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, 1998
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
2,944,588 shares outstanding
as of November 3, 1998
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<TABLE>
PART I - FINANCIAL INFORMATION
COMMUNITY BANCORP, INC.
Item 1. CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,461,548 $ 16,704,667
Federal funds sold 21,800,000 14,600,000
Securities available for sale, at market 34,959,866 38,880,166
Securities held to maturity (market value
$82,513,295 at 9/30/98 and $56,404,323
at 12/31/97) 82,436,409 56,304,224
Mortgage loans held for sale 2,069,434 2,173,322
Loans 136,881,181 139,839,853
Less allowance for possible loan losses 3,066,705 3,215,559
----------- -----------
Total net loans 133,814,476 136,624,294
Premises and equipment, net 4,750,173 4,637,965
Other assets, net 3,443,690 3,625,889
----------- -----------
Total assets $299,735,596 $273,550,527
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $ 56,878,701 $ 55,678,794
Interest bearing 193,132,598 177,109,740
----------- -----------
Total deposits 250,011,299 232,788,534
Federal funds purchased and securities
sold under repurchase agreements 23,291,291 16,637,064
Other liabilities 1,501,688 1,688,830
----------- -----------
Total liabilities 274,804,278 251,114,428
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,
2,944,588 share outstanding, (2,926,257
shares outstanding at 12/31/97) 7,998,045 7,998,045
Surplus 524,106 414,120
Undivided profits 18,615,979 16,418,790
Treasury stock, at cost, 254,630 shares,
(272,961 shares at 12/31/97) (2,364,573) (2,529,552)
Accumulated other comprehensive income 157,761 134,696
Total stockholders' equity 24,931,318 22,436,099
----------- -----------
Total liabilities and
stockholders' equity $299,735,596 $273,550,527
=========== ===========
<FN>
See accompanying notes.
</TABLE>
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<TABLE>
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $3,245,414 $3,398,535 $9,862,947 $9,750,798
Interest and div. on securities:
Taxable interest 1,540,196 1,286,068 4,186,809 3,895,732
Nontaxable interest 126,677 85,890 341,372 224,506
Dividends 16,351 15,183 48,268 43,915
Interest on federal funds sold 431,014 98,583 881,449 254,615
--------- --------- ---------- ----------
Total interest income 5,359,652 4,884,259 15,320,845 14,169,566
--------- --------- ---------- ----------
Interest expense:
Deposits 1,723,556 1,541,319 4,996,615 4,507,856
Short term borrowings 344,897 186,332 771,118 549,895
--------- --------- --------- ---------
Total interest expense 2,068,453 1,727,651 5,767,733 5,057,751
--------- --------- --------- ---------
Net interest income 3,291,199 3,156,608 9,553,112 9,111,815
Provision for loan losses 0 0 0 0
--------- --------- --------- ---------
Net interest income after
provision for loan losses 3,291,199 3,156,608 9,553,112 9,111,815
--------- --------- --------- ---------
Noninterest income:
Merchant credit card assessments 285,745 244,933 878,870 737,525
Service charges 142,058 148,999 439,897 464,124
Other charges, commissions, fees 313,112 224,667 824,704 653,022
Gains on sales of loans, net 71,807 10,823 218,336 26,809
Gains on sales of securities, net 0 10,463 0 8,599
Other 20,273 19,039 61,040 60,262
--------- --------- --------- ---------
Total noninterest income 832,995 658,924 2,422,847 1,950,341
--------- --------- --------- ---------
Noninterest expense:
Salaries and benefits 1,253,602 1,041,578 3,761,197 3,399,152
Data processing 150,138 143,251 435,114 434,871
Occupancy, net 168,280 153,029 451,836 428,152
Furniture and equipment 113,766 96,962 344,168 299,941
Credit card processing 268,292 223,687 772,506 629,233
Other 598,061 584,713 1,626,724 1,723,548
--------- --------- --------- ---------
Total noninterest expense 2,552,139 2,243,220 7,391,545 6,914,897
--------- --------- --------- ---------
Income before income taxes 1,572,055 1,572,312 4,584,414 4,147,259
Income taxes 579,357 588,693 1,687,825 1,563,067
--------- --------- --------- ---------
Net income $ 992,698 $ 983,619 $2,896,589 $2,584,192
========= ========= ========= =========
Earnings per common share $ .337 $ .333 $ .986 $ .878
Dividends per share $ .082 $ .072 $ .238 $ .210
Weighted average number of shares 2,944,588 2,950,558 2,936,262 2,942,529
<FN>
See accompanying notes.
