.8 million, a decrease of 3.34%. Subordinated debentures also report a steady decrease starting at an average volume of $216 thousand as of year-end 1996, decreasing 51% to an average volume of $107 thousand as of year-end 1997 and then decreasing 55% to end the 1998 year at an average volume of $48 thousand. NOW and money market funds set a different trend by starting year-end 1996 at an average volume of $41.4 million, then decreasing to $39.3 million or by 4.9% as of year-end 1997, then increasing by 14.2% to $44.9 million as of year-end 1998. Time deposits followed the same trend beginning at an average volume of $96.2 million, decreasing to $94.8 million or by 1.5% and then increasing to $98.2 million or by 3.6% for the same comparison period. Other borrowed funds charted its own course with an average volume reported for year-end 1996 of $99 thousand, increasing to an average volume of $4.061 million as of year-end 1997, and then decreasing slightly to an average volume of $4.060 million as of year-end 1998. Time deposit accounts for the biggest portion of interest-bearing liabilities with figures of 56.5%, 55.7% and 55.1%, respectively, as of December 31, 1996, 1997 and 1998. Other borrowed funds accounted for the smallest portion for the year ended 1996 at .06%, while subordinated debentures claim the least for December 31, 1997, at a figure of .06%, and .03% for December 31, 1998. The average volume of subordinated debentures has been steadily decreasing over the last three years. The 9% debentures have all been converted as of December 31, 1998, and the redemption period for the 11% debentures is in the second phase with a price of 103%, translating into 407.48 shares of Community Bancorp. stock for each debenture redeemed. The redemption price decreases 1% every two years beginning July 31, 1998, with a maturity date of July 31, 2004. Actual debentures outstanding as of December 31, 1998, was $20,000. Effects of Inflation-Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements because as costs and prices rise, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Corporation's ability to preserve its purchasing power depends primarily on its ability to manage net interest income. The Corporation's net interest income improved during 1997 due to an increase in the spread as loans repriced at slightly higher rates and the interest rates paid on deposit accounts decreased. In 1998 the spread was not as favorable as 1997 due to a decrease in loan volume, the biggest source of interest income, and an increase in deposit volume, the biggest source of interest expense. Interest Income versus interest expense (net interest Income)-Net interest income represents the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e., other borrowings). Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and from changes in the yield earned and costs paid (rate). The table labeled "Average Balances and Interest Rates" provides the visual analysis for the comparison of interest income versus interest expense. These figures, which include earnings on tax-exempt investment securities, are stated on a tax- equivalent basis with an assumed rate of 34%. Interest income rose from $16.91 million at the end of 1996 to $17.13 million for 1997 and then to $17.39 million for 1998, an increase of 1.3% and 1.5%, respectively. Interest expense decreased from $8.2 million to $7.8 million and then increased to $8.1 million as of year-end 1998, or 4.2% for 1996 versus 1997, and 3.1% for 1997 versus 1998. The overall effect, or net interest income, was $8.7 million for the year ended 1996 versus $9.3 million for the year ended 1997 and a 1998 year-end net interest income of $9.31 million. Net interest spread, the difference between the yield on interest-earning assets versus interest-bearing liabilities, at the end of 1998 was 3.78% compared to 4.08% for 1997 and 3.90% for 1996. Interest differential, defined as net interest income divided by average earning assets, for the years ended 1998, 1997 and 1996, was reported at 4.45%, 4.71% and 4.49% respectively. Income from loans for the year was $13.8 million for 1998, $13.9 million for 1997 and $13.4 million for 1996, resulting in yields of 9.31% for 1998, 9.51% for 1997 and 9.65% for 1996. The income on taxable investment went from $2.10 million for 1996 to $2.12 million for 1997 and then increased to $2.2 million for 1998. The respective yields on these investments are 5.86% for 1996, 5.94% for 1997 and 5.66% for 1998. The income on tax-exempt securities took a different course for the same comparison periods revealing an interest income figure for the 12 months of 1996 of $1.1 million, then decreasing by 16.6% to end at a 12-month figure for 1997 of $929 thousand and increasing