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COMMUNITY BANCORP /VT - Quarter Report: 2003 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 the Quarterly Period Ended March 31, 2003
Commission File Number 000-16435

COMMUNITY BANCORP.

(Exact Name of Registrant as Specified in its Charter)

Vermont

03-0284070

(State of Incorporation)

(IRS Employer Identification Number)

   

Derby Road, Derby, Vermont

05829

(Address of Principal Executive Offices)

(zip code)

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

 

Not Applicable

Former Name, Former Address and Formal Fiscal Year

(If Changed Since Last Report)

 

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


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes (   )  No (X)


At May 02, 2003 there were 3,767,295 shares outstanding of the Corporation's common stock.

Total Pages - 27 Pages

FORM 10-Q

Table of Contents

 

Page

PART I  FINANCIAL INFORMATION

 
   

Item I  Financial Statements

4

Item 2  Management's Discussion and Analysis of Financial Condition and Results of Operation

10

Item 3  Quantitative and Qualitative Disclosures About Market Risk

21

Item 4  Controls and Procedures

21

   

PART II  OTHER INFORMATION

 
   

Item 1  Legal Proceedings

21

Item 2  Changes in Securities and Use of Proceeds

21

Item 3  Defaults Upon Senior Securities

21

Item 4  Submission of Matters to a Vote of Security Holders

21

Item 5  Other Information

21

Item 6  Exhibits and Reports on Form 8-K

21

Signatures

22

Certification Statements

22

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

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

 

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Balance Sheets

  ( Unaudited )

March 31

December 31

2003

2002

Assets

  Cash and due from banks

$7,047,766

$8,957,633

  Federal funds sold and overnight deposits

2,957,215

5,079,647

     Total cash and cash equivalents

10,004,981

14,037,280

  Securities held-to-maturity (fair value $38,973,617 at

   03/31/03 and $39,359,442 at 12/31/02)

38,645,389

38,969,114

  Securities available-for-sale

43,966,831

41,074,804

  Restricted equity securities

1,356,850

1,309,050

  Loans held-for-sale

2,892,312

6,169,017

  Loans

200,340,051

200,913,490

    Allowance for loan losses

( 2,217,207

)

( 2,155,789

)

    Unearned net loan fees

( 840,983

)

( 879,501

)

      Net loans

197,281,861

197,878,200

  Bank premises and equipment, net

5,325,602

5,292,597

  Accrued interest receivable

1,970,995

1,744,805

  Other real estate owned, net

58,800

0

  Other assets

3,850,829

2,752,738

      Total assets

$305,354,450

$309,227,605

Liabilities and Stockholders' Equity

 Liabilities

  Deposits:

    Demand, non-interest bearing

$32,064,058

$32,302,824

    NOW and money market accounts

83,684,533

88,786,101

    Savings

39,323,007

37,737,157

    Time deposits, $100,000 and over

20,878,907

20,591,082

    Other time deposits

82,010,770

81,504,466

      Total deposits

257,961,275

260,921,630

  Federal funds purchased and other borrowed funds

5,040,000

5,040,000

  Repurchase agreements

12,188,057

14,069,026

  Accrued interest and other liabilities

3,617,675

3,491,847

      Total liabilities

278,807,007

283,522,503

 Stockholders' Equity

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

   authorized and 3,939,078 shares issued at 03/31/03

   and 3,939,078 shares issued at 12/31/02

9,847,694

9,847,694

  Additional paid-in capital

16,423,022

16,423,022

  Retained earnings

1,534,989

625,932

  Accumulated other comprehensive income

926,193

984,953

  Less: treasury stock, at cost; 182,902 shares at 03/31/03

   and 182,377 shares at 12/31/02

( 2,184,455

)

( 2,176,499

)

      Total stockholders' equity

26,547,443

25,705,102

      Total liabilities and stockholders' equity

$305,354,450

$309,227,605

See accompanying notes

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Statements of Income

  ( Unaudited )

For The First Quarter Ended March 31,

2003

2002

Interest income

  Interest and fees on loans

$3,470,789

$3,590,777

  Interest on debt securities

    Taxable

616,154

720,504

    Tax-exempt

214,232

224,724

  Dividends

11,667

11,348

  Interest on federal funds sold and overnight deposits

19,670

22,347

     Total interest income

4,332,512

4,569,700

Interest expense

  Interest on deposits

1,329,977

1,616,134

  Interest on borrowed funds

62,479

94,175

  Interest on repurchase agreements

36,752

83,068

     Total interest expense

1,429,208

1,793,377

   Net interest income

2,903,304

2,776,323

   Provision for loan losses

( 75,000

)

( 132,000

)

      Net interest income after provision

2,828,304

2,644,323

Other operating income

  Service fees

235,419

224,138

  Security gains

142,904

3,648

  Other

567,707

464,930

     Total other operating income

946,030

692,716

Other operating expenses

  Salaries and wages

974,231

959,487

  Pension and other employee benefits

306,365

275,760

  Occupancy expenses, net

422,883

411,553

  Other

860,966

925,673

     Total other operating expenses

2,564,445

2,572,473

   Income before income taxes

1,209,889

764,566

   Applicable income taxes

300,833

148,642

      Net Income

$909,056

$615,924

Earnings per share on weighted average

$0.24

$0.17

Weighted average number of common shares

 used in computing earnings per share

3,756,512

3,731,991

Dividends declared per share

$0.16

$0.16

Book value per share on shares outstanding at March 31,

$7.07

$6.37

Per share data for 2002 restated to reflect a 5% stock dividend declared in December, 2002.

