UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
Commission File No. 33-12756-B
COMMUNITY BANCORP, INC.
A Massachusetts Corporation
IRS Employer Identification No. 04-2841993
17 Pope Street, Hudson, Massachusetts 01749
Telephone - (978)568-8321
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Common Stock
$2.50 par value
2,960,947 shares outstanding
as of July 15, 1999
PART I - FINANCIAL INFORMATION
COMMUNITY BANCORP, INC.
Item 1. CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 17,489,175 $ 17,601,043
Federal funds sold 15,310,404 17,000,000
Securities available for sale, at market 29,868,882 31,685,402
Securities held to maturity (market value
$85,925,867 at 6/30/99 and $87,832,432
at 12/31/98) 87,036,591 87,058,589
Mortgage loans held for sale 474,700 1,330,278
Loans 154,954,834 140,223,942
Less allowance for possible loan losses 3,000,719 2,981,012
----------- -----------
Total net loans 151,954,115 137,242,930
----------- -----------
Premises and equipment, net 6,162,061 5,576,789
Other assets, net 3,803,074 3,391,800
----------- -----------
Total assets $312,099,002 $300,886,831
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $ 60,173,926 $ 60,511,257
Interest bearing 200,833,183 193,897,478
----------- -----------
Total deposits 261,007,109 254,408,735
----------- -----------
Federal funds purchased and securities
sold under repurchase agreements 22,398,289 19,747,496
Other liabilities 1,661,134 1,265,351
----------- -----------
Total liabilities 285,066,532 275,421,582
----------- -----------
Stockholders' equity:
Preferred stock, $2.50 par value, 100,000
shares authorized, none issued or outstanding
Common stock, $2.50 par value, 12,000,000
shares authorized, 3,199,218 shares issued,
2,960,947 shares outstanding, (2,944,588
shares outstanding at 12/31/98) 7,998,045 7,998,045
Surplus 638,619 524,106
Undivided profits 20,698,634 19,274,861
Treasury stock, at cost, 238,271 shares,
(254,630 shares at 12/31/98) (2,217,342) (2,364,573)
Accumulated other comprehensive income (85,486) 32,810
----------- -----------
Total stockholders' equity 27,032,470 25,465,249
----------- -----------
Total liabilities and
stockholders' equity $312,099,002 $300,886,831
=========== ===========
<FN>
See accompanying notes.
-2-
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Interest income:
Interest and fees on loans $3,423,430 $3,270,641 $6,673,397 $6,617,533
Interest and div. on securities:
Taxable interest 1,472,064 1,368,854 3,038,840 2,646,613
Nontaxable interest 137,148 119,728 272,645 214,695
Dividends 16,474 15,247 35,600 31,917
Interest on federal funds sold 186,277 265,544 300,990 450,435
--------- --------- ---------- ---------
Total interest income 5,235,393 5,040,014 10,321,472 9,961,193
--------- --------- ---------- ---------
Interest expense:
Deposits 1,640,318 1,663,439 3,214,380 3,273,059
Short term borrowings 216,185 230,067 444,940 426,221
--------- --------- --------- ---------
Total interest expense 1,856,503 1,893,506 3,659,320 3,699,280
--------- --------- --------- ---------
Net interest income 3,378,890 3,146,508 6,662,152 6,261,913
Provision for loan losses 0 0 0 0
--------- --------- --------- ---------
Net interest income after
provision for loan losses 3,378,890 3,146,508 6,662,152 6,261,913
--------- --------- --------- ---------
Noninterest income:
Merchant credit card assessments 301,141 288,920 613,883 593,125
Service charges 153,364 149,661 298,704 297,839
Other charges, commissions, fees 282,010 244,405 580,142 511,592
Gains on sales of loans, net 10,386 103,801 49,767 146,529
Gains on sales of securities, net 0 0 0 0
Other 27,172 20,464 49,014 40,767
--------- --------- --------- ---------
Total noninterest income 774,073 807,251 1,591,510 1,589,852
--------- --------- --------- ---------
Noninterest expense:
Salaries and benefits 1,305,659 1,246,516 2,619,047 2,507,595
Data processing 165,050 136,319 316,596 284,976
Occupancy, net 210,736 138,991 386,788 283,556
Furniture and equipment 121,891 113,415 212,921 230,402
Credit card processing 285,515 261,308 554,040 504,214
Printing, stationery & supplies 68,094 58,004 132,797 130,499
Marketing and advertising 87,158 57,374 173,078 104,948
Other 407,830 390,350 824,584 793,216
--------- --------- --------- ---------
Total noninterest expense 2,651,933 2,402,277 5,219,851 4,839,406
--------- --------- --------- ---------
Income before income taxes 1,501,030 1,551,482 3,033,811 3,012,359
Income taxes 539,207 568,187 1,090,334 1,108,468
--------- --------- --------- ---------
Net income $ 961,823 $ 983,295 $1,943,477 $1,903,891
========= ========= ========= =========
Earnings per common share $ .326 $ .335 $ .659 $ .649
Dividends per share $ .089 $ .079 $ .176 $ .156
Weighted average number of shares 2,952,498 2,937,739 2,948,565 2,932,030
<FN>
See accompanying notes.