slightly to end the 12 months of 1998 at an interest figure of $930 thousand. The tax- equivalent yield for these investments started at 7.86% at the end of 1996 and decreased 21 basis points to 7.65% for 1997, and then decreased 53 basis points to a 1998 year-end yield of 7.12%. The income on other securities increased from $78 thousand for 1996, to $79 thousand for 1997, and then increased to $82 thousand for 1998, with average yields reported at 6.68%, 6.76% and 6.46%, respectively. Interest income for federal funds sold was reported at $246 thousand with a yield of 5.22% for the 12-month comparison period of 1996, compared to income of $140 thousand with a yield of 5.42% for 1997, and income of $237 thousand yielding 4.81% for the same period of 1998. Interest income of $185 thousand yielding 5.54% was reported on the new Bank of Boston sweep account as of December 31, 1998. Overall, interest generated by our average earning assets increased by 1.3% from 1996 to 1997 and 1.5% from 1997 to 1998 to end the 1998 year with tax-equivalent interest income of approximately $17.4 million. The average yield on total average earning assets decreased from 8.70% for 1996 to 8.68% for 1997 and ended the 1998 calendar year at 8.31%, a decrease of two basis points and 37 basis points, respectively. Interest expense associated with our savings accounts decreased for each comparison year, starting at $944 thousand at year-end 1996, decreasing $67 thousand or 7.1% to $877 thousand as of year-end 1997, and then decreasing $70 thousand or 8.0% to a 1998 year-end expense figure of $807 thousand. The average yield also decreased throughout the three-year comparison period to end at 2.62% as of December 31, 1998. Interest expense on NOW and money market funds began the year-end comparison period at $1.5 million as of 1996, then decreased 8.3% to end 1997 at $1.4 million; then an increase of 12% is noted when comparing year- end 1997 to year-end 1998, to end at a reported expense figure of $1.6 million. The average yield started the comparison period at a rate of 3.68% as of December 31, 1996, then decreased 13 basis points to a rate of 3.55% as of December 31, 1997, and then decreased seven basis points to end at 3.48% as of December 31, 1998. Interest expense on time deposits reported the same trend as NOW and money market funds beginning at year-end 1996 with an expense figure of $5.68 million, then decreasing $377 thousand or 6.6% to a year-end 1997 expense figure of $5.3 million, then increasing by $192 thousand or 3.6% to a reported expense figure of $5.5 million as of year-end 1998. The average yield on these funds tracked its own course starting at an average yield of 5.90%, then decreasing 30 basis points to end at 5.60% as of the end of 1997, and then reported the same average yield of 5.60% as of the end of the 1998 fiscal year. Other borrowed funds followed the opposite pattern as it began the three year-end comparison periods at a figure of $7 thousand for year-end 1996, increased $238 thousand to end the 1997 fiscal year at $245 thousand, and then decreased to $198 thousand or by 19% as of year-end 1998. An $8 million borrowing during the year, of which $4 million is still outstanding at year-end 1997, gives the reason for this dramatic increase for the 1996 versus 1997 comparison period. The average yields decreased steadily from 7.07% to 6.03% and then to 4.88%, respectively, for December 31, 1996, 1997 and 1998. As the volume of subordinated debentures decreases, so does the expense associated with this liability. Interest expense of $21,000, $11 thousand and $5 thousand was noted for the twelve months ended 1996, 1997 and 1998, respectively, which transforms into a decrease of 47.6% and 54.5%, respectively. The results are average yields of 9.72% as of year-end 1996, 10.28% as of year end 1997 and 10.42% as of year-end 1998. In total, interest expense associated with total interest-bearing liabilities began the year-end comparison periods at $8.2 million for 1996, decreased to $7.8 million for 1997 and ended 1998 at a figure of $8.1 million, with average yields of 4.80%, 4.60% and 4.53%, respectively. Other operating income and expenses-A strong fourth quarter in 1996 helped to boost earnings for the 1996 year while a decrease in earnings for the fourth quarter of 1997 resulted in lower earnings for the 1997 fiscal year. The fourth quarter of 1998 was better than 1997, but not quite as good as 1996 due in part to a shortfall in the anticipated tax credits for the 1998 calendar year. Other operating income for this quarter was reported at $430,258 for 1998, $346,910 for 1997 and $343,572 for 1996. Service fees reports the biggest increase for the fourth quarter of 1997 versus 1996, at 5%, with income