SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)of the Securities Exchange Act of 1934
For Nine Months Ended September 30, 2001Commission File Number 000-16435
COMMUNITY BANCORP.
(Exact Name of Registrant as Specified in its Charter)
Vermont
03-0284070
(State of Incorporation)
(IRS Employer Identification Number)
Derby Road, Derby, Vermont
05829
(Address of Principal Executive Offices)
(zip code)
Registrant's Telephone Number: (802) 334-7915
Not ApplicableFormer Name, Former Address and Formal Fiscal Year(If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( )
At October 16, 2001 there were 3,551,106 shares outstanding of the Corporation's common stock.
Total Pages -19 Pages
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
The following are the consolidated financial statements for Community Bancorp. and subsidiaries, "the Company".
COMMUNITY BANCORP. AND SUBSIDIARIES
Consolidated Balance Sheets
( Unaudited )
September 30
December 31
2001
2000
Assets
Cash and due from banks
6,160,903
6,110,527
5,900,762
Federal funds sold and overnight deposits
15,516,556
0
4,663,905
Total cash and cash equivalents
21,677,459
10,564,667
Securities held-to-maturity (fair value $35,783,843 at 09/30/01,
$42,466,587 at 12/31/00, and $51,751,518 at 09/30/00)
35,154,245
42,197,130
52,094,438
Securities available-for-sale
19,625,275
19,145,938
19,016,875
Restricted equity securities
1,224,650
1,141,650
Loans held-for-sale
817,623
710,991
626,500
Loans
184,867,799
176,815,408
171,927,463
Allowance for loan losses
(1,936,438)
(1,796,810)
(1,761,291)
Unearned net loan fees
(985,405)
(950,937)
(927,417)
Net loans
181,945,956
174,067,661
169,238,755
Bank premises and equipment, net
4,859,766
4,693,934
4,598,838
Accrued interest receivable
1,782,606
1,929,495
2,079,398
Other real estate owned, net
208,557
201,123
297,769
Other assets
2,623,184
2,586,788
2,631,130
Total assets
$269,919,321
$252,785,237
$262,290,020
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing
27,833,634
25,640,868
27,187,479
NOW and money market accounts
61,582,852
55,776,849
51,769,069
Savings
33,601,886
29,810,798
33,097,392
Time deposits, $100,000 and over
17,227,568
17,504,358
16,849,480
Other time deposits
82,458,539
79,651,657
78,855,006
Total deposits
$222,704,479
$208,384,530
$207,758,426
Federal funds purchased and other borrowed funds
5,055,000
5,592,000
17,055,000
Repurchase agreements
16,992,976
14,371,538
13,443,825
Accrued interest and other liabilities
1,525,127
1,886,999
1,215,314
Subordinated convertible debentures
2,000
20,000
Total liabilities
$246,279,582
$230,255,067
$239,492,565
Stockholders' Equity
Common stock - $2.50 par value;
6,000,000 shares authorized and 3,694,652 shares issued
at 09/30/01, 3,478,561 shares issued at 12/31/00, and
3,461,721 shares issued at 09/30/00
9,236,631
8,696,402
8,654,303
Additional paid-in capital
13,289,787
11,515,514
11,389,068
Retained earnings
2,583,809
3,731,098
4,096,193
Accumulated other comprehensive income
180,207
(23,108)
(135,676)
Less: treasury stock, at cost; 145,163 shares at 09/30/01,
122,777 shares at 12/31/00, and 105,494 shares at 09/30/00
(1,650,695)
(1,389,736)
(1,206,433)
Total stockholders' equity
$23,639,739
$22,530,170
$22,797,455
Total liabilities and stockholders' equity
Consolidated Statements of Income
For The Third Quarter Ended September 30,
1999
Interest income
Interest and fees on loans
3,907,199
3,792,690
3,294,974
Interest and dividends on investment securities
U.S. Treasury securities
165,101
341,881
554,450
U.S. Government agencies
334,055
380,862
133,946
States and political subdivisions
196,162
254,551
196,180
Corporate dividends and interest
48,473
21,468
20,556
Interest on federal funds sold and overnight deposits
82,911
23,047
47,549
Total interest income
$4,733,901
$4,814,499
$4,247,655
Interest expense
Interest on deposits
1,894,359
2,004,156
1,831,568
Interest on borrowed funds
61,078
257,465
51,495
Interest on repurchase agreements
129,872
132,335
13,647
Interest on subordinated debentures
550
Total interest expense
$2,085,309
$2,394,506
$1,897,260
Net interest income
2,648,592
2,419,993
2,350,395
Provision for loan losses
(60,000)
(63,000)
(115,000)
Net interest income after provision
$2,588,592
$2,356,993
$2,235,395
Other operating income
Trust department income
98,178
93,811
62,054
Service fees
231,313
210,869
176,797
Security gains (losses)
10,095
(7,275)
Other
215,218
152,869
165,765
Total other operating income
$554,804
$450,274
$404,616
Other operating expenses
Salaries and wages
890,960
778,804
724,113
Pension and other employee benefits
238,195
207,918
205,874
Occupancy expenses, net
390,090
354,521
280,158
Trust department expenses
43,973
23,168
13,080
713,517
612,353
603,047
Total other operating expenses
$2,276,735
$1,976,764
$1,826,272
Income before income taxes
866,661
830,503
813,739
Applicable income taxes (credit)
211,794
198,155
209,833
Net Income
$654,867
$632,348
$603,906
Earnings per share on weighted average
$0.18
$0.17
Weighted average number of common shares
used in computing earnings per share
3,550,607
3,531,062
3,498,746
Dividends declared per share
$0.16
Book value per share on shares outstanding
$6.66
$6.47
$6.41
Per share data for 2000 and 1999 restated to reflect a 5% stock dividend paid on February 1, 2001.