See accompanying notes.

 

COMMUNITY BANCORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

  ( Unaudited )

  For the Three Months Ended March 31,

2003

2002

Reconciliation of Net Income to Net Cash Provided by Operating Activities:

  Net Income

$909,056

$615,924

Adjustments to Reconcile Net Income to Net Cash Provided

 by Operating Activities:

  Depreciation and amortization

152,100

169,212

  Provision for loan losses

75,000

132,000

  (Credit) provision for deferred income taxes

(10,890

)

(2,542

)

  Gain on sale of loans

(306,078

)

(105,728

)

  Gain on sale of fixed assets

(19,306

)

0

  Securities gains

(142,904

)

(3,648

)

  Gain on sales of OREO

0

(8,758

)

  OREO writedowns

20,700

0

  Amortization of bond premium, net

82,659

72,771

  Proceeds from sales of loans held for sale

16,404,700

11,901,331

  Originations of loans held for sale

(12,821,917

)

(10,128,389

)

  Increase (decrease) in taxes payable

311,723

117,402

  (Increase) decrease in interest receivable

(226,190

)

(361,669

)

  (Increase) decrease in mortgage service rights

(65,823

)

(83,664

)

  (Increase) decrease in other assets

(254,970

)

(620,567

)

  (Decrease) increase in unamortized loan fees

(38,518

)

(6,887

)

  (Decrease) increase in interest payable

(4,757

)

8,363

  (Decrease) increase in accrued expenses

(155,713

)

72,205

  (Decrease) increase in other liabilities

(31,249

)

24,625

     Net cash provided by operating activities

3,877,623

1,791,981

Cash Flows from Investing Activities:

  Investments - held to maturity

    Maturities and paydowns

4,389,755

4,286,581

    Purchases

(4,076,689

)

(1,948,596

)

  Investments - available for sale

    Sales and maturities

8,213,770

3,000,000

    Purchases

(11,123,924

)

(11,138,542

)

  Purchase of restricted equity securities

(47,800

)

(84,400

)

  Investment in limited partnership, net

(318,256

)

(165,437

)

  Decrease in loans, net

455,906

312,100

  Capital expenditures, net

(165,799

)

(122,070

)

  Recoveries of loans charged off

24,451

35,455

  Proceeds from sales of other real estate owned

0

8,758

     Net cash used in investing activities

(2,648,586

)

(5,816,151

)

Cash Flows from Financing Activities:

  Net (decrease) increase in demand, NOW, money market and savings accounts

(3,754,484

)

3,200,841

  Net increase in certificates of deposit

794,129

1,191,718

  Net decrease in short-term borrowings and repurchase agreements

(1,880,969

)

(4,058,377

)

  Net increase (decrease) in borrowed funds

0

0

  Payments to acquire treasury stock

(7,955

)

(246,268

)

  Dividends paid

(412,057

)

(415,022

)

     Net cash used in financing activities

(5,261,336

)

(327,108

)

     Net decrease in cash and cash equivalents

(4,032,299

)

(4,351,278

)

  Cash and cash equivalents:

       Beginning

14,037,280

14,700,415

       Ending

$10,004,981

$10,349,137

See accompanying notes.

Supplemental Schedule of Cash Paid to Date

  Interest

$1,433,965

$1,785,014

  Income taxes

$0

$33,782

See accompanying notes.

Supplemental Schedule of Noncash Investing and Financing Activities:

  Unrealized (loss) gain on securities available-for-sale

($89,031

)

($358,666

)

  OREO acquired in settlements of loans

$79,500

$38,466

  Debentures converted to common stock

$0

$1,000

  Investments in limited partnership

    (Increase) decrease in limited partnerships

($779,498

)

($10,491

)

    Increase (decrease) in contributions payable

$461,242

($154,946

)

($318,256

)

($165,437

)

Dividends Paid

  Decrease in dividends payable attributable to dividends declared

412,057

568,649

  Dividends reinvested

0

(153,627

)

$412,057

$415,022

See accompanying notes.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND CONSOLIDATION

     The interim consolidated financial statements of Community Bancorp. and subsidiaries are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for fair presentation of the financial condition and results of operations of the Company contained herein have been made. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2002, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.


NOTE 2. GOODWILL

     SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. The Company chose to expense the remainder of the goodwill associated with the acquisition of Liberty Savings Bank during the second quarter of 2002. The result was an expense before taxes of $245,575.


