10-Q 1 r10q_063002.txt FORM 10-Q FOR JUNE 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 JUNE 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 June 30, 2002 PART I - FINANCIAL INFORMATION COMMUNITY BANCORP, INC. Item 1. CONSOLIDATED BALANCE SHEETS (Unaudited)

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

-3- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Continued) (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 June 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 $2,848,483 for the six months ended June 30, 2002, representing an increase of $371,644 or 15.0% over $2,476,839 for the same period in 2001. Basic earnings per share of $.479 for the current period represented an increase of $.061 from $.418 for the six months ended June 30, 2001. Diluted earnings per share of $.478 for the current period represented an increase of $.060 from $.418 for the six months ended June 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 $331,947,399 at June 30, 2002 increased by $12,881,060 or 4.0% from $319,066,339 at December 31, 2001. The increase in deposits occurred in the interest-bearing categories. Loans of $191,285,645 at June 30, 2002 increased by $2,832,942 or 1.5% from $188,452,703 at December 31, 2001. This increase took place in the commercial loan category, partially offset by a decrease in real estate mortgages. Noncurrent loans (nonaccrual loans, troubled debt restructurings and loans 90 days or more past due but still accruing) totaled $238,297 and $332,981 at June 30, 2002 and December 31, 2001, respectively. Assets of $416,134,456 at June 30, 2002 represented a $13,428,712 or 3.3% increase from $402,705,744 at December 31, 2001. Six months ended June 30, 2002 as Compared To Six months ended June 30, 2001 ------------------------------ Net Interest Income ------------------- Interest income for the six months ended June 30, 2002 was $11,334,061, representing a decrease of $1,379,969 or 10.9% from $12,714,030 for the six months ended June 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 $2,916,875, representing a decrease of $1,846,725 or 38.8% from $4,763,600 for the six months ended June 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 six months ended June 30, 2002 was $8,417,186, representing an increase of $466,756 or 5.9% from $7,950,430 for the six months ended June 30, 2001. Noninterest Income and Expense ------------------------------ Noninterest income for the six months ended June 30, 2002 was $2,465,366, representing an increase of $94,431 or 4.0% from $2,370,935 for the six months ended June 30, 2001. This increase was primarily the result of increases in gains on sales of securities and other charges commissions and fees, partially offset by a decrease in merchant credit card assessments. Noninterest expense for the six months ended June 30, 2002 of $6,432,086 decreased by $56,107 or 0.9% from $6,488,193 for the same period in 2001. This decrease was primarily the result of decreases in occupancy, credit card processing, professional -9- fees, marketing and advertising, and other expense, partially offset by an increase in salaries and benefits. Provision for Loan Losses ------------------------- The provision for loan losses for the six months ended June 30, 2002 was $90,000, compared to $0 for the six months ended June 30, 2001. This increase reflects management's continuing evaluation of the adequacy of the allowance for loan losses. Income Taxes ------------ Income tax expense of $1,511,983 for the six months ended June 30, 2002 compared to $1,356,333 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 $2,848,483 for the first six months of 2002 represented an increase of $371,644 or 15.0% from $2,476,839 recorded for the first six months of 2001. Basic earnings per share of $.479 for the current period represented an increase of $.061 from $.418 for the six months ended June 30, 2001. Diluted earnings per share of $.478 for the six months ended June 30, 2002 represented an increase of $.060 from $.418 for the six months ended June 30, 2001. Three months ended June 30, 2002 as Compared To Three months ended June 30, 2001 -------------------------------- Net Interest Income ------------------- Interest income for the three months ended June 30, 2002 was $5,737,689, representing a decrease of $556,667 or 8.8% from $6,294,356 for the three months ended June 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 $1,435,792, representing a decrease of $854,004 or 37.3% from $2,289,796 for the three months ended June 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 June 30, 2002 was $4,301,897, representing an increase of $297,337 or 7.4% from $4,004,560 for the three months ended June 30, 2001. Noninterest Income and Expense ------------------------------ Noninterest income for the three months ended June 30, 2002 was $1,227,537 representing a decrease of $14,147 or 1.1% from $1,241,684 for the three months ended June 30, 2001. This decrease was primarily the result of a decrease in merchant credit card assessments and gains on sales of loans, partially offset by an increase in service