For the First Nine Months Ended September 30,
11,644,676
10,618,741
9,748,162
554,737
1,170,260
1,684,898
1,194,300
948,757
401,999
545,290
560,221
447,769
94,266
63,927
59,405
220,374
87,219
159,082
$14,253,643
$13,449,125
$12,501,315
6,002,986
5,560,791
5,483,598
220,127
403,319
150,567
449,696
272,022
22,957
706
1,650
$6,673,515
$6,237,782
$5,658,772
7,580,128
7,211,343
6,842,543
(240,000)
(321,000)
(415,000)
$7,340,128
$6,890,343
$6,427,543
307,073
251,314
167,563
681,363
596,786
520,060
164,534
(18,782)
562,264
541,845
540,556
1,715,234
1,371,163
1,228,179
2,529,294
2,231,405
2,131,401
718,360
668,870
604,324
1,207,409
1,080,981
923,954
108,042
73,511
41,082
2,145,054
1,902,705
1,801,701
$6,708,159
$5,957,472
$5,502,462
2,347,203
2,304,034
2,153,260
562,442
589,397
572,069
$1,784,761
$1,714,637
$1,581,191
$0.50
$0.48
$0.46
3,541,442
3,549,489
3,457,523
Consolidated Statements of Cash Flows (unaudited)
Reconciliation of net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
458,273
448,650
304,786
240,000
321,000
415,000
(Credit) provision for deferred income taxes
(115,211)
(6,193)
(30,150)
Gain on sale of loans
(85,040)
(24,772)
(89,534)
Securities (gain) losses
(164,534)
18,782
(Gain) losses on sales of OREO
(15,955)
(56,594)
6,244
OREO writedowns
6,883
19,590
Amortization of bond premium, net
74,834
133,604
240,582
Proceeds from sales of loans held for sale
7,641,571
2,008,907
9,424,068
Originations of loans held for sale
(7,663,163)
(1,950,212)
(9,467,687)
Increase (decrease) in taxes payable
38,505
96,554
28,240
Decrease (increase) in interest receivable
146,889
(595,206)
(461,965)
(Increase) decrease in mortgage service rights
(5,274)
22,361
(32,119)
Decrease (increase) in other assets
3,247
(117,218)
201,483
Increase (decrease) in unamortized loan fees
34,468
36,303
36,270
(Decrease) increase in interest payable
(115,272)
89,505
(29,686)
Increase (decrease) in accrued expenses
162,670
(16,846)
1,229
Increase (decrease) in other liabilities
85,643
79,575
120,326
Net cash provided by operating activities
$2,506,412
$2,209,720
$2,267,868
Cash Flows from investing activities:
Investments - held to maturity
Maturities and paydowns
23,849,227
9,586,421
18,936,104
Purchases
(23,772,217)
(31,799,200)
(26,313,397)
Investments - available for sale
Sales and maturities
13,170,168
9,987,892
(6,285,878)
(9,291,211)
Purchase of restricted equity securities
(83,000)
Investment in limited partnership, net
(20,388)
(4,078)
(14,130)
(Increase) decrease in loans, net
(8,486,918)
(20,073,351)
(4,337,162)
Capital expenditures, net
(624,105)
(724,791)
(1,622,280)
Recoveries of loans charged off
119,974
113,377
74,913
Proceeds from sales of other real estate owned
222,702
563,551
453,841
Net Cash Used in Investing Activities
($1,910,435)
($32,350,179)
($22,113,322)
Cash Flows from Financing Activities:
Net increase in demand, NOW, money market
and savings accounts
11,789,857
1,377,014
11,950,238
Net increase (decrease) in certificates of deposit
2,530,092
4,538,532
(1,430,512)
Net increase in short-term borrowings and
repurchase agreements
2,621,438
10,820,543
1,171,117
Net (decrease) increase in borrowed funds
(537,000)
13,000,000
Payments to acquire treasury stock
(259,349)
(758,212)
(2,831)
Debentures redeemed for cash
(12,000)
Dividends paid
(1,162,083)
(988,895)
(841,065)
Net cash provided by financing activities
$14,970,955
$27,988,982
$10,846,947
Net increase (decrease) in cash and cash equivalents
$15,566,932
($2,151,477)
($8,998,507)
Cash and cash equivalents:
Beginning
$6,110,527
$12,716,144
$20,424,088
Ending
$21,677,459
$10,564,667
$11,425,581
Supplemental Schedule of Cash Paid During the Year
Interest paid
$6,788,787
$6,148,277
$5,687,724
Income Taxes Paid
$639,149
$499,038
$573,980
Supplemental schedule of noncash investing and financing activities:
Net change in securities valuation
$308,053
$168,803
($498,281)
OREO acquired in settlements of loans
$214,181
$376,915
$589,427
Debentures converted to common stock
$6,000
$0
Stock dividends
$1,801,552
$1,851,338
Dividends declared
$1,130,498
$1,081,410
$1,553,648
Decrease (Increase) in dividends payable
536,926
537,361
Dividends reinvested
(505,341)
(629,876)
(712,583)
$1,162,083
$988,895
$841,065
