-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jw5jxRguAgZc7kQMzL9sQB16r2WftzXwopHOnYEiB40m4wIxmWLStr/PmX20+Oic QwQhWBL/JbpwKMBC+BrhSg== 0000742170-02-000008.txt : 20020415 0000742170-02-000008.hdr.sgml : 20020415 ACCESSION NUMBER: 0000742170-02-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANCORP INC /MA/ CENTRAL INDEX KEY: 0000742170 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042841993 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-12756-B FILM NUMBER: 02584157 BUSINESS ADDRESS: STREET 1: 17 POPE ST CITY: HUDSON STATE: MA ZIP: 01749 BUSINESS PHONE: 978-568-8321 MAIL ADDRESS: STREET 1: 17 POPE STREET CITY: HUDSON STATE: MA ZIP: 01749 10-K405 1 r10k-2001.txt FORM 10-K FOR DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 15, 2002 was $47,813,292. The total number of shares of common stock outstanding at March 15, 2002 was 5,940,606. Documents Incorporated By Reference Parts II, III and IV incorporate information by reference from the Annual Report to shareholders for the year ended December 31, 2001. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report of Community Bancorp, Inc. (the "Company") on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains, in addition to historic factual 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. The Company wishes to caution readers that the following important factors, among others, could affect the Company's actual results and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company herein: 1. The effect of changes in laws and regulations, including federal and state banking laws and regulations with which the Company its subsidiary, Community National Bank (the "Bank"), must comply; 2. The effect of changes in accounting policies and practices, as may be adopted by regulatory agencies as well as by the Financial Accounting Standards Board ("FASB") or the Securities and Exchange Commission ("SEC"); 3. The effect on the Company's competitive position within its market area of increasing consolidation within the banking industry, and increasing competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; 4. The effect of unforeseen changes in interest rates; and 5. The effect of changes in the business cycle and in the New England and national economies. -i- TABLE OF CONTENTS Page # ------ PART I - ------ Item 1. Business 1 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submissions of Matters to a Vote of Security Holders 14 PART II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Consolidated Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure 19 PART III - -------- Item 10. Directors and Executive Officers 20 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 28 PART IV - ------- Item 14. Exhibits and Financial Statements 29 Exhibit Index 30 Consent of Independent Public Accountants 32 Subsidiaries of Company 33 Letter to Commission Pursuant to Temporary Note 3T 34 SIGNATURES 35 SUPPLEMENTAL INFORMATION 36 -ii- PART I - ------ ITEM 1. BUSINESS Community Bancorp, Inc., a Massachusetts corporation ("Company"), is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Holding Company has one subsidiary, Community National Bank, a national banking association ("Bank"). The Holding Company owns all the outstanding shares of the Bank. At present, the Holding Company conducts no activities independent of the Bank. In 1992, the Bank formed Community Securities Corporation as a wholly owned subsidiary. The activities of this subsidiary consist of buying, selling, dealing in or holding securities in its own behalf and not as a broker. In 1998, the Bank formed Community Benefits Consulting, Inc. as a wholly owned subsidiary. The activities of this subsidiary consist of providing consulting services to small businesses in the areas of employee benefits and human resources administration. 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 commercial, real estate, installment and other loans. The Bank also offers official checks, traveler's checks, safe deposit boxes and other customary bank services to its customers. In 1994 the Bank introduced a telephone banking service allowing customers to perform account inquiries and other functions using a Touch Tone telephone. In 1995 the Bank introduced a PC- based office banking system for businesses that allows business customers to access their accounts and perform a number of functions directly through an office PC. In 1996 the Bank introduced a PC-based home banking and bill payment system for consumers. In 1997, the Bank formed a third-party arrangement with Murphy Insurance Brokerage, Ltd. for the purpose of providing insurance products and services to the bank's customers and the general public. In 1999, the Bank introduced fully-transactional Internet-based online banking services for both retail and business customers. In 2000 the Bank introduced investment management and trust services. The business of the Bank is not significantly affected by seasonal factors. In the last five years the Bank derived its operating income from the following sources:
% of Operating Income -------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Interest and fees on loans 53% 55% 56% 55% 60% Interest and dividends on securities and federal funds sold 33 33 31 31 28 Charges, fees and other sources 14 12 13 14 12 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
Competition The Bank generally concentrates its activities within a 20 mile radius of Hudson, Massachusetts and currently operates full service branch offices in Hudson, Acton, Boxborough, Concord, Framingham, Marlborough, Stow and Sudbury, Massachusetts. These communities are generally characterized by a growing residential population and moderate to high household income. In addition to its main office, the Bank also operates a full service branch office and a consumer lending office in the Town of Hudson. The Bank also operates two remote ATM facilities in Hudson and Marlborough. The banking business in the Bank's market area is highly competitive. The Bank competes actively with other banks, as well as with other financial institutions -1- engaged in the business of accepting deposits or making loans, such as savings and loan associations, savings banks and finance companies. In the Bank's general market area there are approximately 2 national banks, 2 Massachusetts trust companies, 7 savings banks, 2 cooperative banks and 8 credit unions. Since several of the competing institutions are significantly larger than the Bank in assets and deposits, the Bank strongly emphasizes a personal approach to service while utilizing the latest in technology in order to meet and surpass the vigorous competition. The Bank also faces competition from numerous other banks, both locally and nation-wide, which utilize the Internet to solicit and service customers. The 1999 passing by Congress of the Gramm-Leach-Bliley Act, which eliminates previous barriers to combinations of banking organizations with insurance companies and securities firms, could result in significant changes taking place within the various financial services industries. Certain provisions of the Act were effective upon enactment, while others become effective over time. The Company continues to monitor developments resulting from the passage of this legislation and the evolution of the financial services industry. Regulation of the Company The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and files with the Federal Reserve Board the reports as required under the Bank Holding Company Act. The Bank Holding Company Act requires prior approval by the Federal Reserve Board of the acquisition by the Company of substantially all the assets or more than five percent of the voting stock of any bank. The Bank Holding Company Act also allows the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the Company can engage in such activities or transactions between the affiliated banks and the Company or other affiliates. The Bank Holding Company Act prohibits the Company and the Bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services. Regulation of the Bank The Bank is a national banking association chartered under the National Bank Act. As such, it is subject to the supervision of the Comptroller of the Currency and is examined by his office. In addition, it is subject to examination by the Federal Reserve Board, by reason of its membership in the Federal Reserve System, and by the Federal Deposit Insurance Corporation, by reason of the insurance of its deposits by such corporation. Areas in which the Bank is subject to regulation by federal authorities include reserves, loans, investments, trust services, sales of investment securities, participation in mergers and consolidations, compliance with applicable laws and regulations, and certain transactions with or in the stock of the Company. Employees The Company and the Bank employ 126 full-time equivalent employees. -2- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The following tables present the condensed average balance sheets and the components of net interest differential for the three years ended December 31, 2001, 2000 and 1999. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a taxable equivalent basis.
2001 ------------------------------------ Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ------ Federal funds sold $ 34,506,868 $ 1,304,577 3.78% Deposits with banks 432,486 14,931 3.45% Securities: Taxable 123,415,782 7,325,117 5.94% Non-taxable (1) 18,297,661 1,343,057 7.34% Preferred stock 4,613,191 306,282 6.64% Total loans and leases (1)(2) 180,532,900 15,770,587 8.74% ----------- ---------- ---- Total earning assets 361,798,888 26,064,551 7.20% ---------- Reserve for loan losses (2,773,133) Other non interest- bearing assets 26,559,111 ----------- Total average assets $385,584,868 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $142,606,069 $ 2,248,630 1.58% Time deposits 97,451,773 5,104,998 5.24% Repurchase agreements 37,165,229 1,275,081 3.43% Borrowed funds 219,178 5,435 2.48% ----------- --------- ---- Total interest-bearing liabilities 277,442,249 8,634,144 3.11% --------- Non interest-bearing deposits 70,876,944 Other non interest-bearing liabilities 2,753,995 Stockholders' equity 34,511,678 ----------- Total average liabilities and stockholders' equity $385,584,866 =========== Net interest income $17,430,407 ========== Net yield on interest earning assets 4.82% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $556,715. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-3- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued)
2000 ------------------------------------ Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ------ Federal funds sold $ 26,890,957 $ 1,696,050 6.31% Securities: Taxable 114,423,018 7,187,807 6.28% Non-taxable (1) 13,137,948 911,054 6.93% Total loans and leases (1)(2) 169,014,121 15,485,363 9.16% ----------- ---------- ---- Total earning assets 323,466,044 25,280,274 7.82% ---------- Reserve for loan losses (2,914,363) Other non interest- bearing assets 27,322,739 ----------- Total average assets $347,874,420 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $133,044,768 $ 3,163,311 2.38% Time deposits 84,386,262 4,497,957 5.33% Repurchase agreements 32,246,526 1,693,324 5.25% ----------- --------- ---- Total interest-bearing liabilities 249,677,556 9,354,592 3.75% --------- Non interest-bearing deposits 66,238,341 Other non interest-bearing liabilities 2,117,075 Stockholders' equity 29,841,448 ----------- Total average liabilities and stockholders' equity $347,874,420 =========== Net interest income $15,925,682 ========== Net yield on interest earning assets 4.92% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $315,609. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-4- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued)
1999 ------------------------------------ Average Interest Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ------ Federal funds sold $ 16,626,364 $ 824,531 4.96% Securities: Taxable 107,354,336 6,502,696 6.06% Non-taxable (1) 11,870,957 821,184 6.92% Total loans and leases (1)(2) 154,304,452 13,994,518 9.07% ----------- ---------- ---- Total earning assets 290,156,109 22,142,929 7.63% ---------- Reserve for loan losses (3,022,301) Other non interest- bearing assets 27,133,289 ----------- Total average assets $314,267,097 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $112,910,766 $ 2,238,683 1.98% Time deposits 88,705,026 4,563,234 5.14% Repurchase agreements 24,461,823 1,027,751 4.20% ----------- --------- ---- Total interest-bearing liabilities 226,077,615 7,829,668 3.46% --------- Non interest-bearing deposits 59,254,021 Other non interest-bearing liabilities 1,838,508 Stockholders' equity 27,096,953 ----------- Total average liabilities and stockholders' equity $314,267,097 =========== Net interest income $14,313,261 ========== Net yield on interest earning assets 4.93% ==== (1) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $302,204. A federal tax rate of 34% was used in performing this calculation. (2) The average balances of non-accruing loans and loans held for sale are included in the loan balance.
