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 March 31, 2007
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
|
Vermont
|
03-0284070
|
|
(State
of Incorporation)
|
(IRS
Employer Identification Number)
|
|
4811
US Route 5, Derby, Vermont
|
05829
|
|
(Address
of Principal Executive Offices)
|
(zip
code)
|
|
Registrant's
Telephone Number: (802)
334-7915
|
|
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act).
|
Large
accelerated filer ( )
|
Accelerated
filer ( )
|
Non-accelerated
filer ( X )
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
( ) NO(X)
At
May 8,
2007, there were 4,145,067 shares outstanding of the Corporation's common
stock.
|
FORM
10-Q
|
|
|
Index
|
|
|
Page
|
|
|
PART
I FINANCIAL INFORMATION
|
|
|
Item
I Financial
Statements
|
4
|
|
10
|
|
|
21
|
|
|
Item
4 Controls and
Procedures
|
21
|
|
PART
II OTHER INFORMATION
|
|
|
Item
1 Legal
Proceedings
|
21
|
|
Item
1A Risk Factors
|
21
|
|
22
|
|
|
Item
6 Exhibits
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22
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|
23
|
|
PART
I. FINANCIAL INFORMATION
The
following are the consolidated financial statements for Community Bancorp.
and
Subsidiary, "the Company".
|
COMMUNITY
BANCORP. AND SUBSIDIARY
|
||||||||||||
|
Consolidated
Balance Sheets
|
March
31
|
December
31
|
March
31
|
|||||||||
|
|
2007
|
2006
|
2006
|
|||||||||
|
|
(Unaudited)
|
|
(Unaudited)
|
|||||||||
|
Assets
|
||||||||||||
|
Cash
and due from banks
|
$ |
8,750,703
|
$ |
11,292,831
|
$ |
7,950,121
|
||||||
|
Federal
funds sold and overnight deposits
|
1,242,023
|
8,173,779
|
21,037
|
|||||||||
|
Total
cash and cash equivalents
|
9,992,726
|
19,466,610
|
7,971,158
|
|||||||||
|
Securities
held-to-maturity (fair value $20,911,000 at 03/31/07,
|
||||||||||||
|
$21,301,000
at 12/31/06, and $28,522,000 at 03/31/06)
|
20,788,310
|
21,069,866
|
28,464,535
|
|||||||||
|
Securities
available-for-sale
|
21,717,027
|
22,612,207
|
33,389,975
|
|||||||||
|
Restricted
equity securities, at cost
|
2,308,950
|
2,828,250
|
3,252,150
|
|||||||||
|
Loans
held-for-sale
|
528,872
|
566,300
|
1,014,344
|
|||||||||
|
Loans
|
266,475,860
|
268,729,726
|
258,802,897
|
|||||||||
|
Allowance
for loan losses
|
(2,295,985 | ) | (2,267,821 | ) | (2,220,719 | ) | ||||||
|
Unearned
net loan fees
|
(585,079 | ) | (632,105 | ) | (693,118 | ) | ||||||
|
Net
loans
|
263,594,796
|
265,829,800
|
255,889,060
|
|||||||||
|
Bank
premises and equipment, net
|
12,418,999
|
12,334,024
|
11,861,406
|
|||||||||
|
Accrued
interest receivable
|
1,799,659
|
1,667,135
|
1,923,659
|
|||||||||
|
Other
assets
|
5,602,488
|
5,440,350
|
5,496,346
|
|||||||||
|
Total
assets
|
$ |
338,751,827
|
$ |
351,814,542
|
$ |
349,262,633
|
||||||
|
Liabilities
and Shareholders' Equity
|
||||||||||||
|
Liabilities
|
||||||||||||
|
Deposits:
|
||||||||||||
|
Demand,
non-interest bearing
|
$ |
46,801,261
|
$ |
47,402,628
|
$ |
45,250,947
|
||||||
|
NOW
and money market accounts
|
72,457,733
|
81,402,928
|
83,853,164
|
|||||||||
|
Savings
|
40,098,014
|
38,471,441
|
45,763,070
|
|||||||||
|
Time
deposits, $100,000 and over
|
33,957,887
|
33,835,057
|
26,925,642
|
|||||||||
|
Other
time deposits
|
97,699,320
|
99,876,140
|
82,905,518
|
|||||||||
|
Total
deposits
|
291,014,215
|
300,988,194
|
284,698,341
|
|||||||||
|
Federal
funds purchased and other borrowed funds
|
40,000
|
40,000
|
16,017,000
|
|||||||||
|
Repurchase
agreements
|
14,457,778
|
17,083,946
|
16,309,660
|
|||||||||
|
Accrued
interest and other liabilities
|
2,255,765
|
2,971,591
|
2,944,159
|
|||||||||
|
Total
liabilities
|
307,767,758
|
321,083,731
|
319,969,160
|
|||||||||
|
Shareholders'
Equity
|
||||||||||||
|
Common
stock - $2.50 par value; 6,000,000 shares authorized
|
||||||||||||
|
and
4,354,946 shares issued at 03/31/07, 4,339,619 shares
|
||||||||||||
|
issued
at 12/31/06, and 4,293,939 shares issued at 03/31/06
|
10,887,365
|
10,849,048
|
10,734,847
|
|||||||||
|
Additional
paid-in capital
|
22,175,854
|
22,006,492
|
21,507,605
|
|||||||||
|
Retained
earnings
|
733,787
|
760,667
|
142,079
|
|||||||||
|
Accumulated
other comprehensive loss
|
(198,205 | ) | (270,664 | ) | (476,326 | ) | ||||||
|
Less:
treasury stock, at cost; 209,510 shares
|
(2,614,732 | ) | (2,614,732 | ) | (2,614,732 | ) | ||||||
|
Total
shareholders' equity
|
30,984,069
|
30,730,811
|
29,293,473
|
|||||||||
|
Total
liabilities and shareholders' equity
|
$ |
338,751,827
|
$ |
351,814,542
|
$ |
349,262,633
|
||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
|
COMMUNITY
BANCORP. AND SUBSIDIARY
|
|
|||||||
|
Consolidated
Statements of Income
|
|
|||||||
|
(Unaudited)
|
|
|||||||
|
For
The First Quarter Ended March 31,
|
2007
|
2006
|
||||||
|
|
|
|
||||||
|
Interest
income
|
|
|||||||
|
Interest
and fees on loans
|
$ |
4,763,196
|
$ |
4,266,090
|
||||
|
Interest
on debt securities
|
||||||||
|
Taxable
|
207,770
|
305,811
|
||||||
|
Tax-exempt
|
206,790
|
244,785
|
||||||
|
Dividends
|
49,957
|
42,443
|
||||||
|
Interest
on federal funds sold and overnight deposits
|
32,245
|
15,317
|
||||||
|
Total
interest income
|
5,259,958
|
4,874,446
|
||||||
|
Interest
expense
|
||||||||
|
Interest
on deposits
|
1,903,355
|
1,407,864
|
||||||
|
Interest
on federal funds purchased and other borrowed funds
|
7,714
|
131,911
|
||||||
|
Interest
on repurchase agreements
|
82,120
|
77,202
|
||||||
|