-3-
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Net income $ 961,823 $ 983,295 $1,943,477 $1,903,891
Other comprehensive income:
Unrealized securities gains
(losses) arising during period (182,023) (73,665) (200,262) (64,290)
Income tax (expense) benefit on
securities gains (losses)
arising during period 74,501 32,961 81,966 28,998
-------- -------- --------- ---------
Net unrealized securities gains
(losses) arising during period (107,522) (40,704) (118,296) (35,292)
-------- -------- -------- ---------
Less: reclassification
adjustment for securities
(gains) losses included in
income 0 0 0 0
Income tax expense (benefit) on
securities (gains) losses
included in income 0 0 0 0
-------- -------- -------- ---------
Net reclassification adjustments
for securities (gains) losses
included in net income 0 0 0 0
-------- -------- -------- ---------
Other comprehensive income (107,522) (40,704) (118,296) (35,292)
-------- -------- --------- ---------
Comprehensive income $ 854,301 $ 942,591 $1,825,181 $1,868,599
======= ======== ========= =========
<FN>
See accompanying notes.
-4-
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
-------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 1,943,477 $ 1,903,891
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease in mortgage loans held for sale 855,578 330,898
Premium on sale of mortgages 54,318 110,452
Depreciation and amortization 446,568 434,503
Increase (decrease) in other liabilities 273,594 (257,869)
Increase (decrease) in taxes payable 45,763 (49,912)
Increase (decrease) in interest payable 103,937 (5,175)
(Increase) decrease in other assets (263,736) 151,895
(Increase) in interest receivable (142,611) (116,023)
---------- ----------
Total adjustments 1,373,411 598,769
---------- ----------
Net cash provided by operating activities 3,316,888 2,502,660
---------- ----------
Cash flows from investing activities:
Maturities and principal repayments of
securities available for sale 6,766,150 6,281,845
Maturities and principal repayments of
securities held to maturity 16,413,116 12,753,012
Purchases of securities available for sale (5,150,150) (84,600)
Purchases of securities held to maturity (16,391,119) (29,694,341)
Net change in federal funds sold 1,689,596 (12,900,000)
Net change in loans and other real estate
owned (14,728,939) 4,215,306
Acquisition of property, plant and equipment (1,031,840) (568,130)
---------- ----------
Net cash (used in) investing activities (12,433,186) (19,996,908)
---------- ----------
Cash flows from financing activities:
Net change in deposits 6,598,373 10,180,406
Net change in federal funds purchased 0 (3,000,000)
Net change in repurchase agreements 2,650,793 9,212,368
Sale of treasury stock 261,744 274,965
Dividends paid (506,480) (444,791)
---------- ----------
Net cash provided by financing activities 9,004,430 16,222,948
---------- ----------
Net (decrease) in cash and due from banks (111,868) (1,271,300)
---------- ----------
Cash and due from banks at beginning
of period 17,601,043 16,704,667
---------- ----------
Cash and due from banks at end of period $17,489,175 $15,433,367
========== ==========
<FN>
See accompanying notes.
-5-
COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
_________________________________________________________________________
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for
any interim period are not necessarily indicative of results expected
for the full year. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report to
shareholders and Form 10-K for the year ended December 31, 1998.
