UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-16435
COMMUNITY BANCORP.
|
Vermont |
03-0284070 |
|
(State of Incorporation) |
(IRS Employer Identification Number) |
|
|
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4811 US Route 5, Derby, Vermont |
05829 |
|
(Address of Principal Executive Offices) |
(zip code) |
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|
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Registrant's Telephone Number: (802) 334-7915 |
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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 ( )
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
At August 10, 2004, there were 3,825,740 shares outstanding of the Corporation's common stock.
Total Pages - 27 Pages
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FORM 10-Q |
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Page |
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PART I FINANCIAL INFORMATION |
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Item I Financial Statements |
4 |
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Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations |
10 |
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Item 3 Quantitative and Qualitative Disclosures About Market Risk |
20 |
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Item 4 Controls and Procedures |
21 |
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PART II OTHER INFORMATION |
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Item 1 Legal Proceedings |
21 |
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Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
21 |
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Item 3 Defaults Upon Senior Securities |
21 |
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Item 4 Submission of Matters to a Vote of Security Holders |
21 |
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Item 5 Other Information |
22 |
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Item 6 Exhibits and Reports on Form 8-K |
22 |
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23 |
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
The following are the consolidated financial statements for Community Bancorp. and subsidiary, "the Company".
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|||||||||
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Consolidated Balance Sheets |
|||||||||
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June 30 |
December 31 |
June 30 |
|||||||
|
2004 |
2003 |
2003 |
|||||||
|
(Unaudited) |
(Unaudited) |
||||||||
|
Assets |
|||||||||
|
Cash and due from banks |
$ |
12,529,172 |
$ |
11,620,762 |
$ |
12,329,224 |
|||
|
Federal funds sold and overnight deposits |
3,518,537 |
2,751,148 |
0 |
||||||
|
Total cash and cash equivalents |
16,047,709 |
14,371,910 |
12,329,224 |
||||||
|
Securities held-to-maturity (fair value $21,522,492 at 06/30/04, |
|||||||||
|
$41,716,965 at 12/31/03, and $23,150,193 at 06/30/03) |
21,452,759 |
41,563,840 |
22,833,848 |
||||||
|
Securities available-for-sale |
49,994,886 |
56,319,321 |
47,262,004 |
||||||
|
Restricted equity securities, at cost |
2,310,650 |
1,356,850 |
1,356,850 |
||||||
|
Loans held-for-sale |
1,509,863 |
2,253,151 |
5,043,058 |
||||||
|
Loans |
206,914,372 |
204,277,612 |
199,236,983 |
||||||
|
Allowance for loan losses |
(2,254,308 |
) |
(2,199,110 |
) |
(2,220,509 |
) |
|||
|
Unearned net loan fees |
(774,697 |
) |
(805,284 |
) |
(819,816 |
) |
|||
|
Net loans |
203,885,367 |
201,273,218 |
196,196,658 |
||||||
|
Bank premises and equipment, net |
7,763,600 |
7,814,922 |
5,322,788 |
||||||
|
Accrued interest receivable |
1,435,856 |
1,676,190 |
1,503,558 |
||||||
|
Other real estate owned, net |
82,800 |
88,277 |
58,800 |
||||||
|
Other assets |
4,135,774 |
4,024,728 |
4,628,645 |
||||||
|
Total assets |
$ |
308,619,264 |
$ |
330,742,407 |
$ |
296,535,433 |
|||
|
Liabilities and Shareholders' Equity |
|||||||||
|
Liabilities |
|||||||||
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Deposits: |
|||||||||
|
Demand, non-interest bearing |
$ |
39,011,142 |
$ |
38,198,327 |
$ |
35,359,586 |
|||
|
NOW and money market accounts |
67,205,425 |
98,209,841 |
65,887,734 |
||||||
|
Savings |
46,681,757 |
41,506,976 |
40,931,930 |
||||||
|
Time deposits, $100,000 and over |
21,968,820 |
22,116,006 |
21,327,797 |
||||||
|
Other time deposits |
77,944,749 |
79,648,109 |
81,689,292 |
||||||
|
Total deposits |
252,811,893 |
279,679,259 |
245,196,339 |
||||||
|
Federal funds purchased and other borrowed funds |
13,380,000 |
8,040,000 |
9,336,746 |
||||||
|
Repurchase agreements |
11,873,549 |
12,016,570 |
11,041,119 |
||||||
|
Accrued interest and other liabilities |
3,033,139 |
3,921,432 |
3,505,928 |
||||||
|
Total liabilities |
281,098,581 |
303,657,261 |
269,080,132 |
||||||
|
Shareholders' Equity |
|||||||||
|
Common stock - $2.50 par value; 6,000,000 shares authorized |
|||||||||
|
and 4,014,349 shares issued at 06/30/04, 3,971,989 shares |
|||||||||
|
issued at 12/31/03, and 3,950,199 shares issued at 06/30/03 |
10,035,873 |
9,929,973 |
9,875,497 |
||||||
|
Additional paid-in capital |
17,459,952 |
16,861,802 |
16,564,428 |
||||||
|
Retained earnings |
2,260,788 |
1,971,870 |
2,022,882 |
||||||
|
Accumulated other comprehensive income (loss) |
(1,544 |
) |
506,006 |
1,176,975 |
|||||
|
Less: treasury stock, at cost; 185,938 shares at 06/30/04, 182,905 |
|||||||||
|
shares at 12/31/03, and 182,904 shares at 06/30/03 |
(2,234,386 |
) |
(2,184,505 |
) |
(2,184,481 |
) |
|||
|
Total shareholders' equity |
27,520,683 |
27,085,146 |
27,455,301 |
||||||
|
Total liabilities and shareholders' equity |
$ |
308,619,264 |
$ |
330,742,407 |
$ |
296,535,433 |
|||
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||
|
COMMUNITY BANCORP. AND SUBSIDIARY |
||||||
|
Consolidated Statements of Income |
||||||
|
( Unaudited ) |
||||||
|
For The Second Quarter Ended June 30, |
2004 |
2003 |
||||
|
Interest income |
||||||
|
Interest and fees on loans |
$ |
3,369,169 |
$ |
3,570,895 |
||
|
Interest on debt securities |
||||||
|
Taxable |
521,559 |
578,889 |
||||
|
Tax-exempt |
269,598 |
235,484 |
||||
|
Dividends |
12,337 |
11,098 |
||||
|
Interest on federal funds sold and overnight deposits |
4,475 |
4,934 |
||||
|
Total interest income |
4,177,138 |
4,401,300 |
||||
|
Interest expense |
||||||
|