Total
interest expense
|
1,993,189
|
1,616,977
|
||||||
|
Net
interest income
|
3,266,769
|
3,257,469
|
||||||
|
Provision
for loan losses
|
37,500
|
37,500
|
||||||
|
Net
interest income after provision
|
3,229,269
|
3,219,969
|
||||||
|
Non-interest
income
|
||||||||
|
Service
fees
|
324,023
|
312,185
|
||||||
|
Other
income
|
379,323
|
357,439
|
||||||
|
Total
non-interest income
|
703,346
|
669,624
|
||||||
|
Non-interest
expense
|
||||||||
|
Salaries
and wages
|
1,131,174
|
1,164,530
|
||||||
|
Employee
benefits
|
431,599
|
416,168
|
||||||
|
Occupancy
expenses, net
|
606,142
|
571,898
|
||||||
|
Other
expenses
|
981,079
|
960,630
|
||||||
|
Total
non-interest expense
|
3,149,994
|
3,113,226
|
||||||
|
|
||||||||
|
Income
before income taxes
|
782,621
|
776,367
|
||||||
|
Applicable
income taxes
|
107,365
|
110,425
|
||||||
|
Net
Income
|
$ |
675,256
|
$ |
665,942
|
||||
|
|
||||||||
|
Earnings
per share
|
$ |
0.16
|
$ |
0.16
|
||||
|
Weighted
average number of common shares
|
||||||||
|
used
in computing earnings per share
|
4,135,457
|
4,075,565
|
||||||
|
Dividends
declared per share
|
$ |
0.17
|
$ |
0.17
|
||||
|
Book
value per share on shares outstanding at March
31,
|
$ |
7.47
|
$ |
7.17
|
||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
|
COMMUNITY
BANCORP. AND SUBSIDIARY
|
||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||
|
(Unaudited)
|
||||||||
|
For
the Three Months Ended March 31,
|
2007
|
2006
|
||||||
|
Cash
Flow from Operating Activities:
|
||||||||
|
Net
Income
|
$ |
675,256
|
$ |
665,942
|
||||
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
||||||||
|
Depreciation
and amortization
|
231,854
|
217,593
|
||||||
|
Provision
for loan losses
|
37,500
|
37,500
|
||||||
|
Deferred
income taxes
|
(31,521 | ) | (30,013 | ) | ||||
|
Net
gain on sale of loans
|
(57,644 | ) | (56,016 | ) | ||||
|
Loss
on sale or disposal of fixed assets
|
0
|
396
|
||||||
|
Gain
on investment in Trust LLC
|
(44,709 | ) | (30,416 | ) | ||||
|
Amortization
of bond premium, net
|
4,966
|
27,772
|
||||||
|
Proceeds
from sales of loans held for sale
|
5,759,917
|
4,637,746
|
||||||
|
Originations
of loans held for sale
|
(5,664,845 | ) | (4,009,492 | ) | ||||
|
(Decrease)
increase in taxes payable
|
(211,114 | ) |
140,438
|
|||||
|
Increase
in interest receivable
|
(132,524 | ) | (134,408 | ) | ||||
|
Increase
in mortgage servicing rights
|
(5,990 | ) | (7,538 | ) | ||||
|
Increase
in other assets
|
(10,770 | ) | (124,128 | ) | ||||
|
Amortization
of limited partnerships
|
97,530
|
84,756
|
||||||
|
(Decrease)
increase in unamortized loan fees
|
(47,026 | ) |
9,012
|
|||||
|
Decrease
in interest payable
|
(69,581 | ) | (6,531 | ) | ||||
|
Decrease
in accrued expenses
|
(212,535 | ) | (167,993 | ) | ||||
|
Increase
in other liabilities
|
32,019
|
9,705
|
||||||
|
Net
cash provided by operating activities
|
350,783
|
1,264,325
|
||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Investments
- held to maturity
|
||||||||
|
Maturities
and paydowns
|
2,869,900
|
3,187,227
|
||||||
|
Purchases
|
(2,588,344 | ) | (3,260,096 | ) | ||||
|
Investments
- available for sale
|
||||||||
|
Sales
and maturities
|
1,000,000
|
3,000,000
|
||||||
|
Proceeds
from sale of restricted equity securities
|
519,300
|
0
|
||||||
|
Decrease
in limited partnership contributions payable
|
(236,094 | ) | (94 | ) | ||||
|
Investments
in limited partnership
|
(222,000 | ) |
0
|
|||||
|
Decrease
(increase) in loans, net
|
2,233,881
|
(8,208,255 | ) | |||||
|
Capital
expenditures, net
|
(316,829 | ) | (462,276 | ) | ||||
|
Recoveries
of loans charged off
|
10,649
|
22,345
|
||||||
|
Net
cash provided by (used in) investing
activities
|
3,270,493
|
(5,721,149 | ) | |||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Net
decrease in demand, NOW, money market and savings accounts
|
(7,919,989 | ) | (16,342,189 | ) | ||||
|
Net
(decrease) increase in time deposits
|
(2,053,990 | ) |
6,728,119
|
|||||
|
Net
decrease in repurchase agreements
|
(2,626,168 | ) | (1,037,480 | ) | ||||
|
Net
increase in short-term borrowings
|
0
|
8,977,000
|
||||||
|
Repayments
in long-term borrowings
|
0
|
(3,000,000 | ) | |||||
|
Payments
to acquire treasury stock
|
0
|
(11 | ) | |||||
|
Dividends
paid
|
(494,983 | ) | (472,396 | ) | ||||
|
Net
cash used in financing activities
|
(13,095,130 | ) | (5,146,957 | ) | ||||
|
Net
decrease in cash and cash equivalents
|
(9,473,884 | ) | (9,603,781 | ) | ||||
|
Cash
and cash equivalents:
|
||||||||
|
Beginning
|
19,466,610
|
17,574,939
|
||||||
|
Ending
|
$ |
9,992,726
|
$ |
7,971,158
|
||||
|
Supplemental
Schedule of Cash Paid During the Period
|
||||||||
|
Interest
|
$ |
2,062,770
|
$ |
1,623,508
|
||||
|
Income
taxes
|
$ |
350,000
|
$ |
0
|
||||
|
Supplemental
Schedule of Noncash Investing and Financing
Activities:
|
||||||||
|
Change
in unrealized loss on securities available-for-sale
|
$ |
109,786
|
$ | (36,678 | ) | |||
|
Dividends
Paid
|
||||||||
|
Dividends
declared
|
$ |
702,136
|
$ |
689,846
|
||||
|
Increase
in dividends payable attributable to dividends declared
|
(2,587 | ) | (91 | ) | ||||
|
Dividends
reinvested
|
(204,566 | ) | (217,359 | ) | ||||
| $ |
494,983
|
$ |
472,396
|
|||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
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, 2006 contained in the Company's Annual
Report on Form 10-K.