2. EARNINGS PER SHARE
The Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share" (SFAS No. 128), effective December 31,
1997. This Statement requires the presentation of "basic" earnings
per share, which excludes the effect of dilution, and "diluted"
earnings per share, which includes the effect of dilution. The
Company's "basic" and "diluted" earnings per share computations are
identical in the periods presented, as there is no dilution effect.
Earnings per share is based on the weighted average number of shares
outstanding during the period.
3. COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board Statement
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), effective
January 1, 1998. Components of comprehensive income are net income
and all other non-owner changes in equity. The Statement requires
that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Company has chosen to disclose
comprehensive income in the Consolidated Statements of Comprehensive
Income.
-6-
4. OPERATING SEGMENTS
The Company adopted Financial Accounting Standards Board Statement
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131), during 1998. SFAS No. 131 established
standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to the
stockholders. It also established standards for related disclosures
about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision-maker, or decision making
group, in deciding how to allocate resources and in assessing
performance.
The Company has one reportable segment: community banking. At
present, the Company conducts no activities independent of the Bank.
The Bank is engaged in substantially all of the business operations
customarily conducted by an independent commercial bank in
Massachusetts. Banking services offered include acceptance of
checking, savings and time deposits, and the making of consumer,
commercial, real estate and other loans. The Bank also offers
official checks, traveler's checks, safe deposit boxes, Internet
banking and bill payment services and other customary banking
services to its customers.
5. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation.
The reclassifications have no effect on net income.
-7-
PART I - FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
The Company recorded net income of $1,943,477 for the six months ended
June 30, 1999, representing an increase of $39,586 or 2.1% over
$1,903,891 for the six months ended June 30, 1998. Earnings per share of
$.659 for the current period represented an increase of $.010 from $.649
for the corresponding period in 1998.
The Company recorded net income of $961,823 for the three months ended
June 30, 1999, representing a decrease of $21,472 or 2.2% from $983,295
for the three months ended June 30, 1998 Earnings per share of $.326 for
the current period represented a decrease of $.009 from $.335 for the
corresponding period in 1998.
Deposits of $261,007,109 at June 30, 1999 increased by $6,598,374 or 2.6%
from $254,408,735 at December 31, 1998. The increase in deposits
occurred primarily in the interest bearing category of certificates of
deposit, partially offset by a decrease in CMA investment accounts.
Loans of $154,954,834 at June 30, 1999 increased by $14,730,892 or 10.5%
from $140,223,942 at December 31, 1998. The growth in loans occurred
primarily in the commercial, residential mortgage and home equity account
categories. Noncurrent loans (nonaccrual loans and loans 90 days or more
past due but still accruing) totaled $1,075,724 and $913,151 at June 30,
1999 and December 31, 1998, respectively. There were no accruing
troubled debt restructurings at June 30, 1999 or December 31, 1998.
Assets of $312,099,002 at June 30, 1999 represented an $11,212,171 or
3.7% increase from $300,886,831 at December 31, 1998.
Six months ended June 30, 1999 as Compared To
Six months ended June 30, 1998
---------------------------------------------
Net Interest Income
Interest income for the six months ended June 30, 1999 was $10,321,472,
representing an increase of $360,279 or 3.6% from $9,961,193 for the six
months ended June 30, 1998, primarily due to higher average loan and
federal funds sold balances in 1999, partially offset by lower average
interest rates in the current period. Interest expense was $3,659,320,
representing a decrease of $39,960 or 1.1% from $3,699,280 for the six
months ended June 30, 1998, primarily due to lower average interest rates
in 1999, partially offset by higher average interest bearing deposit
balances in the current period. Net interest income for the six months
ended June 30, 1999 was $6,662,152, representing an increase of $400,239
or 6.4% from $6,261,913 for the six months ended June 30, 1998.
Noninterest Income and Expense
Noninterest income for the six months ended June 30, 1999 was $1,591,510
representing an increase of $1,658 or 0.1% from $1,589,852 for the six
months ended June 30, 1998. This increase was primarily the result of
-8-
increases in merchant credit card assessments, service charges,
commissions and fees and other income, partially offset by a reduction in
gains on sales of loans. The decrease in gains on sales of loans
resulted from a significant reduction in residential mortgage volume
during the current period as compared to the same period in 1998.