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONSFor the Nine Months Ended September 30, 2001
Community Bancorp. (The "Company") is a bank holding company whose subsidiaries include Community National Bank and Liberty Savings Bank. Community National Bank ("the Bank") is a full service institution operating in the state of Vermont. The Bank has eight commercial banking offices, five of which are located in Orleans County, one in Essex County, one in Caledonia County, and the newest office in Washington County. On May 29, 2001, Community National Bank opened its eighth office on 95-97 State Street in Montpelier, Vermont. This office operates as a full service institution, serving the Barre-Montpelier area. The Company felt it was time to branch out into another county in Vermont. This office has proved to be a profitable addition to the Company with average loans totaling $820,764 and average total deposits of $391,596. The Company also leases space in Barre for a trust office to serve the needs of clients in that area. Liberty Savings Bank ("Liberty") is a New Hampshi re guaranty savings bank acquired by Community Bancorp. on December 31, 1997. Currently this bank is inactive and shares the mailing address of Community Bancorp.
In a recent press release, the Company announced plans to establish a new trust and investment company to be known as Community Financial Services Group. This new venture is formed jointly with the National Bank of Middlebury in Vermont and Woodsville Guaranty Savings Bank in New Hampshire. Each institution will house an office staffed with full-time professional advisors offering trust, investment management, estate, tax and retirement planning services to individuals, non-profits and businesses. Subject to regulatory approval, the business will be fully operational during the first quarter of 2002. The Company anticipates recognition of a gain on this transaction of approximately $567,000 ($374,000 net of tax).
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying interim consolidated financial statements of Community Bancorp. And subsidiaries are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for fair presentation of the financial condition and results of operations of the company contained herein have been made. The unaudited consolidated financial statements and note thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2000, contained in the company's Annual Report on Form 10-K for the year ended December 31, 2000.
Most of the Bancorp's business is conducted through the Bank; therefore, the following narrative is based primarily on this Bank's operations. The various spreadsheets preceding this section are consolidated figures for Community Bancorp. and subsidiaries, and can be used to provide a more detailed comparison of the information disclosed in the following narrative.
OVERVIEW
Net income for the third quarter ended September 30, 2001 was $654,867, representing an increase of 3.6% and 8.4%, respectively, over the net income figures of $632,348 for the third quarter ended September 30, 2000, and $603,906 for the same period in 1999. The results of this are earnings per share of $0.18 for the third quarter of 2001 and 2000 and $0.17 for the third quarter of 1999. The Company declared a cash dividend of $0.16 per share payable August 1, 2001 to shareholders of record as of July 15, 2001. Net income for the first nine months of 2001 was $1,784,761 compared to $1,714,637 for the first nine months of 2000, and $1,581,191 for the first nine months of 1999, representing an increase of 4.1% for 2001 versus 2000, and 12.9% for 2001 versus 1999. Earnings per share for the first nine months were $0.50 for 2001 compared to $0.48 for 2000 and $0.46 for 1999. The third quarter of 2001 was more profitable than the third quarter of 2000 due in part to a heavier volume of loans sold on the secondary market, and a substantial decrease in interest paid on deposit accounts. Net income for the first nine months of 2001 was more profitable than both the 2000 and 1999 comparison periods due to a decrease in the provision for loan losses and a substantial gain on the sale of treasuries from the investment portfolio.