NOTE
2. RECENT ACCOUNTING DEVELOPMENTS
In
March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets-an Amendment to FASB Statement No. 140”. SFAS No. 156 requires mortgage
servicing rights associated with loans originated and sold, where servicing
is
retained, to be initially capitalized at fair value and subsequently accounted
for using the “fair value method” or the “amortization method”. The Company is
using the amortization method for subsequent reporting. Mortgage servicing
rights are evaluated for impairment based upon the fair value of the rights
as
compared to amortized cost. The Company implemented changes to its valuation
analysis, with the assistance of a specialized valuation consulting firm, during
the first quarter of 2007. The model used to value the mortgage
servicing rights utilizes prepayment assumptions based on the Bond Market
Association prepayment survey. The discount rate applied is at the
lower end of the observed industry range. Other assumptions include
delinquency rates, servicing cost inflation, and annual unit loan
cost. All assumptions are adjusted periodically to reflect current
circumstances. SFAS No. 156 was effective January 1, 2007.
Implementation of SFAS No. 156 did not have a material effect on the financial
statements of the Company.
In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”, which gives entities the option to
measure eligible financial assets and financial liabilities at fair value on
an
instrument by instrument basis. The election to use the fair value option is
available when an entity first recognizes a financial asset or financial
liability. Subsequent changes in fair value must be recorded in earnings. SFAS
No. 159 contains provisions to apply the fair value option to existing eligible
financial instruments at the date of adoption. This statement is effective
as of
the beginning of an entity’s first fiscal year after November 15, 2007, with
provisions for early adoption. The Company is in the process of analyzing the
impact of SFAS No. 159 but does not expect that it will have a material impact
on the Company’s financial statements.
NOTE
3.
INCOME TAXES
In
July
2006, FASB issued Financial Accounting Standards Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold of more-likely-than-not, and a measurement attribute
for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in the financial statements. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. Effective January
1,
2007, the Company adopted FIN 48. The implementation of FIN 48 did not have
a
material impact on the Company’s financial statements.
The
Company’s income tax returns for the years ended December 31, 2003, 2004, 2005
and 2006 are open to audit under the statute of limitations by the Internal
Revenue Service. The Company’s policy is to record interest and
penalties related to uncertain tax positions as part of its provision for income
taxes. The Company has no penalties and interest recorded for the three month
periods ended March 31, 2007 and 2006.
NOTE
4. EARNINGS PER SHARE
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
5. 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 statement of income,
but
the cumulative effect of such items from period-to-period is reflected as a
separate component of the equity section of the balance sheet (accumulated
other
comprehensive income or loss). Other comprehensive income or loss,
along with net income, comprises the Company's total comprehensive
income.
The
Company's total comprehensive income for the comparison periods is calculated
as
follows:
|
For
the first quarter ended March 31,
|
2007
|
2006
|
||||||
|
Net
income
|
$ |
675,256
|
$ |
665,942
|
||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||
|
Unrealized
holding gains (losses) on available-for-sale
|
||||||||
|
securities
arising during the period
|
109,786
|
(36,678 | ) | |||||
|
Tax
effect
|
(37,327 | ) |
12,471
|
|||||
|
Other
comprehensive income (loss), net of tax
|
72,459
|
(24,207 | ) | |||||
|
Total
comprehensive income
|
$ |
747,715
|
$ |
641,735
|
||||
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 March 31, 2007
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 contained 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 Federal Home Loan Bank (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, which erode the competitive advantage of in-market branch facilities;
(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.
OVERVIEW
Net
income for the first quarter of 2007 was $675,256 or $0.16 per share versus
$665,942 or $0.16 per share for the same period last year. Net
interest income for the first quarter of 2007 was $3.27 million compared to
$3.26 million for the first quarter of 2006. In spite of a now
inverted yield curve, this increase in net interest income was achieved due
to
the decrease in borrowed funds and the implementation of deposit
reclassification during the first quarter of 2007. Deposit
reclassification has significantly reduced the Company’s non-interest bearing
daily reserve requirement at the Federal Reserve Bank, creating higher earning
assets. Managing interest rate spreads continues to be a challenge
due to the flat, and at times inverted, yield curve.
Total
assets at March 31, 2007 were $338.8 million compared to $351.8 million at
December 31, 2006 and $349.3 at March 31, 2006. Loans decreased by
$2.0 million and overnight deposits were down by $9.47 million. This
decrease in cash was related to our normal seasonal decrease in municipal
deposits during the first quarter and the paying off of some brokered deposits
that were used to fund loan growth in 2006. While total assets
decreased in both comparison periods, we had 3% loan growth with 2% deposit
growth year-over-year. We are especially seeing good loan and deposit
growth in our central Vermont market.
Non-interest
income for this quarter was $703,346 compared to $669,624 for the first quarter
of 2006. Non-interest expenses were $3.15 million for the first
quarter of 2007 compared to $3.11 million for the same period in 2006 or an
increase of 1.2%, between years. Decreases in salaries and benefits
year-to-year were offset by increases in occupancy and outside professional
and
consulting costs.
During
the first quarter the Company implemented the use of a pricing module to price
loans and deposits. The use of the module should allow the Company to
make pricing decisions that are both competitive and profitable.
The
following pages describe our first quarter financial results in much more
detail. Please take the time to read them to more fully understand the three
months ended March 31, 2007 in relation to the 2006 comparison
periods. The discussion below should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes included
in
this report and with the Company's Annual Report on Form 10-K for the year
ended
December 31, 2006. 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.
Other-Than-Temporary
Impairment of Securities - Companies are required to perform periodic
reviews of individual securities in their investment portfolios to determine
whether decline in the value of a security is other than temporary. A review
of
other-than-temporary impairment requires companies to make certain judgments
regarding the materiality of the decline, its effect on the financial statements
and the probability, extent and timing of a valuation recovery and the company’s
intent and ability to hold the security. Pursuant to these requirements,
management assesses valuation declines to determine the extent to which such
changes are attributable to fundamental factors specific to the issuer, such
as
financial condition, business prospects or other factors or market-related
factors, such as interest rates. Declines in the fair value of securities below
their cost that are deemed to be other than temporary are recorded in earnings
as realized losses.
Allowance
for Loan Losses - Management evaluates on an ongoing basis its judgment as
to which policies are considered to be critical. 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 considers historical experience as well as other factors
including the effect of changes in the local real estate market on collateral
values, current economic indicators and their probable impact on borrowers
and
changes in delinquent, non-performing or impaired loans. Management’s
estimates used in calculating the ALL may increase or decrease based on changes
in these factors, which in turn will affect the amount of the Company’s
provision for loan losses charged against current period
income. Actual results could differ significantly from these
estimates under different assumptions, judgments or conditions.
Other
Real Estate Owned - 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. Because the extent of any recovery on these loans depends
largely on the amount the Company is able to realize upon liquidation of the
underlying collateral, 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.
Mortgage
Servicing Rights - As required by SFAS No. 156, “Accounting for Servicing
of Financial Assets-an Amendment to FASB Statement No. 140”, mortgage servicing
rights associated with loans originated and sold, where servicing is retained,
are initially capitalized at fair value and included in other assets in the
consolidated balance sheet. Mortgage servicing rights are amortized into
non-interest income in proportion to, and over the period of, estimated future
net servicing income of the underlying financial assets. The value of
capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio. The
carrying value of the mortgage servicing rights is periodically reviewed for
impairment based on a determination of fair value and impairment, if any, is
recognized through a valuation allowance and is recorded as amortization of
other assets. Critical accounting policies for mortgage servicing
rights relate to the initial valuation and subsequent impairment tests. The
methodology used to determine the valuation of mortgage servicing rights
requires the development and use of a number of estimates, including anticipated
principal amortization and prepayments of that principal balance. Events that
may significantly affect the estimates used are changes in interest rates and
the payment performance of the underlying loans. The Company
implemented changes to its valuation analysis, with the assistance of a
specialized valuation consulting firm during the first quarter of
2007. The model used to value the mortgage servicing rights utilizes
prepayment assumptions based on the Bond Market Association prepayment
survey. The discount rate applied is at the lower end of the observed
industry range. Other assumptions include delinquency rates,
servicing cost inflation, and annual unit loan cost. All assumptions
are adjusted periodically to reflect current
circumstances. Implementation of SFAS No. 156 did not have a material
effect on the financial statements of the Company.