-5- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued) The following table shows, for the periods indicated, the dollar amount of changes in interest income and interest expense resulting from changes in volume and interest rates. The total dollar amount of interest income from earning assets is calculated on a taxable equivalent basis.
2001 as compared to 2000 Due to a change in: -------------------------------------- Volume Rate Total ---------- ---------- ---------- Interest income from: Federal funds sold $ 288,868 $ (680,341) $ (391,473) Deposits with banks 14,931 -- 14,931 Securities: Taxable 526,349 (389,039) 137,310 Non-taxable 378,137 53,866 432,003 Preferred stock 306,282 -- 306,282 Loans & leases 995,083 (709,859) 285,224 --------- --------- --------- Total 2,509,650 (1,725,373) 784,277 --------- --------- --------- Interest expense on: Interest-bearing deposits: Savings, money market and NOW 149,677 (1,064,358) (914,681) Time deposits 682,989 (75,948) 607,041 Repurchase agreements 168,644 (586,887) (418,243) Borrowed funds 5,435 -- 5,435 --------- --------- --------- Total 1,006,745 (1,727,193) (720,448) --------- --------- --------- Net interest income $1,502,905 $ 1,820 $1,504,725 ========= ========= ========= 2000 as compared to 1999 Due to a change in: -------------------------------------- Volume Rate Total ---------- ---------- ---------- Interest income from: Federal funds sold $ 647,063 $ 224,456 $ 871,519 Securities: Taxable 448,932 236,179 685,111 Non-taxable 88,683 1,187 89,870 Loans & leases 1,351,971 138,874 1,490,845 --------- --------- --------- Total 2,536,649 600,696 3,137,345 --------- --------- --------- Interest expense on: Interest-bearing deposits: Savings, money market and NOW 472,985 451,643 924,628 Time deposits (233,817) 168,540 (65,277) Federal funds purchased and repurchase agreements 408,724 256,849 665,573 --------- --------- --------- Total 647,892 877,032 1,524,924 --------- --------- --------- Net interest income $1,888,757 $ (276,336) $1,612,421 ========= ========= ========= Note: The change due to the volume/rate variance has been allocated to volume.
-6- Securities Portfolio The following table indicates the carrying value of the Company's consolidated securities portfolio at December 31, 2001, 2000 and 1999.
(in $000) 2001 2000 1999 - --------- -------- -------- -------- U.S. Government obligations $ -- $ -- $ 4,099 U.S. Government agencies 137,772 125,009 110,219 Obligations of states and political subdivisions 20,348 16,273 12,580 Preferred stock 6,635 -- -- FHLBB stock 1,245 1,095 Corporate debt securities 5,208 -- -- Other securities 175 175 175 ------- ------- ------- Total $171,383 $142,552 $128,033 ======= ======= =======
The following table shows the maturities, carrying value and weighted average yields of the Company's consolidated securities portfolio at December 31, 2001. The yields are calculated by dividing the annual interest, net of amortization of premiums and accretion of discounts, by the amortized cost of the securities at the dates indicated. The yields on state and municipal securities are presented on a taxable equivalent basis.
After one After five Maturing: Within but within but within After one year five years ten years ten years ------------- ------------- ------------- ------------- (in $000) Amount Yield Amount Yield Amount Yield Amount Yield --------- ------ ----- ------ ----- ------ ----- ------ ----- U.S. Govt. obligations held to maturity $ -- -- $ -- -- $ -- -- $ -- -- U.S. Govt. obligations available for sale -- -- -- -- -- -- -- -- U.S. Govt. agencies held to maturity -- -- 18,344 4.79% -- -- -- -- U.S. Govt. agencies available for sale 5,106 6.13% 47,321 4.68% -- -- -- -- State and political subdivi- sions held to maturity 1,230 3.70% 125 4.40% 7,198 7.35% 11,795 7.61% Mortgage-backed securities available for sale -- -- 4,297 5.11% -- -- 9,338 5.78% Mortgage-backed securities held to maturity 122 6.64% 12,476 6.20% 25,808 6.12% 14,960 6.35% Preferred stock -- -- -- -- -- -- 6,635 4.82% FHLBB stock -- -- -- -- -- -- 1,245 5.25% Corporate debt securities -- -- 5,208 5.69% -- -- -- -- Other securities -- -- -- -- -- -- 175 6.00% Current estimated prepayment speed assumptions were used in estimating the maturities of mortgage-backed securities in the above table. At December 31, 2001 the Company did not own securities of any issuer where the aggregate book value of such securities exceeded ten percent of the Company's stockholders' equity.
-7- Loan Portfolio The following table summarizes the distribution of the Bank's loan portfolio as of December 31 for each of the years indicated:
(in $000) 2001 2000 1999 1998 1997 - --------- -------- -------- -------- -------- -------- Commercial and industrial $ 26,993 $ 24,206 $ 23,419 $ 21,127 $ 18,066 Real estate - residential 81,231 76,945 66,788 55,055 54,211 Real estate - commercial 64,436 57,870 58,485 47,399 48,329 Real estate - construction 1,628 2,077 1,454 2,795 4,868 Loans to individuals 13,548 14,165 13,544 13,197 13,571 Other 617 766 670 651 795 ------- ------- ------- ------- ------- Total loans $188,453 $176,029 $164,360 $140,224 $139,840 ======= ======= ======= ======= =======
Loan maturities for commercial and real estate (construction) loans only at December 31, 2001 were as follows: $13,756,749 due in one year or less; $11,682,791 due after one year through five years; $3,181,204 due after five years. Of the Bank's commercial and real estate (construction) loans due after one year, $9,444,524 have floating or adjustable rates and $5,419,471 have fixed rates. Nonaccrual, Past Due and Restructured Loans It is the policy of the Bank to discontinue the accrual of interest on loans when, in management's judgment, the collection of the full amount of interest is considered doubtful. This will generally occur once a loan has become 90 days past due, unless the loan is well secured and in the process of collection. The following table sets forth information on nonaccrual, past due loans and restructured loans as of December 31 for each of the years indicated:
(in $000) 2001 2000 1999 1998 1997 - --------- ------ ------ ------ ------ ------ Nonaccrual loans $ 320 $ 558 $ 684 $ 913 $ 633 Accruing loans past due 90 days or more 13 2 -- 2 239 Restructured loans -- -- -- -- -- ----- ----- ----- ----- ----- Total $ 333 $ 560 $ 684 $ 915 $ 872 ===== ===== ===== ===== ===== For the period ended December 31, 2001, the reduction of interest income associated with nonaccrual and restructured loans was $17,604. The interest on these loans that was included in interest income for 2001 was $79,020.
Potential Problem Loans As of December 31, 2001 other than the above, there were no loans where management had serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. Concentrations of Credit As of December 31, 2001, except as disclosed in the above table, there were no concentrations of loans exceeding 10% of total loans. -8- Summary of Loan Loss Experience The following table summarizes historical data with respect to loans outstanding, loan losses and recoveries, and the allowance for possible loan losses at December 31 for each of the years indicated:
(in $000) 2001 2000 1999 1998 1997 - --------- -------- -------- -------- -------- -------- Average outstanding loans (1) $180,533 $169,014 $154,304 $138,311 $136,844 Allowance for loan losses (in $000) 2001 2000 1999 1998 1997 - --------- ------- ------- ------- ------- ------- Balance at beginning of period $ 2,812 $ 3,042 $ 2,981 $ 3,216 $ 3,482 Charge-offs: Commercial and industrial (85) (111) (36) (37) (133) Real estate - residential -- (42) -- (132) (16) Real estate - commercial (70) (118) -- (59) (99) Real estate - construction -- -- -- -- -- Loans to individuals (107) (200) (76) (76) (118) ----- ----- ----- ----- ----- Total charge-offs (262) (471) (112) (304) (366) Recoveries: Commercial and industrial 115 58 153 48 35 Real estate - residential -- 27 1 6 41 Real estate - commercial -- 18 8 2 -- Real estate - construction -- -- -- -- -- Loans to individuals 20 138 11 13 24 ----- ----- ----- ----- ----- Total recoveries 135 241 173 69 100 Net (charge-off) recovery (127) (230) 61 (235) (266) Provision for loan losses -- -- -- -- -- ----- ----- ----- ----- ----- Balance at end of period $ 2,685 $ 2,812 $ 3,042 $ 2,981 $ 3,216 ===== ===== ===== ===== ===== Ratio of net charge-offs to average loans .07% .14% (.00%) .17% .19% ===== ===== ===== ===== ===== (1) Includes the aggregate average balance of loans held for sale.