of $175,267 versus $166,847, while it was the only decrease for the fourth quarter of 1998 compared to the same period of 1997. Other income reported the biggest increase for the fourth quarter of 1998 versus 1997, with an increase of $44,962, or 30.6%. Income from sold loans, a component of other income, reported income of $34,813 for the fourth quarter of 1998 versus income of $1,879 for the same period in 1997, clearly supporting the total increase for the quarter. Trust department income increased $40,400 for the fourth quarter of 1998 versus 1997, while a decrease of $10,244 or 29.3% was reported for 1997 versus 1996. Expenses incurred for the set-up and installation of new equipment in 1997 for trust processing are key reasons for the respective increase and decrease, as well as solid growth in trust accounts during 1998. Other operating income for the twelve months of 1998 reported at $1.6 million is an increase of almost 19% over the 1997 figure of $1.34 million, which is a 4% increase over the 1996 figure of $1.28 million. Other income again reported the biggest increase for 1998 versus 1997, to end 1998 at a figure of $771,947, an increase of $218,920, or 40% over the 1997 figure of $553,027. Income from sold loans again contributes to the overall increase in other income with reported income for the 1998 year of $153,699, compared to income of $19,580 for 1997. Service fees ended the 1997 year at $695,260, an increase of $90,811 or 15% over the 1996 year-end figure, while a decrease is noted for the 1998 versus 1997 comparison period. On the average, customers are maintaining higher balances in their deposit accounts during the 1998 fiscal year, leading to a decrease in fees for these accounts. Trust department income reported the biggest decrease for the calendar years 1997 versus 1996 mostly due to the reasons mentioned above. Another component of other income is Mortgage Servicing Rights. Through the implementation of FASB #122, "Accounting for Mortgage Servicing Rights," the Company has reported income of $122,533 for the twelve months ended December 31, 1998, compared to $43,211 for the same period in 1997 and $38,531 at year-end 1996. In May 1995 the FASB issued SFAF No. 122 "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement #65." This standard was effective for fiscal years beginning after December 15, 1995; however, early adoption was permitted. This statement requires the Company to recognize as separate assets the rights to service mortgage loans for others, however those rights are acquired. The Company allocates the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage loan servicing rights), based on their relative fair value. This value is determined through use of market prices under comparable servicing sales contracts. Other operating expenses for the fourth quarter of 1998 were reported at $1.72 million, resulting in a decrease of 2% over the 1997 fourth quarter figure of $1.75 million. The fourth quarter of 1996 ended at an expense figure of $1.58 million, tallying an increase of $174,353 or just over 11% for the 1997 versus 1996 comparison periods. Pension and other employee benefits accounts for the biggest increase for 1998 versus 1997 created by additional funds that were needed to cover a shortfall for the 1997 fiscal year. Other expenses reported the biggest increase for the fourth quarter ended 1997 versus the same period in 1996 with an expense figure of $614,150 for 1997 compared to $466,580 for 1996, an increase of 31.6%. OREO expenses, a component of other expenses, showed expenses totaling $95,753 for the fourth quarter of 1997 and $88,999 for the same period in 1996, resulting in an increase of $6,754 for this comparison period. An auction was held during the last quarter of both 1997 and 1996 in an attempt to decrease our OREO portfolio. In both cases most of the properties that sold, did so at a loss, increasing overall expenses associated with these properties. Additionally, a substantial write-down was taken in 1997 on a property the Company has held for several years. Total other operating expenses ended the 1998 fiscal year at $7.02 million, an increase of $261,920 or 3.9% over the 1997 fiscal year figure of $6.8 million, which is an increase of $361,554 over the 1996 figure of $6.4 million. Other expenses tallied the biggest increase for 1998 versus 1997 fiscal year comparison periods with an expense figure of $2.23 million and $2.04 million, respectively. Loss on limited partnership, a component of other expense, reported an expense figure of $74,779 for the fiscal year 1998 compared to $24,000 a year ago. This increase was the result of a change in the way the loss for this partnership is booked from year to year. Salaries reported