NOTE 3.  CRITICAL ACCOUNTING POLICIES


     The Company's critical accounting policies are considered to be the allowance for loan losses and accounting for significant estimates, including valuation of real estate acquired in foreclosure or satisfaction of loans, and accounting for taxes and deferred taxes as described below.


Use of estimates


The preparation of consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ materially from those estimates.


Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and deferred tax assets. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The amount of the change that is reasonably possible cannot be estimated.


While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions or other factors beyond the Company's control. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.


Allowance for loan losses


The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management's periodic evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries.


Income taxes


The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company's deferred tax assets are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset.


NOTE 4.  RECENT ACCOUNTING DEVELOPMENTS


Financial Accounting Standards Board (FASB) Interpretation Number 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", (FIN 45), an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34, was issued in November 2002.


The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.


Financial and standby letters of credit are included in the scope of FIN 45, while commercial letters of credit are not. A guarantor of financial and standby letters of credit is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.


This Interpretation contains disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation does not have a material effect on the Company's consolidated financial statements.


In 2003, FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133.


The amendment requires contracts with comparable characteristics be accounted for similarly. This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing pronouncements.


SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively.


The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 does not affect the Company's consolidated financial condition and results of operations.


NOTE 5.  TOTAL COMPREHENSIVE INCOME


Accounting principles generally require recognized revenue, expenses, gains, and losses to be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Total comprehensive income was $850,296 and $379,204 for the three months ended March 31, 2003 and 2002, respectively.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2003

FORWARD-LOOKING STATEMENTS


     The Company's Management's Discussion and Analysis of Financial Condition and Results of Operations, 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. Readers are cautioned not to place undo reliance on such statements as they speak only as of the date they are made. 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.


OVERVIEW

     Community Bancorp. (the "Company") is a bank holding company headquartered in Derby, Vermont, which has one operating commercial bank subsidiary, Community National Bank (the "Bank"). The Bank is a commercial banking institution, which offers a full range of retail banking services to residents and businesses in northeastern and north central Vermont. The Bank has eight offices, five of which are located in Orleans County, one in Essex County, one in Caledonia County and the newest office, located in Washington County. Plans are underway to establish another office in Washington County in the town of Barre. The Company is in the process of hiring personnel for this office, and a temporary office will be set up on the site adjacent to the permanent office site. The temporary office is scheduled to open in May of this year, with the permanent office opening in November.


     The Company also owns all of the stock of Liberty Savings Bank ("Liberty"), an inactive New Hampshire guaranty savings bank charter. The Company is negotiating a sale of this charter.


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


RESULTS OF OPERATIONS


     Income before income taxes of $1.2 million was reported for the first quarter of 2003 compared to $764,566 for 2002, resulting in an increase of $445,323 or 58%. Net income for the first quarter ended March 31, 2003 was $909,056, representing an increase of 48% over the net income figures of $615,924 for the first quarter ended March 31, 2002. The results of this are earnings per share of $0.24 for the first quarter of 2003 and $0.17 for 2002. The first quarter of 2003 was profitable due in part to a decrease in interest expense, as well as an increase in non-interest income attributable to the heavy volume of loans sold into the secondary market
.


     Return on average assets (ROA), which measures how effectively a corporation uses its assets to produce earnings, reported ratios of 1.19% and .87%, respectively for the first quarter ended 2003 and 2002. Return on average equity (ROE), which is the ratio of income earned to average shareholders' equity was 14.11% for 2003 and 10.59% for 2002.


INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST 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, and rate sensitivity of earning assets as well as by interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets. Tables A and B at the end of this narrative provide a visual comparison for each period. Figures presented on these two reports are consolidated and are stated on a tax equivalent basis assuming a federal tax rate of 34%.


     Net interest income for the first three months comparison period was just over $3 million for 2003 compared to $2.9 million for 2002. The tax equivalent net interest spread, defined as the difference between the yield on earning assets and the rate paid on interest bearing liabilities, was 3.79% for the first three months of 2003 compared to 3.77% for the same period in 2002. The interest differential, defined as net interest income divided by average earning assets, was 4.16% and 4.27%, for the respective comparison periods.


     Total interest income for the first three months decreased $242,592 or by 5.2% from $4.69 million in 2002 to $4.44 million in 2003. Interest expense decreased $366,202 or by 20.4% from $1.79 million in 2002 to $1.43 million in 2003. Interest earned on loans accounts for 78% of total interest income and revealed a decrease of $119,988 or 3.3% for 2003 compared to 2002. In comparison, interest paid on deposits comprises 93% of total interest expense and shows a decrease of $286,157 or 17.7% for the same comparison period. Although an increase is noted for the first three months of 2003 in the average volume of earning assets compared to the same period of 2002, a decrease of 78 basis points is noted in the average yield, contributing to the decrease in income. The average volume of interest bearing liabilities increased as well, while the rate paid on these accounts decreased 80 basis points. While volumes increased in both average earning assets and average interest bearing liabilities, the decrease in yields paid on liabilities out paced the decrease in yields earned on assets, resulting in an increase in net interest income.


