Community Bancorp - 10-Q quarterly report FY

CONFORMED COPY

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 Six Months Ended June 30, 2000
Commission File Number 000-16435

COMMUNITY BANCORP.

(Exact Name of Registrant as Specified in its Chapter)


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 ( )

At July 27, 2000 there were 3,356,343 shares outstanding of the Corporation's
common stock.

Total Pages - 23 Pages

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PART I.

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS

For the Six Months Ended June 30, 2000

   Community Bancorp. (the "Company") is a bank holding company whose
subsidiaries include Community National Bank and Liberty Savings Bank.
Community National Bank ("the Bank") is a full service institution operating in
the state of Vermont. The Bank has seven offices, five of which are located in
Orleans County, one in Essex County, and one in Caledonia County. Liberty
Savings Bank ("Liberty") is a New Hampshire guaranty savings bank acquired
by Community Bancorp. on December 31, 1997. Currently this bank is inactive
and shares the mailing address of Community Bancorp. Management is working
with the board of directors to find a suitable location in the northern part of New
Hampshire to operate Liberty as a lending facility, and may expand in the future
into a full service financial institution. Most of the Bancorp's business is
conducted through the Bank, therefore, the following narrative is based
primarily on this Bank's operations. The various spreadsheets preceding this
section are consolidated figures for Community Bancorp. and subsidiaries
("the Company"), and can be used to provide a more detailed comparison of the
information disclosed in the following narrative.

OVERVIEW

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. Our time deposits
greater than $100,000 increased $71,178 or .5% to end the first six months of
2000 at a volume of $15.97 million compared to $15.89 million at the end of
the 1999 calendar year. Other time deposits increased $460,875 from December
31, 1999 to June 30, 2000. A review of these deposits, primarily the time
deposits over $100,000 indicates that they are primarily generated locally
and regionally and are established customers of the Company. The Company
has no brokered deposits. Now and money market funds decreased $4.5 million
to end the first six months of 2000 at $47.6 million compared to $52.1 million
as of the end 1999. The positive response to the repurchase agreements is a key
factor to the decrease in now and money market funds. Our gross loan portfolio
increased 9.7% from $152.6 million at the end of 1999 to $167.4 million at the
end of the first six months of 2000. The Bank has purchased approximately $4.4
million in loans from other institutions contributing to the increase in the loan
portfolio. Federal funds sold and overnight deposits decreased dramatically to
end the first six months of 1999 at $151,646 compared to $2.8 million as of the
end of the 1999 calendar year. An increase in the Company's investment portfolio
also helped to increase assets for the first six months of 2000. As of June 30,
2000, the Company held in it's investment portfolio treasuries classified as
"Available for Sale" at a fair value of $20.9 million, compared to $29 million
as of December 31, 1999, a decrease of $8.1 million or 27.8%. Treasuries
classified as "Held to Maturity" ended the first six months of 2000 at a book
value of $43.1 million compared to $29.9 million as of the end of the 1999
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 Federal Home Loan Bank of Boston (FHLB)
and Federal Reserve stock. These securities remain at a balance totaling $1.14
million as of June 30, 2000. The Company currently has an advance of just over
$13 million against an available line of $105.6 million, with an additional $2
million and $4.1 million, respectively, at First Boston and FHLB.

Credit Risk - Management follows strict underwriting guidelines, and has
established a thorough loan-by-loan review policy. These measures help to insure
the adequacy of the loan loss coverage. The Executive Officers and the Board of
Directors conduct periodic reviews of the loan portfolio. Topics discussed include
potential exposures existing within the portfolio. Factors considered are each
borrower's financial condition, the industry or sector for the economy in which
the borrower operates, and overall economic conditions. Existing or potential
problems are noted and addressed by senior management in order to assess the risk
of probable loss or delinquency. A variety of loans are reviewed periodically
by an independent firm in order to assure accuracy and compliance with various
policies and procedures set by the regulatory authorities. The Company also
employs a Credit Administration Officer whose duties include, among others, a
review of the loan portfolio including delinquent and non-performing loans.