Interest on deposits |
1,117,351 |
1,276,919 |
||||
|
Interest on borrowed funds |
80,307 |
63,889 |
||||
|
Interest on repurchase agreements |
28,607 |
33,279 |
||||
|
Total interest expense |
1,226,265 |
1,374,087 |
||||
|
Net interest income |
2,950,873 |
3,027,213 |
||||
|
Provision for loan losses |
34,000 |
18,000 |
||||
|
Net interest income after provision |
2,916,873 |
3,009,213 |
||||
|
Non-interest income |
||||||
|
Service fees |
354,182 |
247,576 |
||||
|
Security gains |
18,631 |
0 |
||||
|
Other income |
511,339 |
742,139 |
||||
|
Total non-interest income |
884,152 |
989,715 |
||||
|
Non-interest expense |
||||||
|
Salaries and wages |
1,034,579 |
977,477 |
||||
|
Pension and other employee benefits |
340,161 |
304,617 |
||||
|
Occupancy expenses, net |
519,013 |
445,067 |
||||
|
Other expenses |
883,346 |
895,435 |
||||
|
Total non-interest expense |
2,777,099 |
2,622,596 |
||||
|
Income before income taxes |
1,023,926 |
1,376,332 |
||||
|
Applicable income taxes |
204,725 |
287,451 |
||||
|
Net Income |
$ |
819,201 |
$ |
1,088,881 |
||
|
Earnings per share on weighted average |
$0.22 |
$0.29 |
||||
|
Weighted average number of common shares |
||||||
|
used in computing earnings per share |
3,818,337 |
3,767,298 |
||||
|
Dividends declared per share |
$0.17 |
$0.16 |
||||
|
Book value per share on shares outstanding at June 30, |
$7.19 |
$7.29 |
||||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
|
COMMUNITY BANCORP. AND SUBSIDIARY |
||||||
|
Consolidated Statements of Income |
||||||
|
( Unaudited ) |
||||||
|
For The Six Months Ended June 30, |
2004 |
2003 |
||||
|
Interest income |
||||||
|
Interest and fees on loans |
$ |
6,682,771 |
$ |
7,041,684 |
||
|
Interest on debt securities |
||||||
|
Taxable |
1,114,698 |
1,195,043 |
||||
|
Tax-exempt |
510,412 |
449,716 |
||||
|
Dividends |
20,953 |
22,765 |
||||
|
Interest on federal funds sold and overnight deposits |
9,405 |
24,604 |
||||
|
Total interest income |
8,338,239 |
8,733,812 |
||||
|
Interest expense |
||||||
|
Interest on deposits |
2,269,686 |
2,606,896 |
||||
|
Interest on borrowed funds |
153,637 |
126,368 |
||||
|
Interest on repurchase agreements |
58,762 |
70,031 |
||||
|
Total interest expense |
2,482,085 |
2,803,295 |
||||
|
Net interest income |
5,856,154 |
5,930,517 |
||||
|
Provision for loan losses |
85,000 |
93,000 |
||||
|
Net interest income after provision |
5,771,154 |
5,837,517 |
||||
|
Non-interest income |
||||||
|
Service fees |
601,148 |
482,995 |
||||
|
Security gains |
18,631 |
142,904 |
||||
|
Other income |
927,582 |
1,309,846 |
||||
|
Total non-interest income |
1,547,361 |
1,935,745 |
||||
|
Non-interest expense |
||||||
|
Salaries and wages |
2,065,336 |
1,951,708 |
||||
|
Pension and other employee benefits |
717,028 |
610,982 |
||||
|
Occupancy expenses, net |
1,013,433 |
867,950 |
||||
|
Other expenses |
1,721,741 |
1,756,401 |
||||
|
Total non-interest expense |
5,517,538 |
5,187,041 |
||||
|
Income before income taxes |
1,800,977 |
2,586,221 |
||||
|
Applicable income taxes |
217,934 |
588,284 |
||||
|
Net Income |
$ |
1,583,043 |
$ |
1,997,937 |
||
|
Earnings per share on weighted average |
$0.42 |
$0.53 |
||||
|
Weighted average number of common shares |
||||||
|
used in computing earnings per share |
3,809,511 |
3,761,935 |
||||
|
Dividends declared per share |
$0.34 |
$0.32 |
||||
|
Book value per share on shares outstanding at June 30, |
$7.19 |
$7.29 |
||||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
|
COMMUNITY BANCORP. AND SUBSIDIARY |
||||||
|
Consolidated Statements of Cash Flows |
||||||
|
(Unaudited) |
||||||
|
For the Six Months Ended June 30, |
2004 |
2003 |
||||
|
Reconciliation of Net Income to Net Cash Provided by Operating Activities: |
||||||
|
Net Income |
$ |
1,583,043 |
$ |
1,997,937 |
||
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating |
||||||
|
Activities: |
||||||
|
Depreciation and amortization |
387,960 |
317,400 |
||||
|
Provision for loan losses |
85,000 |
93,000 |
||||
|
(Credit) provision for deferred income taxes |
(25,411 |
) |
29,123 |
|||
|
Net gain on sale of loans |
(230,173 |
) |
(773,314 |
) |
||
|
Gain on sale of fixed assets |
0 |
(19,306 |
) |
|||
|
Net gain on sale of securities |
(18,631 |
) |
(142,904 |
) |
||
|
Gains on sales of other real estate owned |
(6,314 |
) |
0 |
|||
|
Writedowns of other real estate owned |
0 |
20,700 |
||||
|
Loss on Trust LLC |
11,762 |
34,465 |
||||
|
Amortization of bond premium, net |
234,724 |
167,888 |
||||
|
Proceeds from sales of loans held for sale |
19,964,766 |
33,671,410 |
||||
|
Originations of loans held for sale |
(18,991,305 |
) |
(31,772,137 |
) |
||
|
Increase (decrease) in taxes payable |
201,257 |
(60,839 |
) |
|||
|
Decrease in interest receivable |
240,334 |
241,247 |
||||
|
Increase in mortgage servicing rights |
(103,105 |
) |
(78,183 |
) |
||
|
Decrease (increase) in other assets |
122,165 |
(809,554 |
) |
|||
|
Decrease in unamortized loan fees |
(30,587 |
) |
(59,685 |
) |
||
|
Decrease in interest payable |
(27,572 |
) |
(9,022 |
) |
||
|
Decrease in accrued expenses |
(383,041 |
) |
(93,908 |
) |
||
|
(Decrease) increase in other liabilities |
12,296 |
(57,365 |
) |
|||
|
Net cash provided by operating activities |
3,027,168 |
2,696,953 |
||||
|
Cash Flows from Investing Activities: |
||||||
|
Investments - held to maturity |
||||||
|
Maturities and paydowns |
31,502,073 |
23,409,501 |
||||
|
Purchases |
(11,410,436 |
) |
(7,296,091 |
) |
||
|
Investments - available for sale |
||||||
|
Sales and maturities |
11,038,770 |
9,213,770 |
||||
|
Purchases |
(5,680,000 |
) |
(15,113,155 |
) |
||
|
Purchase of restricted equity securities |
(953,800 |
) |
(47,800 |
) |
||
|
Investment in limited partnership, net |
(292,118 |
) |
(503,408 |
) |
||
|
(Increase) decrease in loans, net |
(2,770,261 |
) |
1,506,161 |
|||
|
Capital expenditures, net |
(336,637 |
) |
(328,284 |
) |
||
|
Proceeds from sales of other real estate owned |
39,678 |
0 |
||||
|
Recoveries of loans charged off |
75,812 |
62,566 |
||||
|
Net cash provided by investing activities |
21,213,081 |
10,903,260 |
||||
|
Cash Flows from Financing Activities: |
||||||
|
Net decrease in demand, NOW, money market and savings accounts |
(25,016,820 |
) |
(16,646,832 |
) |
||
|
Net (decrease) increase in certificates of deposit |
(1,850,546 |
) |
921,541 |
|||
|
Net decrease in short-term borrowings and repurchase agreements |