CHANGES IN FINANCIAL CONDITION


     The Company had total average assets of $309 million at March 31, 2003 and $296 million at December 31, 2002. Average earning assets were $294 million for the period ended March 31, 2003, including average loans of $205 million and average investment securities of $82 million. Average earning assets were $283 million for the year ended December 31, 2002 including average loans of $197 million and average investment securities of $81 million. Although the actual balance of loans decreased from December 31, 2002 to March 31, 2003, the substantial growth in the loan portfolio during the last quarter of 2002 helped to increase the average volume for the first three months of 2003. An increase of $2.8 million in the Company's sweep account also contributed to the increase in earning assets with average volume figures of $5.7 million for the first three months of 2003, compared to $2.9 million for the year ended 2002.


     Average interest bearing liabilities at March 31, 2003 were $247 million, with average time deposits reported totaling $102 million and NOW & money market funds of $88 million. At December 31, 2002, average interest bearing liabilities of $238 million were reported including average time deposits of $100 million and NOW & money market funds at $82 million. The same scenario applies to the increase in average volume of NOW and money market funds as the increase in average loan volume. An increase in municipal deposits during the last quarter of 2002, generated from the new collateralized deposit product discussed below, helped to boost the average volume on these deposit accounts for the first three months of 2003.


OTHER OPERATING INCOME AND EXPENSES


     Total other operating income for the first quarter of 2003 was $946,030 compared to $692,716 for the same quarter in 2002, an increase of $253,314 or 36.6%. Security gains of $142,904 accounted for the biggest increase for the first quarter of 2003 compared to 2002. The Company sold four of its investments from the Corporate Bond portfolio netting a gain before taxes of $132,312. Other income increased $102,777 with figures reported of $567,707 and $464,930, respectively, for the first quarter of 2003 and 2002. Income generated through the sale and servicing of loans sold to the secondary market continues to account for most of the increase in other income for the comparison periods with figures of $429,040 for the first three months of 2003 and $231,832 for 2002.


     Total other operating expenses for the first quarter comparison periods decreased to $2.56 million for 2003 from $2.57 million for 2002, with other expenses noting the only decrease for 2003 versus 2002. Expense for the first quarter of 2002 totaling $70,745 relating to the Company's former trust department depicts the reason for the decrease. As mentioned in previous reports, the Company sold its trust operations in April of 2002 to a newly formed trust company, jointly owned with two other financial institutions, thereby eliminating associated income and expenses. The Company did however report losses of $25,844 in the first quarter of 2003, for its one-third portion of the investment in the newly formed entity.


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


APPLICABLE INCOME TAXES


     Provisions for income taxes increased $152,191 with figures of $300,833 for the first quarter of 2003 versus $148,642 for the same period in 2002. The increase in computed tax expense is consistent with increased earnings for the comparison period.


RISK MANAGEMENT


Liquidity Risk - Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The repayment of loans and growth in deposits are two of the major sources of liquidity. Other time deposits increased $506,304 as of the end of the first three months of 2003, while time deposits greater than $100,000 increased $287,825. A review of these deposits indicates that they are primarily generated locally and regionally and are established customers of the Company. Savings accounts increased $1.6 million, despite the decrease in the rate earned on these funds. The Company began offering a new interest bearing collateralized deposit account to its municipal account holders during the last part of 2001. This account was well received during 2002, contributing to the increase in NOW and money market funds in that time period. The decrease in these accounts during the first three months of 2003 is a seasonal fluctuation reflecting the municipal tax collection cycle. The Company anticipates an increase starting in the second quarter of 2003.


     The Company believes that a portion of the increase in deposits is due to the current economic environment, as customers seek a safe haven for their money. This has created a high level of liquidity that the Company considers temporary. The Company has purchased assets, primarily 3-5 year Government Agency securities, attempting to maximize yields and maintain adequate liquidity.


     In January of 2003, the Company entered into an agreement with Promontory Interfinancial Network that will make it possible to offer FDIC Insured deposits beyond the $100,000 limit. This Certificate of Deposit Account Registry Service (CDARS) uses a deposit-matching engine to match CDARS deposits in other participating banks, dollar- for-dollar. This product is designed to enhance customer attraction and retention, build deposits and improve net interest margins, while providing unlimited FDIC coverage to customers.


     Due to the nature of the placement of funds, CDARS deposits are defined as "brokered deposits". It has always been the Company's policy not to accept brokered deposits. The Company's Asset Liability policy now states that the Company will not accept brokered deposits, other than through the CDARS program in the Promontory Interfinancial Network.


     During the first quarter, the company had placed three test-Certificates of Deposit in the CDARS program. These were short-term and matured during the reporting period. The Company will continue to monitor the development of this product closely and manage any associated risk accordingly.