   Specific allocations are made in situations management feels are at a greater
risk for loss. A quarterly review of the qualitative factors including "Levels of,
and Trends in, Delinquencies and Non-Accruals" and "National and Local
Economic Trends and Conditions", help to ensure that areas with potential risk
are noted and coverage increased or decreased to reflect the trends in
delinquencies and non-accruals. Residential first mortgage loans make up the
largest part of the loan portfolio and have the lowest historical loss ratio
helping to alleviate the overall risk.

Allowance for loan losses and provisions - The valuation allowance for loan
losses of $1.8 million as of June 30, 2000 composed 1.1% of the total gross
loan portfolio. A primary concern of management is to reduce the exposure of
credit loss within the portfolio. The Company maintains a residential loan
portfolio of approximately $102 million and a commercial real estate portfolio
of approximately $32 million accounting for 60% and 20%, respectively, of the
total loan portfolio. This large loan volume together with the low historical
loan loss experience helps to support our basis for loan loss coverage.

   Non-Performing assets for the company are made up of three different types
of loans, "90 Days or More Past Due", "Non-Accruing Loans", and "Other Real
Estate Owned" (OREO). A comparison of these non-performing assets revealed a
decrease in non-accruing loans of $389,897 or 22.2%, and the OREO portfolio
decreased $41,654 or by 9.6%, while a modest increase of $5,295 or just under
1% was noted in loans 90 days or more past due. The portfolio of non-accruing
loans makes up the biggest portion of the non-performing assets and consists of
$1.3 million or 92% of real estate secured mortgage loans at the end of the first
six months of 2000, thereby reducing the exposure to loss.

Non-performing assets as of June 30, 2000 and December 31, 1999 were as follows:

   Other real estate owned is made up of property that the Company owns in lieu
of foreclosure or through normal foreclosure proceedings, and property that the
Company does not hold title to but is in actual control of, known as in-substance
foreclosure. The value of the property is determined prior to transferring the
balance to other real estate owned. The balance transferred to OREO is the
lesser of the appraised value of the property, or book value of the loan. A write-
down may be deemed necessary to bring the book value of the loan equal to the
appraised value. Appraisals are then done periodically thereafter charging any
additional write-downs to the appropriate expense account.

Market Risk and Asset and Liability Management - Market risk is the risk of
loss in a financial instrument arising from adverse changes in market prices
and rates, foreign currency exchange rates, commodity prices and equity prices.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
have any market risk sensitive instruments acquired for trading purposes. The
Company attempts to structure its balance sheet to maximize net interest income
while controlling its exposure to interest rate risk. The Company's Asset/
Liability Committee formulates strategies to manage interest rate risk by
evaluating the impact on earnings and capital of such factors as current
interest rate forecasts and economic indicators, potential changes in such fore-
casts and indicators, liquidity, and various business strategies. The Asset/-
Liability Committee's methods for evaluating interest rate risk include an
analysis of the Company's interest rate sensitivity "gap", which provides a
static analysis of the maturity and repricing characteristics of the entire
balance sheet, and a simulation analysis which calculates projected net
interest income based on alternative balance sheet and interest rate scenarios,
including "rate shock" scenarios involving immediate substantial increases or
decreases in market rates of interest.

Interest Rate Sensitivity "Gap" Analysis - An interest rate sensitivity "gap"
is defined as the difference between the interest-earning assets and interest-
bearing liabilities maturing or repricing within a given time period. A gap
is considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to affect
net interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market interest rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.

   The following tables set forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at June 30,
2000, and December 31, 1999. 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 detailed
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.

GAP ANALYSYS
Community Bancorp. & Subsidiaries
June 30, 2000
Cumulative repriced within

GAP ANALYSYS
Community Bancorp. & Subsidiaries
December 31, 1999
Cumulative repriced within:

(1) The Company may sell investments available for sale with a fair value of
$28,982,188 at any time.
(2) Loan totals exclude non-accruing loans amounting to $1,758,549.
 