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, and deferred taxes. The assumptions considered in making these
estimates are based on historical experience and on various other factors that
are believed by management to be reasonable under the
circumstances. Management acknowledges that the use of different
estimates or assumptions could produce different estimates of carrying
values.
RESULTS
OF OPERATIONS
The
Company’s net income for the first quarter of 2007 was $675,256, representing an
increase of $9,314, or 1.4% over net income of $665,942 for the first quarter
of
2006. This resulted in earnings per share of $0.16 for the first quarter of
2007
and 2006. Core earnings (net interest income) for the first quarter
of 2007 increased $9,300 or .29% over the first quarter of
2006. Interest income on loans increased comparatively with interest
expense on deposit accounts, while interest income on investments decreased
comparatively with interest expense on borrowed funds, thereby minimally
contributing to the increase in net interest income. The Company’s
volume of overnight deposits was higher in the first quarter of 2007 compared
to
the first quarter of 2006 contributing to the increase in core
earnings.
Return
on average assets (ROA), which is net income divided by average total assets,
measures how effectively a corporation uses its assets to produce
earnings. Return on average equity (ROE), which is net income divided
by average shareholders' equity, measures how effectively a corporation uses
its
equity capital to produce earnings. ROA for the first quarter of 2007
and 2006 were the same, while a slight decrease was noted in ROE for the same
comparison period. The following table shows these ratios annualized
for the three month comparison periods.
|
For
the quarter ended March 31,
|
2007
|
2006
|
|
Return
on Average Assets
|
.78%
|
.78%
|
|
Return
on Average Equity
|
9.21%
|
9.26%
|
INTEREST
INCOME LESS INTEREST EXPENSE (NET INTEREST INCOME)
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, and rate sensitivity of earning assets and interest bearing
liabilities, market interest rates and the amount of non-interest bearing funds
which support earning assets. The three 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 Company’s corporate tax rate
is 34%, therefore, to equalize tax-free and taxable income in the comparison,
we
must divide the tax-free income by 66%, with the result that every tax-free
dollar is equal to $1.52 in taxable income.
Tax-exempt
income is derived from our Municipal Investments. These investments
have decreased approximately $13 million from year to year, resulting in a
decrease of $57,568 in income, and a related reduction of $19,573 in the tax
effect of exempt income between periods. The following table shows
the reconciliation between reported net interest income and tax equivalent,
net
interest income for the three-month comparison period, of 2007 and
2006:
|
For
the three months ended March 31,
|
2007
|
2006
|
||||||
|
Net
interest income as presented
|
$ |
3,266,769
|
$ |
3,257,469
|
||||
|
Effect
of tax-exempt income
|
106,528
|
126,101
|
||||||
|
Net
interest income, tax equivalent
|
$ |
3,373,297
|
$ |
3,383,570
|
||||
AVERAGE
BALANCES AND INTEREST RATES
The
table below presents average earning assets and average interest-bearing
liabilities supporting earning assets. Interest income (excluding
interest on non-accrual loans) and interest expense are both expressed on a
tax
equivalent basis, both in dollars and as a rate/yield for the 2007 and 2006
comparison periods. Loans are stated before deduction of non-accrual
loans, unearned discount and allowance for loan losses.
|
For
the Three Months Ended March 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|||||||||||||||||||
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|||||||||||||||||||
|
EARNING
ASSETS
|
||||||||||||||||||||||||
|
Loans
(gross)
|
$ |
268,765,407
|
$ |
4,763,196
|
7.19 | % | $ |
256,932,478
|
$ |
4,266,090
|
6.73 | % | ||||||||||||
|
Taxable
Investment Securities
|
21,771,660
|
207,770
|
3.87 | % |
34,754,454
|
305,811
|
3.57 | % | ||||||||||||||||
|
Tax
Exempt Investment Securities
|
20,863,909
|
313,318
|
6.09 | % |
27,568,087
|
370,886
|
5.46 | % | ||||||||||||||||
|
Federal
Funds Sold
|
0
|
0
|
0.00 | % |
749,222
|
6,952
|
3.76 | % | ||||||||||||||||
|
Sweep
Accounts
|
2,606,060
|
32,245
|
5.02 | % |
705,296
|
8,365
|
4.81 | % | ||||||||||||||||
|
Other
Investments
|
2,348,080
|
49,957
|
8.63 | % |
3,284,650
|
42,443
|
5.24 | % | ||||||||||||||||
|
TOTAL
|
$ |
316,355,116
|
$ |
5,366,486
|
6.88 | % | $ |
323,994,187
|
$ |
5,000,547
|
6.26 | % | ||||||||||||
|
INTEREST
BEARING LIABILITIES
|
||||||||||||||||||||||||
|
Savings
Deposits
|
$ |
38,801,457
|
$ |
33,342
|
0.35 | % | $ |
45,212,425
|
$ |
38,852
|
0.35 | % | ||||||||||||
|
NOW
& Money Market Funds
|
75,401,509
|
442,389
|
2.38 | % |
91,195,121
|
444,140
|
1.98 | % | ||||||||||||||||
|
Time
Deposits
|
132,171,953
|
1,427,625
|
4.38 | % |
106,712,277
|
924,872
|
3.51 | % | ||||||||||||||||
|
Fed
Funds Purchased and Other Borrowed Funds
|
544,533 | 7,713 | 5.74 | % | 11,317,269 | 131,911 | 4.73 | % | ||||||||||||||||
|
Repurchase
Agreements
|
14,999,911
|
82,120
|
2.22 | % |
17,495,079
|
77,202
|
1.79 | % | ||||||||||||||||
|
TOTAL
|
$ |
261,919,363
|
$ |
1,993,189
|
3.09 | % | $ |
271,932,171
|
$ |
1,616,977
|
2.41 | % | ||||||||||||
|
Net
Interest Income
|
$ |
3,373,297
|
$ |
3,383,570
|
||||||||||||||||||||
|
Net
Interest Spread(1)
|
3.79 | % | 3.85 | % | ||||||||||||||||||||
|
Interest
Margin(2)
|
4.32 | % | 4.24 | % | ||||||||||||||||||||
|
(1) Net
interest Spread is the difference between the yield on earning assets
and
the rate paid on interest bearing liabilities.
|
|
(2) Interest
margin is net interest income divided by average earning
assets.
|
A
decrease of $7.6 million is noted in the average volume of earning assets for
the first three months of 2007 compared to the same period of 2006, while an
increase of 62 basis points is noted in the average yield. Interest
earned on the loan portfolio accounts for approximately 88.8% of total interest
income for 2007 and 85.3% for 2006. This increase is mostly
attributable to an increase in interest rates through repricing of loans in
the
Company’s adjustable rate portfolio and the $11.8 million increase in the loan
volume, which was more than offset by a decrease in volume of $19.7 million
in
the investment portfolio. Also contributing to the increase in
interest earned is the increase in overnight funds in the sweep accounts of
$1.9
million together with an increase of 21 basis points in rate. This
increase in investable funds was a result of the implementation of deposit
reclassification during the first quarter of 2007. Deposit
reclassification allows banks to reclassify certain balances of transactional
accounts to non-transactional accounts for the purposes of calculating the
daily
non-interest bearing cash reserve balances required to be maintained by the
Federal Reserve Bank.
