Community Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[ x ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2005

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                 

Commission File Number 000-16435

COMMUNITY BANCORP.

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

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

At November 10, 2005, there were 4,049,334 shares outstanding of the Corporation's common stock.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND CONSOLIDATION

     The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for fair presentation of the financial condition and results of operations of the Company contained herein have been made. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2004, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 2. 5% STOCK DIVIDEND

     In May 2005, the Company declared a 5% stock dividend payable July 1, 2005 to shareholders of record as of June 15, 2005. As a result of this stock dividend, all per share data for prior periods have been restated.

NOTE 3.  RECENT ACCOUNTING DEVELOPMENTS

     Any accounting developments announced during the first nine months of 2005 were not applicable, thereby requiring no disclosure by the Company.

     Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period (retroactively adjusted for stock splits and stock dividends) and reduced for shares held in Treasury.

NOTE 5.  COMPREHENSIVE INCOME

     Accounting principles generally require recognized revenue, expenses, gains, and losses to be included in net income. Certain changes in assets and liabilities, such as the after-tax effect of unrealized gains and losses on available-for-sale securities, are not reflected in the income statement, but the cumulative effect of such items from period-to-period is reflected as a separate component of the equity section of

The Company's total comprehensive income for the comparison periods is calculated as follows:

NOTE 6. INCOME TAXES

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the Period Ended September 30, 2005

FORWARD-LOOKING STATEMENTS

     The Company's Management's Discussion and Analysis of Financial Condition and Results of Operations may contain certain forward-looking statements about the Company's operations, financial condition and business. When used in the discussion below, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.

     Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, management's expectations as to future asset growth, income trends, results of operations, local market conditions and economic outlook, and other matters reflected in the Overview section, estimated contingent liability related to the Company's participation in the Federal Home Loan Bank (FHLB) Mortgage Partnership Finance (MPF) program, assumptions made within the asset/liability management process, and management's expectations as to the future interest rate environment and the Company's related liquidity level. Although these statements are based on management's current expectations and estimates, many of the factors that could influenc e or determine actual results are unpredictable and not within the Company's control. Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

     Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) competitive pressures increase among financial services providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from nonbank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (2) interest rates change in such a way as to reduce the Company's margins; (3) general economic or monetary conditions, either nationally or regionally, are less favorable than expected, resulting in a deterioration in credit quality or a diminished demand for the Company's products and services; and (4) changes in laws or government rules, or the way in which courts interpret those laws or rules, adversely affect the Company's business.

     Total assets grew from year-end 2004 by $15,410,166 and from September of last year by $25,613,650. The third quarter is our traditional growth quarter and this year was no exception.

     Non-interest income for the third quarter of 2005 was down $33,869 and the figure for the first nine months of 2005 was down by $90,338 from 2004. This decline was due in part to lower originations and sales of 30-year fixed rate mortgages into the secondary market. Many consumers have opted to take a 5-year variable rate mortgage this year as opposed to a 30-year fixed rate mortgage that was more popular last year at our institution. The 5-year variable rate mortgages are held in our own portfolio and contribute to our net interest income, while the 30-year fixed rate products are mostly sold in the secondary market creating servicing fee and premium income contributing to our non- interest income. We had no security gains during 2005, while gains of $25,428 were recognized during the third quarter of 2004 and $44,059 for the first nine months of 2004. Non-interest expense is up $21,779 for the third quarter of 2005 compared to 2004, and is up by $409,792 year to date as com pared to the same period last year. The increase is due primarily to increases in salaries and outside agency fees. All of the recent corporate scandals such as Enron and the resulting Sarbanes Oxley Act have resulted in increases in the cost of regulation, particularly in legal and audit fees, as well as staff required to report to the regulators. We have also experienced higher losses due to the fraudulent use of our customers' debit cards.

