COMMUNITY BANCORP /VT - Quarter Report: 2001 March (Form 10-Q)

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 Three Months Ended March 31, 2001
Commission File Number 000-16435

COMMUNITY BANCORP.

(Exact Name of Registrant as Specified in its Chapter)

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

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

At May 8, 2001 there were 3,530,216 shares outstanding of the Corporation's common stock.

Total Pages - 18 Pages

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

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

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, 2001

     Community Bancorp. (the "Company") is a bank holding company whose subsidiaries include Community National Bank and Liberty Savings Bank. Community National Bank ("the Bank") is a full service institution operating in the state of Vermont. The Bank has seven offices, five of which are located in Orleans County, one in Essex County, and one in Caledonia County. An eighth office is scheduled to open in May of 2001 in the city of Montpelier, in Washington County. This office will serve as a full service institution, occupying approximately 1,500 square feet in a renovated facility at 95 - 97 State Street, Montpelier, with an annual lease of $27,000. Liberty Savings Bank ("Liberty") is a New Hampshire guaranty savings bank acquired by Community Bancorp. on December 31, 1997. Currently this bank is inactive and does not have any offices or deposit taking authority, and shares the mailing address of Community Bancorp. Most of the Bancorp's business is conducted through the Bank; therefore, the following narrative is based primarily on this Bank's operations. The Balance Sheet and Statements of Income preceding this section are consolidated figures for Community Bancorp. and subsidiaries ("the Company"), and can be used in conjunction with the other reports following them to provide a more detailed comparison of the information disclosed in the following narrative.

     Net income for the first quarter ended March 31, 2001 was $488,917, representing an increase of 12.8% and 19%, respectively, over the net income figures of $433,625 for the first quarter ended March 31, 2000, and $410,797 for the same period in 1999. The results of this are earnings per share of $0.14 for the first quarter of 2001 and $0.12 for each of the other two quarters. The Company declared a cash dividend of $0.16 per share payable February 1, 2001 to shareholders of record as of January 15, 2001. This cash dividend was followed by a 5% stock dividend payable February 1^st to shareholders of record as of January 16^th. As a result of the 5% stock dividend, all per share data has been restated for the first quarter of 2000 and 1999. The first quarter of 2001 was better than 2000 and 1999 due in part to a decrease in provisions for loan losses as well as an increase in trust department income. The trust department acquired the assets of Northfield Savings Bank during the latter part of 2000 contributing to the increase in income.

     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.

     Net interest income for the first quarter comparison period started at $2.18 million for 1999, and increased to $2.35 million for 2000, and then increased slightly to $2.4 million as of the end of the first quarter of 2001, resulting in an increase of 7.72% for 2000 versus 1999, and 2.34% for 2001 versus 2000. Total interest income for the first quarter of 2000 increased $126,843 or 3.13% compared to 1999, and 2001 increased $592,043 or 14.17% compared to 2000. Interest expense decreased for the first quarter of 2000 compared to the first quarter of 1999 by $41,401 or 2.21%, while an increase of $537,171 or 29.34% is noted for 2001 versus 2000. A review of the first quarter figures for interest earned on loans, the major source of interest income, reveals an increase of 4% for the first quarter of 2000 compared to 1999, and an increase of 15.7% for the first quarter of 2001 compared to the same quarter in 2000. In comparison, interest paid on deposits, the major source of interest expense, shows a decrease of 4.8%, and an increase of 20.5%, respectively. The loan portfolio has increased $18.4 million since the end of the first quarter in 2000, accounting for the increase in income for the comparison periods. Time deposits have increased approximately $10.3 million, accounting for the increase the interest expense on these interest-bearing liabilities. The result is a tax equivalent spread for the first quarter equaling 3.48% for 2001 versus 3.78% for 2000 and 3.52% for 1999.

     The Company had total average assets of $252.1 million at March 31, 2001 and $245.5 million at December 31, 2000. Average earning assets were $240.6 million for the first three months ended March 31, 2001, including average loans of $175.6 million and average investment securities of $59.2 million. Average earning assets were $233.8 million for the year ended December 31, 2000 including average loans of $165.2 million and average investment securities of $65.7 million. The increase in loan volume was a direct result of the competitive interest rates the Company offered over the past year.

     Average interest bearing liabilities at March 31, 2001 were $203.7 million, with average time deposits reported totaling $98.8 million and NOW & money market funds of $51.5 million. At December 31, 2000, average interest bearing liabilities of $196 million were reported including average time deposits of $92.7 million and NOW & money market funds at an average volume $51.3 million.

     Repurchase agreements have proved to be a lucrative business option with reported average volumes of $10 million at December 31, 2000 and $15.6 million as of March 31, 2001, an increase of $5.6 million, or 56%.