(143,021 |
) |
(3,027,907 |
) |
||
|
Net increase in borrowed funds and federal funds purchased |
5,340,000 |
4,296,746 |
||||
|
Payments to acquire treasury stock |
(49,881 |
) |
(7,981 |
) |
||
|
Dividends paid |
(844,182 |
) |
(843,836 |
) |
||
|
Net cash used in financing activities |
(22,564,450 |
) |
(15,308,269 |
) |
||
|
Net increase (decrease) in cash and cash equivalents |
1,675,799 |
(1,708,056 |
) |
|||
|
Cash and cash equivalents: |
||||||
|
Beginning |
14,371,910 |
14,037,280 |
||||
|
Ending |
$ |
16,047,709 |
$ |
12,329,224 |
||
|
Supplemental Schedule of Cash Paid During the Period |
||||||
|
Interest |
$ |
2,509,657 |
$ |
2,812,317 |
||
|
Income taxes |
$ |
42,088 |
$ |
620,000 |
||
|
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||
|
Change in unrealized gain on securities available-for-sale |
$ |
(769,015 |
) |
$ |
290,943 |
|
|
Other real estate owned acquired in settlements of loans |
$ |
27,887 |
$ |
79,500 |
||
|
Investments in limited partnership |
||||||
|
Decrease (increase) in limited partnerships |
$ |
149,801 |
$ |
(1,026,999 |
) |
|
|
(Decrease) increase in contributions payable |
(441,919 |
) |
523,591 |
|||
|
$ |
(292,118 |
) |
$ |
(503,408 |
) |
|
|
Dividends Paid |
||||||
|
Dividends declared |
$ |
1,294,125 |
$ |
600,987 |
||
|
(Increase) decrease in dividends payable attributable to dividends declared |
(4,106 |
) |
412,057 |
|||
|
Dividends reinvested |
(445,837 |
) |
(169,208 |
) |
||
|
$ |
844,182 |
$ |
843,836 |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND CONSOLIDATION
The interim consolidated financial statements of Community Bancorp. and subsidiary 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 should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standards (SFAS) No. 133 Implementation Issue C13, "When a Loan Commitment Is Included in the Scope of Statement 133," requires commitments to originate mortgage loans that will be held for sale upon origination to be accounted for as derivatives, but does not provide guidance on how the fair value of those commitments should be measured.
In March 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105, "Application of Accounting Principles to Loan Commitments" in which the staff indicated it believes loan commitments are written options and therefore should never result in the recognition of an asset under SFAS No. 133. Rather, the staff indicated lenders should initially recognize a liability for loan commitments, with the offsetting debit recognized as a derivative loss to the extent a premium is not received from the potential borrower.
The staff indicated it would not object to a registrant's recognizing loan commitments as assets provided it discontinues that practice for commitments entered into in the first reporting period beginning after March 15, 2004 and provided assets recorded on loan commitments entered into prior to that date are reversed when the related loan closes or the commitment expires.
SAB No. 105 did not have a material effect on the Company's consolidated financial statements and results of operations.
Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period and reduced for shares held in Treasury.
NOTE 4. COMPREHENSIVE INCOME
Accounting principles generally require recognized revenue, expenses, gains, and losses to be included in net income. Certain changes in assets and liabilities, such as the after-tax effect of unrealized gains and losses on available-for-sale securities, are not reflected in the income statement, but the cumulative effect of such items from period -to-period is reflected as a separate component of the equity section of
The Company's total comprehensive income for the comparison period is calculated as follows:
|
For the second quarter ended June 30, |
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
819,201 |
|
$ |
1,088,881 |
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
Change in unrealized holdings gains on available-for-sale |
|
|
|
|
|
|
|
securities arising during the period |
|
(1,120,082 |
) |
|
379,973 |
|
|
Reclassification adjustment for gains realized in income |
|
(18,631 |
) |
|
0 |
|
|
Net unrealized gains (losses) |
|
(1,138,713 |
) |
|
379,973 |
|
|
Tax effect |
|
387,163 |
|
|
(129,191 |
) |
|
Other comprehensive income (loss), net of tax |
|
(751,550 |
) |
|
250,782 |
|
|
Total comprehensive income |
$ |
67,651 |
|
$ |
1,339,663 |
|
|
For the six months ended June 30, |
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
1,583,043 |
|
$ |
1,997,937 |
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
Change in unrealized holdings gains on available-for-sale |
|
|
|
|
|
|
|
securities arising during the period |
|
(750,384 |
) |
|
433,311 |
|
|
Reclassification adjustment for gains realized in income |
|
(18,631 |
) |
|
(142,368 |
) |
|
Net unrealized gains (losses) |
|
(769,015 |
) |
|
290,943 |
|
|
Tax effect |
|
261,465 |
|
|
(98,921 |
) |
|
Other comprehensive income(loss), net of tax |
|
(507,550 |
) |
|
192,022 |
|
|
Total comprehensive income |
$ |
1,075,493 |
|
$ |
2,189,959 |
|
|
|
|
|
|
|
|
|
The shift from an unrealized gain position at June 30, 2003 to an unrealized loss position at June 30, 2004 is due primarily to the effect of rising interest rates during 2004. When rates rise, the value of interest-bearing securities decreases.
NOTE 5. INCOME TAXES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the Period Ended June 30, 2004
FORWARD-LOOKING STATEMENTS
The Company's Management's Discussion and Analysis of Financial Condition and Results of Operations may contain certain forward-looking statements about the Company's operations, financial condition and business. When used therein, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.
Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, management's expectations as to future asset growth, income trends, results of operations and other matters reflected in the Overview section, estimated contingent liability related to the Company's participation in the FHLB Mortgage Partnership Finance (MPF) program, assumptions made within the asset/liability management process, and management's expectations as to the future interest rate environment and the Company's related liquidity level. Although these statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company'
s control. Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.
Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) competitive pressures increase among financial services providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from nonbank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (2) interest rates change in such a way as to reduce the Company's margins; (3) general economic or monetary conditions, either nationally or regionally, are less favorable than expected, resulting in a deterioration in credit quality or a diminished demand for the Company's products and services; and (4) changes in laws or government rules, or the way in which courts interpret those laws or rules, adversely affect the Company's business.
The following Management's Discussion and Analysis explains in detail the results of the second quarter and year to date, 2004.
Net income was $819,201 or $0.22 per share for the three months ended June 30, 2004 versus $1,088,881 or $0.29 per share for the three months ended June 30, 2003 and $1,583,043 or $0.42 per share for the first six months of 2004, compared to $1,997,937 or $0.53 per share for the comparable period last year.
Mortgage activity was soft in the first quarter but picked up in the second quarter as customers scrambled to rewrite their existing mortgages to lock in favorable interest rates prior to a much anticipated increase. We expect interest rates to continue to rise in the last half of the year, slowing down the volume of requests to rewrite existing residential mortgages.
We experienced negative asset growth during the first six months, some of which is consistent with our annual growth cycle, and some is the maturing of some municipal loans. We expect to finish the year with good asset growth, driven by our Washington and Caledonia County offices, as well as our well positioned Main office in Derby.
Non-interest income was down by $105,563 this quarter because of fewer sales of mortgages in the secondary market. Year to date non-interest income is down by $388,384 mostly because of lower security gains, fewer sales of loans in the secondary market. An increase in service charges and fees helped to offset the decreases in other non-interest income. Non-interest expense increased by $154,503 this quarter and by $330,497 year to date mostly because of the cost associated with the opening of the new Barre office. We expect that this new office will be the center of our continued growth in Washington County.
We still believe that this year's results will be lower than last years, but we believe that we are well positioned to increase our spreads as interest rates rebound from these historically low levels.
The following pages describe the financial results in more detail. Please take the time to read them to more fully understand the results for the second quarter and first six months of 2004 in relation to other recent comparison periods. The discussion below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. This report includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934 (the "Exchange Act").
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared according to accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The Securities and Exchange Commission (SEC) has defined a company's critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company
under different conditions or using different assumptions or estimates.
Management believes that the calculation of the allowance for loan losses (ALL) is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ALL, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, use of current economic indicators and their probable impact on borrowers and changes in delinquent, nonperforming or impaired loans. Management's estimates used in the ALL may increase or decrease based on changes in these factors resulting in adjustments to the Company's provision for loan losses. Actual results could differ significantly from these estimates under different assumptions, judgments or conditions.
Occasionally, the Company acquires property in connection with foreclosures or in satisfaction of debt previously contracted. To determine the value of property acquired in foreclosure, management often obtains independent appraisals for significant properties. Accordingly, the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions. The amount of the change that is reasonably possible cannot be estimated. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance 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.
Management utilizes numerous techniques to estimate the carrying value of various assets held by the Company, including, but not limited to, property, plant and equipment, mortgage servicing rights, and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management acknowledges that the use of different estimates or assumptions could produce different estimates of carrying values.
Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical.
RESULTS OF OPERATIONS
The Company's net income for the second quarter of 2004 was $819,201, representing a decrease of 24.8% over net income of $1.1 million for the second quarter of 2003. This resulted in earnings per share of $0.22 and $0.29, respectively, for the second quarter of 2004 and 2003. Net income for the first six months of 2004 was $1.6 million, representing a decrease of $414,894 compared to a net income figure of $2.0 million for the first six months of 2003, with earnings per share of $0.42 for the six months ended June 30, 2004 versus $0.53 for the six months ended June 30, 2003.
|
For the second quarter ended June 30, |
2004 |
2003 |
|
|
|
|
|
Return on Average Assets |
1.00% |
1.42% |
|
Return on Average Equity |
11.78% |
16.18% |
|
For the first six months ended June 30, |
2004 |
2003 |
|
|
|
|
|
Return on Average Assets |
.96% |
1.31% |
|
Return on Average Equity |
11.49% |
15.16% |
INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)
Net interest income, the difference between interest income and expense, represents the largest portion of the Company's earnings, and is affected by the volume, mix, and rate sensitivity of earning assets as well as by interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets. The tables below provide a visual comparison of the consolidated figures, and are stated on a tax equivalent basis assuming a federal tax rate of 34%.
The following table shows the reconciliation between reported net interest income and tax equivalent net interest income for the six months comparison period, of 2004 and 2003:
|
For the period ended June 30, |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net interest income as presented |
$ |
5,856,154 |
$ |
5,930,517 |
|
Effect of tax-exempt income |
|
262,939 |
|
231,672 |
|
Net interest income, tax equivalent |
$ |
6,119,093 |
$ |
6,162,189 |
AVERAGE BALANCES AND INTEREST RATES
The table below presents average earning assets (including non-accrual loans) and average interest-bearing liabilities supporting earning assets, as well as interest income and interest expense expressed both in dollars and as a rate/yield for the 2004 and 2003 comparison periods.
|
For the Six Months Ended: |
||||||||||
|
2004 |
2003 |
|||||||||
|
Average |
Income/ |
Rate/ |
Average |
Income/ |
Rate/ |
|||||
|
Balance |
Expense |
Yield |
Balance |
Expense |
Yield |
|||||
|
INTEREST EARNING ASSETS |
||||||||||
|
Loans (gross) |
$ |
206,008,649 |
$ |
6,682,771 |
6.52% |
$ |
204,834,261 |
$ |
7,041,684 |
6.93% |
|
Taxable Investment Securities |
60,888,762 |
1,114,698 |
3.68% |
54,080,777 |
1,195,043 |
4.46% |
||||
|
Tax Exempt Investment Securities |
40,266,513 |
773,351 |
3.86% |
28,626,743 |
681,389 |
4.80% |
||||
|
Federal Funds Sold |
1,245,753 |
4,845 |
0.78% |
1,531,519 |
9,431 |
1.24% |
||||
|
Sweep Account |
1,382,405 |
4,560 |
0.66% |
3,149,073 |
15,173 |
0.97% |
||||
|
Other Securities |
1,553,923 |
20,953 |
2.71% |
1,334,138 |
22,765 |
3.44% |
||||
|
TOTAL |
$ |
311,346,005 |
$ |
8,601,178 |
5.56% |
$ |
293,556,511 |
$ |
8,965,485 |
6.16% |
|
INTEREST BEARING LIABILITIES |
||||||||||
|
Savings Deposits |
$ |
43,653,997 |
$ |
81,490 |
0.38% |
$ |
39,408,040 |
$ |
148,144 |
0.76% |
|
NOW & Money Market Funds |
94,798,167 |
704,560 |
1.49% |
86,341,646 |
782,967 |
1.83% |
||||
|
Time Deposits |
101,530,835 |
1,483,636 |
2.94% |
102,859,315 |
1,675,785 |
3.29% |
||||
|
Other Borrowed Funds |
9,829,884 |
150,962 |
3.09% |
5,310,559 |
122,331 |
4.65% |
||||
|
Notes Payable |
97,527 |
2,675 |
5.52% |
145,856 |
4,038 |
5.58% |
||||
|
Repurchase Agreements |
11,831,849 |
58,762 |
1.00% |
12,163,971 |
70,031 |
1.16% |
||||
|
TOTAL |
$ |
261,742,259 |
$ |
2,482,085 |
1.91% |
$ |
246,229,387 |
$ |
2,803,296 |
2.30% |
|
Net Interest Income |
$ |
6,119,093 |
$ |
6,162,189 |
||||||
|
Net Interest Spread |
3.65% |
3.86% |
||||||||
|
Interest Differential |
3.95% |
4.23% |
||||||||
The tax equivalent net interest spread, defined as the difference between the yield on earning assets and the rate paid on interest bearing liabilities, was 3.65% and 3.86%, for the first six months of 2004 and 2003, respectively. The interest differential, defined as net interest income divided by average earning assets, was 3.95% and 4.23%, for the respective 2004 and 2003 comparison periods.