     The Company's in house loan portfolio decreased $573,439 over the last three months, while the investment portfolio increased a total of $2.6 million for the same time period. As of March 31, 2003, the Company held in its investment portfolio securities classified as "Available for Sale" at a fair value of $44 million, compared to $41 million as of December 31, 2002, an increase of $3 million or 7%. Securities classified as "Held to Maturity" ended the first three months of 2003 at a book value of $38.6 million compared to $39 million as of the end of the 2002 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 Bank stock. FHLB stock increased $47,800, increasing the combined stock balance to $1.4 million as of March 31, 2003.


     The Company has a $4.3 million credit line with FHLB. Interest is chargeable at a rate determined daily of approximately 25 basis points higher than the rate paid on fed funds sold. Additional borrowing capacity of approximately $95.5 million is available through the FHLB, which is secured by the Company's qualifying loan portfolio. As of March 31, 2003, the Company has advances of just over $5 million against the $95.5 million in borrowing authority at FHLB, with no advances against the $4.3 million. Under a separate agreement, the Company has the authority to collateralize public unit deposits, such as the Company's collateralized public deposit accounts mentioned above, up to its FHLB borrowing capacity ($95.5 million less outstanding advances) with letters of credit issued by FHLB. At March 31, 2003, approximately $34.6 million was pledged as collateral for these deposits. Interest is charged to the Company quarterly based on the average daily balance outstanding at a rate of 20 basis points. At March 31, 2003, an average daily balance of approximately $9.6 million was reported.


Credit Risk - A primary concern of management is to reduce the exposure of credit loss within the portfolio. Management follows established underwriting guidelines, and any exceptions to the policy must be approved by a lender with higher authority than the lender originating the loan. The adequacy of the loan loss coverage is reviewed quarterly by the risk management committee of the Board of Directors. This committee meets to discuss, among other matters, potential exposures, historical loss experience, 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 of the Company's internal risk ratings and compliance with various internal policies and procedures, as well as those set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duties include monitoring and reporting on the status of the loan portfolio including delinquent and non-performing loans.


     Specific allocations are made in situations management believes may represent a greater risk for loss. A quarterly review of various qualitative factors, including 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 mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio helping to alleviate the overall risk.

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

2003

2002

(Dollars in Thousands)

Total

% of

Total

% of

Loans

Total

Loans

Total

Real Estate Loans

  Construction & Land Development

7,677

3.78%

2,070

1.08%

  Farm Land

3,093

1.52%

2,439

1.28%

  1-4 Family Residential

118,033

58.08%

116,782

61.12%

  Commercial Real Estate

30,862

15.19%

32,802

17.17%

Loans to Finance Agricultural Production

408

0.20%

356

0.19%

Commercial & Industrial

20,639

10.15%

13,545

7.09%

Consumer Loans

22,146

10.90%

22,823

11.94%

All Other Loans

      374

0.18%

      259

0.13%

      Gross Loans

203,232

100%

191,076

100%

Less:

  Reserve for Loan Losses

(2,217

)

-1.09%

(2,113

)

-1.11%

  Deferred Loan Fees

     (841

)

-0.41%

     (944

)

-0.49%

      Net Loans

200,174

98.50%

188,019

98.40%

 

Allowance for loan losses and provisions - The valuation allowance for loan losses of $2.2 million as of March 31, 2003 composed 1.1% of the total gross loan portfolio. As of such date, the Company maintained a residential loan portfolio of $118 million and a commercial real estate portfolio of $42 million, accounting for approximately 79% of the total loan portfolio. This volume, together with the low historical loan loss experience in these portfolios, helps to support the Company's basis for loan loss coverage.

 

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

(Dollars in Thousands)

2003

2002

Loans Outstanding End of Period

203,232

191,076

Ave. Loans Outstanding During Period

204,566

192,315

Loan Loss Reserve, Beginning of Period

2,156

2,008

Loans Charged Off:

  Real Estate

0

16

  Commercial

0

0

  Consumer

38

45

      Total

38

61

Recoveries:

  Real Estate

2

2

  Commercial

0

1

  Consumer

22

31

      Total

24

34

Net Loans Charged Off

14

27

Provision Charged to Income

75

132

Loan Loss Reserve, End of Period

2,217

2,113

     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". Loans 90 days or more past due totaled $135,067 and accounted for just over 7% of the total non-performing assets as of March 31, 2003, compared to a volume of $356,874 comprising 18% as of December 31, 2002. Non-Accruing loans made up 89% of these non-performing assets with a balance of $1.65 million, compared to $1.63 million or 82% for the same comparison periods. As of March 31, 2003, the Company's OREO portfolio consisted of one property with a balance of $58,800, while the 2002 year ended with no OREO properties.


Non-performing assets as of March 31, 2003 and December 31, 2002 were as follows:

 

03/31/2003

12/31/2002

     

Non-Accruing loans

$1,648,255

$1,631,330

Loans past due 90 days or more and still accruing

135,067

356,874

Other real estate owned

58,800

            0

   Total

$1,842,122

$1,988,204

     Other real estate owned is made up of property that the Company has acquired by deed 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, less cost to sell, or the 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 does not have any market risk sensitive instruments acquired for trading purposes. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure and attempts to structure the 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 Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that:

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

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

and,

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

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


     The tables on the following two pages set forth the estimated maturity or repricing of the Company's interest earning assets and interest-bearing liabilities at March 31, 2003, and December 31, 2002.