</TABLE>
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<TABLE>
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 992,698 $ 983,619 $2,896,589 $2,584,192
Other comprehensive income:
Unrealized securities gains
(losses) arising during period 99,247 145,952 39,226 167,111
Income tax (expense) benefit on
securities gains (losses)
arising during period (40,890) (60,526) (16,161) (69,301)
--------- --------- --------- ---------
Net unrealized securities gains
(losses) arising during period 58,357 85,426 23,065 97,810
--------- --------- --------- ---------
Less: reclassification
adjustment for securities
(gains) losses included in
income 0 (10,463) 0 (8,599)
Income tax expense (benefit) on
securities (gains) losses
included in income 0 4,339 0 3,566
--------- --------- --------- ---------
Net reclassification adjustments
for securities (gains) losses
included in net income 0 (6,124) 0 (5,033)
--------- --------- --------- ---------
Other comprehensive income 58,357 79,302 23,065 92,777
--------- --------- --------- ---------
Comprehensive income $1,051,055 $1,062,921 $2,919,654 $2,676,969
========= ========= ========= =========
<FN>
See accompanying notes.
</TABLE>
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<TABLE>
COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,896,589 $ 2,584,192
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease (increase) in mortgage loans
held for sale 489,450 (234,321)
Premium on sale of mortgages 142,940 112,935
Depreciation and amortization 615,893 591,241
(Decrease) increase in other liabilities (132,053) 243,473
(Decrease) increase in taxes payable (108,993) 73,264
(Decrease) in interest payable (10,575) (35,260)
Decrease (increase) in other assets 157,901 (5,022)
(Increase) in interest receivable (263,644) (133,508)
---------- ----------
Total adjustments 890,919 612,802
---------- ----------
Net cash provided by operating activities $ 3,787,508 $ 3,196,994
---------- ----------
Cash flows from investing activities:
Maturities and principal repayments of
securities available for sale 9,437,884 4,309,414
Maturities and principal repayments of
securities held to maturity 21,831,805 9,848,767
Sales of securities available for sale 0 2,913,737
Sales of securities held to maturity 0 2,000,000
Purchases of securities available for sale (5,482,625) (10,068,750)
Purchases of securities held to maturity (47,963,991) (9,180,014)
Net change in federal funds sold (7,200,000) 300,000
Net change in loans and other real estate
owned 2,599,856 (11,000,216)
Proceeds from sales of other real estate
owned 0 15,600
Acquisition of property, plant and equipment (728,100) (476,233)
---------- ----------
Net cash used in investing activities (27,505,171) (11,337,695)
---------- ----------
Cash flows from financing activities:
Net change in deposits 17,222,765 12,342,993
Net change in federal funds purchased (3,000,000) 0
Net change in repurchase agreements 9,654,227 (849,985)
Sale of treasury stock 274,965 150,019
Dividends paid (677,413) (599,829)
---------- ----------
Net cash provided by financing activities 23,474,544 11,043,198
---------- ----------
Net increase in cash and due from banks (243,119) 2,902,497
Cash and due from banks at beginning
of period 16,704,667 14,391,567
---------- ----------
Cash and due from banks at end of period $16,461,548 $17,294,064
========== ==========
<FN>
See accompanying notes.
</TABLE>
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COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
_________________________________________________________________________
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, 1997.
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 weighte
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. Prior year
data has been restated to conform to the requirements of SFAS No. 130.
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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), effective January 1, 1998. This Statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS No. 131 introduces a new model for
segment reporting called the "management approach". The management approach
is based on the way the chief operating decision-maker organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure and any other in which management
disaggregates a company. Based on the "management approach" model, the
Company has determined that its business is comprised of a single operating
segment and that SFAS No. 131 therefore has no impact on its financial
statements.
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.
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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 $2,896,589 for the nine months ended
September 30, 1998, representing an increase of $312,397 or 12.1% over
$2,584,192 for the nine months ended September 30, 1997. Earnings per share
of $.986 for the current period represented an increase of $.108 from $.878
for the corresponding period in 1997.
