10-Q 1 r10q_093001.txt FORM 10-Q FOR SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2001 Commission File No. 33-12756-B COMMUNITY BANCORP, INC. A Massachusetts Corporation IRS Employer Identification No. 04-2841993 17 Pope Street, Hudson, Massachusetts 01749 Telephone - (978)568-8321 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Common Stock $2.50 par value 5,940,606 shares outstanding as of September 30, 2001 PART I - FINANCIAL INFORMATION COMMUNITY BANCORP, INC. Item 1. CONSOLIDATED BALANCE SHEETS (Unaudited)

-2- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

-4- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

-5- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

-7- COMMUNITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 _____________________________________________________________________________ 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report to shareholders and Form 10-K for the year ended December 31, 2000. 2. EARNINGS PER SHARE ------------------ The Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" (SFAS No. 128), effective December 31, 1997. This Statement requires the presentation of "basic" earnings per share, which excludes the effect of dilution, and "diluted" earnings per share, which includes the effect of dilution. Earnings per share is based on the weighted average number of shares outstanding during the period. A reconciliation between basic and diluted earnings per share from continuing operations is as follows:

-8- 3. COMPREHENSIVE INCOME -------------------- The Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (SFAS No. 130), effective January 1, 1998. Components of comprehensive income are net income and all other non-owner changes in equity. The Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. 4. OPERATING SEGMENTS ------------------ The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. The adoption of SFAS No. 131 did not have any material effect on the Company's primary financial statements or results of operations. The Company has identified its reportable operating business segment as "Community Banking". The Company's community banking segment consists of commercial and retail banking. The community banking segment is managed as a single strategic unit and derives its revenues from a wide range of banking services, including investing and lending activities and the acceptance of demand, savings and time deposits. Nonreportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the thresholds requiring separate disclosure are included in the "Other" category in the disclosure of business segments below. The nonreportable segment represents the holding company financial information. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies. The consolidation adjustments reflect certain eliminations of intersegment revenue, cash and investments in the subsidiary. Reportable segment-specific information, and the reconciliation to consolidated financial information, are as follows: Adjustments Community and Banking Other Eliminations Consolidated ----------- ----------- ------------ ------------