 

GAP ANALYSIS

Community Bancorp. & Subsidiaries

March 31, 2003

Cumulative repriced within:

Dollars in thousands,

3 Months

4 to 12

1 to 3

3 to 5

Over 5

by repricing date

or less

Months

Years

Years

Years

Total

Interest sensitive assets:

Federal funds sold

1,490

0

0

0

0

1,490

Overnight deposits

1,467

0

0

0

0

1,467

Investments -

  Available for Sale

0

0

18,129

15,363

10,475

43,967

  Held to Maturity

18,149

7,326

3,668

3,905

5,597

38,645

Restricted equity securities

0

0

0

0

1,357

1,357

Loans(1)

51,325

42,391

46,268

16,151

45,449

201,584

   Total interest sensitive assets

72,431

49,717

68,065

35,419

62,878

288,510

Interest sensitive liabilities:

Certificates of deposit

19,503

35,657

27,859

19,871

0

102,890

Money markets

16,168

21,593

0

0

20,000

57,761

Regular savings

0

11,323

0

0

28,000

39,323

Now and super now accounts

0

0

0

0

25,923

25,923

Borrowed funds

0

0

0

30

5,010

5,040

Repurchase agreements

12,188

         0

         0

         0

         0

  12,188

   Total interest sensitive liabilities

47,859

68,573

27,859

19,901

78,933

243,125

Net interest rate sensitivity gap

24,572

(18,856

)

40,206

15,518

(16,055

)

Cumulative net interest rate

sensitivity gap

24,572

5,716

45,922

61,440

45,385

Cumulative net interest rate

sensitivity gap as a

percentage of total assets

8.05%

1.87%

15.04%

20.12%

14.86%

Cumulative interest sensitivity

gap as a percentage of total

interest-earning assets

8.52%

1.98%

15.92%

21.30%

15.73%

Cumulative interest earning assets

as a percentage of cumulative

interest-bearing liabilities

151.34%

104.91%

131.83%

137.42%

118.67%

(1) Loan totals exclude non-accruing loans amounting to $1,648,255.

 

 

 

GAP ANALYSIS

Community Bancorp. & Subsidiaries

December 31, 2002

Cumulative repriced within:

Dollars in thousands,

3 Months

4 to 12

1 to 3

3 to 5

Over 5

by repricing date

or less

Months

Years

Years

Years

Total

Interest sensitive assets:

Federal funds sold

2,100

0

0

0

0

2,100

Overnight deposits

2,980

0

0

0

0

2,980

Investments -

  Available for Sale

0

0

18,066

13,514

9,495

41,075

  Held to Maturity

708

22,033

3,686

5,897

6,645

38,969

Restricted equity securities

0

0

0

0

1,309

1,309

Loans(1)

46,225

47,906

47,029

17,298

46,994

205,452

   Total interest sensitive assets

52,013

69,939

68,781

36,709

64,443

291,885

Interest sensitive liabilities:

Certificates of deposit

12,331

44,227

25,339

20,199

0

102,096

Money markets

113

32,380

0

0

24,000

56,493

Regular savings

0

7,737

0

0

30,000

37,737

Now and super now accounts

0

0

0

0

32,293

32,293

Borrowed funds

0

0

0

30

5,010

5,040

Repurchase agreements

14,069

         0

         0

         0

         0

  14,069

   Total interest sensitive liabilities

26,513

84,344

25,339

20,229

91,303

247,728

Net interest rate sensitivity gap

25,500

(14,405

)

43,442

16,480

(26,860

)

Cumulative net interest rate

sensitivity gap

25,500

11,095

54,537

71,017

44,157

Cumulative net interest rate

sensitivity gap as a

percentage of total assets

8.25%

3.59%

17.64%

22.97%

14.28%

Cumulative interest sensitivity

gap as a percentage of total

interest-earning assets

8.74%

3.80%

18.68%

24.33%

15.13%

Cumulative interest earning assets

as a percentage of cumulative

interest-bearing liabilities

196.18%

110.01%

140.04%

145.40%

117.82%

(1) Loan totals exclude non-accruing loans amounting to $1,631,330.

 

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK


The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, interest rate caps and floors written on adjustable rate loans, and commitments to sell loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.


The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of their interest rate cap agreements through credit approvals, limits, and monitoring procedures.


The Company generally requires collateral or other security to support financial instruments with credit risk.

Financial instruments whose contract amount represent credit risk

Contract or

at March 31, 2003 (in thousands)

----Notional Amount----

   

Mortgage loan commitments

$ 9,977

Unused commercial lines of credit

5,821

Unused portions of construction loans

1,537

Unused portion credit card lines

7,258

Unused home equity lines of credit

2,730

   

Standby letters of credit

377

   

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At March 31, 2003, the Company has binding loan commitments at fixed rates approximating $6.4 million that are included in the "mortgage loan commitments" figure above.