OTHER OPERATING INCOME AND EXPENSES

   Total other operating income for the second quarter of 2000 was $518,593
compared to $450,091 for the second quarter of 1999 and $513,773 for the second
quarter of 1998, an increase of $68,502 or 15.2% for 2000 versus 1999, and a
decrease of $63,682 or 12.4% for 1999 versus 1998. Trust department income
reports the biggest increase for the second quarter of 2000 versus the same
period in 1999. A decrease is noted in other income for both 2000 versus 1998
and 1999 versus 1998 at a reported $78,290, and $92,052, respectively. Income
from sold loans accounts for a portion of the decreases with figures for the
second quarter of 2000 of $8,508 compared to $36,700 for 1999 and $101,344
for the same quarter in 1998. Total other operating income for the first six
months of 2000 ended at $920,889 compared to $823,563 as of the end of the
first six months of 1999 and $810,536 for the same period in 1998. The results
are an increase of $97,326 or 11.8% for 2000 versus 1999 and an increase of
$13,027 or 1.6% for 1999 versus 1998. Trust department income continues to
note the biggest increase throughout the comparison period reporting increases
of $51,994 or 49.3% for 2000 versus 1999, and $39,669 or 60.3% for 1999
versus 1998. Our trust department has expanded in all aspects from employees
to customers, with the end result showing an increase in income over the last
few years. A loss of $11,507 was taken during the first six months of 2000 as
the result of the sale of some low yielding treasuries. These treasuries were
replaced with higher yielding agencies, anticipating that the higher yield would
soon make up for the loss on the sale of the treasuries. Other income recognized
the only decrease for 1999 versus 1998 reported at $37,362 or 9.1%. This
decrease offset most of the increase in trust department income for the six
months comparison period of 1999 versus 1998, resulting in a modest $13,027
increase for that time period.

   Total other operating expenses followed a different path for the second
quarter comparisons with figures of almost $2 million for 2000, and increase
of $143,219 or 7.8% over the 1999 figure of $1.83 million, which increased
$67,474 over the 1998 figure of $1.76 million. Occupancy expense notes the
biggest increase for the second quarter of 2000 versus 1999, due to significant
increases in depreciation, taxes on bank property, and service contracts.
Expenses associated with the Company's non-performing assets were higher for
the second quarter of 1999 compared to the same quarter in 1998, contributing
$31,299 to the increase in other expenses for this comparison period. Total
other operating expense for the six month comparison periods increased from
$3.6 million for 1998 to $3.7 million for 1999, and then increased to $4 million
for 2000, resulting in increases of 3% for 1999 versus 1998, and 8.3% for 2000
versus 1999. Other expenses for the first six months reported the biggest
increase of $91,698 or 7.7%, followed closely by occupancy expense with a
reported increase for 2000 versus 1999 of $82,664 or 12.8%. Expenses of $61,500
on non-accrual loans for the first six months of 1999 supported the increase in
other expenses for the 1999 versus 1998 period.

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

APPLICABLE INCOME TAXES

   Income before taxes increased from $746,924 for the second quarter of 1998
to $785,172 for the second quarter of 1999, and then increased to $895,412 for
the second quarter of 2000. The results are increases of just over 5% for 1999
versus 1998 and 14% for 2000 versus 1999. As a result, provisions for income
taxes increased $29,701 or 15.7% for the 1999 versus 1998 comparison period,
and an increase of $28,065 or 12.8% is noted for the 2000 versus 1999 period
ending the second quarter of 2000 at $246,748. Income before taxes for the
first six months increased from $1.27 million for 1998 to $1.34 million for
1999 to $1.47 million as of June 30, 2000, with income taxes calculated at
$302,855, $362,236, and $391,242, respectively.

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 their purchasing power
to remain aggressive.

CAPITAL RESOURCES

   The Company's stockholders' equity started the year at $22,181,154,
increased through earnings of $1,082,289 and sales of common stock of
$478,131 through dividend reinvestment, and adjustments totaling $32,046
for valuation allowance for securities. It was decreased by dividends totaling
$1,079,309, the purchase of treasury stock of $97 and the purchase of stock
through the Stock Buyback Plan of $436,991. The Company announced plans to
buy up to 6% or 205,000 shares of its outstanding common stock at current
market prices. To date, the price per share was in the range of $9.50 to $10.25.
The Company declared a dividend in December of 1999, payable in February of
2000. As a result, the Company had to accrue the dividend, decreasing
stockholders' equity by $537,361 as of December 31, 1999. Stockholders'
equity ended the first six months of 2000 at $22,794,584 with a book value
of $6.76 per share. All stockholders' equity is unrestricted. Additionally, it
is noted that the net unrealized loss on valuation allowance for securities has
decreased since the beginning of the year. A review of this activity shows that
as the maturity date of the investments gets closer, the market price becomes
favorably better, therefore, material loss is greatly reduced.