the biggest increase for the twelve months-comparison period of 1997 versus 1996 with a figure of $2.8 million for 1997, an increase of $177,100 or 6.8% over the 1996 figure of $2.6 million, while it reported the smallest increase for the 1998 versus 1997 fiscal years. This moderate increase for 1998 versus 1997 can be attributed to a reduction in the requirement of full-time hours, as well as personnel changes. Many of the components of other operating expenses are estimated on a yearly basis and accrued in monthly installments. In an attempt to present accurate figures on the statement of income for any interim period, these expenses are reviewed quarterly by senior management to ensure that monthly accruals are accurate, and any necessary adjustments are made at that time. Applicable Income Taxes-Income before taxes of $888,263 is reported for the fourth quarter of 1998, compared to $798,066 for the same period in 1997, and $883,687 for the fourth quarter of 1996, translating to an increase of $90,197 or 11.3% for 1998 versus 1997, and a decrease of $85,621 or 9.7% for 1997 versus 1996. Figures presented at the end of 1998 for income before taxes show a tiny increase of less than one-half of 1% compared to the same period in 1997, and an increase of just under 1% for fiscal year 1997 versus 1996. Provisions for income taxes for the fourth quarters ended 1998, 1997 and 1996 are reported at $225,648, $235,567 and $183,441, respectively. Provisions for income taxes for each fiscal year are reported as a decrease of $44,758 or 5.9%, from $755,104 for 1997 to $710,346 for 1998, and an increase of 15.4% from $654,092 for 1996 to $755,104 for 1997. This increase in income tax expense for 1997 is due in part to the absence of an anticipated tax credit for 1997, part of which was booked in 1998 with the remainder anticipated to be booked within the next fiscal year. Financial Summary-The calendar year of 1998 ended with a 2.1% increase over the calendar year of 1997 and a 1.3% decrease over the same period in 1996. Total earnings of $2.19 million were reported for 1998, compared to $2.15 million for 1997 and $2.22 million for 1996. The results of these figures are earnings per share of $0.71 for 1998, compared to $0.72 for the year ended 1997 and $0.78 for 1996. A two-for-one stock split was announced on March 13, 1998, payable on June 1, 1998, to shareholders of record as of May 15, 1998. This was accomplished through a 100% stock dividend. In order for this to occur, the Company's shareholders voted on and approved a proposal to increase the number of shares the Company may issue. This was voted on at the annual shareholders meeting held on May 5, 1998. As a result of this stock split, per share data for all comparison periods has been restated to reflect this transaction. The most recent cash dividend of $0.15 was paid on November 1, 1998, to shareholders of record as of October 15, 1998. Return on average assets (ROA), which measures how effectively a corporation uses its assets to produce earnings, decreased to 1.00% for 1998, versus 1.02% for 1997 and 1.07% for 1996. Return on average equity (ROE), which is the ratio of income earned to average shareholders' equity, was 10.35% for 1998 compared to 10.69% for 1997 and 12.16% for 1996. Capital Resources-Stockholders' equity at December 31, 1997, was $20,480,357 with a book value of $6.79 per share. It increased through earnings of $2,190,374, the sale of common stock of $963,052, through our dividend reinvestment program and debenture conversions mentioned earlier, and increased $201,666 through adjustments for the valuation allowance of securities. It decreased through purchases of treasury stock of $244 and dividends paid totaling $1,833,146. As of December 31, 1998, stockholders' equity was $22,002,059 with a book value of $7.07 per share. All stockholders' equity is unrestricted. Additionally, it is noted that as the maturity date on securities classified as available-for-sale draws near, the market price on these securities becomes more favorable, thereby greatly reducing the material loss associated with these investments through the valuation allowance. The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The Bank is required to maintain minimum amounts of capital to total "risk- weighted" assets as defined by the banking regulators. At December 31, 1998, the Bank is required to have minimum Tier I and Total Capital ratios of 4.00% and 8.00%, respectively. The Company's consolidated risk-weighted assets were reported at $107.5 million with reported ratios at December 31, 1998, of approximately 20% for Tier I capital and 21.3% for Total capital. The report labeled "Capital Ratios" provides a better understanding of the components of each of the Tier I and Tier II capital ratios as well as a three-year comparison of the growth of these ratios. The Company intends to continue the past policy of maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs. From time to time the Company may make contributions to the capital of either of its subsidiaries, the Bank or Liberty. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to either the Bank's or Liberty'S capital. Year 2000-The Company is currently working to resolve the potential impact of the year 2000 (Y2K) on the processing of date-sensitive information by the Company's computerized information systems. The Y2K problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company-s systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or systems failures. The Federal Reserve Board and other federal banking regulators (together known as the Federal Financial Institutions Examination Council, or "FFEIC") have developed joint guidelines and benchmarks for assessing Y2K risk, remediation of non-compliant systems and components and post-remediation testing and implementation. In an effort to correctly assess the effect of Y2K on the financial position of the Company and assess our readiness for Y2K, a Y2K committee was organized which meets on a regular basis to keep executive management and the Board of Directors informed of our progress towards Y2K compliance. The committee has developed strategic, customer awareness, customer risk assessment, test and contingency plans. In accordance with FFEIC guidelines, the Y2K committee has defined five phases in the Y2K project management: Phase I-Awareness Phase In this phase we defined the problem and gained executive level commitment. The Y2K committee developed an overall strategy. This phase has been completed. Phase II-Assessment Phase During this phase, we assessed the size and complexity of the Y2K issues and identified both information technology (IT) and non-IT systems that could be affected by the change. At this time, we also identified systems which were mission-critical and non-mission-critical. We define mission-critical systems as vital to the successful continuation of our core business activities. Our core business activities include servicing deposits, servicing loans, item processing and accounting, originating deposits, originating loans, investments and trust. The mission-critical systems that support our core business activities include: our AS/400 (mainframe computer) and operating system; check processing software; check sorters; loan, deposit and account origination software; Fedline (interface to the Federal Reserve Bank); and trust accounting software. Other systems not deemed mission-critical, but important, include: human resources; payroll; ATM networks; voice banking system; heating and faxes. We also evaluated the Y2K effect on strategic business initiatives. We assessed the risk exposure of our customers as funds providers, funds takers and capital market/asset counterparties. This phase has been completed; however, we continue to monitor our exposure on an on-going basis. Phase III-Renovation Phase This phase includes hardware and software upgrades or replacements and other changes. No mission-critical hardware or software needed to be replaced. All of our software applications are provided by vendors and these applications were already Y2K compliant when we began the renovation phase. We are, however, replacing several PC's which support non-mission-critical applications. This will be complete by 6/30/99. Phase IV-Validation Phase This is the testing phase. During this phase the systems identified in Phase II (Assessment) are tested for Y2K compliance. Systems that were deemed mission-critical were tested first. We have now started testing the remaining systems. All mission-critical systems were tested by 12/31/98 and were in compliance. Non-mission critical systems will be tested by 6/30/99. Phase V-Implementation Phase January 1, 2000, will be a processing day. If we detect any failures of our mission-critical systems, we will implement our contingency plans as appropriate. The Company does not write any source programming code and is therefore dependent upon external vendors and service providers to alter their programs to become Y2K-compliant. We have received certification from our vendors as to their product compliance; however, we will still test all mission-critical and non-mission-critical systems identified in Phase II. We have identified the following timetable for the testing phase: 12/31/98 testing of internal mission-critical systems was completed 03/31/99 testing with service providers for mission critical systems should be complete 06/30/99 testing of non-mission-critical systems should be complete.