The provision for loan losses is based upon management's estimation of the amount necessary to maintain the allowance for loan losses at an adequate level to absorb inherent losses in the loan portfolio, as determined by current and anticipated economic conditions and other pertinent factors. The methodology for assessing the adequacy of the overall allowance consists of an evaluation of its three components: 1. The valuation allowance for loans specifically identified as impaired. 2. The formula allowance for the various loan portfolio categories. 3. The imprecision allowance. -9- The following table reflects the allocation of the allowance for loan losses and the percent of loans in each category to total outstanding loans, including loans held for sale, as of December 31 for each of the years indicated:
2001 2000 1999 -------------------- ------------------- ------------------ Percent of Percent of Percent of loans in loans in loans in category to category to category (in $000) Amount total loans Amount total loans Amount total loans - --------- ------- ----------- ------- ----------- ------ ----------- Commercial & industrial $ 755 14.7% $ 398 14.2% $ 263 14.7% Real estate - residential 208 43.1% 249 43.7% 596 40.6% Real estate - commercial 965 34.1% 815 32.9% 227 35.6% Real estate - construction 21 0.9% 41 1.2% 15 0.9% Loans to individuals 259 7.2% 170 8.0% 128 8.2% Imprecision 477 N/A 1,139 N/A 1,813 N/A ----- ----- ----- ----- ----- ----- Total $2,685 100.0% $2,812 100.0% $3,042 100.0% ===== ===== ===== ===== ===== ===== 1998 1997 -------------------- ------------------- Percent of Percent of loans in loans in category to category to (in $000) Amount total loans Amount total loans - --------- ------- ----------- ------- ----------- Commercial & industrial $ 238 15.5% $ 318 13.5% Real estate - residential 197 39.3% 198 38.8% Real estate - commercial 518 33.8% 565 34.5% Real estate - construction 35 2.0% 62 3.5% Loans to individuals 130 9.4% 126 9.7% Imprecision 1,863 N/A 1,947 N/A ----- ----- ----- ----- Total $2,981 100.0% $3,216 100.0% ===== ===== ===== ===== The allocation of the allowance for loan losses to the categories of loans shown above includes both specific potential loss estimates for individual loans and formula allocations deemed to be reasonable to provide for additional potential losses within the categories of loans set forth.
-10- Deposits The following table shows the average deposits and average interest rate paid for each of the last three years:
2001 2000 1999 ----------------- ----------------- ----------------- Average Average Average Average Average Average (in $000) Balance Rate Balance Rate Balance Rate - --------- -------- ------- -------- ------- -------- ------- Demand deposits $ 70,877 0.00% $ 66,238 0.00% $ 59,254 0.00% NOW/FlexValue deposits 42,566 0.40% 36,010 0.85% 31,778 0.79% Money market deposits 34,410 2.20% 35,211 3.08% 27,824 2.66% Savings deposits 65,630 2.01% 61,824 2.83% 53,309 2.34% Time deposits 97,452 5.24% 84,386 5.33% 88,705 5.14% ------- ---- ------- ---- ------- ---- Total $310,935 2.37% $283,669 2.70% $260,870 2.61% ======= ==== ======= ==== ======= ====
As of December 31, 2001, the Bank had certificates of deposit in amounts of $100,000 or more aggregating $42.2 million. These certificates of deposit mature as follows:
Maturity Amount (in $000) -------- ---------------- 3 months or less $15,200 Over 3 months through 6 months 7,488 Over 6 months through 12 months 12,237 Over 12 months 7,254 ------ Total $42,179 ======
-11- Return on Equity and Assets The following table summarizes various financial ratios of the Company for each of the last three years:
Years ended December 31, ---------------------------- 2001 2000 1999 ---- ---- ---- Return on average total assets (net income divided by average total assets) 1.32% 1.30% 1.25% Return on average stockholders' equity (net income divided by average stockholders' equity) 14.72% 15.19% 14.45% Dividend payout ratio (total declared dividends per share divided by net income per share) 30.01% 27.27% 27.40% Equity to assets (average stockholders' equity as a percentage of average total assets) 8.95% 8.58% 8.62%
-12- Short-Term Borrowings The Bank engages in certain borrowing agreements throughout the year. These are in the ordinary course of the Bank's business. Such short-term borrowings consist of securities sold under repurchase agreements, which are borrowings from customers, federal funds purchased, and borrowings from the Federal Home Loan Bank of Boston. The following table summarizes such short-term borrowings at December 31 for each of the years indicated:
Weighted Max. Weighted average amount average interest out- Average interest Balance, rate at standing amount rate end of end of at any out- during period period month-end standing period ---------- -------- --------- -------- -------- Year ended 12/31/01 - ---------- Federal Funds Purchased -- -- -- -- -- Repurchase Agreements $34,023,288 1.69% $40,284,061 $37,165,229 3.43% Federal Home Loan Bank Borrowing 10,000,000 2.48% 10,000,000 219,178 2.48% Year ended 12/31/00 - ---------- Federal Funds Purchased -- -- -- -- -- Repurchase Agreements $33,463,166 5.78% $44,089,321 $32,246,526 5.25% Year ended 12/31/99 - ---------- Federal Funds Purchased -- -- -- -- -- Repurchase Agreements $21,766,424 4.79% $28,306,070 23,283,740 4.05% Federal Home Loan Bank Borrowing -- -- 10,000,000 1,178,082 5.27%
-13- ITEM 2. PROPERTIES The Bank's Main Office (approximately 32,000 square feet) at 17 Pope Street, Hudson, Massachusetts, the Consumer Loan Center (2,623 square feet) at 12 Pope Street, Hudson, Massachusetts, the Hudson South Office (1,040 square feet) at 177 Broad Street, Hudson, Massachusetts, the Marlborough Center Office (1,800 square feet) at 96 Bolton Street, Marlborough, Massachusetts, and the Framingham Office (a 4,450 square foot branch office with a separate 2,050 square foot building leased to a tenant) at 35 Edgell Road, Framingham, Massachusetts, are owned by the Bank. The Bank's Stow Office (1,228 square feet) at 159 Great Road, Stow, Massachusetts, the Concord Office (1,200 square feet) at 1134 Main Street, Concord, Massachusetts, the Acton Office (2,100 square feet) at 274 Great Road, Acton, Massachusetts, the Marlborough East Office (1,110 square feet) at 500 Boston Post Road, Marlborough, Massachusetts, the Boxborough Office (1,350 square feet) at 629 Massachusetts Avenue, Boxborough, Massachusetts, and the Sudbury Office (2,700 square feet) at 450 Boston Post Road, Sudbury, Massachusetts, are leased by the Bank from third parties. All properties occupied by the Bank are in good condition and are adequate at present and for the foreseeable future for the purposes for which they are being used. In the opinion of management the properties are adequately insured. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceeding. The Bank is involved in various routine legal actions arising in the normal course of business. Based on its knowledge of the pertinent facts and the opinions of legal counsel, management believes the aggregate liability, if any, resulting from the ultimate resolution of these actions will not have a material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 2001. -14- PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's common stock. The record number of holders of the Company's common stock was approximately 464 as of March 15, 2002. The Company customarily declares quarterly cash dividends on its outstanding common stock. The following table sets forth the cash dividends per share declared for the years 2001 and 2000:
2001 2000 ---- ---- First quarter $ .058 $ .049 Second quarter .062 .051 Third quarter .066 .053 Fourth quarter .071 .056 ----- ----- Total $ .257 $ .209 ===== =====
For a discussion of restrictions on the ability of the Bank to pay dividends to the Company, see footnote 12 on page 22 of the Annual Report to Shareholders for the year ended December 31, 2001, which is hereby incorporated by reference. On May 1, 2001 the Company sold 18,387 unregistered shares of its common stock to the Community Bancorp, Inc. 401(k) Savings Plan and 7,778 unregistered shares of its common stock to the Community Bancorp, Inc. Employee Stock Ownership Plan at a per-share price of $9.00. The aggregate cash price of these sales was $235,485. Registration of such shares involved in the above transactions was not required because the transactions were exempt pursuant to the private offering provisions of the Securities Act and the rules thereunder. Alternatively, the Company believes that registration of shares issued to its 401(k) Plan was not required because the transaction did not constitute a "sale" under Section 2(3) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA A five year summary of selected consolidated financial data for the Company is presented on page 3 of the Annual Report to Shareholders for the year ended December 31, 2001 and is hereby incorporated by reference. -15- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is contained on pages 28 through 30 of the Annual Report to Shareholders for the year ended December 31, 2001 and is hereby incorporated by reference. Critical Accounting Policies The Company's preparation of its consolidated financial statements requires the use of estimates that affect the recorded balances of assets and liabilities, the disclosure of contingent assets and liabilities, and the reporting of income and expense. The Company has implemented accounting policies and procedures that determine how such estimates are utilized in preparing the financial statements. There can be no assurance that actual results will not differ from those estimates. The Company's significant accounting policies are described in Note 1 to the consolidated financial statements, which is contained on pages 9 through 12 of the Annual Report to Shareholders for the year ended December 31, 2001. The Company's management believes the following accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements: * Loans: Loans are stated at the amount of unpaid principal, net of unearned discounts and unearned net loan origination fees. It is the policy of the Company to discontinue the accrual of interest on loans when, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Otherwise, interest income is subsequently recognized only to the extent cash payments are received. Interest on loans is accrued and included in income as earned based upon contractual interest rates applied to outstanding principal balances. Nonrefundable loan origination fees and related costs are deferred and amortized as an adjustment to the related loan yield over the contractual life of the loan. When loans are sold or fully repaid, any unamortized fees, discounts and costs are recognized in income. Mortgage loans held for sale are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgages are recognized at the time of sale. A loan is considered to be impaired when it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are individually evaluated for impairment, except for smaller balance homogenous residential and consumer loans which are evaluated in aggregate, according to the Company's normal loan review process, including overall credit evaluation, nonaccrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment. Impaired loans are measured based on the present value of expected future cash flows, discounted at each loan's effective interest rate, or the fair value of the collateral for certain collateral-dependent loans. For collateral-dependent loans, the extent of impairment is the shortfall, if any, between the collateral value, less costs to dispose of such collateral, and the carrying value of the loan. -16- * Allowance for Loan Losses: The allowance for loan losses is based on management's estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. The methodology of assessing the appropriateness of the allowance consists of a review of the following three key elements: 1. The valuation allowance for loans specifically identified as impaired 2. The formula allowance for the various loan portfolio classifications 3. The imprecision allowance The valuation allowance reflects specific estimates of potential losses on individually impaired loans. When each impaired loan is evaluated, if the net present value of the expected cash flows (or fair value of the collateral if the loan is collateral-dependent) is lower than the recorded loan balance, the difference represents the valuation allowance for that loan. The formula allowance is a percentage-based estimate based on historical loss experience and assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances and commitments to extend credit. The formula allowance employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. When a loan's credit quality becomes suspect, it is placed on the Company's internal "watch list" and its allowance allocation is increased. For the remainder of the loan portfolio, appropriate allowance levels are estimated based on judgments regarding the type of loan, economic conditions and trends, potential exposure to loss and other factors. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. In addition to the valuation allowance and the formula allowance, there is an imprecision allowance that is determined based on the totals of the valuation and formula allowances. The imprecision allowance reflects the measurement imprecision inherent in determining the valuation allowance and the formula allowance. It represents 15% - 25% of the valuation and formula allowances, depending upon management's evaluation of various conditions, the effects of which are not directly measured in determining the valuation and formula allowances. The evaluation of the inherent loss resulting from these conditions involves a higher level of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the imprecision allowance include the following: * Levels of and trends in delinquencies and impaired loans * Levels of and trends in charge-offs and recoveries * Trends in loan volumes and terms * Effects of changes in credit concentrations * Effects of and changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices * National and local economic conditions * Trends and duration of the present business cycle * Findings of internal and external credit review examiners When an evaluation of these conditions signifies a change in the level of risk, the Company adjusts the formula allowance. Periodic credit reviews enable further adjustment to the formula allowance through the risk rating of loans and the identification of loans requiring a valuation allowance. -17- In addition, the formula allowance model is designed to be self-correcting by taking into consideration recent actual loss experience. Losses are charged against the allowance for loan losses when management believes the collectibility of principal is doubtful. Asset/Liability Management and Interest Rate Risk It is the Company's general policy to reasonably match the rate sensitivity of its assets and liabilities in an effort to prudently manage interest rate risk. 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 Company's ability to adjust the rates of its interest rate sensitive assets in response to such changes. The Company's negative one-year cumulative gap position at December 31, 2001, which represents the excess of rate-sensitive liabilities versus rate- sensitive assets, was 7.2% expressed as a percentage of total assets. The following table presents rate-sensitive assets and rate-sensitive liabilities as of December 31, 2001:
-------------------------------------------------------------------------- (Dollars in thousands) 1 to 6 7 to 12 1 to 2 2 to 5 Over 5 Months Months Years Years Years Total ---------- --------- ---------- --------- --------- ---------- RATE-SENSITIVE ASSETS Federal funds sold $ 12,913 $ -- $ -- $ -- $ -- $ 12,913 Cash letter 15,500 -- -- -- -- 15,500 Securities 20,006 23,430 32,007 58,243 37,697 171,383 Adjustable-rate loans 53,265 9,573 23,473 34,606 9,963 130,880 Fixed-rate loans 3,917 4,128 8,364 13,678 27,486 57,573 Loans held for sale 1,910 -- -- -- -- 1,910 --------- --------- ---------- ---------- -------- --------- Total $ 107,511 $ 37,131 $ 63,844 $ 106,527 $ 75,146 $ 390,159 --------- --------- ---------- --------- -------- --------- RATE-SENSITIVE LIABILITIES Demand deposits $ -- $ -- $ -- $ -- $ 78,514 $ 78,514 NOW/FlexValue accounts* 11,280 -- -- -- 33,840 45,120 Money market accounts 12,952 -- -- -- 19,769 32,721 Savings accounts 10,152 -- -- -- 30,458 40,610 Cash management accounts 12,953 -- -- -- 7,803 20,756 Certificates of deposit 55,320 26,886 7,671 11,449 -- 101,345 Repurchase agreements 33,216 695 112 -- 19 34,023 Borrowed funds -- 10,000 -- -- -- 10,000 --------- --------- ---------- --------- -------- --------- Total $ 135,873 $ 37,581 $ 7,783 $ 11,449 $ 170,403 $ 363,089 --------- --------- ---------- --------- -------- --------- Gap $ (28,362) $ (450) $ 56,061 $ 95,078 $ (95,257) $ 27,070 ========== ========= ========= ========= ======== ========= Cumulative Gap $ (28,362) $ (28,812) $ 27,249 $ 122,327 $ 27,070 ========== ========= ========= ========= ======== Gap as a percent of total assets (7.04%) (0.11%) 13.92% 23.61% 23.65% Cumulative gap as a percent of total assets (7.04%) (7.15%) 6.77% 30.38% 6.72% * Cumulative gap as a percent of total assets if NOW and FlexValue accounts are considered immediately withdrawable (15.44%) (15.56%) (1.64%) 21.97% 6.72% Whenever possible, maturity dates or contractual repricing dates have been used in the preparation of the above table. In addition to those factors, certain assumptions are utilized such as the estimation of prepayments associated with certain loans and mortgage-backed securities. For purposes of this table, the Company considers the cash letter sent for collection each evening to convert from a rate-insensitive asset the day it is sent for collection to a rate- sensitive
-18- asset the following day when it is funded and becomes an interest-earning asset. The Company's historical experience over more than ten years, during which time interest rates have risen and fallen significantly, has demonstrated that demand deposit balances are rate-insensitive. The Company considers 25% of NOW account, FlexValue account, money market account and savings account balances to be rate-sensitive, with the remaining 75% of those balances to be rate- insensitive. In addition, certain money market account balances are tied to a short-term treasury rate and are repriced monthly. All certificates of deposit are considered to be rate sensitive. The rate sensitivity or insensitivity of the Company's various balance sheet categories is reflected in the above table. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk is the sensitivity of income to variations in interest rates over a specified time horizon. The primary goal of interest rate risk management is to control this risk within specific limits and guidelines approved by the Company's Asset/Liability Committee and Board of Directors. Those limits and guidelines reflect the Company's tolerance for interest rate risk. The Company also uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a one year time horizon. Simulation analysis involves projecting future income and expense derived from the Company's assets and liabilities under various interest rate scenarios. The Company's interest rate risk policy specifies that if overnight interest rates were to shift upward or downward by 200 basis points over four quarters (i.e. 50 basis points per quarter for four consecutive quarters), estimated net interest income for that twelve month period should decline by no more than 5.00% of net interest income. However, during 2001 the Federal Reserve Board reduced the overnight federal funds target rate eleven times, and at December 31, 2001 that rate stood at 1.75%. The Company's management believes it is very unlikely that rates could fall more than an additional 100 basis points during 2002. Therefore, for purposes of this December 31, 2001 disclosure, the Company has measured the impact on net interest income of a 200 basis point increase and a 100 basis point decrease in overnight interest rates over four consecutive quarters. One-quarter of the increase was projected to take place in each of the four quarters, and one-half of the decrease was projected to take place in each of the first and third quarters. Based upon those assumptions, the following table sets forth the Company's estimated net interest income exposure:
Rate Change Estimated Exposure to (Basis Points) Net Interest Income -------------- --------------------- +200 (0.12%) -100 0.38%
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements are included on pages 3 through 27 the Annual Report to shareholders for the year ended December 31, 2001 and are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in the Company's independent public accountants or disagreements with the Company's accountants on accounting or financial disclosure during the 24 months ended December 31, 2001 or in any period subsequent to the most recent financial statements. -19- PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth, as to each of the Directors and Executive Officers of the Company and the Bank, such person's age, position, term of office, and all business experience during the past five years. All Directors of the Company have served since 1984, except Mr. Frias who has been a Director of the Company since 1985, Mr. Parker who has been a Director of the Company since 1986, Messrs. Hughes and Webster who have been Directors of the Company since 1995, and Ms. Colosi who has been a Director of the Company since 1999. Each Director of the Company is also a Director of the Bank. Each executive officer holds office until the first Director's meeting following the annual meeting of stockholders and thereafter until his or her successor is elected and qualified.
Business Experience Term of During Past Name Age Position Office Five Years ---- --- -------- ------- ------------------- Grace L. Blunt 47 Senior Vice Senior Vice President, President Community National Bank, of Bank Assistant Clerk, Community Bancorp, Inc. Alfred A. 84 Director of 2003 Retired Cardoza (1) Company and Bank Jennie Lee 46 Director of 2003 President and Treasurer, Colosi Company and E. T.& L. Construction, Bank Inc. Antonio Frias 62 Director of 2003 President and Treasurer, Company and S & F Concrete Bank Contractors, Inc.; John P. Galvani 45 Exec. Vice Executive Vice President, President Community National Bank of Bank I. George 85 Director of 2002 Chairman, Gould's, Inc. Gould (2) Company and Bank Horst Huehmer 74 Director of 2004 Retired; formerly Company and Manager, Hudson Light Bank and Power Department Donald R. 52 Treasurer and 2004 Executive Vice Hughes, Jr. Clerk of President and Cashier, Company; Exec. Community National Bank; Vice President Treasurer and Clerk, of Bank; Director Community Bancorp, Inc. of Company and Bank -20- James A. 62 President & 2002 President and CEO, Langway (2) CEO of Company Community National Bank and Bank; and Community Director of Bancorp, Inc. Company and Bank Robert E. Leist 48 Senior Vice Senior Vice President, President Community National Bank of Bank Dennis F. 64 Chairman of 2003 President and Murphy, Jr. the Board, Treasurer, D. F. Company and Murphy Insurance Bank Agency, Inc.; Treasurer, Village Real Estate David L. 73 Director of 2002 Chairman of the Board, Parker (2,3) Company and Larkin Lumber Co. Bank Mark Poplin 78 Director of 2004 President and Company and Treasurer, Poplin Bank Supply Co.; Secretary, Poplin Furniture Co. David W. 60 Director of 2004 President & Treasurer, Webster (3) Company and Knight Fuel Co., Inc. Bank (1) Mr. Cardoza is retiring as a Director of the Company and the Bank effective April 1, 2002. (2) Messrs. Gould, Langway and Parker have been nominated for election at the 2002 Annual Meeting to serve until 2005. (3) Mr. Webster's wife and Mr. Parker are cousins.