5. RECLASSIFICATIONS ----------------- Certain amounts in the prior period's financial statements have been reclassified to be consistent with the current period's presentation. The reclassifications have no effect on net income. -10- PART I - FINANCIAL INFORMATION ------------------------------ Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary The Company recorded net income of $3,883,489 for the nine months ended September 30, 2001, representing an increase of $520,320 or 15.5% over $3,363,169 for the same period in 2000. Basic earnings per share of $.655 for the current period represented an increase of $.086 from $.569 for the nine months ended September 30, 2000. The improvement in net income resulted primarily from an increase in net interest income and noninterest income, partially offset by increases in salaries and benefits, data processing and ATM network, occupancy, furniture and equipment, credit card processing, professional fees and other expense. Deposits of $327,044,180 at September 30, 2001 increased by $19,915,348 or 6.5% from $307,128,832 at December 31, 2000. The increase in deposits occurred in the interest-bearing categories. Loans of $182,942,693 at September 30, 2001 increased by $6,913,428 or 3.9% from $176,029,265 at December 31, 2000. This increase took place in the commercial and installment loan categories, partially offset by a decrease in home equity loans. Noncurrent loans (nonaccrual loans, troubled debt restructurings and loans 90 days or more past due but still accruing) totaled $358,318 and $560,295 at September 30, 2001 and December 31, 2000, respectively. Assets of $397,096,285 at September 30, 2001 represented an $22,228,774 or 5.9% increase from $374,867,511 at December 31, 2000. Nine months ended September 30, 2001 as Compared To Nine months ended September 30, 2000 ------------------------------------ Net Interest Income ------------------- Interest income for the nine months ended September 30, 2001 was $19,394,388, representing an increase of $1,192,167 or 6.5% from $18,202,221 for the nine months ended September 30, 2000, primarily due to higher average loan, Federal funds sold and securities balances, partially offset by lower average interest rates in 2001. Interest expense was $6,883,591, representing an increase of $153,337 or 2.3% from $6,730,254 for the nine months ended September 30, 2000, primarily due to higher average interest bearing deposit and repurchase agreement balances, partially offset by lower average interest rates in 2001. Net interest income for the nine months ended September 30, 2001 was $12,510,797, representing an increase of $1,038,830 or 9.1% from $11,471,967 for the nine months ended September 30, 2000. Noninterest Income and Expense ------------------------------ Noninterest income for the nine months ended September 30, 2001 was $3,031,254, representing an increase of $488,758 or 19.2% from $2,542,496 for the nine months ended September 30, 2000. This increase was primarily the result of increases in merchant credit card assessments, other charges, commissions and fees, and gains on sales of loans. -11- Noninterest expense for the nine months ended September 30, 2001 of $9,567,655 was up $787,551 or 9.0% from $8,780,104 for the same period in 2000. This increase was primarily the result of increases in salaries and employee benefits, data processing and ATM network, furniture and equipment, credit card processing, professional fees, and other expense, partially offset by a reduction in marketing and advertising. Provision for Loan Losses ------------------------- There was no provision for loan losses for the nine months ended September 30, 2001 or 2000, reflecting management's continuing evaluation of the adequacy of the allowance for loan losses and its belief that the allowance is adequate. Income Taxes ------------ Income tax expense of $2,090,907 for the nine months ended September 30, 2001 compared to $1,871,190 for the same period in 2000. The increase was the result of an increase in taxable income during the current period. Net Income ---------- Net income of $3,883,489 for the first nine months of 2001 represented an increase of $520,320 or 15.5% from $3,363,169 recorded for the first nine months of 2000. Basic earnings per share of $.655 for the current period represented an increase of $.086 from $.569 for the nine months ended September 30, 2000. Three months ended September 30, 2001 as Compared To Three months ended September 30, 2000 ------------------------------------- Net Interest Income ------------------- Interest income for the three months ended September 30, 2001 was $6,321,676, representing an decrease of $165,377 or 2.5% from $6,487,053 for the three months ended September 30, 2000, primarily due to lower average interest rates, partially offset by higher average loan, federal funds sold and securities balances, in 2001. Interest expense was $2,119,991, representing a decrease of $339,846 or 13.8% from $2,459,837 for the three months ended September 30, 2000, primarily due to lower average interest rates, partially offset by higher average interest bearing deposit and repurchase agreement balances, in 2001. Net interest income for the three months ended September 30, 2001 was $4,201,685, representing an increase of $174,469 or 4.3% from $4,027,216 for the three months ended September 30, 2000. Noninterest Income and Expense ------------------------------ Noninterest income for the three months ended September 30, 2001 was $1,019,001 representing an increase of $163,054 or 19.0% from $855,947 for the three months ended September 30, 2000. This increase was primarily the result of an increase in merchant credit card assessments, other charges, commissions and fees, and gains on sales of loans. Noninterest expense for the three months ended September 30, 2001 of $3,079,462 was up $46,470 or 1.5% from $3,032,992 for the corresponding period in 2000. This increase was primarily the result of increases in data processing and ATM network, occupancy, credit card processing, professional fees and other expense, partially offset by decreases in salaries and benefits, and marketing and advertising. -12- Provision for Loan Losses ------------------------- There was no provision for loan losses for the three months ended September 30, 2001 or 2000, reflecting management's continuing evaluation of the adequacy of the allowance for loan losses and its belief that the allowance is adequate. Income Taxes ------------ Income tax expense of $734,574 for the three months ended September 30, 2001 compared to $662,949 for the corresponding period in 2000. The increase was the result of an increase in taxable income during the current period. Net Income ---------- Net income of $1,406,650 for the three months ended September 30, 2001 represented an increase of $219,428 or 18.5% from $1,187,222 recorded for the corresponding period in 2000. Earnings per share of $.236 for the current period represented an increase of $.035 from $.201 for the three months ended September 30,2000. Allowance for Loan Losses ------------------------- The allowance for loan losses is based on management's estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. The methodology for assessing the appropriateness of the allowance consists of a review of the following three key elements: - The valuation allowance for loans specifically identified as impaired - The formula allowance for the various loan portfolio classifications - The unallocated allowance The valuation allowance reflects specific estimates of potential losses on individual impaired loans. When each impaired loan is evaluated, if the difference between the net present value of the loan (or fair value of the collateral if the loan is collateral-dependent) is lower than the recorded loan balance, the difference represents the valuation allowance for that loan. The formula allowance is a percentage-based reflection of historical loss experience and assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances and commitments to extend credit. The formula allowance employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. When a loan's credit quality becomes suspect, it is placed on the Company's internal "watch