   The Company is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by the banking regulators. The minimum requirements
for Tier I and Total Capital are 4% and 8%, respectively. As of June 30, 2000,
the Company continued to maintain ratios far above the minimum requirements
with reported ratios of approximately 18% for Tier I and 19% for Total Capital.

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

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

FORWARD-LOOKING STATEMENTS

   When used herein, the terms "expect, plan, anticipate, believe" or similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements.

   The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash Flow
and Financial Condition. These statements are based on current expectations,
estimates and projections about the industries in which the Company operates,
management's beliefs and various assumptions made by management which are
difficult to predict. Among the factors that could affect the outcome of the
statements are general industry and market conditions and growth rates. There-
fore, actual outcomes and their impact on the Company may differ materially
from what is expressed or forecasted. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.


                                            PART II.

Item 1

Legal Proceedings

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


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

 
Item 4

Submission of Matters to a Vote of Security Holders

   The following matters were submitted to a vote of security holders, at the
Annual Meeting of Shareholders of Community Bancorp. on May 2, 2000:

 

1. To elect three directors to serve until the Annual Meeting of Shareholders
   in 2003;
2. To consider and vote on an amendment to the Company's Articles of
   Association to limit the liability of directors, except for certain breaches of
   duty, as specified by Vermont law;
3. To consider and vote on an amendment to Article Eleven of the company's
   Articles of Association to modify existing language relating to indemnification
   of directors, officers and others;
4. To ratify the selection of the independent public accounting firm of A.M.
   Peisch & Company as the Corporation's external auditors for the fiscal year
   ending December 31, 2000;

 
The results are as follows:

Item 5

Other Information

NONE

Item 6

Exhibits and Reports on Form 8-K

The following exhibits are filed as part of this report:
Exhibit 2.1 - Amendments to article 11 and new article 16 of the Community Bancorp.,
amended and restated articles of association
Exhibit 2.2 - Amended By-laws for Community Bancorp. including new Article 9
(Indemnification)
Exhibit 27 - Financial Data Schedule

Reports on Form 8-K

Form 8-K dated April 11, 2000, announcing a stock buyback plan for Community Bancorp.,
was filed on the same date.

                                 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: August 4, 2000                     By: /s/ Richard C. White
                                           Richard C. White, President

 
DATED: August 4, 2000                     By: /s/ Stephen P. Marsh
                                           Stephen P. Marsh,
                                           Vice President & Treasurer

                                                          Exhibit 2.1

The following two amendments to the Amended and Restated Articles of Association
of Community Bancorp. were adopted by the requisite vote of the shareholders at
the Annual Meeting of Shareholders held on May 2, 2000 and became effective on
May 12, 2000, upon filing in the Office of the Vermont Secretary of State:

Article Eleven is amended to read in its entirety as follows:

                             ARTICLE ELEVEN
                            INDEMNIFICATION

The Board of Directors is authorized to adopt such By-laws and other
regulations or arrangements (including contracts) providing for indemnification
of, and advancement of expenses to, any person who is or was a director,
officer, employee or agent of the Corporation, as the Directors may deem
advisable, to the extent not inconsistent with applicable law.

Article Sixteen is added, reading in its entirety as follows:

                             ARTICLE SIXTEEN
                 LIMITATION OF DIRECTOR LIABILITY

A Director of the Corporation shall have no personal liability to the Corporation
or to its shareholders for money damages for any action taken, or any failure to
take any action, solely as a director, based on a failure to discharge his or her
own duties in accordance with Section 8.30 of Title 11A of the Vermont Statutes
Annotated, except for (a) the amount of a financial benefit received by the
Director to which the Director is not entitled; (b) an intentional reckless
infliction of harm on the Corporation or its shareholders; (c) a violation
of Section 8.33 of Title 11A of the Vermont Statutes Annotated; or (d) an
intentional or reckless criminal act. This Article Sixteen shall not be deemed
to eliminate or limit the liability of a Director for any act or omission
occurring prior to the date this Article becomes effective. No amendment or
repeal of this Article Sixteen shall apply to or have any effect on the liability
or alleged liability of any Director of the Corporation for or with respect to
any acts or omissions of such Director occurring prior to such amendment or
repeal.