In
comparison, the average volume of interest bearing liabilities for the first
three months of 2007 decreased approximately $10.0 million over the 2006
comparison period, while the average rate paid on these accounts increased
68
basis points. Interest paid on time deposits comprised 71.6% and
57.2%, respectively, of total interest expense for the 2007 and 2006 comparison
periods. The Company has offered various CD specials at competitive
rates, most of which are short term, which has appealed to customers, resulting
in a shift from the lower yielding deposit accounts to higher cost time
deposits. Year-to-date, the increase in the average rate paid on
interest-bearing liabilities has exceeded the average yield earned on
interest-earning assets, putting pressure on the Company’s net interest spread,
which declined from 3.85% for the first three months of 2006 to 3.79% for the
first three months of 2007.
CHANGES
IN INTEREST INCOME AND INTEREST EXPENSE
The
following table summarizes the variances in interest income and interest expense
on a fully tax-equivalent basis for the first three months of 2007 and 2006
resulting from volume changes in average assets and average liabilities and
fluctuations in rates earned and paid.
|
Variance
|
Variance
|
|||||||||||
|
RATE
/ VOLUME
|
Due
to
|
Due
to
|
Total
|
|||||||||
|
Rate(1)
|
Volume(1)
|
Variance
|
||||||||||
|
INCOME
EARNING ASSETS
|
||||||||||||
|
Loans
(2)
|
300,744
|
196,362
|
497,106
|
|||||||||
|
Taxable
Investment Securities
|
25,847
|
(123,888 | ) | (98,041 | ) | |||||||
|
Tax
Exempt Investment Securities
|
43,105
|
(100,673 | ) | (57,568 | ) | |||||||
|
Federal
Funds Sold
|
(6,952 | ) |
0
|
(6,952 | ) | |||||||
|
Sweep
Account
|
1,336
|
22,544
|
23,880
|
|||||||||
|
Other
Investments
|
27,444
|
(19,930 | ) |
7,514
|
||||||||
|
Total
Interest Earnings
|
391,524
|
(25,585 | ) |
365,939
|
||||||||
|
INTEREST
BEARING LIABILITIES
|
||||||||||||
|
Savings
Deposits
|
23
|
(5,533 | ) | (5,510 | ) | |||||||
|
NOW
& Money Market Funds
|
90,934
|
(92,685 | ) | (1,751 | ) | |||||||
|
Time
Deposits
|
282,405
|
220,348
|
502,753
|
|||||||||
|
Other
Borrowed Funds
|
28,273
|
(152,471 | ) | (124,198 | ) | |||||||
|
Repurchase
Agreements
|
18,576
|
(13,658 | ) |
4,918
|
||||||||
|
Total
Interest Expense
|
420,211
|
(43,999 | ) |
376,212
|
||||||||
|
Changes
in Net Interest Income
|
(28,687 | ) |
18,414
|
(10,273 | ) | |||||||
|
(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 allowances
for
loan losses. The principal balances of non-accrual loans is
included in calculation of the yield on
|
|
loans, while the interest on these non-performing assets is
excluded.
|
NON-INTEREST
INCOME AND NON-INTEREST EXPENSE
Non-interest
income increased $33,722, or 5.04% for the first quarter of 2007 compared to
the
first quarter of 2006 from $669,624 to $703,346. Income from assets
held under the Company’s Supplemental Employee Retirement Plan (SERP), which is
stock market driven, increased $32,756, as a result of the stock market activity
during the first quarter of 2007, accounting for most of this
increase. Service fees increased $11,838, or by 3.79%, but was offset
by a decrease in currency exchange income of $12,500, or 3.42%. The
value of the Canadian dollar continues to be more favorable than in past years,
thereby generating less income for the conversion of these funds.
Non-interest
expense increased $36,768, or by 1.18% for the first quarter of 2007 compared
to
2006, more than offsetting the increase in non-interest
income. Salaries and wages decreased $33,356 or by 2.86%, due to
higher accruals in 2006 compared to 2007, which was adjusted later in the year
due to attrition and the consolidation of some positions. Occupancy
expense increased $34,244 or by 5.99%, due to an increase in depreciation
expense and maintenance on buildings. A new phone system was
installed throughout all the branch offices, and is now up and
running. This equipment, along with an increase in IT equipment and
software contributes to the increase in depreciation expense. The
increase in maintenance on buildings, which includes heating and snow removal,
is attributable to the severe weather conditions experienced in the Northeast
Kingdom this winter. Employee benefits expense increased $15,431 or
by 3.71% primarily due to increases in group insurance costs. Other
expenses increased $20,449 or by 2.13%, due to small increases in various
expense items.
Management
monitors all components of other non-interest 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.
APPLICABLE
INCOME TAXES
Provisions
for income taxes decreased $3,060 for the first quarter of 2007 compared to
the
first quarter of 2006. The decrease in provision versus an increase
in income before taxes is attributable to an increase in low income housing
tax
credits.
CHANGES
IN FINANCIAL CONDITION
The
following table reflects the composition of the Company's major categories
of
assets and liabilities as a percent of total assets as of the dates
indicated:
|
ASSETS
|
March
31, 2007
|
December
31, 2006
|
March
31, 2006
|
|||
|
Loans
(gross)*
|
$
267,004,732
|
78.82%
|
$
269,296,026
|
76.55%
|
$
259,817,241
|
74.39%
|
|
Available
for Sale Securities
|
21,717,027
|
6.41%
|
22,612,207
|
6.43%
|
33,389,975
|
9.56%
|
|
Held
to Maturity Securities
|
20,788,310
|
6.14%
|
21,069,866
|
5.99%
|
28,464,535
|
8.15%
|
|
*includes
loans held for sale
|
||||||
|
LIABILITIES
|
||||||
|
Savings
Deposits
|
$ 40,098,014
|
11.84%
|
$ 38,471,441
|
10.94%
|
$ 45,763,070
|
13.10%
|
|
Demand
Deposits
|
46,801,261
|
13.82%
|
47,402,628
|
13.47%
|
45,250,947
|
12.96%
|
|
NOW
& Money Market Funds
|
72,457,733
|
21.39%
|
81,402,928
|
23.14%
|
83,853,164
|
24.01%
|
|
Time
Deposits
|
131,657,207
|
38.87%
|
133,711,197
|
38.01%
|
109,831,160
|
31.45%
|
The
Company's loan portfolio increased $7.2 million, or by 2.77%, from March 31,
2006 to March 31, 2007 due to strong loan activity within the residential loan
portfolio during the balance of 2006. The residential loan portfolio
consists, not only of first lien mortgages, but also includes junior liens
and
home equity lines of credit. During 2006, the latter two components
were priced more aggressively, resulting in increases in both portfolios of
approximately $6.5 million in total from year to year. Loan activity
during the first quarter of 2007 including in the residential loan portfolio,
slowed down considerably, accounting for the decrease in gross loans of $2.3
million, or 0.85% compared to December 31, 2006. Available-for sale
investments decreased $11.7 million, or by 34.96% from March 31, 2006 to March
31, 2007, through maturities that were not only used to fund loan growth, but
also pay off a portion of the short-term borrowings during the last quarter
2006. Time deposits decreased $2.1 million, or by 1.54%, from
December 31, 2006 to March 31, 2007, while an increase of $21.8 million, or
19.87%, is noted from March 31, 2006 to March 31, 2007. Various rate
competitive specials were offered during 2006 in an effort to increase this
portfolio, which also accounted for a portion of the $5.7 million decrease
year
to year in savings deposits. During 2006, the Company accessed
wholesale funds through the Certificate of Deposit Account Registry Service
(CDARS) of Promontory Interfinancial Network. At December 31, 2006
approximately $4.0 million were still outstanding, all of which were paid off
at
March 31, 2007. NOW and money market funds decreased throughout the
comparison period due to the loss of some substantial municipal
deposits. Municipal deposit products are priced very competitively
throughout the Company’s servicing area, and do not carry as much loyalty as
regular deposits, due to the nature of the funds.