No Director holds a directorship in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940. -21- ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer and the four most highly compensated other executive officers whose aggregate compensation by the Company and the Bank exceeded $100,000 during 2001.
Long-Term Compensation Annual Compensation Awards ----------------------- ------------ (a) (b) (c) (d) (g) (i) (1) Securities Underlying All Other Name and Salary Bonus Options Compensation Principal Position Year ($) ($) (#) ($) - ------------------ ---- ------ ----- ---------- ------------ James A. Langway 2001 $237,888 $103,800 23,789 $10,022 President and CEO 2000 226,562 75,000 -- 8,974 of the Company and 1999 217,848 93,800 -- 9,121 the Bank Donald R. Hughes, Jr. 2001 140,568 51,844 14,057 9,155 Treasurer and Clerk of 2000 133,874 25,000 -- 8,493 Company; Executive Vice 1999 128,725 31,538 -- 8,828 President and Cashier of the Bank John P. Galvani 2001 114,800 18,900 10,500 5,948 Executive Vice President 2000 98,730 16,000 -- 5,536 of the Bank 1999 93,712 15,931 -- 5,440 Grace L. Blunt 2001 96,750 18,772 9,100 5,280 Senior Vice President 2000 84,240 15,036 -- 5,713 of the Bank 1999 81,000 13,770 -- 5,507 Robert E. Leist 2001 96,546 16,944 9,655 3,789 Senior Vice President 2000 91,948 15,723 -- 3,622 of the Bank 1999 88,421 15,032 -- 3,220 Note: 1. The Company maintains a 401(k) Savings Plan ("401(k) Plan") for employees age 21 or over and who meet other requirements. Prior to December 31, 2001, the Company also maintained an Employee Stock Ownership Plan ("ESOP") for employees age 21 or older who were participants in the Company's Retirement Plan and who met other requirements. Messrs. Langway, Hughes, Galvani, and Leist and Ms. Blunt are participants in the Company's 401(k) and ESOP Plans. (Effective December 31, 2001, the ESOP was merged into the 401(k) Plan.) Of the $10,022 reported above for 2001 in column (i) for Mr. Langway, $2,730 represents Company ESOP contributions, $5,250 represents Company 401(k) Plan contributions and $2,042 represents group life insurance premiums paid by the Company. Of the $9,155 reported above for 2001 in column (i) for Mr. Hughes, $2,729 represents Company ESOP contributions, $5,250 represents Company 401(k) Plan contributions and $1,176 represents group life insurance premiums paid by the Company. Of the $5,948 reported above for 2001 in column (i) for Mr. Galvani, $2,132 represents Company ESOP contributions, $3,294 represents Company 401(k) Plan contributions and $522 represents group life insurance premiums paid by the Company. Of the $5,280 reported above for 2001 in column (i) for Ms. Blunt, $1,855 represents Company ESOP contributions, $2,903 represents Company 401(k) Plan contributions -22- and $522 represents group life insurance premiums paid by the Company. Of the $3,789 reported above for 2001 in column (i) for Mr. Leist, $1,819 represents Company ESOP contributions, $1,448 represents Company 401(k) Plan contributions and $522 represents group life insurance premiums paid by the Company.
Stock Options Granted in 2001 The following table sets forth certain information regarding stock options granted during 2001 to the named Executive Officers. The grants reflected in the table were made pursuant to the Company's 2001 Incentive Stock Option Plan for Key Employees.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term - --------------------------------------------------------- ------------------------------ (a) (b) (c) (d) (e) (f) (g) % of Total Number of Options Securities Granted to Exercise Underlying Employees or Options in Fiscal Base Price Expiration 5% 10% Name Granted (#) Period ($/Share) Date ($) ($) - ---- ----------- --------- ---------- ---------- -------- -------- James A. Langway 23,789 19.9% $10.00 04/09/11 $149,608 $379,135 Donald R. Hughes, Jr. 14,057 11.8% 10.00 04/09/11 88,404 224,032 John P. Galvani 10,500 8.8% 10.00 04/09/11 66,034 167,343 Grace L. Blunt 9,100 7.6% 10.00 04/09/11 57,229 145,031 Robert E. Leist 9,655 8.1% 10.00 04/09/11 60,720 153,876
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Options The following table sets forth certain information regarding stock options exercised during fiscal 2001 and stock options held at December 31, 2001, by the named Executive Officers. No stock appreciation rights ("SARS") are outstanding pursuant to the Company's 2001 Incentive Stock Option Plan for Key Employees.
(a) (b) (c) (d) (e) Securities Value of Underlying Unexercised Unexercised In-The-Money Options at Options at Fiscal Year-End Fiscal Year-End Shares Value (#) ($) Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable (1) - ---- ------------ -------- -------------- ----------------- James A. Langway 0 $0 0 / 23,789 $0 / $47,578 Donald R. Hughes, Jr. 0 0 0 / 14,057 0 / 28,114 John P. Galvani 0 0 0 / 10,500 0 / 21,000 Grace L. Blunt 0 0 0 / 9,100 0 / 18,200 Robert E. Leist 0 0 0 / 9,655 0 / 19,310 Note: 1. There is no established public trading market for the Company's common stock. For purposes of this table, the value of the unexercised in-the-money options at fiscal year-end has been based upon a fair value of $12.00, the most recent trade price of the Company's stock at December 31, 2001.
-23- Compensation of Directors During 2001, Directors of the Bank received a fee of $900 per month and the Chairman of the Board of the Bank received a fee of $1,500 per month. Directors who are not also employees of the Bank also received an annual retainer of $2,000. The Company itself pays no compensation to its Directors for their services. During 2001, the Company adopted the "2001 Directors' Plan" (the "Directors' Plan"), which is a non-qualified stock option plan for Directors who are not also employees of the Company. Under the Director's Plan, during 2001 each director was granted options to purchase 1,000 shares of the Company's common stock at a price of $10.00 per share. Employment Contracts and Termination of Employment and Change-in-Control Arrangements The Company has entered into five-year Employment Agreements with James A. Langway, President and Chief Executive Officer of the Company, and with Donald R. Hughes, Jr., Treasurer and Clerk of the Company, which specify the employee's duties and minimum compensation during the period of the Employment Agreement. Each Employment Agreement is extended for one additional year, on the anniversary of the commencement date, unless prior notice is given by either party. Employment by the Company shall terminate upon the employee's resignation, death, disability, or for "cause" as defined in the Employment Agreement. If employment is involuntarily terminated by the Company for any reason except for cause, or if the Employment Agreement is not renewed at its expiration, the Company is required to make additional payments to the employees. During the term of the Employment Agreement and for one year afterwards, the employee cannot compete with the Company within its market area. The Company has also entered into Severance Agreements with Mr. Langway and Mr. Hughes regarding termination of employment by the Company or Bank subsequent to a "change in control" of the Company, as defined in the Severance Agreement. Following the occurrence of a change in control, if the employee's employment is terminated (except because of gross dereliction of duty, death, retirement, disability or conviction for criminal misconduct) or is involuntarily terminated for "good reason" as defined in the Severance Agreement, then the employee shall be entitled to a lump sum payment from the Company approximately equal to three times his average annual compensation for the previous five years, plus accrued vacation pay and bonus awards. If Mr. Langway or Mr. Hughes is entitled to receive benefits under both his Employment Agreement and his Severance Agreement, he must choose the agreement under which he will claim benefits. The Company has entered into an Executive Supplemental Income Agreement with James A. Langway, President and Chief Executive Officer of the Company, which commenced July 12, 1988 and which specifies benefits payable to Mr. Langway for a ten (10) year period following the date on which he ceases to be employed by the Company. The Agreement provides that the Company will pay Mr. Langway $40,774 each year, increased by increases in the Consumer Price Index, for a ten (10) year period following the date he ceases to be employed by the Company for any cause whatsoever after attaining age 55. The Agreement was amended on January 26, 1990, increasing the annual base retirement benefit to be paid to Mr. Langway from $40,774 to $60,774 each year, increased by increases in the Consumer Price Index in the same manner as the original Agreement. Mr. Langway attained age 55 during 1994. The Company records annual expense in anticipation of future payments expected to be made under this Agreement. The annual expense amount recorded is determined by an independent actuary based on Mr. Langway's -24- life expectancy at the time he begins receiving payments. During 2001, the Company recorded $7,928 in such expense. The Bank has entered into "change in control" Severance Agreements with John P. Galvani, Executive Vice President, Grace. L. Blunt, Senior Vice President, and Robert E. Leist, Senior Vice President. -25- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table and related notes set forth information regarding stock owned by each of the directors of the Company and Bank, and by all directors and executive officers of the Company and Bank as a group, at March 15, 2002.
