10-Q 1 march2002.htm 10-Q REPORT DATED MARCH 31, 2002 CONFORMED COPY

 

 

 

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2002
Commission File Number 000-16435

COMMUNITY BANCORP.

(Exact Name of Registrant as Specified in its Chapter)

Vermont

03-0284070

(State of Incorporation)

(IRS Employer Identification Number)

 

 

Derby Road, Derby, Vermont

05829

(Address of Principal Executive Offices)

(zip code)

Registrant's Telephone Number:  (802) 334-7915

Not Applicable
Former Name, Former Address and Formal Fiscal Year
(If Changed Since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days.
  Yes ( X )  No (  )

At May 6, 2002 there were 3,562,287 shares outstanding of the Corporation's common stock.

Total Pages - 19 Pages

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

The following are the consolidated financial statements for Community Bancorp. and subsidiaries, "the Company".

 

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Balance Sheets

( Unaudited )

March 31

December 31

2002

2001

Assets

Cash and due from banks

$7,542,795

$8,681,237

Federal funds sold and overnight deposits

2,806,342

6,019,178

Total cash and cash equivalents

10,349,137

14,700,415

Securities held-to-maturity (fair value $38,416,003 at 03/31/02

and $40,967,678 at 12/31/01)

38,303,013

40,644,481

Securities available-for-sale

40,227,748

32,513,512

Restricted equity securities

1,309,050

1,224,650

Loans held-for-sale

1,446,252

3,113,466

Loans

189,630,278

190,042,381

Allowance for loan losses

(2,113,326)

(2,007,408)

Unearned net loan fees

(944,307)

(951,194)

Net loans

186,572,645

187,083,779

Bank premises and equipment, net

4,825,982

4,867,413

Accrued interest receivable

2,105,802

1,744,133

Other real estate owned, net

98,466

60,000

Other assets

3,529,777

2,726,075

Total assets

$288,767,872

$288,677,924

Liabilities and Stockholders' Equity

Liabilities

Deposits:

Demand, non-interest bearing

29,119,558

30,724,508

NOW and money market accounts

79,419,631

76,779,687

Savings

35,225,784

33,059,937

Time deposits, $100,000 and over

18,917,519

18,017,850

Other time deposits

79,779,600

79,487,551

Total deposits

$242,462,092

$238,069,533

Federal funds purchased and other borrowed funds

5,055,000

5,055,000

Repurchase agreements

15,775,133

19,833,510

Accrued interest and other liabilities

1,740,850

2,272,055

Subordinated convertible debentures

0

1,000

Total liabilities

$265,033,075

$265,231,098

Stockholders' Equity

Common stock - $2.50 par value; 6,000,000 shares

authorized and 3,717,971 shares issued at 03/31/02

and 3,706,674 shares issued at 12/31/01

9,294,927

9,266,686

Additional paid-in capital

13,538,399

13,412,012

Retained earnings

3,076,158

2,459,827

Accumulated other comprehensive income

(210,261)

26,459

Less: treasury stock, at cost; 167,501 shares at 03/31/02

and 150,065 at 12/31/01

(1,964,426)

(1,718,158)

Total stockholders' equity

$23,734,797

$23,446,826

Total liabilities and stockholders' equity

$288,767,872

$288,677,924

 

 

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Statements of Income

( Unaudited )

For The First Quarter Ended March 31,

2002

2001

2000

Interest income

Interest and fees on loans

$3,590,777

$3,822,953

$3,304,829

Interest on debt securities

Taxable

720,504

670,572

680,809

Tax-exempt

224,724

171,030

141,538

Dividends

11,348

23,833

20,571

Interest on federal funds sold and overnight deposits

22,347

80,878

29,476

Total interest income

$4,569,700

$4,769,266

$4,177,223

Interest expense

Interest on deposits

1,616,134

2,088,049

1,733,293

Interest on borrowed funds

94,175

98,635

53,488

Interest on repurchase agreements

83,068

180,564

43,296

Interest on subordinated debentures

0

550

550

Total interest expense

$1,793,377

$2,367,798

$1,830,627

Net interest income

2,776,323

2,401,468

2,346,596

Provision for loan losses

(132,000)

(90,000)

(162,000)

Net interest income after provision

$2,644,323

$2,311,468

$2,184,596

Other operating income

Trust department income

109,826

105,468

71,350

Service fees

224,138

215,840

182,787

Security gains (losses)

3,648

29,644

(11,507)

Other

355,104

153,869

159,666

Total other operating income

$692,716

$504,821

$402,296

Other operating expenses

Salaries and wages

959,487

782,446

719,104

Pension and other employee benefits

275,760

239,133

223,186

Occupancy expenses, net

411,553

406,669

365,384

Trust department expenses

70,745

31,042

23,694

Other

854,928

731,060

677,406

Total other operating expenses

$2,572,473

$2,190,350

$2,008,774

Income before income taxes

764,566

625,939

578,118

Applicable income taxes (credit)