RISK
MANAGEMENT
Interest
Rate Risk and Asset and Liability Management
- Management actively monitors and manages its
interest rate risk exposure and attempts to structure the balance sheet to
maximize net interest income while controlling its exposure to interest rate
risk. The Company's Asset/Liability Management Committee (ALCO)
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 ALCO meets monthly to
review financial statements, liquidity levels, yields and spreads to better
understand, measure, monitor and control the Company’s interest rate
risk. In the ALCO process, the committee members apply policy limits
set forth in the Asset Liability, Liquidity and Investment policies approved
by
the Company’s Board of Directors. The ALCO's methods for evaluating
interest rate risk include an analysis of the effects of interest rate changes
on net interest income and 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.
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 interest sensitive assets and liabilities
also change, thereby impacting net interest income (NII), the primary component
of the Company’s earnings. Fluctuations in interest rates can also
have an impact on liquidity. The ALCO uses an outside consultant to
perform quarterly rate shock simulations 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. The ALCO
utilizes the results of this simulation model to quantify the estimated exposure
of NII and liquidity to sustained 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 200 basis point (bp) shift upward and a 100 bp
shift downward in interest rates. The analysis also provides a
summary of the Company's liquidity position. Furthermore, the analysis provides
testing of the assumptions used in previous simulation models by comparing
the
projected NII with actual NII. The asset/liability
simulation model provides management with an important tool for making sound
economic decisions regarding the balance sheet.
While
assumptions are developed based upon current economic and local market
conditions, the Company cannot provide any assurances as to the predictive
nature of these assumptions including how or when customer preferences or
competitor influences might change.
Credit
Risk - A primary concern of management is to reduce the
exposure to credit loss within the loan 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 help 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 duties include monitoring and reporting
on
the status of the loan portfolio including delinquent and non-performing
loans. Credit
risk
may also arise from geographic concentration of loans. While the
Company’s loan portfolio is derived primarily from its primary market area in
northeast Vermont, geographic concentration is partially mitigated by the
continued growth of the Company’s loan portfolio in central Vermont, its newest
market area.
The
following table reflects the composition of the Company's loan portfolio as
of
the dates indicated:
|
March
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
Total
Loans
|
%
of Total
|
Total
Loans
|
%
of Total
|
|||||||||||||
|
Real
Estate Loans
|
||||||||||||||||
|
Construction
& Land Development
|
$ |
12,065,174
|
4.52 | % | $ |
11,889,203
|
4.41 | % | ||||||||
|
Farm
Land
|
4,771,562
|
1.78 | % |
3,217,107
|
1.19 | % | ||||||||||
|
1-4
Family Residential
|
140,599,774
|
52.66 | % |
143,228,599
|
53.19 | % | ||||||||||
|
Home
Equity Lines
|
13,961,933
|
5.23 | % |
13,778,692
|
5.12 | % | ||||||||||
|
Commercial
Real Estate
|
52,882,786
|
19.81 | % |
54,236,037
|
20.14 | % | ||||||||||
|
Loans
to Finance Agricultural Production
|
246,778
|
0.09 | % |
224,257
|
0.08 | % | ||||||||||
|
Commercial
& Industrial
|
22,540,703
|
8.44 | % |
21,992,790
|
8.17 | % | ||||||||||
|
Consumer
Loans
|
19,760,501
|
7.40 | % |
20,588,227
|
7.65 | % | ||||||||||
|
All
Other Loans
|
175,521
|
0.07 | % |
141,114
|
0.05 | % | ||||||||||
|
Gross
Loans
|
267,004,732
|
100 | % |
269,296,026
|
100 | % | ||||||||||
|
Less:
|
||||||||||||||||
|
Allowance
for Loan Losses
|
(2,295,985 | ) | -0.86 | % | (2,267,821 | ) | -0.84 | % | ||||||||
|
Deferred
Loan Fees
|
(585,079 | ) | -0.22 | % | (632,105 | ) | -0.24 | % | ||||||||
|
Net
Loans
|
$ |
264,123,668
|
98.92 | % | $ |
266,396,100
|
98.92 | % | ||||||||
Allowance
for loan losses and provisions - The Company maintains an
allowance for loan losses at a level that management believes is adequate to
absorb losses inherent in the loan portfolio (See “Critical Accounting
Policies”). As of March 31, 2007, the Company maintained a residential loan
portfolio (including home equity lines of credit) of $154.6 million, compared
to
$157.0 million at December 31, 2006, accounting for 57.9% and 58.3%,
respectively, of the total loan portfolio. The commercial real estate
portfolio (including construction, land development and farmland loans) totaled
$69.6 million and $69.3 million, respectively, at March 31, 2007 and December
31, 2006, comprising 26.1% and 25.7%, respectively, of the total loan
portfolio. The Company's commercial loan portfolio includes loans
that carry guarantees from government programs, thereby mitigating the Company's
credit risk on such loans. At March 31, 2007, the Company had $17.8
million in loans under various government loan guarantee programs, with the
guaranteed portion totaling $12.5 million, compared to $18.4 million in loans
carrying a guaranteed total of $13.1 million at December 31,
2006. The volume of residential and commercial loans secured by real
estate, together with the low historical loan loss experience in these
portfolios, and highly skilled and diligent loan underwriting and credit
administration staffs, helps to support the Company's estimate for loan loss
coverage.