Noninterest expense for the six months ended June 30, 1999 of $5,219,851
was up $380,445 or 7.9% from $4,839,406 for the same period in 1998.
This increase was primarily the result of increases in salaries and
employee benefits, data processing, occupancy, credit card processing,
printing, stationery and supplies, marketing and advertising and other
expense, partially offset by a reduction in furniture and equipment.
Many of the non-inflationary increases in noninterest expense were the
result of costs associated with the opening of two new Community National
Bank branch offices during the second quarter of 1999, and the Bank's
continued investment in technology to enhance customer service and
product delivery systems.
Provision for Loan Losses
There was no provision for loan losses for the six months ended June 30,
1999 or 1998, reflecting management's continuing evaluation of the
adequacy of the allowance for loan losses and its belief that the
allowance is adequate.
Income Taxes
Income tax expense of $1,090,334 for the six months ended June 30, 1999
compared to $1,108,468 for the same period in 1998, the result of an
increase in taxable income during the current period.
Net Income
Net income of $1,943,477 for the first six months of 1999 represented an
increase of $39,586 or 2.1% from $1,903,891 recorded for the first six
months of 1998. Earnings per share of $.659 for the current period
represented an increase of $.010 from $.649 for the six months ended June
30, 1998.
Three months ended June 30, 1999 as Compared To
Three months ended June 30, 1998
-----------------------------------------------
Net Interest Income
Interest income for the three months ended June 30, 1999 was $5,235,393,
representing an increase of $195,379 or 3.9% from $5,040,014 for the
three months ended June 30, 1998, primarily due to higher average loan
and federal funds sold balances in 1999, partially offset by lower
average interest rates in the current period. Interest expense was
$1,856,503, representing a decrease of $37,003 or 2.0% from $1,893,506
for the three months ended June 30, 1998, primarily due to lower average
interest rates in 1999, partially offset by higher average interest
bearing deposit balances in the current period. Net interest income for
the three months ended June 30, 1999 was $3,378,890, representing an
increase of $232,382 or 7.4% from $3,146,508 for the three months ended
June 30, 1998.
-9-
Noninterest Income and Expense
Noninterest income for the three months ended June 30, 1999 was $774,073,
representing a decrease of $33,178 or 4.1% from $807,251 for the three
months ended June 30, 1998. This decrease was primarily the result of
a decrease in gains on sales of loans, partially offset by increases in
merchant credit card assessments, service charges, other charges,
commissions and fees and other income. The reduction in gains on sales
of loans resulted from a significant reduction in residential mortgage
volume during the current period as compared to the same period in 1998.
Noninterest expense for the three months ended June 30, 1999 of
$2,651,933 was up $249,656 or 10.4% from $2,402,277 for the corresponding
period in 1998. This increase was primarily the result of increases in a
variety of noninterest expense categories. Many of the non-inflationary
increases in noninterest expense were the result of costs associated with
the opening of two new Community National Bank branch offices during the
second quarter of 1999, and the Bank's continued investment in technology
to enhance customer service and product delivery systems.
Provision for Loan Losses
There was no provision for loan losses for the three months ended June
30, 1999 or 1998, reflecting management's continuing evaluation of the
adequacy of the allowance for loan losses and its belief that the
allowance is adequate.
Income Taxes
Income tax expense of $539,207 for the three months ended June 30, 1999
compared to $568,187 for the corresponding period in 1998, the result of
a decrease in taxable income during the current period.