148,642

137,022

144,493

Net Income

$615,924

$488,917

$433,625

Earnings per share on weighted average

$0.17

$0.14

$0.12

Weighted average number of common shares

used in computing earnings per share

3,554,277

3,533,854

3,556,538

Dividends declared per share

$0.16

$0.16

$0.16

Book value per share on shares outstanding

$6.60

$6.59

$6.42

Per share data for 2000 restated to reflect a 5% stock dividend paid on February 1, 2001.

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

For the Three Months Ended March 31,

2002

2001

2000

Reconciliation of net income to net cash provided by operating activities:

Net Income

$615,924

$488,917

$433,625

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

169,212

157,875

149,550

Provision for loan losses

132,000

90,000

162,000

(Credit) provision for deferred income taxes

(2,542)

(22,199)

(44,522)

Gain on sale of loans

(105,728)

(18,039)

(7,586)

Securities (gain) losses

(3,648)

(29,644)

11,507

(Gain) losses on sales of OREO

(8,758)

(2,485)

(19,169)

Amortization of bond premium, net

72,771

23,220

49,566

Proceeds from sales of loans held for sale

11,901,331

1,159,239

615,781

Originations of loans held for sale

(10,128,389)

(844,500)

(619,127)

Increase (decrease) in taxes payable

117,402

160,074

189,017

(Increase) decrease in interest receivable

(361,669)

(37,051)

(326,577)

(Increase) decrease in mortgage service rights

(83,664)

7,866

8,903

(Increase) decrease in other assets

(620,567)

97,345

(208,953)

(Decrease) increase in unamortized loan fees

(6,887)

(18,152)

(2,994)

Increase (decrease) in interest payable

8,363

(68,259)

(26,352)

Increase (decrease) in accrued expenses

72,205

(24,545)

(89,623)

Increase (decrease) in other liabilities

24,625

15,434

27,412

Net cash provided by operating activities

$1,791,981

$1,135,096

$302,458

Cash Flows from investing activities:

Investments - held to maturity

Maturities and paydowns

4,286,581

6,299,716

2,526,246

Purchases

(1,948,596)

(12,664,522)

(11,227,404)

Investments - available for sale

Sales and maturities

3,000,000

10,078,517

7,994,923

Purchases

(11,138,542)

0

0

Purchase of restricted equity securities

(84,400)

(83,000)

0

Investment in limited partnership, net

(165,437)

0

0

Decrease (increase) in loans, net

312,100

2,639,695

(3,257,633)

Capital expenditures, net

(122,070)

(147,051)

(36,136)

Recoveries of loans charged off

35,455

37,098

42,320

Proceeds from sales of other real estate owned

8,758

42,485

65,939

Net Cash Used in Investing Activities

($5,816,151)

$6,202,938

($3,891,745)

Cash Flows from Financing Activities:

Net increase (decrease) in demand, NOW, money market

and savings accounts

3,200,841

(6,239,479)

(1,791,476)

Net increase (decrease) in certificates of deposit

1,191,718

3,178,891

(1,136,691)

Net (decrease) increase in short-term borrowings and

repurchase agreements

(4,058,377)

(1,162,884)

2,784,359

Net (decrease) increase in borrowed funds

0

(537,000)

0

Payments to acquire treasury stock

(246,268)

(110,358)

(39)

Debentures redeemed for cash

0

0

0

Dividends paid

(415,022)

(363,222)

(289,872)

Net cash provided by financing activities

($327,108)

($5,234,052)

($433,719)

Net increase (decrease) in cash and cash equivalents

($4,351,278)

$2,103,982

($4,023,006)

Cash and cash equivalents:

Beginning

$14,700,415

$6,110,527

$12,716,144

Ending

$10,349,137

$8,214,509

$8,693,138

Supplemental Schedule of Cash Paid During the Year

Interest

$1,785,014

$2,436,057

$1,856,979

Income taxes

$33,782

($851)

$0

Supplemental schedule of noncash investing and financing activities:

Net change in securities valuation

($358,666)

$257,319

($19,251)

OREO acquired in settlements of loans

$38,466

$40,000

$148,809

Debentures converted to common stock

$1,000

$1,000

$0

Stock dividends

$0

$1,803,162

$0

Dividends paid

Dividends declared

$0

$0

$0

Decrease (Increase) in dividends payable

568,649

536,925

537,362

Dividends reinvested

(153,627)

(173,703)

(247,490)

$415,022

$363,222

$289,872

 

Note 1

BASIS OF PRESENTATION AND CONSOLIDATION

     The interim consolidated financial statements of Community Bancorp. and subsidiaries are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for fair presentation of the financial condition and results of operations of the company contained herein have been made. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2001, contained in the company's Annual Report on Form 10-K for the year ended December 31, 2001.