     In October of 2004, we broke ground for the new 17,000 square foot addition to our main office in Derby, and work is progressing on schedule and on budget. In mid October, various departments were moved into their new space in the new addition so that remodeling could begin within the "old part" of the building. Prior to the move, there were 65 people working in space designed for 38, so we welcomed the new space. Once renovations are complete, more privacy will be provided for our customers, as well as a larger customer lobby with improved seating space for customers. The new drive up ATM is fully operational. This project is providing some construction jobs in the Northeast Kingdom and will allow us to fill two needed positions in the Bank. We believe that the future of banking in the Northeast Kingdom is promising, and this expansion will allow us to continue to be a community leader.

     The following pages describe the financial results of our third quarter and the first nine months of 2005 in much more detail. Please take the time to read them to more fully understand those results in relation to the 2004 third quarter and nine month comparison periods. The discussion below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. This report includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934 (the "Exchange Act").

CRITICAL ACCOUNTING POLICIES

     The Company's consolidated financial statements are prepared according to accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The Securities and Exchange Commission (SEC) has defined a company's critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Compa ny under different conditions or using different assumptions or estimates.

     Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical. Management believes that the calculation of the allowance for loan losses (ALL) is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of the Company's consolidated financial statements. In estimating the ALL, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, use of current economic indicators and their probable impact on borrowers and changes in delinquent, non-performing or impaired loans. Management's estimates used in the ALL may increase or decrease based on changes in these factors resulting in adjustments to the Company's provision for loan losses. Actual results could differ significantly from these estimates under different assumptions, judgments or conditions.

     The Company's net income for the third quarter of 2005 was $918,112, representing an increase of 14.8% over net income of $800,123 for the third quarter of 2004. This resulted in earnings per share of $0.23 and $0.20, respectively, for the third quarter of 2005 and 2004. Net income for the first nine months increased $22,131, or just under one percent, with net income for the first nine months of 2005 reported at $2.41 million compared to $2.38 million for the same period in 2004.

     The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the nine month comparison periods in 2005 and 2004:

AVERAGE BALANCES AND INTEREST RATES

     An increase of $6.2 million is noted in the average volume of earning assets for the first nine months of 2005 compared to the same period of 2004, with an increase of 29 basis points in the average yield. Interest earned on the loan portfolio accounts for approximately 82.6% of total interest income for 2005 and 78.5% for 2004.

     Interest paid on time deposits is the largest component of the Company's interest expense, comprising 55.4% and 60.5%, respectively, of total interest expense for the 2005 and 2004 comparison periods. The average volume of interest-bearing liabilities for the first nine months of 2005 increased approximately $2.5 million over the 2004 comparison period, and the rate paid on these accounts increased 12 basis points.

     The yield on loans for the comparison period has increased 3 basis points. Although the prime rate has increased over 200 basis points, driving short term rates higher, the long end of the curve has not increased at the same rate, further flattening the yield curve. While the rates on loans tied to prime have increased, residential real estate mortgage loans have not repriced or been replaced at higher rates. The Company's balance sheet is slightly asset sensitive, therefore those loans that are tied to the prime rate have repriced to a higher rate, while real estate loans are tied to long-term rates that are now starting to increase. On the liability side, the increase in short-term rates over the last nine months has created pressure to increase rates on deposit products. The Company has been offering specials such as a high-yielding money market account for higher-balance accounts and various time-deposit specials. In recent months, market pressure has increased for hi gher rates on certificate of deposit accounts. As time deposits mature, customers are looking for more options with higher rates. Confidence in non-bank products offered by brokerage houses, such as mutual funds is increasing as well creating even more pressure for competitive rates. The Company experienced an increased need to borrow funds during 2005, as loan growth outpaced deposit growth. The increase in borrowed funds, at the higher rates, contributed significantly to the increase in interest expense for the comparison period. Managing the liability side of the balance sheet is a balancing act between managing yields while retaining and attracting deposits for funding.

CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

    The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the first nine months of 2005 and 2004 resulting from volume changes in average assets and average liabilities and fluctuations in rates earned and paid.