The Company recorded net income of $992,698 for the three months ended
September 30, 1998, representing an increase of $9,079 or .9% over $983,619
for the three months ended September 30, 1997 Earnings per share of $.337
for the current period represented an increase of $.004 from $.333 for the
corresponding period in 1997.
The improvement in net income resulted primarily from an increase in net
interest income and noninterest income, partially offset by increases in
salaries and benefits, occupancy, furniture and equipment and credit card
processing.
Deposits of $250,011,299 at September 30, 1998 increased by $17,222,765 or
7.4% from $232,788,534 at December 31, 1997. The increase in deposits
occurred primarily in the interest bearing categories of NOW accounts,
savings accounts, cash management accounts and certificates of deposit.
Loans of $136,881,181 at September 30, 1998 were down $2,958,672 or 2.1% from
$139,839,853 at December 31, 1997. Increases were realized in the commercial
loan, home equity loan and MasterCard categories while decreases were
experienced in residential real estate mortgages and installment loans.
Noncurrent loans (nonaccrual loans and loans 90 days or more past due but
still accruing) totaled $755,820 and $871,619 at September 30, 1998 and
December 31, 1997, respectively. There were no accruing troubled debt
restructurings at September 30, 1998 or December 31, 1997.
Assets of $299,735,596 at September 30, 1998 represented a $26,185,069 or
9.6% increase from $273,550,527 at December 31, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
NET INTEREST INCOME
Interest income for the nine months ended September 30, 1998 was $15,320,845,
representing an increase of $1,151,279 or 8.1% from $14,169,566 for the nine
months ended September 30, 1997, primarily due to higher average loan,
securities and federal funds sold balances in 1998. Interest expense was
$5,767,733, representing an increase of $709,982 or 14.0% from $5,057,751 for
the nine months ended September 30, 1997, primarily due to higher average
interest bearing deposit and repurchase agreement balances in 1998. Net
interest income for the nine months ended September 30, 1998 was $9,553,112,
representing an increase of $441,297 or 4.8% from $9,111,815 for the nine
months ended September 30, 1997.
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NONINTEREST INCOME AND EXPENSE
Noninterest income for the nine months ended September 30, 1998 was
$2,422,847 representing an increase of $472,506 or 24.2% from $1,950,341 for
the nine months ended September 30, 1997. This increase was primarily the
result of increases in merchant credit card assessments, gains on sales of
loans, other charges, commissions and fees and other income, partially offset
by a reduction in service charges and gains on sales of securities.
Noninterest expense for the nine months ended September 30, 1998 of
$7,391,545 was up $476,648 or 6.9% from $6,914,897 for the same period in
1997. This increase was primarily the result of increases in salaries and
employee benefits, occupancy, furniture and equipment and credit card
processing, partially offset by a reduction in other expense.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the nine months ended September
30, 1998 or 1997, 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 $1,687,825 for the nine months ended September 30, 1998
compared to $1,563,067 for the same period in 1997, the result of an increase
in taxable income during the current period.
NET INCOME
Net income of $2,896,589 for the first nine months of 1998 represented an
increase of $312,397 or 12.1% from $2,584,192 recorded for the first nine
months of 1997. Earnings per share of $.986 for the current period
represented an increase of $.108 from $.878 for the nine months ended
September 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
NET INTEREST INCOME
Interest income for the three months ended September 30, 1998 was $5,359,652,
representing an increase of $475,393 or 9.7% from $4,884,259 for the three
months ended September 30, 1997, primarily due to higher average loan,
securities and federal funds sold balances in 1998. Interest expense was
$2,068,453, representing an increase of $340,802 or 19.7% from $1,727,651 for
the three months ended September 30, 1997, primarily due to higher average
interest bearing deposit and repurchase agreement balances in 1998. Net
interest income for the three months ended September 30, 1998 was $3,291,199,
representing an increase of $134,591 or 4.3% from $3,156,608 for the three
months ended September 30, 1997.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the three months ended September 30, 1998 was
$832,995, representing an increase of $174,071 or 26.4% from $658,924 for the
three months ended September 30, 1997. This increase was primarily
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the result of increases in merchant credit card assessments, gains on sales
of loans and other charges, commissions and fees, partially offset by a
reduction in service charges and gains on sales of securities.