The
following table summarizes the Company's loan loss experience for the three
months ended March 31,
|
2007
|
2006
|
|||||
|
Loans
Outstanding End of Period
|
$ |
267,004,732
|
$ |
259,817,241
|
||
|
Average
Loans Outstanding During Period
|
$ |
268,765,407
|
$ |
256,932,478
|
||
|
Loan
Loss Reserve, Beginning of Period
|
$ |
2,267,821
|
$ |
2,189,187
|
||
|
Loans
Charged Off:
|
||||||
|
Residential
Real Estate
|
0
|
0
|
||||
|
Commercial
Real Estate
|
0
|
0
|
||||
|
Commercial
Loans not Secured by Real Estate
|
0
|
13,266
|
||||
|
Consumer
Loans
|
19,985
|
15,047
|
||||
|
Total
Loans Charged Off
|
19,985
|
28,313
|
||||
|
Recoveries:
|
||||||
|
Residential
Real Estate
|
0
|
300
|
||||
|
Commercial
Real Estate
|
0
|
0
|
||||
|
Commercial
Loans not Secured by Real Estate
|
0
|
316
|
||||
|
Consumer
Loans
|
10,649
|
21,729
|
||||
|
Total
Recoveries
|
10,649
|
22,345
|
||||
|
Net
Loans Charged Off
|
9,336
|
5,968
|
||||
|
Provision
Charged to Income
|
37,500
|
37,500
|
||||
|
Loan
Loss Reserve, End of Period
|
$ |
2,295,985
|
$ |
2,220,719
|
||
|
Net
Charge Offs to Average Loans Outstanding
|
.003 | % | .002 | % | ||
Non-performing
assets for the comparison periods were as follows:
|
March
31, 2007
|
December
31, 2006
|
|||||||||||||
|
Balance
|
Percent
of Total
|
Balance
|
Percent
of Total
|
|||||||||||
|
Non-Accruing
loans
|
$ |
1,320,118
|
93.12 | % | $ |
720,587
|
77.78 | % | ||||||
|
Loans
past due 90 days or more and still accruing
|
97,526
|
6.88 | % |
205,801
|
22.22 | % | ||||||||
|
Total
|
$ |
1,417,644
|
100.00 | % | $ |
926,388
|
100.00 | % | ||||||
Specific
allocations are made in the allowance for loan losses in situations management
believes may represent a greater risk for loss. In addition, a
portion of the allowance (termed "unallocated") is established to absorb
inherent losses that probably exist as of the valuation date although not
identified through management's objective processes for estimated credit
losses. 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. Due in part to local economic
conditions, the Company increased this section of qualitative factors during
the
first quarter of 2007, to allocate portions of the allowance to this
area. 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. While the allowance is described as consisting of
separate allocated portions, the entire allowance is available to support loan
losses, regardless of category.
Market
Risk - 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, investing, 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 under "Interest Rate
Risk and Asset and Liability Management", the Company actively monitors and
manages its interest rate risk through the ALCO
process.
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 three months of 2007, the Company has
not engaged in 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 or
commitments whose contract amount represents credit risk as of March 31, 2007
are as follows:
|
Contract
or
|
||||
|
Notional
Amount
|
||||
|
Unused
portions construction lines of credit
|
$ |
4,261,873
|
||
|
Unused
portions of home equity lines of credit
|
10,946,265
|
|||
|
Other
commitments to extend credit
|
12,952,629
|
|||
|
Unused
portions of credit card lines
|
9,068,572
|
|||
|
Standby
letters of credit and commercial letters of credit
|
99,200
|
|||
|
MPF
credit enhancement obligation, net of liability recorded
|
1,161,227
|
|||
Since
some commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
AGGREGATE
CONTRACTUAL OBLIGATIONS
The
following table presents, as of March 31, 2007, significant fixed and
determinable contractual obligations to third parties, by payment
date:
|
Less
than
|
2-3
|
4-5
|
More
than
|
||||||||||||
|
1
year
|
years
|
years
|
5
years
|
Total
|
|||||||||||
|
Operating
Leases
|
$ |
144,016
|
$ |
292,029
|
$ |
207,923
|
$ |
315,155
|
$ |
959,123
|
|||||
|
Housing
Limited Partnerships
|
42,800
|
0
|
0
|
0
|
42,800
|
||||||||||
|
FHLB
Borrowings
|
30,000
|
0
|
0
|
10,000
|
40,000
|
||||||||||
|
Total
|
$ |
216,816
|
$ |
292,029
|
$ |
207,923
|
$ |
325,155
|
$ |
1,041,923
|
|||||
LIQUIDITY
AND CAPITAL RESOURCES
Managing
liquidity risk is essential to maintaining both depositor confidence and
stability in earnings. 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 Company’s principal sources of funds are
deposits, amortization and prepayment of loans and securities, maturities of
investment securities, sales of loans available for sale, and earnings and
funds
provided from operations. Maintaining a relatively stable funding
base, which is achieved by diversifying funding sources, competitively pricing
deposit products, and extending the contractual maturity of liabilities, reduces
the Company’s exposure to roll over risk on deposits and limits reliance on
volatile short-term borrowed funds. Short-term funding needs arise
from declines in deposits or other funding sources and funding of loan
commitments. The Company’s strategy is to fund assets to the maximum
extent possible with core deposits that provide a sizable source of relatively
stable and low-cost funds. When loan demand out paces deposit growth,
it is necessary for the Company to use alternative funding sources, such as
investment portfolio maturities and short-term borrowings, to meet these funding
needs.
In
past years, while depositors were waiting for improved performance in
stock-market based investments, banks were flush with deposits, creating excess
liquidity. This liquidity was put to good use while loan demand was
high. As depositors gained confidence in the markets, deposit growth
has become stagnate, while loan demand has remained steady. Funding
for loan growth has been augmented with short-term borrowings and cash flows
from maturing investments.
The
Company has taken the approach of offering deposit specials at competitive
rates, in varying terms that fit within the balance sheet mix. The
strategy of offering specials is meant to provide a means to retain deposits
while not having to reprice the entire deposit portfolio.
During
the first three months of 2007, the Company's available-for-sale investment
portfolio decreased with maturities totaling $1.0 million, the held-to-maturity
investment portfolio decreased $281,556 and the loan portfolio decreased $2.3
million. On the liability side, NOW and money market accounts
decreased $8.9 million, time deposits decreased $2.1 million, while savings
deposits increased $1.6 million.
As
a member of the Federal Home Loan Bank of Boston (FHLBB), the Company has access
to pre-approved lines of credit. The Company has a $1.0 million
unsecured Federal Funds line with an available balance of the same at March
31,
2007. Interest is chargeable at a rate determined daily approximately
25 basis points higher than the rate paid on federal funds
sold. Additional borrowing capacity of approximately $82.9 million
through the FHLBB is secured by the Company's qualifying loan
portfolio.
As
of March 31, 2007, the Company had total advances of $40,000 against the $82.9
million consisting of the following:
|
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
|
|||||
|
Total
Long-term Advances
|
$ |
40,000
|
|||||||
Under
a separate agreement with FHLBB, the Company has the authority to collateralize
public unit deposits, up to its FHLBB borrowing capacity ($82.9 million less
outstanding advances noted above) with letters of credit issued by the
FHLBB. At March 31, 2007, approximately $59.2 million was pledged
under this agreement, 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 first quarter of 2007 was approximately $21.1
million.
Other
alternative sources of funding come from unsecured Federal Funds lines with
two
other correspondent banks that total $7.5 million. There were no
balances outstanding on either line at March 31, 2007.