 

ITEM 2. Management's Discussion and Analysis of the Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2002

     Community Bancorp. (the "Company") is a bank holding company headquartered in Derby, Vermont, which has one operating commercial bank subsidiary, Community National Bank (the "Bank"). The Bank is a commercial banking institution which offers a full range of retail banking services to residents and businesses in northeastern and north central Vermont. The Bank has eight offices, five of which are located in Orleans County, one in Essex County, one in Caledonia County and the newest office, located in Washington County.


     The Company also owns all of the stock of Liberty Savings Bank ("Liberty"), an inactive New Hampshire guaranty savings bank charter. Liberty has no substantial assets and does not have any offices or deposit taking authority and there are currently no plans to activate this charter.


     Prior to March 31, 2002 Community National Bank operated a trust department through which it offered a full line of personal fiduciary services. As of such date, the Bank transferred it trust operations to a newly formed Vermont-chartered nondepository trust and investment management affiliate, Community Financial Services Group, LLC based in Newport, Vermont ("CFSG"). The Bank's ownership interest in CFSG is held indirectly, through Community Financial Services Partners, LLC, a Vermont limited liability company ("Partners"), which owns 100% of the limited liability company equity interests of CFSG. On April 1, 2002, the Bank sold a one-third interest in Partners to each of the National Bank of Middlebury, in Middlebury, Vermont and Guaranty Bancorp, Inc., the bank holding company parent of Woodsville Guaranty Savings Bank, Woodsville, New Hampshire. As of such date the Bank retained a one-third ownership interest in Partners and, indirectly, in CFSG. Partners and CFSG are not a consolidated subsidiaries of the Bank.


     Most of the Company's business is conducted through Community National Bank; therefore, the following narrative is based primarily on the Bank's operations. The balance sheet and statements of income preceding this section are consolidated figures for Community Bancorp. and subsidiaries and should be read in conjunction with the other information and reports following them to provide a more detailed comparison of the information disclosed in the following narrative.


OVERVIEW

     Net income for the first quarter ended March 31, 2002 was $615,924, representing an increase of 26% and 42%, respectively, over the net income figures of $488,917 for the first quarter ended March 31, 2001, and $433,625 for the same period in 2000. The results of this are earnings per share of $0.17 for the first quarter of 2002, $0.14 for 2001 and $0.12 for 2000. The Company declared a cash dividend of $0.16 per share payable February 1, 2002 to shareholders of record as of January 15, 2002. In 2001, a 5% stock dividend was declared payable February 1, 2001 to shareholders of record as of January 16, 2001. As a result of the 5% stock dividend, all per share data has been restated for the first quarter of 2000. The first quarter of 2002 was very profitable due to an increased volume of loans sold to the secondary market, as well as a decrease in interest expense. Current interest rates based on prime have decreased dramatically over the past year, accounting for the decrease in interest expense.


     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, rate sensitivity of earning assets as well as interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets. Table A and Table B at the end of this narrative provide a visual comparison for each period. Figures presented are consolidated and are stated on a tax equivalent basis assuming a rate of 34%.


     Net interest income for the first quarter comparison period was $2.4 million for 2001 compared to $2.8 million for 2002, resulting in an increase of 16%. Total interest income for the first quarter decreased $199,566 or by 4.2% from $4.8 million in 2001 to $4.6 million in 2002. Interest expense decreased $574,421 or by 24.3% from $2.37 million in 2001 to $1.8 million in 2002. A review of the first quarter figures for interest earned on loans, the major source of interest income, reveals a decrease of approximately 6% for the first quarter of 2002 compared to 2001. Although an increase is noted in the average volume of loans since the first quarter of 2001, a decrease of 126 basis points is noted in the average yield, contributing to the decrease in income. In comparison, interest paid on deposits, the major source of interest expense, shows a decrease of almost 23% for the same comparison period. Overall, an increase is noted in the average volume of interest bearing accounts, while the rate paid on these accounts has decreased 157 basis points, accounting for the decrease in interest expense. As a result of these changes, the tax equivalent spread for the first quarter increased 29 basis points to 3.77% for 2002 versus 3.48% for 2001.


CHANGES IN FINANCIAL CONDITION


     The Company had total average assets of $289 million at March 31, 2002 and $270 million at December 31, 2001. Average earning assets were $275 million for the first three months ended March 31, 2002, including average loans of $192 million and average investment securities of $77 million. Average earning assets were $249 million for the year ended December 31, 2001 including average loans of $182 million and average investment securities of $58 million.


