10-Q 1 r10q.txt FORM 10-Q FOR SEPTEMBER 30, 2002 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, 2002 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 5,963,885 shares outstanding as of September 30, 2002 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) Nine months ended September 30, ------------------------ 2002 2001 --------- ---------- Cash flows from operating activities: Net income $4,315,976 $ 3,883,489 Adjustments to reconcile net income to net cash provided by operating activities: (Increase)decrease in mortgage loans held for sale (1,372,327) 2,346 Provision for loan losses 135,000 -- Gain on sale of securities (99,125) -- Depreciation and amortization 733,389 758,446 Amortization of securities discounts and premiums, net 335,190 52,459 Deferred income taxes 114 -- Net change in other liabilities (1,238,466) (102,487) Net change in other assets (132,155) 482,677 ---------- ---------- Net cash provided by operating activities 2,677,596 5,076,930 ---------- ---------- Cash flows from investing activities: Maturities and principal repayments of securities available for sale 12,044,079 15,732,486 Maturities and principal repayments of securities held to maturity 17,471,031 45,204,565 Purchases of securities available for sale (14,300,838) (26,070,269) Purchases of securities held to maturity (22,119,186) (43,427,461) Sales of securities available for sale 6,037,711 -- Net change in federal funds sold (7,619,586) (2,172,352) Net change in loans (8,248,926) (6,981,343) Acquisition of property, plant and equipment (470,144) (761,002) ---------- ---------- Net cash used in investing activities (17,205,859) (18,475,376) ---------- ---------- Cash flows from financing activities: Net change in deposits 20,481,309 19,915,348 Net change in borrowings 4,623,729 -- Net change in repurchase agreements (6,838,289) (2,106,575) Sale of treasury stock 244,429 235,485 Dividends paid (1,302,739) (1,042,555) ---------- ---------- Net cash provided by financing activities 17,208,439 17,001,703 ---------- ---------- Net increase in cash and due from banks 2,680,176 3,603,257 ---------- ---------- Cash and due from banks at beginning of period 19,876,999 16,472,547 ---------- ---------- Cash and due from banks at end of period $22,557,175 $20,075,804 ========== ========== The accompanying notes are an integral part of these unaudited, consolidated financial statements. -6- Supplemental disclosures: 1. Cash paid for interest was $4,363,268 and $6,716,231 for the nine months ended September 30, 2002 and 2001, respectively. 2. Cash paid for income taxes was $2,315,927 and $2,070,367 for the nine months ended September 30, 2002 and 2001, respectively.

-7- COMMUNITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 _____________________________________________________________________________ 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, 2001. 2. 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. -8- 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 $4,315,976 for the nine months ended September 30, 2002, representing an increase of $432,487 or 11.1% over $3,883,489 for the same period in 2001. Basic earnings per share of $.725 for the current period represented an increase of $.070 from $.655 for the nine months ended September 30, 2001. Diluted earnings per share of $.723 for the current period represented an increase of $.068 from $.655 for the nine months ended September 30, 2001. The improvement in net income resulted primarily from an increase in net interest income and noninterest income, and a decrease in most noninterest expense categories, partially offset by an increase in salaries and benefits. Deposits of $339,547,648 at September 30, 2002 increased by $20,481,309 or 6.4% from $319,066,339 at December 31, 2001. The increase in deposits occurred in the interest-bearing categories. Loans of $196,643,440 at September 30, 2002 increased by $8,190,737 or 4.3% from $188,452,703 at December 31, 2001. This increase took place in the commercial loan and home equity loan categories, partially offset by a decrease in the real estate mortgage category. Noncurrent loans (nonaccrual loans, troubled debt restructurings and loans 90 days or more past due but still accruing) totaled $270,869 and $332,981 at September 30, 2002 and December 31, 2001, respectively. Assets of $423,680,356 at September 30, 2002 represented a $20,974,612 or 5.2% increase from $402,705,744 at December 31, 2001. Nine months ended September 30, 2002 as Compared To Nine months ended September 30, 2001 ------------------------------------ Net Interest Income ------------------- Interest income for the nine months ended September 30, 2002 was $16,996,826, representing a decrease of $1,835,129 or 9.7% from $18,831,955 for the nine months ended September 30, 2001, primarily due to lower interest rates in 2002, partially offset by an increase in average loan and securities balances in 2002. Interest expense was $4,294,356, representing a decrease of $2,589,235 or 37.6% from $6,883,591 for the nine months ended September 30, 2001, primarily due to lower interest rates in 2002, partially offset by higher average interest bearing deposit and borrowing balances in 2002. Net interest income for the nine months ended September 30, 2002 was $12,702,470, representing an increase of $754,106 or 6.3% from $11,948,364 for the nine months ended September 30, 2001. Noninterest Income and Expense ------------------------------ Noninterest income