list" and its allowance allocation is increased. For the remainder of the loan portfolio, appropriate allowance levels are estimated based on judgments regarding the type of loan, economic conditions and trends, potential exposure to loss and other factors. In addition to the valuation allowance and the formula allowance, there is an unallocated allowance that recognizes the estimation risks associated with the valuation and the formula allowance calculations, and that reflects management's evaluation of various conditions, the effect of which are not directly measurable in determining the valuation and formula allowances. The unallocated allowance is adjusted for qualitative factors including, among others, general economic and business conditions, credit quality trends, loan volumes and concentrations and specific industry conditions within portfolio segments. -13- There are inherent uncertainties with respect to determining the adequacy of the allowance for loan losses. Because of these inherent uncertainties, actual losses may differ from the amounts reflected in these consolidated financial statements. Factors considered in evaluating the adequacy of the allowance includes previous loss experience, current economic conditions and their effect on borrowers, the performance of individual loans in relation to contract terms, and the estimated fair values of underlying collateral. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. Securities ---------- The Company's securities portfolio consists of obligations of the U.S. Government sponsored agencies, mortgage backed securities, obligations of various municipalities, and corporate bonds. Those assets are used in part to secure public deposits and as collateral for repurchase agreements. Total securities were $152,556,014 at September 30, 2001, representing an increase of $10,004,290 or 7.0% from $142,551,724 at December 31, 2000. Securities classified as available for sale were $61,890,003 and $50,110,202 at September 30, 2001 and December 31, 2000 respectively. There were no sales of securities during the six months ended September 30, 2001. Liquidity and Capital Resources ------------------------------- The Company's primary sources of liquidity are customer deposits, amortization and pay-offs of loan principal and maturities of investment securities. These sources provide funds for loan originations, the purchase of investment securities and other activities. Deposits are considered a relatively stable source of funds. At September 30, 2001 and 2000, deposits were $327,044,180 and $309,503,616, respectively. Management anticipates that deposits will grow moderately during the remainder of 2001. As a nationally chartered member of the Federal Reserve System, the Bank has the ability to borrow funds from the Federal Reserve Bank of Boston by pledging certain of its investment securities as collateral. Also, the Bank is a member of the Federal Home Loan Bank which provides additional borrowing opportunities. Bank regulatory authorities have established a capital measurement tool called "Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now constitutes the minimum capital standard for most banking organizations. At September 30, 2001, the Company's Tier 1 leverage capital ratio was 8.75%. Regulatory authorities have also implemented risk-based capital guidelines requiring a minimum ratio of Tier 1 capital to risk weighted assets of 4.00% and a minimum ratio of total capital to risk-weighted assets of 8.00%. At September 30, 2001 the Company's Tier 1 and total risk-based capital ratios were 15.83% and 17.08%, respectively. The Bank is categorized as "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). On September 20, 2001, the Company's Board of Directors declared a third quarter 2001 cash dividend of $.066 per share of common stock to shareholders of record at September 1, 2001, payable on October 15, 2001. -14- Asset/Liability Management -------------------------- The Company has an asset/liability management committee which oversees all asset/liability activities of the Company. The committee establishes general guidelines each year and meets regularly to review the Company's operating results and to make strategic changes when necessary. It is the Company's general policy to reasonably match the rate sensitivity of its assets and liabilities. A common benchmark of this sensitivity is the one year gap position, which is a reflection of the difference between the speed and magnitude of rate changes of interest rate sensitive liabilities as compared with the Bank's ability to adjust the rates of it's interest rate sensitive assets in response to such changes. The Company's negative one-year cumulative gap position at September 30, 2001, representing the excess of repricing liabilities versus repricing assets within a one year time frame, was 2.6% expressed as a percentage of total assets. Cautionary Statement Regarding Forward-Looking Information ---------------------------------------------------------- This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains, in addition to historical information, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. When used in this and other Reports filed by the Company, the words "anticipate", "estimate", "expect", "objective", and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a variety of risks and uncertainties. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, risk factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statement include, but are not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures, adverse changes in asset quality, increased inflation, and adverse legislative or regulatory changes. -15- PART II - OTHER INFORMATION --------------------------- Item 5. OTHER INFORMATION On February 22, 2001, the Company's Board of Directors approved the "2001 Directors' Plan", a stock option plan which provides incentives to present and future directors of the Company who are not employees of the Company or its subsidiaries. The aggregate number of shares of the Company's common stock reserved for grant under the Plan is 30,000. The Board of Directors has granted options under the Plan for the purchase of an aggregate of 9,000 shares of the Company's common stock at a price of $10.00 per share, the fair market value on February 22, 2001. The granted options fully vest over a four year period. The Company filed a Form S-8 Registration Statement with the Securities and Exchange Commission pursuant to the Plan on April 19, 2001. On February 22, 2001, the Company's Board of Directors approved the "2001 Incentive Stock Option Plan for Key Employees", a stock option plan which provides incentives to present and future key employees of the Company and its subsidiaries. The aggregate number of shares of the Company's common stock reserved for grant under the Plan is 384,000. On February 22, 2001, the Board of Directors granted options under the Plan, subject to the Plan's approval by the Company's shareholders, at the fair market value of the shares on the approval date. The Plan was approved by the Company's shareholders at the April 10, 2001 Annual Meeting. The granted options fully vest over a four year period and have an exercise price of $10.00 per share, the fair market value on April 10, 2001. The Company filed a Form S-8 Registration Statement with the Securities and Exchange Commission pursuant to the Plan on April 19, 2001. On September 18, 2001, the Company's Board of Directors declared a third quarter 2001 cash dividend of $.066 per share of common stock to shareholders of record at September 1, 2001, payable on October 15, 2001. -16- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The Company did not file a Form 8-K during the quarter ended September 30, 2001. -17- 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, INC. Date: November 1, 2001 By: /s/ James A. Langway __________________________ James A. Langway President & Chief Executive Officer Principal Executive Officer Date: November 1, 2001 By: /s/ Donald R. Hughes, Jr. __________________________ Donald R. Hughes, Jr. Treasurer and Clerk, Principal Financial Officer and Principal Accounting Officer -18-

COMMUNITY BANCORP INC /MA/ 10-Q