     Average interest bearing liabilities at March 31, 2002 were $232 million, with average time deposits reported totaling $98 million and NOW & money market funds just over $81 million. At December 31, 2001, average interest bearing liabilities of almost $210 million were reported including average time deposits of $99 million and NOW & money market funds at an average volume $57 million. An increase in municipal deposits accounts for most of the increase in NOW & money market funds.


RISK MANAGEMENT


Liquidity Risk - Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The repayment of loans and growth in deposits are two of the major sources of liquidity. Other time deposits report a modest increase as of the end of the first quarter of 2002, while time deposits greater than $100,000 increased almost $1 million. A review of these deposits, primarily the time deposits over $100,000 indicates that they are primarily generated locally and regionally and are established customers of the Company. The Company has no brokered deposits. Now and money market funds increased $2.6 million from December 31, 2001 to end the first three months of 2002 at $79.4 million. The Company began offering a new collateralized deposit account to its municipal account holders during the last part of 2001. This account has been well received during the first three months of 2002, accounting for the increase of $2.6 million noted above. The Company's loan portfolio has seen a decrease over the last three months, partially due to the sale of loans on the secondary market. As of the end of the first three months of 2002, the Company held in it's investment portfolio treasuries classified as "Available for Sale" at a fair value of $40.2 million, compared to $32.5 million as of December 31, 2001, an increase of $7.7 million or 24%. Securities classified as "Held to Maturity" ended the first three months of 2002 at a book value of $38.3 million compared to almost $41 million as of the end of the 2001 calendar year. Both of these types of investments mature at monthly intervals as shown on the gap report at the end of this section. Securities classified as "Restricted Equity Securities" are made up of equity securities the Company is required to maintain in the form of Federal Home Loan Bank of Boston (FHLB) and Federal Reserve stock. These securities increased $84,400 to a balance totaling $1.3 million as of March 31, 2002.


     The Company has a credit lines with an available balance of $4.3 million. Interest is chargeable at a rate determined daily of approximately 25 basis points higher than the rate paid on fed funds sold. Additional borrowing capacity of approximately $103 million is available through the Federal Home Loan Bank of Boston, which is secured by the Company's qualifying loan and investment portfolio. As of March 31, 2002, the Company had an advance of just over $5 million against the $103 million line at FHLB. Under a separate agreement, the Bank has the authority to collateralize public unit deposits, up to their borrowing capacity, $103 million less outstanding advances, with letters of credit issued by the Federal Home Loan Bank. At March 31, 2002, approximately $28 million was pledged as collateral for these deposits. Interest is charged to the Bank quarterly based on the average daily balance outstanding at a rate of 20 basis points.


Credit Risk - A primary concern of management is to reduce the exposure of credit loss within the portfolio. Management follows strict underwriting guidelines, and has established a thorough loan review policy. These measures help to insure the adequacy of the loan loss coverage. The Executive Officers and the Board of Directors conduct an ongoing review of the loan portfolio, which meets to discuss, among other matters, potential exposures. Factors considered are each borrower's financial condition, the industry or sector for the economy in which the borrower operates, and overall economic conditions. Existing or potential problems are noted and addressed by senior management in order to assess the risk of probable loss or delinquency. A variety of loans are reviewed periodically by an independent firm in order to assure accuracy and compliance with various policies and procedures set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duties include, among others, a review of the loan portfolio including delinquent and non-performing loans.


     Specific Allocations are made in situations management feels are at a greater risk for loss. A quarterly review of the Qualitative Factors, which among others are "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 first mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio helping to alleviate the overall risk.

The following table reflects the composition of the Company's loan portfolio for the quarters ended March 31:

2002

2001

2000

(Dollars in Thousands)

Total

% of

Total

% of

Total

% of

Loans

Total

Loans

Total

Loans

Total

Real Estate Loans

Construction & Land

Development

2,070

1.08%

1,158

0.66%

1,154

0.74%

Farm Land

2,439

1.28%

3,106

1.78%

3,293

2.11%

1-4 Family Residential

116,782

61.12%

106,172

60.86%

98,114

62.77%

Commercial Real Estate

32,802

17.17%

27,764

15.91%

23,904

15.29%

Loans to Finance

Agricultural Production

356

0.19%

574

0.33%

616

0.39%

Commercial & Industrial

13,545

7.09%

13,816

7.92%

12,617

8.07%

Consumer Loans

22,823

11.94%

21,687

12.43%

16,430

10.51%

All Other Loans

259

0.14%

186

0.11%

179

0.11%

Gross Loans

191,076

100%

174,463

100%

156,307

100%

Less:

Reserve for Loan Losses

(2,113)