Net interest income, the difference between interest income and interest expense, represents the largest portion of the Company's earnings, and is affected by the volume, mix, rate sensitivity of earning assets as well as interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets.
Net interest income for the third quarter comparison period started at $2.35 million for 1999, increased to $2.42 million for 2000, and then increased to $2.65 million for 2001, resulting in increases of 3% for 2000 versus 1999 and 9.5% for 2001 versus 2000. Total interest income for the third quarter of 2001 decreased $80,598 or by 1.7% compared to the same quarter in 2000, while the third quarter of 2000 increased $566,844 or 13.4% compared to the same quarter of 1999. Interest expense followed the same pattern with a decrease of $309,197 or 12.9% for the third quarter of 2001 compared to 2000, and an increase of $497,246 or 26.2% for the third quarter of 2000 compared to the same quarter in 1999.
Net interest income started at $6.8 million as of the end of the first nine months of 1999, increased $368,800 or 5.4% to $7.2 million as of the end the first nine months of 2000, and then increased $368,785 or 5.1% to end the first nine months of 2001 at a figure of $7.6 million. Total interest income for the first nine months increased $947,810 or 7.6% for 2000 versus 1999, and $804.518 or 6% for 2001 versus 2000. An increase in the loan portfolio over the past three years supports the increase in both comparison periods. Total interest expense increased $579,010 or 10.2% for the first nine months of 2000 versus 1999, and an increase of $435,733 or 7% is recognized for the first nine months of 2001 versus 2000. A review of the nine month figures for interest earned on loans, the major source of interest income, reveals an increase of 8.9% for 2000 compared to 1999, and an increase of 9.7% for 2001 compared to 2000. In comparison, interest paid on deposits, the major source of interest expense, shows an increase of 1.4% and an increase of 8%, respectively. The result is a tax equivalent spread for the first nine months equaling 3.68% for 2001 versus 3.66% for 2000 and 3.65% for 1999.
CHANGES IN FINANCIAL CONDITION
The Company had total average assets of $254 million at September 30, 2001 and $246 million at December 31, 2000. Average earning assets were $241 million for the first nine months ended September 30, 2001, including average loans of $179 million and average investment securities of $56 million. Average earning assets were $234 million for the year ended December 31, 2000 including average loans of $165 million and average investment securities of $66 million. The Company's competitive loan packages contribute to the increase in the average loan volume.
Average interest bearing liabilities at September 30, 2001 were $204 million, with average time deposits reported totaling almost $100 million and NOW & money market funds of $53 million. At December 31, 2000, average interest bearing liabilities of $196 million were reported including average time deposits of $93 million and NOW & money market funds at an average volume of $51 million.
Repurchase agreements increased in volume, starting at an average volume of $10 million at December 31, 2000, and increasing $4.2 million to end at a nine-month average balance of $14.2 million as of September 30, 2001. These accounts have been well received since they were introduced in 1998, and have been successful in retaining current business customers and attracting new ones.