Although an increase is noted in the average volume of earning assets for the first six months of 2004 compared to the same period of 2003, a decrease of 60 basis points is noted in the average yield, due to the decrease in interest income. Interest earned on the loan portfolio accounts for approximately 78% of total interest income for 2004 and 79% for 2003. The current low interest rate environment continues to have a negative effect on earnings produced from the loan portfolio. The average amount of non-accrual loans can also have an impact on the average yield on outstanding loans in any given period. As of June 30, 2004 and 2003, the average balance on non-accrual loans amounted to $1.3 million and $1.5 million, respectively.
In comparison, interest paid on time deposits comprises 60% of total interest expense for both comparison periods. The average volume of interest bearing liabilities for the first six months of 2004 increased over the 2003 comparison period, while the rate paid on these accounts decreased 39 basis points. During the low rate environment, the Company has managed to compensate for a portion of the decrease in yield on average earning assets by reducing the interest paid on interest bearing liabilities where the market would permit. With the recent increase in interest rates, the Company expects to benefit from its asset sensitive position, as a major portion of adjustable rate loans reprice to the higher interest rates within the next year.
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table summarizes the variances in interest income and interest expense for the first six months of 2004 and 2003 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid.
|
Variance |
Variance |
||||||||
|
RATE / VOLUME |
Due to |
Due to |
Total |
||||||
|
Rate(1) |
Volume(1) |
Variance |
|||||||
|
Loans (2) |
$ |
(399,271 |
) |
$ |
40,358 |
$ |
(358,913 |
) |
|
|
Taxable Investment Securities |
(230,915 |
) |
150,570 |
(80,345 |
) |
||||
|
Tax Exempt Investment Securities |
(185,096 |
) |
277,058 |
91,962 |
|||||
|
Federal Funds Sold |
(3,478 |
) |
(1,108 |
) |
(4,586 |
) |
|||
|
Sweep Account |
(4,815 |
) |
(5,798 |
) |
(10,613 |
) |
|||
|
Other Securities |
(5,561 |
) |
3,749 |
(1,812 |
) |
||||
|
Total Interest Earnings |
$ |
(829,136 |
) |
$ |
464,829 |
$ |
(364,307 |
) |
|
|
Savings Deposits |
$ |
(82,656 |
) |
$ |
16,002 |
$ |
(66,654 |
) |
|
|
NOW & Money Market Funds |
(155,148 |
) |
76,741 |
(78,407 |
) |
||||
|
Time Deposits |
(172,727 |
) |
(19,422 |
) |
(192,149 |
) |
|||
|
Other Borrowed Funds |
(75,580 |
) |
104,211 |
28,631 |
|||||
|
Notes Payable |
(36 |
) |
(1,327 |
) |
(1,363 |
) |
|||
|
Repurchase Agreements |
(9,617 |
) |
(1,652 |
) |
(11,269 |
) |
|||
|
Total Interest Expense |
$ |
(495,764 |
) |
$ |
174,553 |
$ |
(321,211 |
) |
|
|
(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) Loans are stated before deduction of unearned discount and allowance for loan losses. The |
|||||||||
|
principal balances of non-accrual loans is included in calculations of the yield on loans, while |
|||||||||
|
the interest on these non-performing assets is excluded. |
|||||||||
NON INTEREST INCOME AND NON INTEREST EXPENSE
Non-interest expense increased for the first six months of 2004 versus 2003 due in part to operating expenses for the new Barre branch. Occupancy expense accounts for the biggest increase in 2004, followed closely by salaries and wages, both of which are mostly related to the Barre office. Additionally, an increase in health insurance payments was noted due to unforeseen incidences.
Management monitors all components of other operating expenses; however, a quarterly review is performed to assure that the accruals for these expenses are accurate. This helps alleviate the need to make significant adjustments to these accounts that in turn affect the net income of the Company.
CHANGES IN FINANCIAL CONDITION
The Company had total assets of $308.6 million at June 30, 2004, $330.7 million at December 31, 2003, and $296.5 million as of June 30, 2003. Loans comprised 67.5% of total assets for the 2004 comparison period followed by investment securities at 23.9%. At December 31, 2003, loans comprised 62.4% and investment securities comprised 30%, while at June 30, 2003 loans accounted for 68.9% of total assets and investment securities made up 24.1%. The up and down composition of the investment portfolio is due primarily to the cyclical activity in the Company's municipal investment portfolio, which is described in more detail in the "Liquidity and Capital Resources" section.
RISK MANAGEMENT
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change, thereby impacting net interest income (NII), the primary component of the Company's earnings. The ALCO uses an outside consultant to perform rate shocks to the Company's net interest income, as well as a variety of other analyses. It is the ALCO's function to provide the assumptions used in the modeling process. These assumptions include, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows. The ALCO then utilizes the results of this simulation model to quantify the estimated exposure of NII to sustaine
d interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company's balance sheet. Furthermore, the model simulates the balance sheet's sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing a flattening yield curve as well. This sensitivity analysis is compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 100 basis point (bp) and a 200 bp shift upward and a 100 bp downward shift in interest rates in one and two year scenarios. The analysis also provides testing of the assumptions used in previous simulation models by comparing the projected NII with actual NII. While assumpti
ons are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. The asset/liability simulation model provides the Company with a tool for making sound economic decisions regarding the balance sheet.