-1.11%

(1,837)

-1.05%

(1,827)

-1.17%

Deferred Loan Fees

(944)

-0.49%

(933)

-0.53%

(888)

-0.57%

Net Loans

188,019

98.40%

171,693

98.41%

153,592

98.26%


Allowance for loan losses and provisions - The valuation allowance for loan losses of approximately $2 million as of March 31, 2002 composed 1.1% of the total gross loan portfolio. The Company maintains a residential loan portfolio of approximately $117 million and a commercial real estate portfolio of approximately $37 million. This total loan volume of approximately $154 million of real estate secured mortgages, accounts for 81% of the total loan portfolio, and together with the low historical loan loss experience among these portfolios, helps to support our basis for loan loss coverage.

The following table summarizes the Company's loan loss experience for the quarters ended March 31,

(Dollars in Thousands)

2002

2001

2000

Loans Outstanding End of Period

191,076

174,463

156,307

Ave. Loans Outstanding During Period

192,315

175,621

154,414

Loan Loss Reserve, Beginning of Period

2,008

1,797

1,715

Loans Charged Off:

Real Estate

16

29

18

Commercial

0

0

15

Consumer

45

58

59

Total

61

87

92

Recoveries:

Real Estate

2

2

2

Commercial

1

2

2

Consumer

31

33

38

Total

34

37

42

Net Loans Charged Off

27

50

50

Provision Charged to Income

132

90

162

Loan Loss Reserve, End of Period

2,113

1,837

1,827


     Non-Performing assets for the company are made up of three different types of loans, "90 Days or More Past Due", "Other Real Estate Owned" (OREO), and "Non-Accruing Loans". A comparison of these non-performing assets reveals a decrease in non-accruing loans of $20,740 or 1.3%. An increase of $31,911 or 54% for loans 90 days or more past due is noted, and an increase of $38,466 is reported in the Company's OREO portfolio. The portfolio of non-accruing loans makes up the biggest portion of the non-performing assets and, as of March 31, 2002, $1.5 million or 97% were real estate secured mortgage loans, thereby reducing the exposure to loss.


Non-performing assets as of March 31, 2002 and December 31, 2001 were as follows:

 

03/31/2002

12/31/2001

 

 

 

Non-Accruing loans

$1,550,518

$1,571,258

Loans past due 90 day or more and still accruing

91,166

59,255

Other real estate owned

98,466

60,000

Total

$1,740,150

$1,690,513

     Other real estate owned is made up of property that the Company owns in lieu of foreclosure or through normal foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The value of the property is determined prior to transferring the balance to other real estate owned. The balance transferred to OREO is the lesser of the appraised value of the property, or book value of the loan. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals are then done periodically thereafter charging any additional write-downs to the appropriate expense account.


Market Risk and Asset and Liability Management - Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Committee formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The Asset/Liability Committee's methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet, and a simulation analysis which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest.


Interest Rate Sensitivity "Gap" Analysis - An interest rate sensitivity "gap" is defined as the difference between the interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.


     The following tables set forth the estimated maturity or repricing of the Company's interest earning assets and interest-bearing liabilities at March 31, 2002, and December 31, 2001. The Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that:

Adjustable-rate loans and certificates of deposit are included in the period when they are first scheduled to adjust and not in the period in which they mature;

Fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments;

And

NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit, to changes in interest rates.

     Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experiences on which the assumptions are based.

GAP ANALYSYS

Community Bancorp. & Subsidiaries

March 31, 2002

Dollars in thousands, by repricing date

Cumulative repriced within:

3 Months

4 to 12

1 to 3

3 to 5

Over 5

or less

Months

Years

Years

Years

Total

Interest sensitive assets:

Federal funds sold

2,300

0

0

0

0

2,300

Overnight deposits

506

0

0

0

0

506

Investments -

 Available for Sale(1)

5,037

5,111

8,157

11,042

10,881

40,228

 Held to Maturity

6,599

13,580

3,503

3,698

10,923

38,303

Restricted equity securities

0

0

0

0

1,309

1,309

Loans(2)

38,529

43,084

47,039

17,549

43,324

189,525

 Total interest sensitive assets

52,971

61,775

58,699

32,289

66,437

272,171

Interest sensitive liabilities:

Certificates of deposit

27,516

45,885

16,200

9,096

0

98,697

Money markets

6,688

27,254

0

0

20,000

53,942

Regular savings

0

7,226

0

0

28,000

35,226

NOW and super now accounts

0

0

0

0

25,477

25,477

Borrowed funds

0

15

0

0

5,040

5,055

Repurchase agreements

15,775

0

0

0

0

15,775

 Total interest sensitive liabilities

49,979

80,380

16,200

9,096

78,517

234,172

Net interest rate sensitivity gap

2,992

(18,605)