RISK MANAGEMENT
Liquidity Risk - Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The repayment of loans and growth in deposits are two of the major sources of liquidity. Our time deposits greater than $100,000 decreased $276,790 or 1.6% to end the first nine months of 2001 at a volume of $17.2 million compared to $17.5 million at the end of the 2000 calendar year. Other time deposits increased $2.8 million from December 31, 2000 to September 30, 2001. This increase is attributable to a variety of attractive rates and maturity schedules offered in an effort to retain and attract new deposit customers. A review of these deposits, primarily the time deposits over $100,000 indicates that they are primarily generated locally and regionally and most are established customers of the Company. The Company has no brokered deposits. Now and money market funds increased $5.8 million to end the first nine months of 2001 at $61.6 million compared to $55.8 million as of the end of 2000. An increase in municipal deposits is a key factor to the increase in now and money market funds. Our gross loan portfolio increased 4.6% from $177.5 million at the end of 2000 to $185.7 million at the end of the first nine months of 2001. This increase is offset by a decrease in the Company's investment portfolio for the first nine months of 2001. As of September 30, 2001, the Company held in its investment portfolio treasuries classified as "Available for Sale" at a fair value of $19.6 million, compared to $19.2 million as of December 31, 2000, an increase of $479,337 or 2.5%. Treasuries classified as "Held to Maturity" ended the first nine months of 2001 at a book value of $35.2 million compared to $42.2 million as of the end of the 2000 calendar year. Both of these types of investments mature at monthly intervals as shown on the gap report at the end of this section. Securities classified as "Restricted Equity Securities" are made up of equity securities the Company is required to maintain in the form Federal Home Loan Bank of Boston (FHLB) and Federal Reserve stock. These securities increased $83,000 to a reported balance of $1.2 million as of September 30, 2001. As a result of the increase in deposits and decrease in debt securities resulting from maturity and call provisions, which were not completely reinvested in earning assets, federal funds sold and overnight deposits reported a balance of $15.5 million as of the end the first nine months of 2001, compared to a zero balance as of the end of the 2000 calendar year. Additionally, the Company currently has an advance of just over $5 million against an available line of $106.8 million, with an additional $2 million and $4.1 million, respectively, at First Boston and FHLB.
Credit Risk - Management follows strict underwriting guidelines, and has established a thorough loan-by-loan review policy. These measures help to insure the adequacy of the loan loss coverage. The Executive Officers and the Board of Directors conduct periodic reviews of the loan portfolio. Topics discussed include potential exposures existing within the portfolio. Factors considered are each borrower's financial condition, the industry or sector for the economy in which the borrower operates, and overall economic conditions. Existing or potential problems are noted and addressed by senior management in order to assess the risk of probable loss or delinquency. A variety of loans are reviewed periodically by an independent firm in order to assure accuracy and compliance with various policies and procedures set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duties include, among others, a review of the loan portfolio including delinquent and non-performi ng loans.
Specific allocations are made in situations management feels are at a greater risk for loss. A quarterly review of the qualitative factors including "Levels of, and Trends in, Delinquencies and Non-Accruals" and "National and Local Economic Trends and Conditions", help to ensure that areas with potential risk are noted and coverage increased or decreased to reflect the trends in delinquencies and non-accruals. Residential first mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio helping to alleviate the overall risk.
Allowance for loan losses and provisions - The valuation allowance for loan losses of $1.9 million as of September 30, 2001 composed 1.04% of the total gross loan portfolio. A primary concern of management is to reduce the exposure of credit loss within the portfolio. The Company maintains a residential loan portfolio of approximately $111 million and a commercial real estate portfolio of approximately $37 million accounting for 60% and 20%, respectively, of the total loan portfolio. This large loan volume together with the low historical loan loss experience helps to support our basis for loan loss coverage.
The three components of non-performing assets for the company are loans classified as 90 days or more past due and still accruing, non-accruing loans, and other real estate owned (OREO). A comparison of these non-performing assets revealed a decrease in non-accruing loans of $16,111 or just over 1%, while an increase of $7,527 or 14.9% was noted in loans 90 days or more past due, as well as an increase in the OREO portfolio of $7,434 or 3.7%. The portfolio of non-accruing loans makes up the biggest portion of the non-performing assets and consists of $1.3 million or 92% of real estate secured mortgage loans at the end of the first nine months of 2001, thereby reducing the exposure to loss. Additionally, during the month of October, the Company has decreased the OREO portfolio by $70,000, has purchase and sale agreements on two other properties, and has set a goal for year-end to sell all remaining properties as well.
Non-performing assets as of September 30, 2001 and December 31, 2000 were as follows:
09/30/2001
12/31/2000
Non-Accruing loans
$1,398,772
$1,414,883
Loans past due 90 day or more and still accruing
58,089
50,562
Other real estate owned
Total
$1,665,418
$1,666,568
Other real estate owned is made up of property that the Company owns in lieu of foreclosure or through normal foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The value of the property is determined prior to transferring the balance to other real estate owned. The balance transferred to OREO is the lesser of the appraised value of the property, or book value of the loan. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals are then done periodically thereafter charging any additional write-downs to the appropriate expense account.
Market Risk and Asset and Liability Management - Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The Asset/Liability Commit tee's methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet, and a simulation analysis which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest.
Current interest rates based on prime are at a 40-year low, decreasing approximately 450 basis points since the beginning of the year, with a majority of the decrease occurring during the last three to four months. While the effect is felt almost immediately on the Company's short-term earning assets, the loan and investment portfolio experience a more gradual decrease. The Company's primary earning assets subject to changes in the prime rate consists of commercial borrowings including lines of credit. The Company has reacted to this activity by reducing the period for rate indexing to quarterly or immediate. Additionally, the Company attempts to offset these changes through prompt decreases in various components of the interest bearing liability portfolio.