Credit Risk - A primary concern of management is to reduce the exposure of credit loss within the portfolio. Management follows established underwriting guidelines, and any exceptions to the policy must be approved by a loan officer with higher authority than the loan officer originating the loan. The adequacy of the loan loss coverage is reviewed quarterly by the risk management committee of the Board of Directors. This committee meets to discuss, among other matters, potential exposures, historical loss experience, 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 of the Company's internal risk ratings and compliance with various internal policies and procedures, as well as those set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duti
es include monitoring and reporting on the status of the loan portfolio including delinquent and non-performing loans.
Specific allocations are made in the allowance for loan losses in situations management believes may represent a greater risk for loss. A quarterly review of various qualitative factors, including levels of, and trends in, delinquencies and non-accruals and national and local economic trends and conditions, helps to ensure that areas with potential risk are noted and coverage increased or decreased to reflect the trends in delinquencies and non-accruals. Residential mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio, helping to alleviate the overall risk.
The following table reflects the composition of the Company's loan portfolio as of the dates indicated:
|
June 30, 2004 |
December 31, 2003 |
|||||||
|
Total |
% of |
Total |
% of |
|||||
|
Loans |
Total |
Loans |
Total |
|||||
|
Real Estate Loans |
||||||||
|
Construction & Land Development |
$ |
8,102,293 |
3.89% |
$ |
8,929,228 |
4.32% |
||
|
Farm Land |
2,558,211 |
1.23% |
2,783,481 |
1.35% |
||||
|
1-4 Family Residential |
119,598,037 |
57.38% |
120,847,588 |
58.51% |
||||
|
Commercial Real Estate |
35,999,003 |
17.27% |
33,421,739 |
16.18% |
||||
|
Loans to Finance Agricultural Production |
489,005 |
0.23% |
528,890 |
0.26% |
||||
|
Commercial & Industrial |
19,333,285 |
9.28% |
16,950,895 |
8.21% |
||||
|
Consumer Loans |
21,770,665 |
10.45% |
22,517,296 |
10.91% |
||||
|
All Other Loans |
573,736 |
0.27% |
551,646 |
0.26% |
||||
|
Gross Loans |
208,424,235 |
100% |
206,530,763 |
100% |
||||
|
Less: |
||||||||
|
Valuation Allowance for Loan Losses |
(2,254,308 |
) |
-1.08% |
(2,199,110 |
) |
-1.06% |
||
|
Deferred Loan Fees |
(774,697 |
) |
-0.37% |
(805,284 |
) |
-0.39% |
||
|
Net Loans |
$ |
205,395,230 |
98.55% |
$ |
203,526,369 |
98.55% |
||
Allowance for loan losses and provisions -
The Company continues to maintain the valuation allowance for loan losses at a level of just over 1% of the total gross loan portfolio. As of June 30, 2004, the Company maintained a residential loan portfolio of almost $120 million and a commercial real estate portfolio (including construction, land development and farm land loans) of $47 million, accounting for approximately 80% of the total loan portfolio. This volume, together with the low historical loan loss experience in these portfolios, helps to support the Company's basis for loan loss coverage.
The following table summarizes the Company's loan loss experience for the six months ended June 30,
|
2004 |
2003 |
||||
|
Loans Outstanding End of Period |
$ |
208,424,235 |
$ |
204,280,041 |
|
|
Ave. Loans Outstanding During Period |
$ |
206,008,649 |
$ |
204,834,261 |
|
|
Loan Loss Reserve, Beginning of Period |
$ |
2,199,110 |
$ |
2,155,789 |
|
|
Loans Charged Off: |
|||||
|
Residential Real Estate |
11,431 |
0 |
|||
|
Commercial Real Estate |
0 |
276 |
|||
|
Commercial Loans not Secured by Real Estate |
0 |
33 |
|||
|
Consumer Loans |
94,183 |
90,537 |
|||
|
Total Loans Charged Off |
105,614 |
90,846 |
|||
|
Recoveries: |
|||||
|
Residential Real Estate |
1,045 |
2,322 |
|||
|
Commercial Real Estate |
55 |
0 |
|||
|
Commercial Loans not Secured by Real Estate |
8,421 |
648 |
|||
|
Consumer Loans |
66,291 |
59,596 |
|||
|
Total Recoveries |
75,812 |
62,566 |
|||
|
Net Loans Charged Off |
29,802 |
28,280 |
|||
|
Provision Charged to Income |
85,000 |
93,000 |
|||
|
Loan Loss Reserve, End of Period |
$ |
2,254,308 |
$ |
2,220,509 |
|
Non-performing assets for the comparison periods were as follows:
|
|
06/30/2004 |
12/31/2003 |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
Percent |
|
|
|
|
Balance |
of Total |
|
Balance |
of Total |
|
|
Non-Accruing loans |
$ |
1,401,049 |
92.89% |
$ |
1,294,534 |
92.30% |
|
|
Loans past due 90 days or more and still accruing |
|
24,423 |
1.62% |
|
19,745 |
1.41% |
|
|
Other real estate owned |
|
82,800 |
5.49% |
|
88,277 |
6.29% |
|
|
Total |
$ |
1,508,272 |
100.00% |
$ |
1,402,556 |
100.00% |
|
Other real estate owned is made up of property that the Company has acquired by deed 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 the book value of the loan, less estimated cost to sell. 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.
Liquidity and Capital Resources
Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. The liquidity needs of the Company require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. The repayment of loans and growth in deposits are two of the major sources of liquidity. A review of these loans and deposits indicates that they are primarily generated locally and regionally and are established customers of the Company. However, due to the potential for unexpected fluctuations in both deposits and loans, active management of the Company's liquidity is necessary. The Company's in-house loan portfolio increased throughout the comparison periods to $207 million as of June 30, 2004. Total deposits increased 14.1% from June 30, 2003 to December 31, 2003, and then decreased by 9.6% by June 30, 2004.. Other time deposits decreased throughout the comparison period from a balance of $81.7 million at Ju
ne 30, 2003 to $79.6 million on December 31, 2003 and then to just under $78 million as of June 30, 2004. As time deposits mature from higher rates, some customers have chosen to leave their funds in non-maturing deposits such as demand deposits, money market and savings accounts. Despite the decrease in the rates earned on these funds, demand deposits increased 10.3% from June 30, 2003 to June 30, 2004 and savings accounts increased by 14.1%. NOW, and money market accounts were at higher levels at December 31, 2003, before falling $31 million to the June 30, 2004 balance of $67.2 million, which compares to a balance of $98.2 million at December 31, 2003. This is a typical trend for the Company's deposit portfolio. Municipal deposit accounts make up approximately 48% of NOW and money market accounts and contributed to the seasonal decrease in deposit accounts during the first half of the year. This fluctuation is seasonal and it is expected that the levels will increase throughout 2004, mirroring the tax col
lection cycle.