Noninterest expense for the three months ended September 30, 1998 of
$2,552,139 was up $308,919 or 13.8% from $2,243,220 for the corresponding
period in 1997. This increase was primarily the result of increases in
salaries and employee benefits, data processing, furniture and equipment,
occupancy, credit card processing, and other expense.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the three months ended September
30, 1998 or 1997, 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 $579,357 for the three months ended September 30, 1998
compared to $588,693 for the corresponding period in 1997, the result of a
small decrease in taxable income during the current period.
NET INCOME
Net income of $992,698 for the first three months of 1998 represented an
increase of $9,079 or .9% from $983,619 recorded for the first three months
of 1997. Earnings per share of $.337 for the current period represented an
increase of $.004 from $.333 for the three months ended September 30, 1997.
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.
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, 1998,
the balance in the allowance was $3,066,705 representing 406% of noncurrent
loans, compared to $3,215,559 or 369% of noncurrent loans at December 31,
1997.
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.
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Total securities were $117,396,275 at September 30, 1998, representing an
increase of $22,211,885 or 23.3% from $95,184,390 at December 31, 1997.
At September 30, 1998, $34,959,866 in securities were classified as
"available for sale". There were no sales of securities during the nine
month period ended September 30, 1998.
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, 1998 and 1997, deposits
were $250.0 and $229.5 million, respectively. Management anticipates that
deposits will remain relatively stable or grow moderately during the
remainder of 1998.
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
now constitutes the minimum capital standard for most banking organizations.
At September 30, 1998, the Company's Tier 1 leverage capital ratio was 8.26%.
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, 1998 the Company's Tier 1 and total risk-based capital ratios
were 15.47% and 16.73%, respectively. The Bank is categorized as "well
capitalized" under the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (F.D.I.C.I.A.).
On September 15, 1998, the Company's Board of Directors declared a third
quarter 1998 cash dividend of $.082 per share of common stock to shareholders
of record at September 1, 1998, payable on October 15, 1998.
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, 1998, representing the
excess of repricing liabilities versus repricing assets within a one year
time frame, was 3.2% of total assets.
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YEAR 2000 PREPAREDNESS
The Company, like most users of computers, computer software, and equipment
utilizing embedded microcontrollers, will be affected by the year 2000 date
change. The Year 2000 ("Y2K") issue presents several potential risks to the
Company:
1. The banking transactions of the Company's customers are processed by one
or more highly sophisticated computer systems, either internal or external
to the Company. The failure of one or more of those systems to function as
a result of the millennium date change could result in the Company's
inability to properly process customer transactions. If that were to
occur, the Company could lose customers to other financial institutions,
resulting in a loss of revenue.
2. 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 Y2K related computer problems, such borrowers'
cash flow could be disrupted, adversely affecting their ability to repay
their loans with the Company.
3. A related issue to that described in #2 above is the risk that Y2K
related problems could affect certain of the Company's business depositors,
potentially causing interruptions in their cash flow and resulting 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.
4. Concern on the part of certain depositors that Y2K 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.
5. The Company contracts with several outside third parties for certain of
its data processing and account servicing functions. Should the systems of
one or more of those third parties fail to function properly after December
31, 1999, the Company could be adversely affected.
6. Should Y2K 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.
7. Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Y2K related
problems. The Company's Y2K contingency plan will address such possible
situations.
The Company believes it is not possible to estimate the potential lost
revenue due to the Y2K issue, as the extent and longevity of such potential
problems cannot be predicted.
The Company began to address the Y2K issue in 1996, and formally established
an internal Y2K Committee in 1997 to assess all systems
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to ensure that they will function properly in the year 2000. This process
involves five separate phases: awareness, assessment, renovation, validation
and implementation.
The Company's Y2K 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 Y2K issue. Those systems include the
Company's information technology systems as well as equipment such as
elevators, bank alarms, vault locks, etc. that may contain imbedded
microprocessors. For each such system, an action plan was created to set
forth the process for determining whether or not the system is Y2K compliant.
Those determinations involve obtaining Y2K compliant certifications from
vendors wherever possible, and by the Company's conducting its own validation
testing.