Interest Rate Sensitivity "Gap" Analysis -
The following tables set forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at September 30, 2001, and December 31, 2000. The Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that:
Adjustable-rate loans and certificates of deposit are included in the period when they are first scheduled to adjust and not in the period in which they mature;
Fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments;
And
NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit, to changes in interest rates.
Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experiences on which the assumptions are based.
GAP ANALYSYS
Community Bancorp. & Subsidiaries
September 30, 2001
Cumulative repriced within:
Dollars in thousands,
3 Months
4 to 12
1 to 3
3 to 5
Over 5
by repricing date
or less
Months
Years
Interest sensitive assets:
Federal funds sold
9,600
Overnight deposits
5,917
Investments -
Available for Sale(1)
10,237
4,129
4,206
1,053
19,625
Held to Maturity
9,528
10,605
423
2,785
11,813
35,154
1,225
Loans(2)
32,901
50,007
42,399
19,517
39,462
184,286
Total interest sensitive assets
57,946
70,849
46,951
26,508
53,553
255,807
Interest sensitive liabilities:
Certificates of deposit
30,160
48,984
13,901
6,641
99,686
Money markets
15,227
5,790
41,017
Regular savings
5,602
28,000
33,602
Now accounts
20,566
Borrowed funds
15
5,040
5,055
16,993
Total interest sensitive liabilities
62,380
60,376
13,916
73,606
216,919
Net interest rate sensitivity gap
(4,434)
10,473
33,035
19,867
(20,053)
Cumulative net interest rate
sensitivity gap
6,039
39,074
58,941
38,888
sensitivity gap as a
percentage of total assets
-1.64%
2.24%
14.48%
21.84%
14.41%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets
-1.73%
2.36%
15.27%
23.04%
15.20%
Cumulative interest earning assets
as a percentage of cumulative
interest-bearing liabilities
92.89%
104.92%
128.59%
141.13%
117.93%
(1) The Company may sell investments available for sale with a fair value of $19,625,275 at any time.
(2) Loan totals exclude non-accruing loans amounting to $1,398,772.
December 31, 2000
2,998
6,030
10,118
19,146
2,145
14,395
9,540
3,517
12,599
42,196
1,142
22,657
51,985
48,031
17,286
36,152
176,111
27,800
72,410
67,689
20,803
49,893
238,595
15,066
75,095
6,369
626
97,156
5,340
6,370
31,710
1,811
29,811
Now and super now accounts
24,067
5,537
40
5,592
14,372
Subordinated debentures
20
40,315
83,276
6,384
646
72,107
202,728
(12,515)
(10,866)
61,305
20,157
(22,214)
(23,381)
37,924
58,081
35,867
-4.95%
-9.25%
15.00%
22.98%
14.19%
-5.25%
-9.80%
15.89%
24.34%
15.03%
68.96%
81.08%
129.18%
144.47%
117.69%
(1) The Company may sell investments available for sale with a fair value of $19,145,938 at any time.
(2) Loan totals exclude non-accruing loans amounting to $1,414,883.
OTHER OPERATING INCOME AND EXPENSES
Total other operating income for the third quarter of 2001 was $554,804 compared to $450,274 for the third quarter of 2000 and $404,616 for the same quarter of 1999, resulting in increases of $104,530 or 23.2% for 2001 versus 2000 and $45,658 or 11.3% for 2000 versus 1999. An increase in activity for loans sold on the secondary market as well as a recovery of $32,500 on a charged off demand deposit account during the third quarter helped to boost income for the respective period. Total other operating income for the first nine months of 2001 ended at $1.72 million compared to $1.37 million for 2000 and $1.23 million as of the end of the first nine months of 1999. The results are an increase of $344,071 or 25.1% for 2001 versus 2000 and $142,984 or 11.6% for 2000 versus 1999. Security gains notes the biggest increase for the 2001 versus 2000 comparison period. Trust department income reported the biggest increase for the comparison period of 2000 versus 1999. The trust dep artment grew considerably in asset size during the year 2000, supporting the increase in income for the year.