Amount and Nature of Beneficial Ownership Title (Number of shares) (1) Percent of Name of ----------------------------------- of Class Beneficial Owner Sole (2) Shared (3) Total Class - ----- ---------------- ------- ---------- ----- ------- Common Alfred A. Cardoza 650 44,522 45,172 0.8% Stock ($2.50 Jennie Lee Colosi 2,000 2,871 4,871 0.1% par) Antonio Frias 76,001 2,120 78,121 1.3% I. George Gould 18,470 24,494 42,964 0.7% Horst Huehmer 1,400 43,864 45,264 0.8% Donald R. Hughes, Jr. 37,916 (4) 64,000 101,916 1.7% James A. Langway 244,143 (5) 298,994 (6) 543,137 9.1% Dennis F. Murphy, Jr. 387,120 464,596 851,716 14.3% David L. Parker 56,084 16,400 (7) 72,484 1.2% Mark Poplin 3,728 303,890 (8) 307,618 5.2% David W. Webster 1,940 140,168 142,108 2.4% All directors and executive officers of the Company and Bank as a group (15 persons) 829,452 1,126,713 1,956,165 32.9% (1) Based upon information provided to the Company by the indicated persons. Certain directors may disclaim beneficial ownership of certain of the shares listed beside their names. (2) Indicates sole voting and investment power. (3) Indicates shared voting and investment power. (4) Includes 37,916 shares held by the Company's 401(k) Plan for which Mr. Hughes has voting power in certain circumstances. (5) Includes 58,955 shares held by the Company's 401(k) Plan for which Mr. Langway has voting power in certain circumstances. (6) Includes 105,366 shares held by the Mark Poplin Family Trust and 193,628 shares held by the Shirley E. Poplin Family Trust, for which Mr. Langway is a trustee. Mr. Langway disclaims any beneficial interest in these shares. -26- (7) Includes 4,000 shares held by the Unitarian Church of Marlboro and Hudson, MA, for which Mr. Parker is a trustee. (8) Includes 105,366 shares held by the Mark Poplin Family Trust and 193,628 shares held by the Shirley E. Poplin Family Trust.
The following persons own beneficially more than five percent of the outstanding stock of the Company as of March 15, 2001:
Amount and Title Name and Address Nature of Percent of of Beneficial Beneficial of Class Owner Ownership Class ----- ---------------- ---------- ------- Common Stock Dennis F. Murphy, Jr. 851,716 shares 14.3% ($2.50 par) 188 Prospect Hill Rd. Still River, MA 01467 James A. Langway 543,137 shares (1,2) 9.1% 1143 Grove Street Framingham, MA 01701 Mark Poplin 307,618 shares (3) 5.2% 6 Greenway Street, #306 Wayland, MA 01778 Einar P. Robsham 303,800 shares 5.1% 164 Cochituate Road Wayland, MA 01778 (1) Includes 58,955 shares held by the Company's 401(k) plan, for which Mr. Langway has voting power in certain circumstances. (2) Includes 105,366 shares held by the Mark Poplin Family Trust and 193,628 shares held by the Shirley E. Poplin Family Trust, for which Mr. Langway is a trustee. Mr. Langway disclaims any beneficial interest in these shares. (3) Includes 105,366 shares held by the Mark Poplin Family Trust and 193,628 shares held by the Shirley E. Poplin Family Trust.
-27- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company, through its wholly-owned bank subsidiary, has had, currently has, and expects to continue to have in the future, banking (including loans and extensions of credit) transactions in the ordinary course of its business with its Directors, Executive Officers, members of their families and associates. Such banking transactions have been and are on substantially the same terms, including interest rates, collateral and repayment conditions, as those prevailing at the same time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. In October of 1997 the Bank entered into a third-party insurance sales agreement with Murphy Insurance Brokerage, Ltd. ("MIBL"). By entering into the agreement, the Bank implemented a decision of the Board of Directors to expand the Bank's product line by providing the public with access to insurance products. The agreement between the Bank and MIBL is structured in the form of a lease arrangement for floor space in the Bank's Main Office located at 17 Pope Street, Hudson, Massachusetts. MIBL is a subsidiary of D. F. Murphy Insurance Agency, Inc., which is owned by Dennis F. Murphy, Jr., Chairman of the Company's Board of Directors. The third-party agreement between the Bank and MIBL had no material affect on the Company's 2001 financial statements or results of operations. In February of 2002 the Bank applied to the Massachusetts Insurance Commissioner's Office to become a licensed insurance broker. -28- PART IV - ------- ITEM 14. EXHIBITS AND FINANCIAL STATEMENTS (a) 1. & 2. Index to Consolidated Financial Statement Schedules The following consolidated financial statements, which are included in the Annual Report to Shareholders of Community Bancorp, Inc. for the year ended December 31, 2001, are hereby incorporated by reference:
Annual Report to Shareholders Description page reference ----------- ---------------- Consolidated balance sheets at December 31, 2001 and 2000 4 Consolidated statements of income for the years ended December 31, 2001, 2000 and 1999 5 Consolidated statements of comprehensive income for the years ended December 31, 2001, 2000 and 1999 6 Consolidated statements of stockholders' equity for the years ended December 31, 2001, 2000 and 1999 7 Consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999 8 Notes to consolidated financial statements 9 - 27 With the exception of the aforementioned information, and information incorporated by reference in Items 5, 6, 7, and 8, the Annual Report to Shareholders for the year ended December 31, 2001 is not deemed to be filed as part of this Form 10-K. Certain schedules required by Regulation S-X have been omitted as the items are either not applicable or are presented in the notes to the financial statements contained in the Annual Report to Shareholders for the year ended December 31, 2001.
3. Exhibits See accompanying Exhibit Index. (b) The Company did not file a Form 8-K during the quarter ended December 31, 2001. -29-
EXHIBIT INDEX ------------- 3.1 Articles of Organization of Company Amendments to Articles of Organization, (dated prior to April 12, 1988) (a) 3.1.i Amendment to Articles of Organization, dated April 12, 1988 3.2 By-Laws of Company (a) 10.1 Community Bancorp, Inc. Employee Stock Ownership Plan (as amended and restated effective January 1, 1985) (b) 10.2 Employment Agreement dated August 19, 1986 between Community Bancorp, Inc. and James A. Langway (c) 10.3 Severance Agreement dated June 10, 1986 between Community Bancorp, Inc. and James A. Langway (d) 10.4 Employment Agreement dated August 19, 1986 between Community Bancorp, Inc. and Donald R. Hughes, Jr. (c) 10.5 Severance Agreement dated June 10, 1986 between Community Bancorp, Inc. and Donald R. Hughes, Jr. (d) 10.6 Executive Supplemental Income Agreement dated July 12, 1988 between Community Bancorp, Inc. and James A. Langway (e) 10.7 Amendment to Executive Supplemental Income Agreement dated January 26, 1990 between Community Bancorp, Inc. and James A. Langway. (f) 10.8 Stock Purchase Agreement dated March 29, 1993 by and among Community Bancorp, Inc. and certain specified persons. (g) 10.9 Shareholder Rights Agreement dated May 24, 1996 between Community Bancorp, Inc. and Cambridge Trust Company. (h) 10.10 Form of Severance Agreement dated February 19, 1998 between Community National Bank and three Executive Officers. (i) 10.11 First Amendment to Shareholder Rights Agreement dated February 15, 2000. (j) 10.12 2001 Directors' Stock Option Plan dated February 22, 2001. (k) 10.13 2001 Incentive Stock Option Plan for Key Employees dated April 10, 2001. (l) -30- 10.14 Consent of Independent Public Accountants Page 32 13. 2001 Annual Report to Shareholders 21. Subsidiaries of Company Page 33 99.1 Letter to Commission Pursuant to Temporary Note 3T Page 34 Notes: (a) Incorporated herein by reference to Exhibits 3.1, and 3.2 and filed as part of Company's Amendment No. 1 to the Registration Statement on Form S-18 (File No. 33-12756-B) filed with Commission on April 16, 1987. (b) Incorporated herein by reference to Exhibit 10.1 as part of Company's Registration Statement on Form S-18 (File No. 33-12756-B) filed with the Commission on March 19, 1987. (c) Incorporated herein by reference to Exhibits 5.8 and 5.9 filed as part of Company's Amendment No. 2 to the Offering Statement on Form 1-A (File No. 24B-2076) filed with the Commission on August 14, 1986. (d) Incorporated herein by reference to Exhibits 5.2 and 5.4 filed as part of Company's Offering Statement on Form 1-A (File No. 24B-2076) filed with the Commission on June 24, 1986. (e) Incorporated herein by reference as filed as part of the Company's December 31, 1988 Form 10-K (File No. 33-12756-B), filed with the Commission on March 30, 1989. (f) Incorporated herein by reference as filed as part of the Company's December 31, 1989 Form 10-K (File No. 33-12756-B), filed with the Commission on March 29, 1990. (g) Incorporated herein by reference as filed as part of the Company's December 31, 1992 Form 10-K (File No. 33-12756-B), filed with the Commission on March 30, 1993. (h) Incorporated herein by reference as filed as part of the Company's Form 8-K (File No. 33-12756-B), filed with the Commission on May 31, 1996. (i) Incorporated herein by reference as filed as part of the Company's December 31, 1998 Form 10-K (File No. 33-12756-B), filed with the Commission on March 24, 1999. (j) Incorporated herein by reference as filed as part of the Company's December 31, 1999 Form 10-K (File No. 033-12756-B), filed with the Commission on March 27, 2000. (k) Incorporated herein by reference as filed as part of the Company's April 17, 2001 Form S-8 (File No. 333-59232), filed with the Commission on April 19, 2001. (l) Incorporated herein by reference as filed as part of the Company's April 17, 2001 Form S-8 (File No. 333-59262), filed with the Commission on April 19, 2001.