When the results of the Company's validation testing programs have revealed
that a particular system is not Y2K compliant, contingency plans have been
formulated to either upgrade the system in order to meet Y2K compliance
requirements or replace the system with one that is certified as Y2K
compliant. A similar procedure is being followed for external systems and
services the bank obtains from third parties. The Company is currently in
the "validation" and "implementation" phases of this process.
An outside third party processes all customer transactions originating at the
Company's thirteen automated teller machines ("ATMs"), and another outside
third party processes the Company's customer credit card transactions.
Testing of those third party systems, as well as the Federal Reserve Bank of
Boston's "Fedwire" system, which processes the Company's wire transfers, for
Y2K compliance will begin during fourth quarter of 1998.
With the exception of the Fedwire wire transfer system and the Company's ATM
network processor, should the testing of any third party system or service
reveal that such system or service is not Y2K compliant, a specific deadline
will be set by which time the system or service must be brought into Y2K
compliance. Should Y2K compliance not be achieved by the specified
deadlines, the Company has developed a contingency plan for each such
external system or service. Those contingency plans document the action the
Company will take for each such non-compliant system. In the cases of the
Fedwire system and the Company's ATM network processor, existing processing
alternatives will be utilized should those outside systems not be Y2K
compliant.
In certain cases, however, such as the potential loss of electrical power or
telecommunications services due to Y2K problems, testing by the Company is
either not practical or not possible. In those cases, contingency plans are
being designed that specify how the Company will deal with each such
potential situations. For example, the Company is considering the lease of
an electrical power generator with sufficient capacity to allow the Company
to maintain critical functions in the event power from the electric utility
is interrupted.
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
-13-
<PAGE>
institutions to follow in addressing the Y2K issue. The Company is currently
in compliance with all federally-mandated Y2K guidelines and timetables.
As of September 30, 1998, the Company is on schedule with its internal Y2K
preparedness efforts. All internal systems identified in the assessment
phase of the project that are considered "mission-critical" have either been
tested (validated) for Y2K compliance or will be tested by December 31, 1998.
The Company's mainframe computer system, its most critical processing system,
has been certified by its respective hardware and software vendors as being
Y2K compliant. In addition, the Company contracted with a qualified
independent firm to test the mainframe system for Y2K compatibility. That
testing indicated that the mainframe system is Y2K compliant. Systems that
have been determined to be Y2K compliant at this time will be re-tested
during 1999 following any material upgrades or enhancements. All significant
"mission-critical" systems that are not presently Y2K compliant will be
either upgraded or replaced by March 31, 1999.
The Company currently believes that it will be able to modify or replace any
affected systems in time to minimize any detrimental effects on the Company's
operations. A number of Y2K compliant systems have already been installed or
are in the process of being installed. The Company's estimated total cost to
replace computer equipment, software programs, or other equipment containing
embedded microprocessors that were not Y2K compliant is approximately
$190,000. As of September 30, 1998, approximately $45,500 of that amount has
been incurred. System maintenance or modification costs are being expensed
as incurred, while the cost of new hardware, software, or other equipment
will be capitalized and amortized over their useful lives.
The Company's overall Y2K contingency plan follows the requirements and
guidelines established by the federal bank regulators. The "operational
guidelines" and "business impact analysis" sections of that plan will be
completed by December 31, 1998.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
On September 15, 1998, the Company's Board of Directors declared a third
quarter 1998 cash dividend of $.082 per share of common stock to shareholders
of record at September 1, 1998, payable on October 15, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Article 9 - Financial Data Schedule for the nine months
ended September 30, 1998
(b) The Company did not file a Form 8-K during the quarter ended
September 30, 1998.
-15-
<PAGE>
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: November 3, 1998 By: /s/ James A. Langway
-------------------------
James A. Langway
President & Chief Executive Officer
Principal Executive Officer
Date: November 3, 1998 By: /s/ Donald R. Hughes, Jr.
-------------------------
Donald R. Hughes, Jr.
Treasurer and Clerk
Principal Financial Officer and
Principal Accounting Officer
-16-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27 Article 9 - Financial Data Schedule for the nine months
ended September 30, 1998
-17-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited September 30, 1998 consolidated financial statements of Community
Bancorp, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<INT-BEARING-DEPOSITS> 0
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