Total other operating expenses followed the same pattern for the third quarter comparisons with figures of $2.28 million for 2001, an increase of $299,971 or 15.2% over the 2000 third quarter figure of $1.98 million, which increased $150,492 or 8.2% over the 1999 figure of $1.83 million. Salaries and wages continue to report the biggest increase for 2001 compared to 2000, due to the increase in personnel needed to staff our newly opened Montpelier office. Occupancy expense notes the biggest increase for the third quarter of 2000 versus 1999, due to significant increases in depreciation, taxes on bank properties, and service contracts. Total other operating expense for the nine month comparison period of 2001 ended at $6.7 million, an increase of $750,687 or 12.6% over the 2000 figure of $5.96 million, which increased $455,010 or by 8.3% over the 1999 figure of $5.5 million. Salaries and wages again notes the biggest increase for the 2001 versus 2000 comparison period followed by other expenses reporting an increase of $242,349 or 12.7%. The Company is celebrating its 150th Anniversary during the 2001 calendar year. The expenses incurred for different events going on throughout the year are included in various components of other expenses. Occupancy expense again reports the biggest increase of $157,027 or 17% for the 2000 versus 1999 comparison period.
Management monitors all components of other operating expenses; however, a quarterly review is performed on crucial components to assure that the accruals for these expenses are accurate. This helps alleviate the need to make drastic adjustments to these accounts that in turn effect the net income of the Company.
APPLICABLE INCOME TAXES
Income before taxes increased from $813,739 for the third quarter of 1999 to $830,503 for the third quarter of 2000, and then increased to $866,661 for the third quarter of 2001. The results are an increase of $16,764 or 2.1% for 2000 versus 1999 and $36,158 or 4.4% for 2001 versus 2000. Provisions for income taxes of $209,833 were reported for 1999 compared to $198,155 for 2000 and $211,794 for 2001. Income before taxes for the first nine months increased from $2.15 million for 1999 to $2.30 million for 2000 to $2.35 million as of September 30, 2001, with income taxes calculated at $572,069, $589,397, and $562,442, respectively.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements. As costs and prices rise during periods of monetary inflation, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Company depends primarily on a strong net interest income to enable their purchasing power to remain aggressive.
CAPITAL RESOURCES
The Company's stockholders' equity started the year at $22,530,170, increased through earnings of $1,784,761 and sales of common stock of $511,341 through dividend reinvestment and debenture conversions, as well as adjustments totaling $203,315 for valuation allowance for securities. It was decreased by dividends totaling $1,667,424, the purchase of treasury stock of $1,526 and the purchase of stock through the Company's stock repurchase program of $257,823. During the first quarter of 2000, the Company announced plans to buy up to 6% or 205,000 shares of its outstanding common stock at current market prices. The price per share during the first nine months of the 2001 calendar year was in the range of $11.25 to $13.25 per share. Additionally, the Company declared a dividend in December of 2000, payable in February of 2001. As a result, an accrual for the dividend was necessary, decreasing stockholders' equity by $536,925 as of December 31, 2000. Stockholders' equity ende d the first nine months of 2001 at $23,639,739 with a book value of $6.66 per share. All stockholders' equity is unrestricted. Additionally, it is noted that the net unrealized loss on valuation allowance for securities has decreased since the beginning of the year. A review of this activity shows that as the maturity date of the investments gets closer, the market price increases, therefore, reducing the amount of the unrealized loss associated with these investment securities.
The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by the banking regulators. The minimum requirements for Tier I and Total Capital are 4% and 8%, respectively. As of September 30, 2001, the Company continued to maintain ratios far above the minimum requirements with reported ratios of approximately 16% for Tier I and 17% for Total Capital.
The Company intends to continue maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs.
From time to time the Company may make contributions to the capital of its subsidiaries, Community National Bank and Liberty Savings Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to either Bank's capital.
RECENT ACCOUNTING DEVELOPMENTS
Community Bancorp. Adopted Statement of Financial Accounting Standards (SFAF) No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective as of January 1, 2001. Concurrent with adoption of the Standard, and as permitted by its provisions, approximately $7 million of debt securities classified as held to maturity were reclassified as securities available for sale. Through the nine month period ended September 30, 2001, some of the debt securities have been subsequently sold with resulting realized net gains of $45,127 included in the income statement caption "Security gains (losses)".
FORWARD-LOOKING STATEMENTS
When used in this report, the terms "expect, plan, anticipate, believe" or similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements.