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 increased $2.5 million from $79.65 million as of December 31, 2000, to $82.14 million as of March 31, 2001.The Company's time deposits greater than $100,000 increased $694,888 to end the first three months of 2001 at a volume of $18.2 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 decreased $5.2 million from December 31, 2000 to end the first three months of 2001 at $50.6 million. This decrease in volume is a result of the increase in volume of repurchase agreements. While the average loan volume increased for the first three months of 2001, the actual balance of the loan portfolio decreased by $2.8 million, from $176.8 million to $174 million. As of the end of the first three months of 2001, the Company held in it's investment portfolio treasuries classified as "Available for Sale" at a fair value of $16.4 million, compared to just over $19 million as of December 31, 2000, a decrease of $2.8 million or 14.5%. Securities classified as "Held to Maturity" ended the first three months of 2001 at a book value of $41.5 million compared to $42.2 million as of the end of the 2000 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 $83,000 to a balance totaling $1.2 million as of March 31, 2001. The Company currently has an advance of just over $5 million against an available line of $106.8 million, with an additional $2 million and $4.3 million, respectively, at First Boston and FHLB.

Credit Risk - Management follows strict underwriting guidelines, and has established a thorough loan-by-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.

Allowance for loan losses and provisions - The valuation allowance for loan losses of $1.8 million as of March 31, 2001 composed 1.1% of the total gross loan portfolio. A primary concern of management is to reduce the exposure of credit loss within the portfolio. The Company maintains a residential loan portfolio of approximately $106 million and a commercial real estate portfolio of approximately $32 million accounting for 61% and 18.4%, respectively, of the total loan portfolio. This large loan volume together with the low historical loan loss experience helps to support our basis for loan loss coverage.

     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 an increase in non-accruing loans of $57,474 or just over 4%. A decrease of $17,758 or 41.2% in loans 90 days or more past due is noted, while the balance for the Company's OREO portfolio remained the same. The portfolio of non-accruing loans makes up the biggest portion of the non-performing assets and, as of March 31, 2001, $1.4 million or 92% were real estate secured mortgage loans, thereby reducing our exposure to loss.

Non-performing assets as of March 31, 2001 and December 31, 2000 were as follows:

     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, 2001, and December 31, 2000. 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:

     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.

     Total other operating expenses followed the same path for the first quarter comparisons with figures of $2.2 million for 2001, an increase of $181,576, or 9%, over the 2000 figure of $2 million, which increased $161,299, or 8.7%, over the 1999 figure of $1.8 million. Salaries and wages tallied the biggest increase for 2001 versus 2000, reporting an increase of $63,342 or 8.8%. As mentioned earlier, the Company plans to open a branch in Montpelier. A few of the employees who will work at this branch were hired during the first quarter of 2001, supporting the increase in related expenses. Other expenses reported the biggest increase for 2000 versus 1999 with an increase of $72,450 or 12%. ATM expenses accounts for the biggest increase in other expense due in part to the installation of an ATM in the Company's Derby Line office. All branches of the Company now have an ATM.

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

     Income before taxes increased from $554,349 for the first quarter of 1999, to $578,118 for the same quarter of 2000, and then increased to $625,939, ensuing increases of $23,769 or 4.3% for 2000 versus 1999, and $47,821 or 8.3% for 2001 versus 2000. Provisions for income taxes followed a different pattern with an increase of $941 or just under 1% for the 2000 versus 1999 comparison period and a decrease of $7,471 or 5.2% for 2001 versus 2000.

     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.

     The Company's stockholders' equity, which started the year at $22,530,170, was increased through earnings of $488,917, sales of common stock of $174,703 through dividend reinvestment and debenture conversions, and $169,831 for valuation of allowance for securities. It was decreased for the purchase of treasury stock of $1,452, and $108,906 for the repurchase of stock through the Stock Buyback Plan. Stockholders' equity ended the first three months of 2001 at $23,253,263 with a book value of $6.59 per share. All stockholders' equity is unrestricted. Additionally, it is noted that the net unrealized gain on valuation allowance for securities has increased since December 31, 2000. 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.

     The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by the banking regulators. The minimum requirements for Tier I and Total Capital are 4% and 8%, respectively. As of March 31, 2001, the Company continued to maintain ratios far above the minimum requirements with reported ratios of approximately 17.5% for Tier I and 18.8% for Total Capital.

     The Company intends to continue maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs.

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

     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.

PART II.

Item 1

Legal Proceedings

     Community National Bank is currently involved in a lawsuit filed on March 23, 1998, in the Orleans Superior Court against the State of Vermont. The issue involves OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport. According to a so-called "public trust doctrine", the State of Vermont might have ownership of any lands created by filling any portion of the navigable waters of the state. The result of this is that the Bank has been unable to sell these properties for fair value because some attorneys will not clear title to the property. The suit filed is an attempt to clear title to said properties by seeking judicial clarification of the public trust doctrine. The Bank received documents in mid April of 2000 pertaining to the ruling of the lawsuit. The judgement was not in the Bank's favor. On June 23, 2000, the Bank filed an appeal to the Vermont Supreme Court, but it may take more than six months to have it set for oral arguments. Regardless of the outcome of the suit, is not likely to have a material impact on the financial statements of the Bank or consolidated Company.

     There are no other 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

       NONE

ITEM 6. Exhibits and Reports on Form 8-K

Exhibits

Exhibit 3 (ii) - Amended and restated Bylaws of Community Bancorp. are filed as part of this report.

Reports on Form 8-K

Form 8-K dated January 29, 2001, announcing the Company's plans to open a branch office in Montpelier, Vermont was filed February 2, 2001.