42,499

23,193

(12,080)

Cumulative net interest rate

sensitivity gap

2,992

(15,613)

26,886

50,079

37,999

Cumulative net interest rate sensitivity

gap as a percentage of total assets

1.04%

-5.41%

9.31%

17.34%

13.16%

Cumulative interest sensitivity

gap as a percentage of total

interest-earning assets

1.10%

-5.74%

9.88%

18.40%

13.96%

Cumulative interest earning assets

as a percentage of cumulative

interest-bearing liabilities

105.99%

88.02%

118.34%

132.17%

116.23%

(1) The Company may sell investments available for sale with a fair value of $40,227,748 at any time.

(2) Loan totals exclude non-accruing loans amounting to $1,550,518.

 

GAP ANALYSYS

Community Bancorp. & Subsidiaries

December 31, 2001

Dollars in thousands by repricing date,

Cumulative repriced within:

3 Months

4 to 12

1 to 3

3 to 5

Over 5

or less

Months

Years

Years

Years

Total

Interest sensitive assets:

Federal funds sold

4,800

0

0

0

0

4,800

Overnight deposits

1,219

0

0

0

0

1,219

Investments -

 Available for Sale(1)

3,032

10,256

5,181

5,996

8,049

32,514

 Held to Maturity

2,227

18,307

3,458

1,703

14,949

40,644

Restricted equity securities

0

0

0

0

1,225

1,225

Loans(2)

33,333

51,484

44,345

18,306

44,117

191,585

 Total interest sensitive assets

44,611

80,047

52,984

26,005

68,340

271,987

Interest sensitive liabilities:

Certificates of deposit

16,296

58,002

15,574

7,633

0

97,505

Money markets

1,167

31,594

0

0

20,000

52,761

Regular savings

0

5,060

0

0

28,000

33,060

Now and super now accounts

0

0

0

0

24,018

24,018

Borrowed funds

0

15

0

30

5,010

5,055

Repurchase agreements

19,834

0

0

0

0

19,834

Total interest sensitive liabilities

37,297

94,671

15,574

7,663

77,028

232,233

Net interest rate sensitivity gap

7,314

(14,624)

37,410

18,342

(8,688)

Cumulative net interest rate

sensitivity gap

7,314

(7,310)

30,100

48,442

39,754

Cumulative net interest rate sensitivity

gap as a percentage of total assets

2.53%

-2.53%

10.43%

16.78%

13.77%

Cumulative interest sensitivity

gap as a percentage of total

interest-earning assets

2.69%

-2.69%

11.07%

17.81%

14.62%

Cumulative interest earning assets

as a percentage of cumulative

interest-bearing liabilities

119.61%

94.46%

120.40%

131.21%

117.12%

(1) The Company may sell investments available for sale with a fair value of $32,513,513 at any time.

(2) Loan totals exclude non-accruing loans amounting to $1,571,258.

 

OTHER OPERATING INCOME AND EXPENSES


     Total other operating income for the first quarter of 2002 was $692,716 compared to $504,821 for the same quarter in 2001, an increase of $187,895 or 37%. Income generated through the sale of loans to the secondary market amounted to $189,392 for the first quarter of 2002 compared to $10,173 for the same quarter of 2001, accounting for the biggest increase in the comparison period.


     Total other operating expenses for the first quarter comparison periods increased from a figure of $2.2 million for 2001 to $2.6 million for 2002, an increase of $382,123, or 17.5%. Salaries and wages tallied the biggest increase for 2002 versus 2001, reporting an increase of $177,041 or 22.6%. The addition of the staff for the Montpelier office mentioned earlier in this discussion supports the increase in these expenses. Loss on limited partnership increased $62,250 from March of 2001 to March of 2002, contributing to the increase in other expenses. The Bank invests funds in various non-profit housing projects designed to provide affordable housing for low to moderate income families. An increase is noted in these investments resulting in an increase in the loss associated with them. Due to the nature of these investments, the losses are offset with a tax savings passed through to the Bank.


     Management monitors all components of other operating expenses; however, a quarterly review is performed assure that the accruals for these expenses are accurate. This helps alleviate the need to make significant adjustments to these accounts that in turn effect the net income of the Company.


APPLICABLE INCOME TAXES


     Income before taxes increased from $625,939 for the first quarter of 2001 to $764,566 for the same quarter of 2002, an increase of $138,627 or 22%. Provisions for income taxes increased accordingly from $137,022 to $148,642 for the comparison period.


EFFECTS OF INFLATION


     Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements. As costs and prices rise during periods of monetary inflation, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Company depends primarily on a strong net interest income to enable their purchasing power to remain aggressive.


