UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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 October 15, 1999 PART I - FINANCIAL INFORMATION COMMUNITY BANCORP, INC. Item 1. CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 1999 1998 ------------ ----------- ASSETS Cash and due from banks $ 19,745,744 $ 17,601,043 Federal funds sold 10,776,623 17,000,000 Securities available for sale, at market 35,898,240 31,685,402 Securities held to maturity (market value $87,403,279 at 9/30/99 and $87,832,432 at 12/31/98) 88,741,299 87,058,589 Mortgage loans held for sale 105,255 1,330,278 Loans 160,677,754 140,223,942 Less allowance for possible loan losses 3,057,975 2,981,012 ----------- ----------- Total net loans 157,619,779 137,242,930 ----------- ----------- Premises and equipment, net 6,089,630 5,576,789 Other assets, net 3,787,549 3,391,800 ----------- ----------- Total assets $322,764,119 $300,886,831 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $ 60,593,741 $ 60,511,257 Interest bearing 216,761,635 193,897,478 ----------- ----------- Total deposits 277,355,376 254,408,735 ----------- ----------- Federal funds purchased and securities sold under repurchase agreements 15,853,260 19,747,496 Other liabilities 1,761,032 1,265,351 ----------- ----------- Total liabilities 294,969,668 275,421,582 ----------- ----------- 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 21,442,286 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 (67,157) 32,810 ----------- ----------- Total stockholders' equity 27,794,451 25,465,249 ----------- ----------- Total liabilities and stockholders' equity $322,764,119 $300,886,831 =========== =========== <FN> See accompanying notes. -2- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended Nine months ended September 30, September 30, --------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ---------- Interest income: Interest and fees on loans $3,534,547 $3,245,414 $10,207,944 $9,862,947 Interest and div. on securities: Taxable interest 1,650,568 1,540,196 4,689,408 4,186,809 Nontaxable interest 141,779 126,677 414,424 341,372 Dividends 19,489 16,351 55,089 48,268 Interest on federal funds sold 227,696 431,014 528,686 881,449 --------- --------- ---------- ---------- Total interest income 5,574,079 5,359,652 15,895,551 15,320,845 --------- --------- ---------- ---------- Interest expense: Deposits 1,772,584 1,723,556 4,986,964 4,996,615 Short term borrowings 237,514 344,897 682,454 771,118 --------- --------- ---------- --------- Total interest expense 2,010,098 2,068,453 5,669,418 5,767,733 --------- --------- ---------- --------- Net interest income 3,563,981 3,291,199 10,226,133 9,553,112 --------- --------- ---------- -------- Provision for loan losses 0 0 0 0 --------- --------- ---------- --------- Net interest income after provision for loan losses 3,563,981 3,291,199 10,226,133 9,553,112 --------- --------- ---------- --------- Noninterest income: Merchant credit card assessments 310,905 285,745 924,788 878,870 Service charges 143,684 142,058 442,388 439,897 Other charges, commissions, fees 300,782 313,112 880,924 824,704 Gains on sales of loans, net 5,938 71,807 55,705 218,336 Gains on sales of securities, net 0 0 0 0 Other 17,394 20,273 66,408 61,040 --------- --------- --------- --------- Total noninterest income 778,703 832,995 2,370,213 2,422,847 --------- --------- --------- --------- Noninterest expense: Salaries and benefits 1,410,644 1,253,602 4,029,691 3,761,197 Data processing & ATM network 253,085 228,501 734,610 677,883 Occupancy, net 179,039 168,280 565,827 451,836 Furniture and equipment 114,690 113,766 327,611 344,168 Credit card processing 330,735 268,292 884,775 772,506 Printing, stationery & supplies 71,026 65,910 203,823 196,409 Professional fees 104,730 121,435 279,897 313,485 Marketing and advertising 57,974 97,951 231,052 202,899 Other 252,104 234,402 736,592 671,162 --------- --------- --------- --------- Total noninterest expense 2,774,027 2,552,139 7,993,878 7,391,545 --------- --------- --------- --------- Income before income taxes 1,568,657 1,572,055 4,602,468 4,584,414 Income taxes 552,598 579,357 1,642,932 1,687,825 --------- --------- --------- --------- Net income $1,016,059 $ 992,698 $2,959,536 $2,896,589 ========= ========= ========= ========= Earnings per common share $ .343 $ .337 $ 1.002 $ .986 Dividends per share $ .092 $ .082 $ .268 $ .238 Weighted average number of shares 2,960,947 2,944,588 2,952,738 2,936,262 <FN> See accompanying notes. -3- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended Nine months ended September 30, September 30, --------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- ---------- ---------- Net income $1,016,059 $ 992,698 $2,959,536 $2,896,589 Other comprehensive income: Unrealized securities gains (losses) arising during period 31,029 99,247 (169,235) 39,226 Income tax (expense) benefit on securities gains (losses) arising during period (12,700) (40,890) 69,268 (16,161) --------- -------- --------- --------- Net unrealized securities gains (losses) arising during period 18,329 58,357 (99,967) 23,065 --------- -------- --------- --------- 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 18,329 58,357 (99,967) 23,065 --------- --------- --------- --------- Comprehensive income $1,034,388 $1,051,055 $2,859,569 $2,919,654 ========= ========= ========= ========= <FN> See accompanying notes. -4- COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended September 