for the nine months ended September 30, 2002 was $3,625,637, representing an increase of $31,950 or 0.9% from $3,593,687 for the nine months ended September 30, 2001. This increase was primarily the result of increases in gains on sales of securities, other charges commissions and fees, and -9- service charges, partially offset by a decrease in merchant credit card assessments. Noninterest expense for the nine months ended September 30, 2002 of $9,581,795 increased by $14,140 or 0.15% from $9,567,655 for the same period in 2001. This increase was primarily the result of an increase in salaries and benefits, partially offset by decreases occupancy, credit card processing, professional fees, marketing and advertising, and other expense. Provision for Loan Losses ------------------------- The provision for loan losses for the nine months ended September 30, 2002 was $135,000, compared to $0 for the nine months ended September 30, 2001. This increase reflects management's continuing evaluation of the adequacy of the allowance for loan losses. Income Taxes ------------ Income tax expense of $2,295,336 for the nine months ended September 30, 2002 compared to $2,090,907 for the same period in 2001. The increase was the result of an increase in taxable income during the current period. Net Income ---------- Net income of $4,315,976 for the first nine months of 2002 represented an increase of $432,487 or 11.1% from $3,883,489 recorded for the first nine months of 2001. Basic earnings per share of $.725 for the current period represented an increase of $.070 from $.655 for the nine months ended September 30, 2001. Diluted earnings per share of $.723 for the nine months ended September 30, 2002 represented an increase of $.068 from $.655 for the nine months ended September 30, 2001. Three months ended September 30, 2002 as Compared To Three months ended September 30, 2001 ------------------------------------- Net Interest Income ------------------- Interest income for the three months ended September 30, 2002 was $5,662,765, representing a decrease of $455,160 or 7.4% from $6,117,925 for the three months ended September 30, 2001, primarily due to lower interest rates in 2002, partially offset by an increase in average loan and securities balances in 2002. Interest expense was $1,377,481, representing a decrease of $742,510 or 35.0% from $2,119,991 for the three months ended September 30, 2001, primarily due to lower interest rates in 2002, partially offset by higher average interest bearing deposit and borrowing balances in 2002. Net interest income for the three months ended September 30, 2002 was $4,285,284, representing an increase of $287,350 or 7.2% from $3,997,934 for the three months ended September 30, 2001. Noninterest Income and Expense ------------------------------ Noninterest income for the three months ended September 30, 2002 was $1,160,271 representing a decrease of $62,481 or 5.1% from $1,222,752 for the three months ended September 30, 2001. This decrease was primarily the result of a decrease in merchant credit card assessments, partially offset by an increase in other charges, commissions and fees. Noninterest expense for the three months ended September 30, 2002 of $3,149,709 was up $70,247 or 2.3% from $3,079,462 for the corresponding period in 2001, -10- primarily the result of increases in salaries and benefits and marketing and advertising, partially offset by a decrease in credit card processing and other expense. Provision for Loan Losses ------------------------- The provision for loan losses for the three months ended September 30, 2002 was $45,000, compared to $0 for the three months ended September 30, 2001. This increase reflects management's continuing evaluation of the adequacy of the allowance for loan losses. Income Taxes ------------ Income tax expense of $783,353 for the three months ended September 30, 2002 compared to $734,574 for the corresponding period in 2001. The increase was the result of an increase in taxable income during the current period. Net Income ---------- Net income of $1,467,493 for the three months ended September 30, 2002 represented an increase of $60,843 or 4.3% from $1,406,650 recorded for the corresponding period in 2001. Basic earnings per share of $.246 for the current period represented an increase of $.010 from $.236 for the three months ended September 30, 2001. Diluted earnings per share of $.245 for the three months ended September 30, 2002 represented an increase of $.009 from $.236 for the three months ended September 30, 2001. 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 imprecision allowance The valuation allowance reflects specific estimates of potential losses on individually impaired loans. When each impaired loan is evaluated, if the net present value of the expected cash flows (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 estimate based on historical loss experience and assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances. 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. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. In addition to the valuation allowance and the formula allowance, there is an -11- imprecision allowance that is determined based on the totals of the valuation and formula allowances. The imprecision allowance reflects the measurement imprecision inherent in determining the valuation allowance and the formula allowance. It represents 15% - 25% of the valuation and formula allowances, depending on management's evaluation of various conditions, the effects of which are not directly measured in determining the valuation and formula allowances. The evaluation of the inherent loss resulting from these conditions involves a higher level of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the imprecision allowance include the following: * Levels of and trends in delinquencies and impaired loans * Levels of and trends in charge-offs and recoveries * Trends in loan volume and terms * Effects of changes in credit concentrations * Effects of and changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices * National and local economic conditions * Trends and duration of the present business cycle * Findings of internal and external credit review examiners When an evaluation of these conditions signifies a change in the level of risk, the Company adjusts the formula allowance. Periodic credit reviews enable further adjustment to the formula allowance through the risk rating of loans and the identification of loans requiring a valuation allowance. In addition, the formula allowance model is designed to be self-correcting by taking into consideration recent actual loss experience. 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 $172,702,627 at September 30, 2002, representing an increase of $1,319,801 or 0.8% from $171,382,826 at December 31, 2001. Securities classified as available for sale were $70,982,910 and $74,116,739 at September 30, 2002 and December 31, 2001 respectively. In addition to the redemption of the Company's shares of stock in the regional ATM network (NYCE) when that company was sold, the Company sold $5.9 million in variable rate and short term available for sale bonds. The sales took place in order to take advantage of current interest rate conditions and improve investment yields. Liquidity and Capital Resources ------------------------------- The Company's primary sources of liquidity are customer deposits, amortization and pay-offs of loan principal and maturities of securities. These sources provide funds for loan originations, the purchase of securities and other activities. Deposits are considered a relatively stable source of funds. At September 30, 2002 and December 31, 2001, deposits were $339,547,648 and $319,066,339, respectively. 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 securities as collateral. Also, the Bank is a member of the -12- 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, 2002, the Company's Tier 1 leverage capital ratio was 9.14%. 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, 2002 the Company's Tier 1 and total risk-based capital ratios were 16.34% and 17.51%, respectively. The Bank is categorized as "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). 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, 2002, representing the excess of repricing liabilities versus repricing assets within a one year time frame, was 0.2% 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. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Within the 90 day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or -13 submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 5. OTHER INFORMATION On September 17, 2002, the Company's Board of Directors declared a third quarter 2002 cash dividend of $.078 per share of common stock to shareholders of record at September 1, 2002, payable on October 15, 2002. On October 1, 2002, the Company initiated a tender offer to purchase up to 222,222 shares of its outstanding common stock, par value $2.50, at a price of $13.50 per share. The tender offer expired on November 1, 2002. A total of 134,505 shares of the Company's Common Stock were validly tendered, not withdrawn, and accepted for purchase. There was no proration. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.(a)(1) Certification of Financial Statements by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.(a)(2) Certification of Financial Statements by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company did not file a Form 8-K during the quarter ended September 30, 2002. -14- 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 8, 2002 By: /s/ James A. Langway --------------------------- James A. Langway President & Chief Executive Officer Principal Executive Officer Date: November 8, 2002 By: /s/ Donald R. Hughes, Jr. --------------------------- Donald R. Hughes, Jr. Treasurer and Clerk, Principal Financial Officer and Principal Accounting Officer -15- CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James A. Langway, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Community Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -16- DATE: November 8, 2002 /s/ James A. Langway ---------------------------- James A. Langway President and Chief Executive Officer I, Donald R. Hughes, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Community Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal -17- controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: November 8, 2002 /s/ Donald R. Hughes, Jr. ------------------------------ Donald R. Hughes, Jr. Treasurer and Clerk and Chief Financial Officer -18- EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION ------- ----------- 99.(a)(1) Certification of Financial Statements by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.(a)(2) Certification of Financial Statements by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -19-

COMMUNITY BANCORP INC /MA/ 10-Q