CAPITAL RESOURCES


     The Company's stockholders' equity, which started the year at $23,446,826, was increased through earnings of $615,924, sales of common stock of $154,626 through dividend reinvestment and debenture conversions. It was decreased $236,720 for valuation of allowance for securities, $10 for the purchase of treasury stock and $246,258 for the repurchase of stock through the Stock Buyback Plan. Additionally, a dividend of $568,649 was paid versus a dividend payable at year end of $569,058, thereby increasing Stockholders' equity by $409 ending the first three months of 2002 at $23,734,797 with a book value of $6.60 per share. All stockholders' equity is unrestricted. Additionally, it is noted that an unrealized loss of $210,261 on valuation allowance for securities was reported as of March 31, 2002, compared to a gain of $26,459 as of December 31, 2001. A review of this activity shows that as the maturity date of the investments gets closer, the market price becomes favorably better, therefore, material loss is greatly reduced.


     Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2002, that the Bank meets all capital adequacy requirements to which it is subject.


As of March 31, 2002, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.


The Bank's actual capital amounts and ratios (000's omitted) are also presented in the table.

 

 

 

 

 

Minimum to be Well

 

 

 

Minimum

Capitalized Under

 

 

 

For Capital

Prompt Corrective

 

 

 

Adequacy Purposes:

Action Provisions:

 

 

Actual

 

 

 

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2002:

 

 

 

 

 

 

Total capital (to risk weighted assets)

$23,825

15.57%

$12,244

8.0%

$15,306

10.0%

Tier I capital (to risk weighted assets)

$21,909

14.31%

$ 6,122

4.0%

$ 9,183

6.0%

Tier I capital (to average assets)

$21,909

7.63%

$11,480

4.0%

$14,350

5.0%

 

 

 

 

 

 

 

As of December 31, 2001:

 

 

 

 

 

 

Total capital (to risk weighted assets)

$23,975

15.59%

$12,305

8.0%

$15,381

10.0%

Tier I capital (to risk weighted assets)

$22,051

14.34%

$ 6,153

4.0%

$ 9,229

6.0%

Tier I capital (to average assets)

$22,051

7.92%

$11,133

4.0%

$13,916

5.0%

 

     From time to time the Company may make contributions to the capital of its subsidiary, Community National Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to the Bank's capital.


RECENT ACCOUNTING DEVELOPMENTS

     The FASB recently issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, and prohibits the use of the pooling-of-interests method for such transactions. The new standard also requires identified intangible assets acquired in a business combination be recognized as an asset apart from goodwill if they meet certain criteria.


     SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. SFAS No. 142 is effective for the Company's fiscal year ending December 31, 2002. The Company does not anticipate the adoption of these pronouncements to have a material effect upon its financial condition or results of operations.


     In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 amends accounting and reporting standards for the disposal of segments of a business and addresses various issues related to the accounting for impairments or disposals of long-lived assets. The provisions of SFAS No. 144 are effective for the Company's fiscal year ending December 31, 2002. The Company is currently assessing the financial statement impact of this pronouncement and does not believe that the statements will have a material adverse effect upon its financial condition or the results of operations.


     Community Bancorp. Adopted Statement of Financial Accounting Standards (SFAF) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAF Nos. 137 and 138, which became effective as of January 1, 2001. Concurrent with adoption of the Standard, and as permitted by its provisions; approximately $7 million of debt securities classified as held to maturity were reclassified as securities available for sale. Through the year ended December 31, 2001, $1 million of the debt securities had been subsequently sold resulting in a net gain of $80,864. For the first quarter ended March 31, 2002, $2 million had matured, leaving approximately $4 million outstanding in the Company's available for sale investment portfolio.


SUBSEQUENT EVENTS - TRUST ACTIVITIES


     As noted in the introductory section of this Management's Discussion and Analysis of the Results of Operations, on April 1, 2002, the Bank sold a one-third interest in Partners to each of the National Bank of Middlebury, Middlebury, Vermont and Guaranty Bancorp, the bank holding company parent of Woodsville Guaranty Savings Bank, Woodsville, New Hampshire. The resulting gain of approximately $617,000 before taxes, will be booked during the second quarter of 2002. As of such date the Bank retained a one-third ownership interest in Partners and, indirectly, in CFSG, the new trust and investment management company affiliate.


FORWARD-LOOKING STATEMENTS


     The Company's Management's Discussion and Analysis of Results of Operations, Cash Flow and Financial Condition contains certain forward-looking statements about the results of operations, financial condition and business of the Company and its subsidiaries. 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. 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. In addition, the Company does not undertake to, and disclaims any obligation to, publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report. 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.