Another source of liquidity for the Company is the purchase of overnight funds against the Company's $4.3 million credit line with the Federal Home Loan Bank of Boston (FHLB). Interest is chargeable at a rate determined daily of approximately 25 basis points higher than the rate paid on fed funds sold. At June 30, 2004, the Company had an advance of $2.3 million against the $4.3 million credit line. Additional borrowing capacity of approximately $91 million is available through the FHLB, which is secured by the Company's qualifying loan portfolio. As of June 30, 2004, the Company had advances of $11 million against the $91 million in borrowing authority at FHLB. The $11 million is made up of the following long-term advances and short-term advances:
|
Long-term Advances |
|
|
|
|
|||
|
|
Annual |
|
|
Principal |
|||
|
Purchase Date |
Rate |
Maturity Date |
|
Balance |
|||
|
|
|
|
|
|
|||
|
November 16, 1992 |
7.57% |
November 16, 2007 |
$ |
30,000 |
|||
|
November 16, 1992 |
7.67% |
November 16, 2012 |
|
10,000 |
|||
|
January 16, 2001 |
4.78% |
January 18, 2011 |
|
5,000,000 |
|||
|
Total Long-term Advances |
|
$ |
5,040,000 |
||||
|
|
|
|
|
|
|||
|
Short-term Advances |
|
|
|
|
|||
|
|
Annual |
|
|
Principal |
|||
|
Purchase Date |
Rate |
Maturity Date |
|
Balance |
|||
|
|
|
|
|
|
|||
|
June 28, 2004 |
1.35% |
July 28, 2004 |
$ |
2,000,000 |
|||
|
June 28, 2004 |
1.46% |
August 30, 2004 |
|
4,000,000 |
|||
|
Total Short-term Advances |
|
$ |
6,000,000 |
||||
|
|
|
|
|
||||
|
Total Advances |
|
$ |
11,040,000 |
||||
At December 31, 2003 and June 30, 2003, the Company had $-0- and $4.3 million, respectively, in short-term advances against the $4.3 million line of credit. These short-term advances are used to offset the seasonal fluctuations in deposit balances during the year. As deposit balances increase, the short-term advances will be paid off.
Under a separate agreement with FHLB, the Company has the authority to collateralize public unit deposits, up to its FHLB borrowing capacity ($91 million less outstanding advances) with letters of credit issued by the FHLB. At June 30, 2004, approximately $47 million was pledged as collateral for these deposits. Interest is charged to the Company quarterly based on the average daily balance for the quarter at an annual rate of 20 basis points. The average daily balance for the second quarter of 2004, was approximately $9.4 million.
The Company's investment portfolio decreased during the second quarter of 2004 as anticipated. The municipal portfolio had approximately $27 million mature on June 30, 2004 and, of that total $20 million renewed during the following quarter. This year, due to increased competition from other banks, the Company experienced some runoff of these accounts. In looking ahead, approximately $5 million is scheduled to mature in 2004, with an additional $7 million having call options scheduled throughout 2004. Investments with call options allow the issuer to call in the investment, before maturity, at predetermined call dates and prices. As investments mature and/or are called, the Company reinvests in a structured ladder of securities with graduated maturities allowing for continued cash flow and reinvestment opportunities, thereby mitigating interest rate risk.
As of the dates indicated, the Company held in its investment portfolio securities made up of the following:
|
|
|
Amortized Cost |
|
Fair Value |
|
June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
$ |
49,997,225 |
$ |
49,994,886 |
|
Held to Maturity |
$ |
21,452,759 |
$ |
21,522,492 |
|
|
|
|
|
|
|
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
$ |
55,552,645 |
$ |
56,319,321 |
|
Held to Maturity |
$ |
41,563,840 |
$ |
41,716,965 |
The Company is required to maintain equity securities in the form of FHLB and Federal Reserve Bank stock. In total, the Company held $2.3 million in such Restricted Equity Securities as of June 30, 2004 and $1.4 million at December 31, 2003 and June 30, 2003. The increase was due to additional purchases of stock in FHLB. In April this year, the FHLB Boston implemented a new capital structure that included a new capital plan to increase their capital. This plan converted all existing capital stock to Class B Stock and increased the member requirements to purchase stock. Under this new capital plan, members are required to maintain a certain level of membership stock investment as well as an activity-based stock investment requirement. The activities that trigger additional stock investment for the Company are borrowings, sale of loans through the Mortgage Partnership Finance Program (MPF), irrevocable letters of credit and the purc hasing of overnight funds. These activities created an increase of approximately $1.0 million in FHLB stock since the implementation of the new capital plan. The current yield on this investment is 2.50%.
In December 2003, the Company declared a cash dividend of $0.17 per share, payable in the first quarter of 2004. In March 2004, the Company declared a cash dividend of $0.17 per share, payable in the second quarter of 2004, and in June 2004, the Company declared a cash dividend of $0.17 per share, payable in the third quarter of 2004.
The following table illustrates the changes in shareholders' equity from December 31, 2003 to June 30, 2004:
|
Balance at December 31, 2003 (book value $7.15 per share) |
$ |
27,085,146 |
|
|
Net income |
|
1,583,043 |
|
|
Issuance of stock |
|
704,050 |
|
|
Cash dividends |
|
(645,875 |
) |
|
Purchase of treasury stock |
|
(49,881 |
) |
|
Dividends declared |
|
(648,250 |
) |
|
Change in unrealized losses on available-for-sale securities, net of tax |
|
(507,550 |
) |
|
|
|
|
|
|
Balance at June 30, 2004 (book value $7.19 per share) |
$ |
27,520,683 |
|
At June 30, 2004, the Company reported that of the 405,000 shares authorized for the stock buyback plan, 155,490 shares have been purchased, leaving 249,510 shares available for repurchase. The repurchase price paid for these shares ranged from $9.75 per share in May of 2000 to $16.45 per share in June of 2004. During the first six months of 2004, the Company repurchased 3,027 shares pursuant to the buyback authority. For additional information on stock repurchases by the Company and affiliated purchasers (as defined in SEC Rule 10b-18), refer to part II, Item 2 of this Report.
Regulators have also established guidelines for minimum capital ratio requirements that define a bank as well-capitalized under prompt corrective action provisions. These minimums are risk-based capital ratio of 10.0% and Tier 1 capital ratio of 6.0%. As of June 30, 2004, the Company and its Subsidiary were deemed well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that time that management believes have changed the Company's classification.
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 Community National Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions.
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 risk-sharing commitments on certain sold 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. During the first six months of 2004, there has not been any activity that has created any additional types of off-balance-sheet risk.