The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.


Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.


The Company enters into a variety of interest rate contracts, including interest rate caps and floors written on adjustable rate loans in managing its interest rate exposure. Interest rate caps and floors on loans written by the Company enable customers to transfer, modify, or reduce their interest rate risk.


AGGREGATE CONTRACTUAL OBLIGATIONS

Contractual obligations as of March 31, 2003 were as follows:

 

Payment due by period

 

Less than

1-3

3-5

More than

 

Contractual Obligations

1 year

years

years

5 years

Total

Operating Leases

$125,366

$435,065

$211,244

$  745,798

$1,517,473

FHLB Borrowings

             0

             0

     30,000

  5,010,000

   5,040,000

   Total

$125,366

$435,065

$241,244

$5,755,798

$6,557,473

EFFECTS OF INFLATION


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


CAPITAL RESOURCES


     The Company periodically repurchases its own common stock under a stock buyback program initially authorized by the Board of Directors in April of 2000. Under the terms of the stock buyback, the Company may repurchase shares of its common stock from time to time in open market purchases and privately negotiated transactions, as market conditions may warrant. The initial authorization for the repurchase of up to 205,000 shares of common stock was extended by the Board of Directors on October 15, 2002 to cover an additional 200,000 shares, with an aggregate limit for such additional share repurchases of $3.5 million. As of March 31, 2003 the Company had repurchased 152,463 shares at a total cost of approximately $1,739,166, including fees and commissions, since the inception of the program.


     The Company's stockholders' equity, which started the year at $25,705,102, increased through earnings of $909,056. It decreased $58,760 for other comprehensive income pertaining to the valuation of securities and $7,955 for the purchase of treasury stock and the repurchase of stock through the stock buyback program. A cash dividend of $0.16 per share and a 5% stock dividend were declared in December of 2002 and paid in February of 2003. As a result, both dividends along with the dividend reinvestment plan entry and associated shares were booked in 2002 to stockholders' equity. Stockholder's equity ended the first three months of 2003 at $26,547,443 with a book value of $7.07 per share. All stockholders' equity is unrestricted.


     Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2003, that the Company meets all capital adequacy requirements to which it is subject.


     As of March 31, 2003, the Company and its Subsidiaries were deemed well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since March 31, 2003 that management believes have changed the Company's regulatory capital category. As of March 31, 2003 the Company reported risk-weighted assets of $163 million compared to almost $169 million at December 31, 2002. From time to time the Company may make contributions to the capital of its subsidiary, Community National Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to the Bank's capital.

The Company's actual capital amounts and ratios (000's omitted) are presented in the table on the following page.

 

       

Minimum to be Well

     

Minimum

Capitalized Under

     

For Capital

Prompt Corrective

 

Actual

Adequacy Purposes:

Action Provisions:

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2003:

           

Total capital (to risk weighted assets)

           

   Consolidated

$27,577

16.90%

$13,050

8.0%

N/A

N/A

   Subsidiary (Community National Bank)

$25,759

15.79%

$13,050

8.0%

$16,312

10.0%

Tier I capital (to risk weighted assets)

           

   Consolidated

$25,536

15.65%

$ 6,525

4.0%

N/A

N/A

   Subsidiary (Community National Bank)

$23,718

14.54%

$  6,525

4.0%

$  9,787

6.0%

Tier I capital (to average assets)

           

   Consolidated

$25,536

8.28%

$12,340

4.0%

N/A

N/A

   Subsidiary (Community National Bank)

$23,718

7.69%

$12,340

4.0%

$15,424

5.0%

             

As of December 31, 2002:

           

Total capital (to risk weighted assets)

           

   Consolidated

$26,828

15.91%

$13,487

8.0%

N/A

N/A

   Subsidiary (Community National Bank)

$25,350

15.04%

$13,484

8.0%

$16,855

10.0%

Tier I capital (to risk weighted assets)

           

   Consolidated

$24,720

14.66%

$  6,743

4.0%

N/A

N/A

   Subsidiary (Community National Bank)

$23,243

13.79%

$  6,742

4.0%

$10,113

6.0%

Tier I capital (to average assets)

           

   Consolidated

$24,720

7.97%

$12,407

4.0%

N/A

N/A

   Subsidiary (Community National Bank)

$23,243

7.49%

$12,406

4.0%

$15,507

5.0%

 

 

Table A

AVERAGE BALANCES AND INTEREST RATES

The table below presents the following information:

    Average earning assets (including non-accrual loans)

    Average interest bearing liabilities supporting earning assets

    Interest income and interest expense as a rate/yield

For the First Three Months Ended:

2003

2002

Average

Income/

Rate/

Average

Income/

Rate/

Balance

Expense

Yield

Balance

Expense

Yield

EARNING ASSETS

Loans (gross)