As of 12/31/98, we had completed the testing of all mission-critical systems and noted only a few minor date formatting errors in loan documen- tation for which we have received corrections, which will be installed during the first quarter of 1999. These minor errors do not affect any calculations and do not affect our ability to process loans. We will begin testing of the non-mission-critical systems during the first quarter of 1999 and anticipate testing to be completed by 3/31/99. At this time we expect to have all our mission-critical and non-mission-critical systems Y2K compliant by 6/30/99. We do not anticipate any major upgrades to existing systems before the year 2000. The costs involved in addressing potential problems are not currently expected to have a material impact on the Company's financial position, results of operations or cash flows in future periods. During 1998 we budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades. The costs included testing of our contingency site, replacement of ten PC's which were not Y2K-compliant and proxy testing of some of our mission- critical systems. We have not calculated the personnel costs relating to Y2K; however, we did not have to hire additional personnel in our Y2K efforts. For 1999, we have budgeted $77,000. Projected expenses include the replacement of additional PCs, PC software upgrades, consulting services, testing, travel and education. Y2K costs are expensed from current earnings. No new projects have been deferred due to the Y2K effort. The yearly software update to our core system provided by one of our vendors has been postponed by the vendor until 2000 in an effort to minimize changes to an already compliant system. This will not have an effect on our operations. We have reviewed the credit risk our commercial borrowers may pose to us if they are not Y2K-compliant. At this time, we have identified only a small number of customers deemed as high risk customers, and their inability or failure to repay their loans as scheduled would not have a material impact on the Company. The worst case scenario relating to Y2K is that we would not have electrical power. If this were the case, our contingency plan is to operate in a manual mode. We have plans for hiring temporary help in this situation. The next worst case scenario is that telephones would be unavailable. If this were the case, the Derby branch could be fully operational. Other branches would need to service deposits in an off-line mode. Requests for account and loan origination could be directed to the Derby branch. Assuming we have electricity and telephones, we anticipate our core systems to be functional. Our Y2K contingency plan is based on our disaster recovery plan, which is written to respond to a complete core system outage. Our contingency plan also outlines manual processes in the event of individual component failures. During the first quarter of 1999, outside consultants will review and validate our contingency plans. Common Stock Performance by Quarter
1998 First Second Third Fourth Trade price High $13.00 $13.75 $15.00 $13.75 Low $11.75 $13.00 $13.75 $11.50 Cash Dividends Declared $ .15 $ .15 $ .15 $ .15 1997 First Second Third Fourth Trade price High $ 9.75 $10.00 $11.00 $11.75 Low $ 9.38 $ 9.75 $10.00 $10.50 Cash Dividends Declared $ .14 $ .14 $ .14 $ .14 Trade price information and cash dividends for all quarters in 1997, and the first quarter of 1998 have been restated to reflect the 100% stock dividend paid on June 1, 1998.
Form 10-K A copy of the Form 10-K Report filed with the Securities and Exchange Commission may be obtained without charge upon written request to: Stephen P. Marsh, Vice President and Treasurer Community Bancorp. P.O. Box 259 Derby, Vermont 05829 The report for the year 1998 is expected to be available about April 1, 1999. Shareholder Services For shareholder services or information contact: Chris Bumps, Executive Secretary Community National Bank P.O. Box 259 Derby, Vermont 05829 (802) 334-7915 Annual Shareholders Meeting The 1999 Annual Shareholders Meeting will be held at 5:30 p.m., May 4, 1999, at the Elks Club in Derby. We hope to see many of our shareholders there. Community Bancorp. Stock As of February 1, 1999, the Corporation's common stock ($2.50 par value) was owned by approximately 830 shareholders of record. Although there is no established public trading market in the Corporation's common stock, several brokerage firms follow the stock and maintain a minor market in it. Trading in the Corporation's stock, however, is not active. You can contact these firms at the following addresses: First Albany Corp. A.G. Edwards P.O. Box 387 1184 Main Street, Suite 1 Burlington, Vermont 05402 St. Johnsbury, Vermont 05819 (800) 451-3249 (800) 457-1002 Salomon Smith Barney Winslow, Evans & Crocker P.O. Box 1095 33 Broad Street Burlington, Vermont 05402 Boston, Massachusetts 02109 (800) 446-0193 (800) 556-8600 EX-27 3
9 1000 YEAR DEC-31-1998 DEC-31-1998 4,897 8,502 7,025 0 21,731 29,878 30,038 148,335 1,659 225,051 197,797 288 883 4,080 0 0 7,852 14,150 225,051 13,758 2,892 422 17072 7,868 209 8,995 660 0 7,021 2,901 2,901 0 0 2,190 .71 .71 7.92 2,354 401 126 3,104 1,502 705 202 1,659 1,659 0 177
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