 

Table A

AVERAGE BALANCES AND INTEREST RATES

The table below presents the following information:

Average earning assets (including non-accrual loans)

Average interest bearing liabilities supporting earning assets

Interest income and interest expense as a rate/yield

For the First Three Months Ended:

2002

2001

Average

Income/

Rate/

Average

Income/

Rate/

Balance

Expense

Yield

Balance

Expense

Yield

EARNING ASSETS

Loans (gross)

192,314,605

3,590,777

7.57%

175,620,619

3,822,953

8.83%

Taxable Investment Securities

53,422,215

720,504

5.47%

44,394,170

670,572

6.13%

Tax Exempt Investment Securities (1)

21,976,464

340,491

6.28%

13,667,571

259,136

7.69%

Federal Funds Sold

2,538,889

11,408

1.82%

2,880,000

47,253

6.65%

Sweep Account

3,397,408

10,939

1.31%

2,876,947

33,625

4.74%

Other Securities

1,228,402

11,348

3.75%

1,141,650

23,833

8.47%

TOTAL

274,877,983

4,685,467

6.91%

240,580,957

4,857,372

8.19%

INTEREST BEARING LIABILITIES

Savings Deposits

34,163,367

120,583

1.43%

30,323,394

171,506

2.29%

NOW & Money Market Funds

81,406,748

531,961

2.65%

51,526,946

476,851

3.75%

Time Deposits

98,033,558

963,590

3.99%

98,837,188

1,439,692

5.91%

Other Borrowed Funds

5,055,000

94,175

7.56%

7,456,722

98,635

5.36%

Repurchase Agreements

13,312,936

83,068

2.53%

15,557,562

180,564

4.71%

Subordinated Debentures

0

0

0.00%

20,000

550

11.15%

TOTAL

231,971,609

1,793,377

3.14%

203,721,812

2,367,798

4.71%

Net Interest Income

2,892,090

2,489,574

Net Interest Spread(2)

3.77%

3.48%

Interest Differential(3)

4.27%

4.20%

(1) Income on investment securities of state and political subdivisions is stated on a fully taxable basis (assuming a 34% tax rate).

(2) Net interest Spread is the difference between the yield on earning assets and the rate paid on interest bearing liabilities.

(3) Interest differential is net interest income divided by average earning assets.

 

 

Table B

CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

The following table summarizes the variances in income for the first three months of 2002 and 2001

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

INCOME EARNING ASSETS

Loans

(595,648)

363,472

(232,176)

Taxable Investment Securities

(86,528)

136,460

49,932

Tax Exempt Investment Securities (2)

(76,195)

157,550

81,355

Federal Funds Sold

(34,314)

(1,531)

(35,845)

Sweep Account

(28,769)

6,083

(22,686)

Other Securities

(14,297)

1,812

(12,485)

Total Interest Earnings

(835,751)

663,846

(171,905)

INTEREST BEARING LIABILITIES

Savings Deposits

(72,606)

21,683

(50,923)

NOW & Money Market Funds

(221,176)

276,286

55,110

Time Deposits

(468,196)

(7,906)

(476,102)

Other Borrowed Funds

40,311

(44,771)

(4,460)

Repurchase Agreements

(83,493)

(14,003)

(97,496)

Subordinated Debentures

(550)

0

(550)

Total Interest Expense

(805,710)

231,289

(574,421)

(1) Items which have shown a year-to-year increase in volume have variances allocated as follows:

Variance due to rate = Change in rate x new volume

Variance due to volume = Change in volume x old rate

Items which have shown a year-to-year decrease in volume have variances allocated as follows:

Variance due to rate = Change in rate x old volume

Variances due to volume = Change in volume x new rate

(2) Income on tax exempt securities is stated on a fully taxable basis. The assumed rate is 34%.

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference to the section labeled "Risk Management" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     There are no pending legal proceedings to which the Company is a party or of which any of its property is the subject, other than routine litigation incidental to its banking business.

ITEM 2. Changes in Securities

       NONE

ITEM 3. Defaults Upon Senior Securities

       NONE

ITEM 4. Submission of Matters to a Vote of Security Holders

       NONE

ITEM 5. Other Information

Incorporated by reference to the section labeled "Subsequent Events - Trust Activities" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 6 Exhibits and Reports on Form 8-K

Exhibits

       NONE

Reports on Form 8-K

Form 8-K dated January 8, 2002, announcing the Company's earnings and other financial information for the period ending December 31, 2001.

 

SIGNATURES

 

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has

Duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

COMMUNITY BANCORP.

 

DATED: May 15, 2002

By: /s/Richard C. White

 

Richard C. White, President

 

 

DATED: May 15, 2002

By: /s/Stephen P. Marsh

 

Stephen P. Marsh,

 

Vice President & Treasurer