In
the first quarter of 2007, the Company declared a cash dividend of $0.17 per
share, payable in the second quarter of 2007, requiring an accrual of $702,136
at March 31, 2007.
The
following table illustrates the changes in shareholders' equity from December
31, 2006 to March 31, 2007:
|
Balance
at December 31, 2006 (book value $7.44 per share)
|
$
|
30,730,811
|
|
|
Net
income
|
675,256
|
||
|
Issuance
of stock through the Dividend Reinvestment Plan
|
207,680
|
||
|
Total
dividends declared
|
(702,136 | ) | |
|
Unrealized
holding gain arising during the period on available-for-sale
securities,
net of tax
|
72,458
|
||
|
Balance
at March 31, 2007 (book value $7.47 per share)
|
$ |
30,984,069
|
At
March 31, 2007, the Company reported that of the 405,000 shares authorized
for
the stock buyback plan, 178,890 shares have been purchased, leaving 226,110
shares available for repurchase. The repurchase price paid for these
shares ranged from $9.75 per share in May of 2000 to $16.50 per share paid
in
September of 2005. During the first three months of 2007, the Company
did not repurchase any shares pursuant to the buyback authority. The
last purchase was December 23, 2005 in which 4,938 shares were repurchased
at a
price of $16.00 per share. 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.
The
primary source of funds for the Company's payment of dividends to its
shareholders is dividends paid to the Company by the Bank. The Bank,
as a National Bank, is subject to the dividend restrictions set forth by the
Comptroller of the Currency ("OCC"). Under such restrictions, the
Bank may not, without the prior approval of the OCC, declare dividends in excess
of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios of total and Tier 1 capital
(as
defined in the regulations) to risk-weighted assets (as defined), and of Tier
1
capital (as defined) to average assets (as defined). Under current
guidelines, banks must maintain a risk-based capital ratio of 8.0%, of which
at
least 4.0% must be in the form of core capital (as defined).
Regulators
have also established minimum capital ratio guidelines for FDIC-insured banks
under the prompt corrective action provisions of the Federal Deposit Insurance
Act, as amended. These minimums are risk-based capital ratio of 10.0%
and Tier 1 capital ratio of 6.0%. As of March 31, 2007, the Company’s
Subsidiary was 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 Subsidiary's classification.
The
risk
based ratios of the Company and its subsidiary as of March 31, 2007 and December
31, 2006 exceeded regulatory guidelines and are presented in the table
below.
|
Minimum
To Be Well
|
||||||
|
Minimum
|
Capitalized
Under
|
|||||
|
For
Capital
|
Prompt
Corrective
|
|||||
|
Actual
|
Adequacy
Purposes:
|
Action
Provisions:
|
||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
(Dollars
in Thousands)
|
||||||
|
As
of March 31, 2007:
|
||||||
|
Total
capital (to risk-weighted assets)
|
||||||
|
Consolidated
|
$33,478
|
14.28%
|
$18,755
|
8.0%
|
N/A
|
N/A
|
|
Bank
|
$33,798
|
14.42%
|
$18,753
|
8.0%
|
$23,442
|
10.0%
|
|
Tier
I capital (to risk-weighted assets)
|
||||||
|
Consolidated
|
$31,182
|
13.30%
|
$ 9,378
|
4.0%
|
N/A
|
N/A
|
|
Bank
|
$31,502
|
13.44%
|
$ 9,377
|
4.0%
|
$14,065
|
6.0%
|
|
Tier
I capital (to average assets)
|
||||||
|
Consolidated
|
$31,182
|
9.15%
|
$13,624
|
4.0%
|
N/A
|
N/A
|
|
Bank
|
$31,502
|
9.25%
|
$13,624
|
4.0%
|
$17,030
|
5.0%
|
|
As
of December 31, 2006:
|
||||||
|
Total
capital (to risk-weighted assets)
|
||||||
|
Consolidated
|
$33,270
|
14.10%
|
$18,879
|
8.0%
|
N/A
|
N/A
|
|
Bank
|
$33,047
|
14.01%
|
$18,872
|
8.0%
|
$23,590
|
10.0%
|
|
Tier
I capital (to risk-weighted assets)
|
||||||
|
Consolidated
|
$31,002
|
13.14%
|
$ 9,439
|
4.0%
|
N/A
|
N/A
|
|
Bank
|
$30,779
|
13.05%
|
$ 9,436
|
4.0%
|
$14,154
|
6.0%
|
|
Tier
I capital (to average assets)
|
||||||
|
Consolidated
|
$31,002
|
8.59%
|
$14,434
|
4.0%
|
N/A
|
N/A
|
|
Bank
|
$30,779
|
8.53%
|
$14,430
|
4.0%
|
$18,038
|
5.0%
|
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.
The
Company's management of the credit, liquidity and market risk inherent in its
business operations is discussed in Part 1, Item 2 of this report under the
caption "RISK MANAGEMENT", which is incorporated herein by
reference. Management does not believe that there have been any
material changes in the nature or categories of the Company's risk exposures
from those disclosed in the Company’s 2006 annual report on form
10-K.
As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), 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. For this purpose, the term “disclosure controls and
procedures” means controls and other procedures of the Company that are designed
to ensure that information required to be disclosed by it in the reports that
it
files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it
files
or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
There
were no changes during the Company’s first 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.
There
has been no material change in the Company's risk factors described in its
Annual Report on Form 10-K for the year ended December 31, 2006.
The
following table provides information as to purchases of the Company’s common
stock during the first quarter ended March 31, 2007, 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
|
||||||||||
|
For
the period:
|
Shares
Purchased(1)(2)
|
Paid
Per Share
|
Announced
Plan(3)
|
End
of the Period
|
|||||||||
|
January
1 - January 31
|
3,057
|
$ |
13.35
|
0
|
226,110
|
||||||||
|
February
1 - February 28
|
5,856
|
$ |
13.48
|
0
|
226,110
|
||||||||
|
March
1 - March 31
|
3,375
|
$ |
13.66
|
0
|
226,110
|
||||||||
|
Total
|
12,288
|
$ |
13.49
|
0
|
226,110
|
||||||||
(1) All
12,288 shares were purchased for the account of participants invested in the
Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf
of the Plan Trustee, the Human Resources Committee of Community National
Bank. Such share purchases were facilitated through Community
Financial Services Group, LLC (“CFSG”), which provides certain investment
advisory services to the Plan. Both the Plan Trustee and CFSG may be
considered affiliates of the Company under Rule 10b-18. All purchases
by the Plan were made in the open market in brokerage transactions and reported
on the OTC Bulletin Board©.
(2) Shares
purchased during the period do not include fractional shares repurchased from
time to time in connection with the participant's election to discontinue
participation in the Company's Dividend Reinvestment Plan.
(3) 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.
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.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behald by the undersigned
thereunto
|
||
|
duly authorized.
|
||
|
COMMUNITY
BANCORP.
|
||
|
DATED: May
8, 2007
|
By:
/s/ Richard C.
White
|
|
|
Richard
C. White, Chairman &
|
||
|
Chief
Executive Officer
|
||
|
DATED: May
8, 2007
|
By: /s/
Stephen P.
Marsh
|
|
|
Stephen
P. Marsh, President &
|
||
|
Chief
Operating Officer
|
||
|
(Chief
Financial Officer)
|
||