Net Income
Net income of $961,823 for the first three months of 1999 represented a
decrease of $21,472 or 2.2% from $983,295 recorded for the first three
months of 1998. Earnings per share of $.326 for the current period
represented a decrease of $.009 from $.335 for the three months ended
June 30, 1998.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level believed
by management to be adequate to absorb potential losses in the loan
portfolio. Management's methodology in determining the adequacy of the
allowance considers specific credit reviews, past loan loss experience,
current economic conditions and trends and the volume, growth and
composition of the loan portfolio. Each loan on the Company's internal
Watch List is evaluated periodically to estimate potential losses. For
loans with potential losses, the bank sets aside or "allocates" a portion
of the ALLL against such potential losses. For the remainder of the
portfolio, "unallocated" reserve amounts are determined based on
judgments regarding the type of loan, economic conditions and trends,
potential exposure to loss and other factors. While the Company achieved
total loan growth of $14,730,892 or 10.5% during the six months ended
-10-
June 30, 1999, there were no significant changes in loan concentrations,
loan quality or loan terms during the period. Estimation methods and
assumptions affecting the allowance remained unchanged from those used in
prior periods. There was no significant reallocation of the allowance
among the various segments of the portfolio. The allowance for possible
loan losses is charged when management determines that the repayment of
the principal on a loan is in doubt. Subsequent recoveries, if any, are
credited to the allowance. At June 30, 1999, the balance in the
allowance was $3,000,719 representing 279% of noncurrent loans, compared
to $2,981,012 or 326% of noncurrent loans at December 31, 1998.
Securities
The Company's securities portfolio consists of obligations of the U.S.
Treasury, U.S. government sponsored agencies, mortgage backed securities
and obligations of various municipalities. Those assets are used in part
to secure public deposits and as collateral for repurchase agreements.
Total securities were $116,905,473 at June 30, 1999, representing a
decrease of $1,838,518 or 1.5% from $118,743,991 at December 31, 1998.
At June 30, 1999, $29,868,882 in securities were classified as "available
for sale". There were no sales of securities during the six months ended
June 30, 1999.
Liquidity and Capital Resources
The Company's primary sources of liquidity are customer deposits,
amortization and pay-offs of loan principal and maturities of investment
securities. These sources provide funds for loan originations, the
purchase of investment securities and other activities. Deposits are
considered a relatively stable source of funds. At June 30, 1999 and
1998, deposits were $261.0 and $243.0 million, respectively. Management
anticipates that deposits will grow moderately during the remainder of
1999.
As a nationally chartered member of the Federal Reserve System, the Bank
has the ability to borrow funds from the Federal Reserve Bank of Boston
by pledging certain of its investment securities as collateral. Also,
the Bank is a member of the Federal Home Loan Bank which provides
additional borrowing opportunities.
Bank regulatory authorities have established a capital measurement tool
called "Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to
assets constitutes the minimum capital standard for most banking
organizations. At June 30, 1999, the Company's Tier 1 leverage capital
ratio was 8.68%. Regulatory authorities have also implemented risk-based
capital guidelines requiring a minimum ratio of Tier 1 capital to risk
weighted assets of 4.00% and a minimum ratio of total capital to risk-
weighted assets of 8.00%. At June 30, 1999 the Company's Tier 1 and
total risk-based capital ratios were 15.50% and 16.75%, respectively.
The Bank is categorized as "well capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.).
On May 18, 1998, the Company's 401(k) Savings Plan ("401(k)") and the
Employee Stock Ownership Plan ("ESOP") purchased 11,359 shares and 5,000
shares, respectively, of common stock from the Company. The stock was
sold to the two Plans at a price of $16.00 per share, which was
determined by the trustees of the Plans, based on a fair market analysis
-11-
performed by an independent third party pursuant to the ESOP, to
represent a fair market price from a financial point of view as of
December 31, 1998. The stock was sold to the two Plans from the
Company's treasury stock account.
On June 15, 1999, the Company's Board of Directors declared a second
quarter 1999 cash dividend of $.089 per share of common stock to
shareholders of record at June 1, 1999, payable on July 15, 1999.
Asset/Liability Management
The Company has an asset/liability management committee which oversees
all asset/liability activities of the Company. The committee establishes
general guidelines each year and meets regularly to review the Company's
operating results and to make strategic changes when necessary.
It is the Company's general policy to reasonably match the rate
sensitivity of its assets and liabilities. A common benchmark of this
sensitivity is the one year gap position, which is a reflection of the
difference between the speed and magnitude of rate changes of interest
rate sensitive liabilities as compared with the Bank's ability to adjust
the rates of it's interest rate sensitive assets in response to such
changes. The Company's negative cumulative one year gap position at June
30, 1999, representing the excess of repricing liabilities versus
repricing assets within a one year time frame, was 6.5% of total assets.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains, in
addition to historical information, "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. When
used in this and other Reports filed by the Company, the words
"anticipate", "estimate", "expect", "objective", and similar expressions
are intended to identify forward-looking statements. These forward-
looking statements are subject to a variety of risks and uncertainties.