The Company has included certain forward-looking statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations. These statements are based on current expectations, estimates and projections about the industries in which the Company operates management's beliefs and various assumptions made by management which are difficult to predict. Among the factors that could affect the outcome of the statements are general industry and market conditions and growth rates. Therefore, actual outcomes and their impact on the Company may differ materially from what is expressed or forecasted. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Table A
AVERAGE BALANCES AND INTEREST RATES
The table below presents the following information:
Average earning assets (including non-accrual loans)
Average interest bearing liabilities supporting earning assets
Interest income and interest expense as a rate/yield
For the First Nine Months Ended:
Average
Income/
Rate/
Balance
Expense
Yield
EARNING ASSETS
Loans (gross)
178,924,798
8.70%
161,838,476
8.76%
Taxable Investment Securities
38,805,669
1,749,038
6.03%
48,214,804
2,119,019
5.87%
Tax Exempt Investment
Securities (1)
14,877,193
822,575
7.39%
15,337,669
843,786
7.35%
Federal Funds Sold
3,533,333
120,306
4.55%
709,489
32,971
6.21%
Sweep Account
2,843,702
100,068
4.70%
1,342,913
54,248
5.40%
Other Securities (2)
2,004,822
96,656
6.45%
1,226,271
67,249
7.33%
TOTAL
240,989,517
14,533,319
8.06%
228,669,622
13,736,014
8.02%
INTEREST BEARING LIABILITIES
Savings Deposits
31,116,558
504,680
2.17%
33,132,423
570,659
2.30%
NOW & Money Market Funds
53,040,767
1,370,437
3.45%
50,123,609
1,364,209
3.64%
Time Deposits
99,766,691
4,127,869
5.53%
91,711,292
3,625,924
5.28%
Other Borrowed Funds
5,842,546
5.04%
8,582,391
6.28%
Repurchase Agreements
14,147,424
4.25%
7,568,065
4.80%
Subordinated Debentures
11,000
8.58%
11.02%
203,924,986
6,673,515
4.38%
191,137,780
6,237,783
4.36%
Net Interest Income
7,859,804
7,498,231
Net Interest Spread(3)
3.68%
3.66%
Interest Differential(4)
(1) Income on investment securities of state and political subdivisions is stated on a fully taxable basis (assuming a 34% tax rate).
(2) Included in other securities are taxable industrial development bonds (VIDA) with income of $2,390 for 2001 and $3,322 for 2000.
(3) Net interest Spread is the difference between the yield on earning assets and the rate paid on interest bearing liabilities.
(4) Interest differential is net interest income divided by average earning assets.
Table B
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in income for the first nine months of
2001 and 2000 resulting from volume changes in assets and liabilities and fluctuations
in rates earned and paid.
Variance
RATE / VOLUME
Due to
Rate(1)
Volume(1)
INCOME EARNING ASSETS
(94,592)
1,120,527
1,025,935
54,381
(424,362)
(369,981)
Securities (2)
4,241
(25,452)
(21,211)
(43,946)
131,281
87,335
(14,851)
60,671
45,820
Other Securities
(13,316)
42,723
29,407
Total Interest Earnings
(108,083)
905,388
797,305
(33,261)
(32,718)
(65,979)
(73,265)
79,493
6,228
183,532
318,413
501,945
(79,910)
(103,282)
(183,192)
(58,751)
236,425
177,674
(366)
(578)
(944)
Total Interest Expense
(62,021)
497,753
435,732
(1) Items which have shown a year-to-year increase in volume have variances allocated as follows:
Variance due to rate = Change in rate x new volume
Variance due to volume = Change in volume x old rate
Items which have shown a year-to-year decrease in volume have variances allocated as follows:
Variance due to rate = Change in rate x old volume
Variances due to volume = Change in volume x new rate
(2) Income on tax exempt securities is stated on a fully taxable basis. The assumed rate is 34%.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Incorporated by reference to the section labeled "Risk Management" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously reported, Community National Bank has been involved in a lawsuit which it initially filed in March of 1998 in state court against the State of Vermont. The issue involved OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport, Vermont. Community National Bank sought a court declaration that it owned the OREO property free of any public trust interest by the State in filled lands, under the public trust doctrine. The lower court ruled in favor of the State of Vermont and Community National Bank appealed to the Vermont Supreme Court. On September 7, 2001, the Vermont Supreme Court filed its opinion in the case, upholding the lower court and denying the bank's claim.
Although the Vermont Supreme Court's ruling may impact the marketability of the OREO property, it will not have any material impact on the financial condition of the bank or the consolidated Company.
There are no other pending legal proceedings to which the Company is a party or of which any of its property is the subject, other than routine litigation incidental to its banking business
ITEM 4 Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 Other Information
ITEM 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
Form 8-K dated July 5, 2001 announcing the earnings and other financial information for the period ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: November 13, 2001
By: /s/ Richard C. White
Richard C. White, President
By: /s/ Stephen P. Marsh
Stephen P. Marsh,
Vice President & Treasurer