-31- [The following consent appears on Arthur Andersen LLP letterhead] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report dated January 18, 2002, included in this Form 10-K, into Community Bancorp, Inc.'s previously filed registration statements on Form S-8 (File No. 333-59262 and File No. 333-59232). /s/ Arthur Andersen LLP Boston, Massachusetts March 20, 2002 -32- SUBSIDIARIES OF COMPANY ----------------------- 1. Community National Bank, a national banking association. -33- LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T -------------------------------------------------- [The following letter appears on Community Bancorp, Inc. letterhead] March 20, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0408 Ladies and Gentlemen: Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, Community Bancorp, Inc. has obtained a letter of representation from Arthur Andersen LLP ("Andersen") stating that the December 31, 2001 audit was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen is not relevant to this audit. Very truly yours, /s/ Donald R. Hughes, Jr. Donald R. Hughes, Jr. Treasurer and Chief Financial Officer -34- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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: March 20, 2002 By: /s/ Donald R. Hughes, Jr. ------------------------- Donald R. Hughes, Jr. Treasurer and Clerk Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date Name and Capacity ----- ----------------- March 20, 2002 /s/ James A. Langway ------------------------ James A. Langway, President & CEO Principal Executive Officer March 20, 2002 /s/ Donald R. Hughes, Jr. ------------------------- Donald R. Hughes, Jr., Treasurer & Clerk, Principal Financial Officer and Principal Accounting Officer March 20, 2002 /s/ James A. Langway ------------------------- James A. Langway, Director March 20, 2002 /s/ Donald R. Hughes, Jr. -------------------------- Donald R. Hughes, Jr., Director March 20, 2002 /s/ I. George Gould -------------------------- I. George Gould, Director March 21, 2002 /s/ Antonio Frias -------------------------- Antonio Frias, Director March 21, 2002 /s/ Dennis F. Murphy, Jr. -------------------------- Dennis F. Murphy, Jr., Director and Chairman March 22, 2002 /s/ Jennie Lee Colosi -------------------------- Jennie Lee Colosi, Director -35- SUPPLEMENTAL INFORMATION ------------------------ Copies of the Notice of Annual Meeting of Shareholders, Proxy Statement and Proxy For Annual Meeting of Shareholders for the Registrant's 2002 annual meeting of shareholders, to be held on April 9, 2002, have been submitted separately as an EDGAR Submission Type DEF 14A. Such material is not deemed to be filed with the Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act. -36- EX-13 3 ar-2001.txt 2001 ANNUAL REPORT TO SHAREHOLDERS [The annual report front cover contains a color graphic and the following text:] Annual Report 2001 Community Bancorp, Inc. Parent Company of Community National Bank [The following text appears on page 1] Table of Contents Message to Stockholders and Friends - - - - - - - - - - - - 2 Selected Consolidated Financial Data - - - - - - - - - - - - 3 Consolidated Balance Sheets - - - - - - - - - - - - - - - - 4 Consolidated Statements of Income - - - - - - - - - - - - - 5 Consolidated Statements of Comprehensive Income - - - - - - 6 Consolidated Statements of Stockholders' Equity - - - - - - 7 Consolidated Statements of Cash Flows - - - - - - - - - - - 8 Notes to Consolidated Financial Statements - - - - - - - - 9 Report of Independent Public Accountants - - - - - - - - - 27 Management's Discussion and Analysis of Financial Condition and Results of Operations - - - - - - 28 Directors & Officers - - - - - - - - - - - - - - - - - - - 31 -1- To Our Stockholders and Friends On behalf of the Board of Directors, management and staff of Community Bancorp, Inc., we are proud to present you with our 2001 Annual Report. The results of operations for the past year are a very positive indication of the Company's continued strength, as we again achieved record earnings. Net income for the year ended December 31, 2001 was $5,080,838, compared to $4,532,119 recorded in 2000. Earnings per share of $0.86 for 2001 represented an 11.7% increase over $0.77 per share in the previous year. Although the nation's economy softened considerably during 2001, prompting the Federal Reserve to lower interest rates an unprecedented eleven times during the year, ongoing independent reviews of our loan portfolio confirm that the Company's assets are of high quality. With a total loan portfolio of over $188 million at year-end, only $128,000 in net loan losses were realized during the year. The Company's return on average assets (ROA), a key measurement of a bank's earnings performance, was 1.32% during 2001, comparing very favorably to peer financial institutions. As a result of our continued strong earnings during 2001, the Board of Directors increased the cash dividend paid to the Company's stockholders in each of the four quarters. Total dividends of $0.26 per share declared during 2001 represented a 24% increase over $0.21 per share declared in 2000. The year 2001 was a gratifying year for the Company, but a difficult year for our country. We were deeply saddened by the events of September 11, 2001 and the nation is still recovering from those tragedies, which prolonged and deepened the economic recession. However, there are signs that the Federal Reserve's interest rate cuts and the tax package passed by the President and Congress last year are beginning to produce results. Nothing is certain, however, and only time will tell if and how much the economy will improve in the short term. In the meantime, our outlook remains positive. We continually strive to provide friendly, courteous and professional service to our many customers. We also strive to provide our customers with technologically advanced services and delivery systems that an increasing number of them desire each year. Community Bancorp, Inc. is committed to being a leader at providing a full range of diversified financial services and innovative technology that will both serve our existing customers well and attract new customers. As we have said in previous letters to our stockholders, as a community bank we know our customers and their needs and we know how to provide the financial services they desire. We believe these are the keys to our ongoing success. On behalf of the Board of Directors, management and staff, we thank our stockholders and customers for their continued support, and we are looking forward to making 2002 another successful year. Sincerely, /s/ James A. Langway /s/ Dennis F. Murphy, Jr. - -------------------- ------------------------- James A. Langway Dennis F. Murphy, Jr. President and Chief Executive Officer Chairman of the Board -2- Selected Consolidated Financial Data ------------------------------------
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total assets $402,705,744 $374,867,511 $327,996,575 $300,886,831 $273,550,527 Total deposits 319,066,339 307,128,832 276,422,308 254,408,735 232,788,534 Total net loans 185,768,186 173,216,873 161,318,593 137,242,930 136,624,294 Allowance for loan losses 2,684,517 2,812,392 3,041,873 2,981,012 3,215,559 Total interest income 25,507,838 24,964,665 21,840,725 20,659,783 19,169,951 Total interest expense 8,634,144 9,354,592 7,829,668 7,675,112 6,895,222 Net interest income 16,873,964 15,610,073 14,011,057 12,984,671 12,274,729 Gains on sales of securities 9,200 -- -- -- 8,587 Provision for loan losses -- -- -- -- -- Net income 5,080,838 4,532,119 3,915,217 3,805,761 3,429,859 Earnings per share 0.86 0.77 0.66 0.65 0.58 Dividends per share 0.26 0.21 0.18 0.16 0.14
[Five-year bar graphs for the following categories appear in this space. Data for the graphs was obtained from the above table.] Total Assets (in millions) Net Income (in millions) Earnings Per Share (in dollars) Total Deposits (in millions) Total Net Loans (in millions) Net Interest Income (in millions) -3- Consolidated Balance Sheets December 31, 2001 and 2000
2001 2000 ----------- ----------- ASSETS Cash and due from banks $ 19,876,999 $ 16,472,547 Federal funds sold 12,912,746 31,136,266 Securities available for sale at fair value (Note 3) 74,116,739 50,110,202 Securities held to maturity (fair value $99,075,447 in 2001 and $92,302,813 in 2000) (Note 3) 97,266,087 92,441,522 Mortgage loans held for sale 1,909,913 295,742 Loans (Notes 4 and 11) 188,452,703 176,029,265 Less allowance for loan losses (Note 4) 2,684,517 2,812,392 ----------- ----------- Total net loans 185,768,186 173,216,873 Bank premises and equipment, net (Note 5) 6,140,477 6,234,641 Other assets, net (Notes 1, 8 and 9) 4,714,597 4,959,718 ----------- ----------- Total assets $402,705,744 $374,867,511 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 6): Noninterest bearing $ 78,513,849 $ 75,969,408 Interest bearing 240,552,490 231,159,424 ----------- ----------- Total deposits 319,066,339 307,128,832 ----------- ----------- Securities sold under repurchase agreements (Note 1) 34,023,288 33,463,166 Borrowed funds (Note 7) 10,000,000 -- Other liabilities (Note 9) 3,305,118 2,460,642 ----------- ----------- Total liabilities 366,394,745 343,052,640 ----------- ----------- Commitments (Notes 10 and 13) -- -- Stockholders' equity: (Notes 1 and 9) 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, 6,398,436 shares issued, 5,940,606 shares outstanding, (5,914,441 shares outstanding at December 31, 2000) 15,996,090 15,996,090 Surplus 219,120 101,378 Undivided profits 21,608,513 18,052,893 Treasury stock, at cost, 457,830 shares, (483,995 at December 31, 2000) (2,297,019) (2,414,762) Accumulated other comprehensive income 784,295 79,272 ----------- ----------- Total stockholders' equity 36,310,999 31,814,871 ----------- ----------- Total liabilities and stockholders' equity $402,705,744 $374,867,511 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