charges and gains on sales of securities. Noninterest expense for the three months ended June 30, 2002 of $3,193,904 was down $31,205 or 1.0% from $3,225,109 for the corresponding period in 2001. This decrease was primarily the result of a decrease in occupancy, credit card processing, and other expense, partially offset by an increase in salaries and benefits. Provision for Loan Losses ------------------------- The provision for loan losses for the three months ended June 30, 2002 was $45,000, compared to $0 for the three months ended June 30, 2001. This -10- increase reflects management's continuing evaluation of the adequacy of the allowance for loan losses. Income Taxes ------------ Income tax expense of $800,431 for the three months ended June 30, 2002 compared to $717,574 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 $1,490,099 for the three months ended June 30, 2002 represented an increase of $186,538 or 14.3% from $1,303,561 recorded for the corresponding period in 2002. Basic earnings per share of $.250 for the current period represented an increase of $.030 from $.220 for the three months ended June 30, 2001. Diluted earnings per share of $.250 for the three months ended June 30, 2002 represented an increase of $.030 from $.220 for the three months ended June 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 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 -11- 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 $172,898,268 at June 30, 2002, representing an increase of $1,515,442 or .9% from $171,382,826 at December 31, 2001. Securities classified as available for sale were $70,317,842 and $74,116,739 at June 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 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 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 June 30, 2002 and December 31, 2001, deposits were $331,947,399 and $319,066,339, respectively. Management anticipates that deposits will increase moderately during the remainder of 2002. 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 June 30, 2002, the Company's Tier 1 leverage capital ratio was 9.06%. 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 June -12- 30, 2002 the Company's Tier 1 and total risk-based capital ratios were 16.31% and 17.50%, 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 June 30, 2002, representing the excess of repricing liabilities versus repricing assets within a one year time frame, was 3.8% 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. -13- PART II - OTHER INFORMATION --------------------------- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Shareholders was held on April 9, 2002. At that meeting, two (2) matters were put before the shareholders for vote. Proxies for the meeting were solicited, and a copy of the Proxy Statement dated March 12, 2002 is incorporated herein by reference and attached hereto as an exhibit. Such Proxy Statement provides a description of the matters put before the shareholders for vote and provides other information required under this Item 4. The results of the voting were as follows: 1. To fix the number of Directors who shall constitute the full Board of Directors at ten. Votes for: 4,254,278 Votes against: 2,932 2. To elect as Directors the three individuals listed as nominees in the Proxy Statement, who, together with the seven Directors whose terms of office did not expire at this meeting, constitute the full Board of Directors. Director Votes For Votes Against -------- --------- ------------- I. George Gould 4,246,380 10,830 James A. Langway 4,246,380 10,830 David L. Parker 4,246,380 10,830 Item 5. OTHER INFORMATION The Company's Chief Executive Officer and Chief Financial Officer have furnished to the Securities and Exchange Commission the certification with respect to this Form 10-Q that is required by Section 906 of the Sarbanes-Oxley Act of 2002. On June 18, 2002, the Company's Board of Directors declared a second quarter 2002 cash dividend of $.075 per share of common stock to shareholders of record at June 1, 2002, payable on July 15, 2002. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Proxy Statement dated March 12, 2002 99.2 Certification of Financial Statements (b) On May 21, 2002 the Company filed a Form 8-K reporting the dismissal of Arthur Andersen LLP as the Company's independent accountant for the fiscal year ended December 31, 2002. On June 7, 2002 the Company filed a Form 8-K reporting the engagement of Wolf & Company, P.C. as the Company's independent accountant effective June 6, 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: August 8, 2002 By: /s/ James A. Langway -------------------- James A. Langway President & Chief Executive Officer Principal Executive Officer Date: August 8, 2002 By: /s/ Donald R. Hughes, Jr. ------------------------- Donald R. Hughes, Jr. Treasurer and Clerk, Principal Financial Officer and Principal Accounting Officer -15- EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION ------- ----------- 99.1 Proxy Statement dated March 12, 2002 99.2 Certification of Financial Statements -16-

COMMUNITY BANCORP INC /MA/ 10-Q