30, -------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net income $ 2,959,536 $ 2,896,589 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in mortgage loans held for sale 1,225,023 489,450 Premium on sale of mortgages 59,938 142,940 Depreciation and amortization 677,075 615,893 Increase (decrease) in other liabilities 302,478 (132,053) Increase (decrease) in taxes payable 121,373 (108,993) Increase (decrease) in interest payable 95,112 (10,575) (Increase) decrease in other assets (129,783) 157,901 (Increase) in interest receivable (279,359) (263,644) ---------- ---------- Total adjustments 2,071,857 890,919 ---------- ---------- Net cash provided by operating activities 5,031,393 3,787,508 ---------- ---------- Cash flows from investing activities: Maturities and principal repayments of securities available for sale 9,652,800 9,437,884 Maturities and principal repayments of securities held to maturity 19,708,408 21,831,805 Purchases of securities available for sale (14,035,128) (5,482,625) Purchases of securities held to maturity (21,391,119) (47,963,991) Net change in federal funds sold 6,223,377 (7,200,000) Net change in loans and other real estate owned (20,399,259) 2,599,856 Acquisition of property, plant and equipment (1,189,916) (728,100) ---------- ---------- Net cash (used in) investing activities (21,430,837) (27,505,171) ---------- ---------- Cash flows from financing activities: Net change in deposits 22,946,641 17,222,765 Net change in federal funds purchased 0 (3,000,000) Net change in repurchase agreements (3,894,236) 9,654,227 Sale of treasury stock 261,744 274,965 Dividends paid (770,004) (677,413) ---------- ---------- Net cash provided by financing activities 18,544,145 23,474,544 ---------- ---------- Net increase (decrease) in cash and due from banks 2,144,701 (243,119) ---------- ---------- Cash and due from banks at beginning of period 17,601,043 16,704,667 ---------- ---------- Cash and due from banks at end of period $19,745,744 $16,461,548 ========== ========== <FN> See accompanying notes. -5- COMMUNITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 consolidated net income of $2,959,536 for the nine months ended September 30, 1999, representing an increase of $62,947 or 2.2% over $2,896,589 for the nine months ended September 30, 1998. Earnings per share of $1.002 for the current period represented an increase of $.016 from $.986 for the corresponding period in 1998. The Company recorded consolidated net income of $1,016,059 for the three months ended September 30, 1999, representing an increase of $23,361 or 2.4% over $992,698 for the three months ended September 30, 1998. Earnings per share of $.343 for the current period represented an increase of $.006 from $.337 for the corresponding period in 1998. Deposits of $277,355,376 at September 30, 1999 increased by $22,946,641 or 9.0% from $254,408,735 at December 31, 1998. The increase in deposits occurred primarily in the interest bearing categories of certificates of deposit and money market deposit accounts, partially offset by a decrease in NOW accounts. Loans of $160,677,754 at September 30, 1999 increased by $20,453,812 or 14.6% 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 $548,681 and $913,151 at September 30, 1999 and December 31, 1998, respectively. There were no accruing troubled debt restructurings at September 30, 1999 or December 31, 1998. Assets of $322,764,119 at September 30, 1999 represented an $21,877,288 or 7.3% increase from $300,886,831 at December 31, 1998. Nine months ended September 30, 1999 as Compared To Nine months ended September 30, 1998 --------------------------------------------------- Net Interest Income Interest income for the nine months ended September 30, 1999 was $15,895,551, representing an increase of $574,706 or 3.8% from $15,320,845 for the nine months ended September 30, 1998, primarily due to higher average loan and securities balances in 1999, partially offset by lower average interest rates in the current period. Interest expense was $5,669,418, representing a decrease of $98,315 or 1.7% from $5,767,733 for the nine months ended September 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 nine months ended September 30, 1999 was $10,226,133, representing an increase of $673,021 or 7.0% from $9,553,112 for the nine months ended September 30, 1998. Noninterest Income and Expense Noninterest income for the nine months ended September 30, 1999 was -8- $2,370,213 representing a decrease of $52,634 or 2.2% from $2,422,847 for the nine months ended September 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 decrease in gains on sales of loans resulted from a reduction in residential mortgage volume during the current period as compared to the same period in 1998. Noninterest expense for the nine months ended September 30, 1999 of $7,993,878 was up $602,333 or 8.1% from $7,391,545 for the same period in 1998. This increase was the result of increases in most 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 nine months ended September 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 $1,642,932 for the nine months ended September 30, 1999 compared to $1,687,825 for the same period in 1998. Net Income Net income of $2,959,536 for the first nine months of 1999 represented an increase of $62,947 or 2.2% from $2,896,589 recorded for the first nine months of 1998. Earnings per share of $1.002 for the current period represented an increase of $.016 from $.986 for the nine months ended September 30, 1998. Three months ended