In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, risk factors that
could cause the Company's actual results to differ materially from those
contemplated in any forward-looking statement include, but are not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures, adverse changes
in asset quality, increased inflation, risks related to Year 2000 issues
(particularly with respect to compliance by third parties on which the
Company relies), and adverse legislative or regulatory changes.
Year 2000
The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
The Company, like most users of computers, computer software, and
equipment utilizing embedded microcontrollers, may be affected by the
Year 2000 date change. The Company recognized the importance of this
issue in 1996 and formally established an internal Year 2000 Committee in
1997, chaired by a member of the Company's senior management team, to
assess all systems to ensure that they will function properly. This
-12-
process involved five separate phases: awareness, assessment, renovation,
validation and implementation.
The Company's Year 2000 Committee established a schedule specifying the
completion dates for each of the process's five phases. During 1997,
the Committee completed the systems assessment phase, identifying each
internal system that could potentially be affected by the Year 2000
issue. Those systems were then designated as either mission-critical or
non-mission-critical. Mission-critical systems were defined by the
Company as being vital to the successful continuance of core business
activities. The Company determined that its only mission-critical system
is its mainframe data processing system. The mainframe system has been
certified by its respective hardware and software vendors as being Year
2000 compliant. In addition, the Company contracted with an independent
consulting firm to test the mainframe system for Year 2000 compatibility.
That testing has verified that the mainframe system is Year 2000
compliant.
For all non-mission-critical systems that could be affected by the Year
2000 issue, action plans were designed which set forth the process for
determining whether or not those systems are compliant. Those
determinations have involved obtaining compliance certifications from
vendors whenever possible and validation testing conducted by the
Company. A similar procedure was followed for external systems and
services the Company obtains from third parties. Testing of those third
party systems for Year 2000 compliance began during fourth quarter of
1998 and was completed during the first quarter of 1999.
When the results of the Company's validation testing revealed that a
particular system or service was not Year 2000 compliant, a specific
deadline was established by which time that system or service must be
brought into compliance. Contingency plans were formulated to either
upgrade such systems in order to meet Year 2000 compliance requirements,
replace them with systems that are certified as compliant, or establish
alternative processing arrangements. Those contingency plans document
the actions the Company has taken for each such non-compliant system. At
June 30, 1999, the Company was in the final or "implementation" phase of
this process.
In certain cases, however, such as the potential loss of electrical power
or telecommunications services due to Year 2000 problems, testing by the
Company has been either not practical or not possible. In those cases,
detailed contingency plans have been designed that specify how the
Company will deal with each such potential situation.
The Year 2000 issue presents several potential risks to the Company. The
banking transactions of the Company's customers are processed by its
internal mainframe data processing system. The failure of that system to
function as a result of the millennium date change could result in the
Company's inability to process customer transactions in the usual manner.
In that event, the Company could potentially lose customers to other
financial institutions, resulting in a loss of revenue. A number of the
Company's borrowers utilize computers and computer software to varying
degrees in conjunction with the operation of their businesses. The
customers and suppliers of those businesses may utilize computers as
well. Should the Company's borrowers, or the businesses on which they
depend, experience Year 2000 related computer problems, such borrowers'
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cash flow could be disrupted, adversely affecting their ability to repay
their loans with the Company. The Company has assessed its Year 2000
exposure to credit customers through the use of questionnaires and
personal interviews. Management's determination of the potential impact
the Year 2000 issue could have on those customers' ability to continue
servicing their debt in a satisfactory manner has been factored into the
Company's credit risk rating system.
Similar problems could affect certain of the Company's business
depositors, potentially causing interruptions in their cash flow that
could result in their inability to maintain historical deposit balance
levels in their accounts. Such an event could result in the reduction of
deposit balances available to the Company for loans, investments, etc.