204,565,843

3,470,789

6.88%

192,314,605

3,590,777

7.57%

Taxable Investment Securities

53,297,058

616,154

4.69%

53,422,215

720,504

5.47%

Tax Exempt Investment Securities (1)

26,909,328

324,594

4.89%

21,976,464

340,491

6.28%

Federal Funds Sold

2,170,722

6,501

1.21%

2,538,889

11,408

1.82%

Sweep Account

5,714,477

13,169

0.93%

3,397,408

10,939

1.31%

Other Securities

1,311,174

11,668

3.61%

1,228,402

11,348

3.75%

     TOTAL

293,968,602

4,442,875

6.13%

274,877,983

4,685,467

6.91%

INTEREST BEARING LIABILITIES

Savings Deposits

38,773,014

83,781

0.88%

34,163,367

120,583

1.43%

NOW & Money Market Funds

88,263,986

400,168

1.84%

81,406,748

531,961

2.65%

Time Deposits

102,439,548

846,028

3.35%

98,033,558

963,590

3.99%

Other Borrowed Funds

5,040,000

60,446

4.86%

5,055,000

94,175

7.56%

Notes Payable

150,000

2,033

5.50%

0

0

0.00%

Repurchase Agreements

12,588,897

36,752

1.18%

13,312,936

83,068

2.53%

     TOTAL

247,255,445

1,429,208

2.34%

231,971,609

1,793,377

3.14%

Net Interest Income

3,013,667

2,892,090

Net Interest Spread(2)

3.79%

3.77%

Interest Differential(3)

4.16%

4.27%

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

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

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

 

 

Table B

CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

The following table summarizes the variances in income for the first three months of 2003 and 2002

resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid.

Variance

Variance

RATE / VOLUME

Due to

Due to

Total

Rate(1)

Volume(1)

Variance

INCOME EARNING ASSETS

Loans

(348,667)

228,679

(119,988

)

Taxable Investment Securities

(102,903)

(1,447

)

(104,350

)

Tax Exempt Investment Securities (2)

(92,282)

76,385

(15,897

)

Federal Funds Sold

(3,809)

(1,098

)

(4,907

)

Sweep Account

(5,254)

7,484

2,230

Other Securities

(445)

765

320

     Total Interest Earnings

(553,360)

310,768

(242,592

)

INTEREST BEARING LIABILITIES

Savings Deposits

(53,056)

16,254

(36,802

)

NOW & Money Market Funds

(176,600)

44,807

(131,793

)

Time Deposits

(160,910)

43,348

(117,562

)

Other Borrowed Funds

(33,549)

(180

)

(33,729

)

Notes Payable

2,033

0

2,033

Repurchase Agreements

(44,209)

(2,107

)

(46,316

)

     Total Interest Expense

(466,291)

102,122

(364,169

)

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

       Variance due to rate = Change in rate x new volume

       Variance due to volume = Change in volume x old rate

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

       Variance due to rate = Change in rate x old volume

       Variances due to volume = Change in volume x new rate

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

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 4. Controls and Procedures

Pursuant to Securities Exchange Act Rule 13a-15(b), within ninety days prior to the date of this Report, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and its Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the President and Chief Executive Officer and the Treasurer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls subsequent to the date of the evaluation referred to above through the date of filing of this report, nor have there been any corrective actions required in regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 2. Changes in Securities

       NONE

ITEM 3. Defaults Upon Senior Securities

       NONE

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

        NONE

ITEM 5. Other Information

        NONE

ITEM 6 Exhibits and Reports on Form 8-K

Exhibits

Exhibit 99.1 - Certification from the Chief Executive Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification from the Chief Financial Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K

Form 8-K dated January 10, 2003, announcing the Company's earnings and other financial information for the period ended December 31, 2002.
Form 8-K/A dated January 10, 2003, filed February 13, 2003 announcing an adjustment of earnings per share due to the recording of a 5% stock dividend and a cash dividend declared in December of 2002 and payable in February of 2003.
Form 8-K dated March 14, 2003 announcing a cash dividend payable May 1, 2003 to shareholders of record as of April 15, 2003.
Form 8-K/A dated March 31, 2003 relating to completion of the engagement of the Company's former independent accountants.

SIGNATURES

 

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report

to be signed on its behalf by the undersigned thereunto duly authorized.

 

COMMUNITY BANCORP.

 


DATED: May 15, 2003

By: /s/Richard C. White

 

Richard C. White, President

   

DATED: May 15, 2003

By: /s/Stephen P. Marsh

 

Stephen P. Marsh,

 

Vice President & Treasurer

FORM 10-Q CERTIFICATIONS

 

I, Richard C. White, President and Chief Executive Officer, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Community Bancorp.;

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.

   

Date: May 15, 2003

/s/Richard C. White

President and Chief Executive Officer

 

I, Stephen P. Marsh, Treasurer and Chief Financial Officer, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Community Bancorp.;

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.

 

Date: May 15, 2003

/s/Stephen P. Marsh

Treasurer and Chief Financial Officer