The Company generally requires collateral or other security to support financial instruments with credit risk. The Company's financial instruments whose contract amount represents credit risk as of June 30, 2004 are as follows:
|
|
Contract or |
|
|
|
Notional Amount |
|
|
|
|
|
|
Commitments to extend credit |
$ |
26,081,004 |
|
|
|
|
|
Unused portions of credit card lines |
|
8,892,049 |
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
182,500 |
|
|
|
|
|
|
|
|
|
MPF credit enhancement obligation |
|
681,140 |
AGGREGATE CONTRACTUAL OBLIGATIONS
The following table presents, as of June 30, 2004, significant fixed and determinable contractual obligations to third parties, by payment date:
|
|
Payment due by period |
||||||||||
|
For the period ended June 30, 2004 |
|
Less than |
|
2-3 |
|
4-5 |
|
More than |
|
|
|
|
|
|
1 year |
|
years |
|
years |
|
5 years |
|
Total |
|
|
Operating Leases |
$ |
200,688 |
$ |
187,221 |
$ |
203,596 |
$ |
700,248 |
$ |
1,291,753 |
|
|
Housing Limited Partnerships |
|
932,407 |
|
|
|
0 |
|
0 |
|
932,407 |
|
|
FHLB Borrowings |
|
6,000,000 |
|
0 |
|
30,000 |
|
5,010,000 |
|
11,040,000 |
|
|
Total |
$ |
7,133,095 |
$ |
187,221 |
$ |
233,596 |
$ |
5,710,248 |
$ |
13,264,160 |
|
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As discussed above, in addition to credit risk in the Company's loan portfolio and liquidity risk, the Company's business activities also generate market risk. 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 does not have any market risk sensitive instruments acquired for trading purposes. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. As discussed above in Part I, Item 2 of this report under the caption "Interest Rate Risk and Asset and Liability Manageme
nt," the Company actively monitors and manages its interest rate risk through the ALCO process. Reference is made to that discussion, as well as to the market risk discussion under the caption "Market Risk" contained in Exhibit 13 (Annual Report to Shareholders) in the Company's annual report on Form 10-K for the year ended December 31, 2003. The Company does not believe that there have been any material changes in the nature or categories of the Company's primary market risk exposures from that disclosed in such 10-K report.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer and its President and Chief Operating Officer (Chief Financial Officer). Based upon that evaluation, such officers concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes during the Company's last fiscal quarter in the Company's internal control over financial reporting identified in connection with the evaluation of the Company's disclosure controls and procedures that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
The Company and/or its subsidiary are subject to various claims and legal actions that have arisen in the normal course of business. Management does not expect that the ultimate disposition of these matters, individually or in the aggregate, will have a material adverse impact on the Company's financial statements.
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table provides information as to purchases of the Company's common stock during the second quarter ended June 30, 2004, by the Company and by any affiliated purchaser (as defined in SEC Rule 10b-18):
|
|
|
|
|
Maximum |
|
|
|
|
|
Number of Shares |
|
|
|
|
Total Number of |
That May Yet Be |
|
|
|
|
Shares Purchased |
Purchased Under |
|
|
Total Number of |
Average Price |
as Part of Publicly |
the Plan at the |
|
Period |
Shares Purchased(1) |
Paid Per Share |
Announced Plan(2) |
End of the Period |
|
|
|
|
|
|
|
April 1, 2004 to April 30, 2004 |
0 |
0 |
0 |
249,803 |
|
May 1, 2004 to May 31, 2004 |
7,668 |
$16.92 |
293 |
249,510 |
|
June 1, 2004 to June 30, 2004 |
675 |
$17.00 |
0 |
249,510 |
|
|
|
|
|
|
|
Total |
8,343 |
$16.92 |
293 |
249,510 |
|
|
|
|
|
|
(1) Includes 8,050 shares purchased by Community Financial Services Group, LLC ("CFSG"), which is deemed to be an affiliate of the Company under Rule 10b-18, for the account of participants invested in the Company Stock Fund under the Company's Retirement Savings Plan. All purchases by CFSG were made in the open market in brokerage transactions and reported on the OTC Bulletin Board©.
(2) The Company's Board of Directors in April, 2000 initially authorized the repurchase from time to time of up to 205,000 shares of the Company's common stock in open market and privately negotiated transactions, in management's discretion and as market conditions may warrant. The Board extended this authorization on October 15, 2002 to repurchase an additional 200,000 shares, with an aggregate limit for such repurchases under both authorizations of $3.5 million. The approval did not specify a termination date.
ITEM 3. Defaults Upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders, at the Annual Meeting of Shareholders of Community Bancorp. on May 4, 2004:
|
To elect four directors to serve until the Annual Meeting of Shareholders in 2007; |
|
|
|
To ratify the selection of the independent public accounting firm of Berry, Dunn, McNeil & Parker as the Corporation's external auditors for the fiscal year ending December 31, 2004; |
The results are as follows:
|
|
|
|
AUTHORITY |
|
|
|
|
|
WITHHELD/ |
BROKER |
|
MATTER |
FOR |
AGAINST |
ABSTAIN |
NON-VOTE |
|
Election of Directors: |
|
|
|
|
|
Michael H. Dunn |
2,739,888.4874 |
39.0000 |
3,192.4484 |
-0- |
|
Marcel M. Locke |
2,713,042.1318 |
26,885.3556 |
3,192.4484 |
-0- |
|
Stephen P. Marsh |
2,739,817.4874 |
110.0000 |
3,192.4484 |
-0- |
|
Dale R. Wells |
2,736,179.4874 |
3,748.0000 |
3,192.4484 |
-0- |
|
Selection of Auditors |
|
|
|
|
|
Berry, Dunn, McNeil & Parker |
2,741,741.5725 |
0 |
6,189.3633 |
-0- |
ITEM 5. Other Information
NONE
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - Certification from the Chief Executive Officer of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification from the Chief Financial Officer of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification from the Chief Executive Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 - Certification from the Chief Financial Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
*This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Act of 1934.
(b) Reports on Form 8-K
Form 8-K dated April 8, 2004 announcing the earnings and other financial information for the Company for the period ended March 31, 2004.
Form 8-K dated May 7, 2004 furnishing the cover letter and the unaudited quarterly report for the period ending March 31, 2004 that was mailed to shareholders on May 7, 2004.
Form 8-K dated June 11, 2004 announcing the intent to pay a cash dividend on August 1, 2004, to shareholders of record as of July 15, 2004.
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report |
|
|
to be signed on its behalf by the undersigned thereunto duly authorized. |
|
|
|
|
|
COMMUNITY BANCORP. |
|
|
|
|
|
DATED: August 10, 2004 |
By: /s/ Richard C. White |
|
|
Richard C. White, Chairman & |
|
|
Chief Executive Officer |
|
|
|
|
DATED: August 10, 2004 |
By: /s/ Stephen P. Marsh |
|
|
Stephen P. Marsh, President & |
|
|
Chief Operating Officer |