Concern on the part of some depositors that potential Year 2000 related
problems could impair access to their deposit balances following the
millennium date change could result in the Company experiencing a deposit
outflow prior to December 31, 1999. The potential increase in cash
requirements has been estimated and factored into the Company's analysis
of projected future liquidity needs. Also, the Company has made a
special arrangement with the Federal Home Loan Bank of Boston for a
$10,000,000 loan for the period of November 15, 1999 through March 15,
2000. The Company believes this loan will provide additional liquidity
sufficient to fund any anticipated cash requirements resulting from
customers withdrawing funds from their deposit accounts.
Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Year 2000
related problems. Also, should Year 2000 related problems occur which
cause any of the Company's systems, or the systems of certain third
parties upon which the Company depends, to become inoperative, increased
personnel costs could be incurred if additional staff is required to
perform functions that the inoperative systems would have otherwise
performed. The Company has designed contingency plans to address such
potential occurrences.
As a nationally chartered financial institution, the Company and its
subsidiary, Community National Bank, are regulated by agencies of the
federal government. Federal bank regulators have established specific
guidelines and timetables for all nationally chartered financial
institutions to follow in addressing the Year 2000 issue. The Company's
Year 2000 contingency plans follow those requirements. As of June 30,
1999, the Company is in compliance with all Year 2000 guidelines and
timetables issued by the banking regulators, and it is also in compliance
with its own internal Year 2000 preparedness schedule.
The Company believes it is not possible to estimate the potential lost
revenue due to the Year 2000 issue, as the extent and longevity of such
potential problems cannot be predicted. However, as of June 30, 1999,
the Company believes it has modified or replaced any affected system that
could have caused any detrimental effects on its operations. The
Company's estimated total cost to test its systems and replace computer
equipment, software programs, or other equipment containing imbedded
microprocessors that were not Year 2000 compliant, is approximately
$216,000, all of which has been incurred as of June 30, 1999. System
maintenance or modification costs have been expensed as incurred, while
the cost of new hardware, software, and other equipment has been
capitalized and amortized over their useful lives.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders was held on April 13, 1999. At
that meeting, two (2) matters were put before the shareholders for
vote. Proxies for the meeting were solicited, and a copy of the Proxy
Statement dated March 23, 1999 is incorporated herein by reference and
attached hereto as an exhibit. Such Proxy Statement provides a
description of the matters put before the shareholders for vote and
provides other information required under this Item 4.
The results of the voting were as follows:
1. To fix the number of Directors who shall constitute the full Board
of Directors at ten.
Votes for: 2,340,521
Votes against: 6,036
2. To elect as Directors the three individuals listed as nominees in
the Proxy Statement, who, together with the seven Directors whose
terms of office did not expire at this meeting, constitute the full
Board of Directors.
Director Votes For Votes Against
-------- --------- -------------
I. George Gould 2,337,021 9,536
James A. Langway 2,337,021 9,536
David L. Parker 2,337,021 9,536
Item 5. OTHER INFORMATION
On April 12, 1999, Community National Bank opened its ninth branch
office, located at 35 Edgell Road, Framingham, Massachusetts.
On May 18, 1999, the Company's Board of Directors elected Jennie Lee
Colosi a Director of the Company, and the Bank's Board of Directors
elected Ms. Colosi a Director of the Bank.
On June 15, 1999, the Company's Board of Directors declared a second
quarter 1999 cash dividend of $.089 per share of common stock to
shareholders of record at June 1, 1999, payable on July 15, 1999.
On June 28, 1999, Community National Bank opened its tenth branch office,
located at 450 Boston Post Road, Sudbury, Massachusetts.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Article 9 - Financial Data Schedule for the six months
ended June 30, 1999
99 Proxy Statement dated March 23, 1999
(b) The Company did not file a Form 8-K during the quarter ended June
30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCORP, INC.
Date: July 30, 1999 By: /s/ James A. Langway
--------------------
James A. Langway
President & Chief Executive Officer
Principal Executive Officer
Date: July 30, 1999 By: /s/ Donald R. Hughes, Jr.
-------------------------
Donald R. Hughes, Jr.
Treasurer and Clerk,
Principal Financial Officer and
Principal Accounting Officer
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EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
------- -----------
27 Article 9 - Financial Data Schedule for the six months
ended June 30, 1999
99 Proxy Statement dated March 23, 1999
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