September 30, 1999 as Compared To Three months ended September 30, 1998 ---------------------------------------------------- Net Interest Income Interest income for the three months ended September 30, 1999 was $5,574,079, representing an increase of $214,427 or 4.0% from $5,359,652 for the three months ended September 30, 1998, primarily due to higher average loan and securities balances in 1999, partially offset by lower average interest rates in the current period. Interest expense was $2,010,098, representing a decrease of $58,355 or 2.8% from $2,068,453 for the three months ended September 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 September 30, 1999 was $3,563,981, representing an increase of $272,782 or 8.3% from $3,291,199 for the three months ended September 30, 1998. -9- Noninterest Income and Expense Noninterest income for the three months ended September 30, 1999 was $778,703, representing a decrease of $54,292 or 6.5% from $832,995 for the three months ended September 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 decrease in gains on sales of loans resulted from a reduction in residential mortgage volume during the current period as compared to the same period in 1998. Noninterest expense for the three months ended September 30, 1999 of $2,774,027 was up $221,888 or 8.7% from $2,552,139 for the corresponding period in 1998. This increase was the result of increases in most 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 September 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 $552,598 for the three months ended September 30, 1999 compared to $579,357 for the corresponding period in 1998. Net Income Net income of $1,016,059 for the first three months of 1999 represented a decrease of $23,361 or 2.4% from $992,698 recorded for the first three months of 1998. Earnings per share of $.343 for the current period represented an increase of $.006 from $.337 for the three months ended September 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 $20,453,812 or 14.6% during the nine months ended September 30, 1999, there were no significant changes in loan concentrations, loan quality or loan terms during the period. Estimation -10- 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 September 30, 1999, the balance in the allowance was $3,057,975, representing 557% 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 $124,639,539 at September 30, 1999, representing an increase of $5,895,548 or 5.0% from $118,743,991 at December 31, 1998. At September 30, 1999, $35,898,240 in securities were classified as "available for sale". There were no sales of securities during the nine months ended September 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 September 30, 1999 and 1998, deposits were $277.4 and $250.0 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 September 30, 1999, the Company's Tier 1 leverage capital ratio was 8.63%. Regulatory authorities have also implemented risk-based capital guidelines requiring a minimum ratio of Tier 1 capital to risk weighted assets of 4.00% and a minimum ratio of total capital to risk-weighted assets of 8.00%. At September 30, 1999 the Company's Tier 1 and total risk-based capital ratios were 15.55% and 16.81%, 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 September 21, 1999, the Company's Board of Directors declared a third quarter 1999 cash dividend of $.092 per share of common stock to shareholders of record at September 1, 1999, payable on October 15, 1999. -11- 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 September 30, 1999, representing the excess of repricing liabilities versus repricing assets within a one year time frame, was 4.8% 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 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 -12- 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 included 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 had to 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 September 30, 1999, the Company had completed all phases 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 were 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' 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. -13- 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 created 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 September 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, 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 was incurred by 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. -14- PART II - OTHER INFORMATION Item 5. OTHER INFORMATION On September 21, 1999, the Company's Board of Directors declared a third quarter 1999 cash dividend of $.092 per share of common stock to shareholders of record at September 1, 1999, payable on October 15, 1999. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Article 9 - Financial Data Schedule for the nine months ended September 30, 1999 (b) The Company did not file a Form 8-K during the quarter ended September 30, 1999. -15- 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: October 26, 1999 By: __________________________ James A. Langway President & Chief Executive Officer Principal Executive Officer Date: October 26, 1999 By: __________________________ Donald R. Hughes, Jr. Treasurer and Clerk, Principal Financial Officer and Principal Accounting Officer -16- EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION ------- ----------- 27 Article 9 - Financial Data Schedule for the nine months ended September 30, 1999 -17-