-4- Consolidated Statements of Income Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---- ---- ---- Interest income: Interest and fees on loans $15,748,562 $15,452,495 $13,947,164 Interest and dividends on securities: Taxable interest 7,239,876 7,096,447 6,427,831 Nontaxable interest 889,442 628,313 566,334 Dividends 310,450 91,360 74,865 Interest on federal funds sold 1,319,508 1,696,050 824,531 ---------- ---------- ---------- Total interest income 25,507,838 24,964,665 21,840,725 ---------- ---------- ---------- Interest expense: Interest on deposits 7,353,628 7,661,268 6,801,917 Interest on securities sold under repurchase agreements 1,275,081 1,693,324 1,027,751 Interest on borrowed funds (Note 7) 5,435 -- -- ---------- ---------- ---------- Total interest expense 8,634,144 9,354,592 7,829,668 ---------- ---------- ---------- Net interest income 16,873,694 15,610,073 14,011,057 ---------- ---------- ---------- Provision for loan losses (Note 4) -- -- -- ---------- ---------- ---------- Net interest income after provision for loan losses 16,873,694 15,610,073 14,011,057 ---------- ---------- ---------- Noninterest income: Merchant credit card processing assessments 1,838,342 1,559,355 1,296,041 Service charges 639,163 635,823 589,697 Other charges, commissions and fees 1,350,290 1,110,542 1,169,175 Gains on sales of loans, net 200,402 89,458 71,661 Gains on sales of securities, net 9,200 -- -- Other 104,903 92,867 89,172 ---------- ---------- ---------- Total noninterest income 4,142,300 3,488,045 3,215,746 ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits (Note 9) 6,649,341 6,093,676 5,632,576 Information technology and ATM network 1,222,091 1,113,844 1,010,383 Occupancy, net 950,410 829,817 761,857 Furniture and equipment 427,634 416,133 370,549 Credit card processing 1,654,208 1,430,434 1,258,102 Printing, stationery and supplies 242,998 244,622 280,008 Professional fees 499,230 415,696 420,423 Marketing and advertising 205,529 276,315 326,348 Other 1,398,478 1,241,280 1,076,763 ---------- ---------- ---------- Total noninterest expense 13,249,919 12,061,817 11,137,009 ---------- ---------- ---------- Income before income tax expense 7,766,075 7,036,301 6,089,794 Income tax expense 2,685,237 2,504,182 2,174,577 ---------- ---------- ---------- Net income $ 5,080,838 $ 4,532,119 $ 3,915,217 ========== ========== ========== Basic earnings per common share (Notes 1 and 9) $ 0.86 $ 0.77 $ 0.66 Diluted earnings per common share (Notes 1 and 9) $ 0.86 $ 0.77 $ 0.66 Basic weighted average number of shares (Notes 1 and 9) 5,932,004 5,912,731 5,909,600 Diluted weighted average number of shares (Notes 1 and 9) 5,940,597 5,912,731 5,909,600 ========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
-5- Consolidated Statements of Comprehensive Income Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---- ---- ---- Net income $ 5,080,838 $ 4,532,119 $ 3,915,217 ---------- ---------- ---------- Other comprehensive income: Unrealized securities gains (losses) arising during period 1,193,540 513,579 (434,930) Income tax (expense) benefit on unrealized securities gains (losses) arising during period (488,517) (210,205) 178,018 ---------- ---------- ---------- Net unrealized securities gains (losses) arising during period 705,023 303,374 (256,912) ---------- ---------- ---------- Less: reclassification adjustment for securities (gains) included in income -- -- -- Income tax expense on securities (gains) included in income -- -- -- ---------- ---------- ---------- Net reclassification adjustment for securities (gains) included in net income -- -- -- ---------- ---------- ---------- Other comprehensive income (loss) 705,023 303,374 (256,912) ---------- ---------- ---------- Comprehensive income (Note 1) $ 5,785,861 $ 4,835,493 $ 3,658,305 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-6- Consolidated Statements of Stockholders' Equity Years ended December 31, 2001, 2000 and 1999
Accumulated Other Common Undivided Treasury Comprehensive Stock Surplus Profits Stock Income -------- -------- ----------- --------- ------------- Balance, December 31, 1998 $ 7,998,045 $524,106 $19,274,861 $(2,364,573) $ 32,810 Net income -- -- 3,915,217 -- -- Cash dividends declared ($0.182 per share) -- -- (1,073,397) -- -- Purchase of 70 shares of treasury stock -- -- -- (630) -- Reissuance of 32,718 shares of treasury stock -- 114,513 -- 147,231 -- Change in accumulated other comprehensive income (Note 1) -- -- -- -- (256,912) - -------------------------- --------- ------- ---------- --------- ------- Balance, December 31, 1999 7,998,045 638,619 22,116,681 (2,217,972) (224,102) Net income -- -- 4,532,119 -- -- Two-for-one stock split effected in the form of a 100% stock dividend 7,998,045 (638,619) (7,359,426) -- -- Cash dividends declared ($0.209 per share) -- -- (1,236,481) -- -- Purchase of 36,348 shares of treasury stock -- -- -- (327,132) -- Reissuance of 28,965 shares of treasury stock -- 101,378 -- 130,342 -- Change in accumulated other comprehensive income (Note 1) 303,374 - -------------------------- --------- ------- ---------- --------- ------- Balance, December 31, 2000 15,996,090 101,378 18,052,893 (2,414,762) 79,272 Net income -- -- 5,080,838 -- -- Cash dividends declared ($0.257 per share) -- -- (1,525,218) -- -- Reissuance of 26,165 shares of treasury stock -- 117,742 -- 117,743 -- Change in accumulated other comprehensive income (Note 1) 705,023 - -------------------------- --------- ------- --------- --------- --------- Balance, December 31, 2001 $15,996,090 $219,120 $21,608,513 $(2,297,019) $ 784,295 ========== ======= ========== ========= ======= The accompanying notes are an integral part of these consolidated financial statements.
-7- Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---- ---- ---- Net income $ 5,080,838 $ 4,532,119 $ 3,915,217 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in mortgage loans held for sale (1,614,171) 36,944 997,592 Depreciation and amortization 1,016,058 974,945 1,063,584 Amortization of investment securities premiums and (discounts), net 70,108 81,136 (47,149) Deferred (prepaid) income taxes 114 (25,646) 91,991 Increase in other liabilities 380,706 643,537 82,050 (Decrease) increase in taxes payable (162,614) 122,817 83,454 (Decrease) increase in interest payable (100,178) 54,196 62,346 Decrease (increase) in other assets, net 9,507 (541,490) (313,921) Decrease (increase) in interest receivable 235,499 (473,882) (365,378) ---------- ---------- ---------- Total adjustments (164,971) 872,557 1,654,569 ---------- ---------- ---------- Net cash provided by operating activities 4,915,867 5,404,676 5,569,786 ---------- ---------- ---------- Cash flows used in investing activities: Purchases of securities held to maturity (59,080,530) (19,024,788) (23,815,119) Purchases of securities available for sale (40,240,342) (13,160,212) (22,967,923) Maturities and principal repayments of securities held to maturity 54,124,695 12,837,780 24,648,691 Maturities and principal repayments of securities available for sale 17,488,502 5,261,021 12,410,077 Net change in federal funds sold 18,223,520 (24,212,240 10,075,974) Net change in loans (12,403,843) (11,944,251) (24,090,657) Sales of other real estate owned -- 45,000 -- Acquisition of premises and equipment (921,894) (866,695) (1,672,117) ---------- ---------- ---------- Net cash used in investing activities (22,809,892) (51,064,385) (25,411,074) ---------- ---------- ---------- Cash flows from financing activities: Net change in deposits 11,937,507 30,706,524 22,013,573 Net change in securities sold under repurchase agreements 560,122 11,696,742 2,018,928 Proceeds of FHLBB borrowing 10,000,000 -- -- Purchase of treasury stock -- (327,132) (630) Reissuance of treasury stock 235,485 231,720 261,744 Dividends paid (1,434,637) (1,186,557) (1,042,411) ---------- ---------- ---------- Net cash provided by financing activities 21,298,477 41,121,297 23,251,204 ---------- ---------- ---------- Net increase (decrease) in cash and due from banks 3,404,452 (4,538,412) 3,409,916 Cash and due from banks at beginning of year 16,472,547 21,010,959 17,601,043 ---------- ---------- ---------- Cash and due from banks at end of year $19,876,999 $16,472,547 $21,010,959 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. Supplemental Disclosures: - ------------------------ 1. Cash paid for interest was $8,734,322, $9,300,396 and $7,767,322 in 2001, 2000 and 1999, respectively. 2. Cash paid for income taxes was $2,847,851, $2,165,000 and $2,091,123 in 2001, 2000 and 1999, respectively. 3. Real estate acquired through, or deeds in lieu of, foreclosure was $10,359 in 1999.
-8- Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of consolidation The accompanying consolidated financial statements include the accounts of Community Bancorp, Inc. (the "Company"), a Massachusetts corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and its wholly-owned subsidiary, Community National Bank, (the "Bank"), a national banking association. The Bank has formed Community Securities Corporation and Community Benefits Consulting, Inc. as wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. At present, the Company conducts no activities independent of the Bank. The Bank has ten offices and is engaged in substantially all of the business operations normally conducted by an independent commercial bank in Massachusetts. Banking services offered include the acceptance of checking, savings, and time deposits, and the making of commercial, real estate, installment and other loans. The Bank also offers official checks, safe deposit boxes, Internet banking and bill payment services, investment management and trust services and other customary banking services to its customers. Use of estimates The preparation of financial statements in conformity with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and due from banks Cash and due from banks consists of cash on hand, amounts due from banks and interest-bearing deposits. Included in cash and due from banks as of December 31, 2001 and 2000 is approximately $1,077,000 and $1,179,000, respectively, that is subject to Federal Reserve withdrawal restrictions. Securities Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held to maturity" securities and reported at amortized cost. Securities purchased to be held for indefinite periods of time and not intended to be held until maturity are classified as "available for sale" securities. Securities classified as available for sale are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in accumulated other comprehensive income. Securities held for indefinite periods of time include securities that management may use in conjunction with the Company's asset/ liability management program and that may be sold in response to changes in interest rates, prepayment risks or other economic factors. When securities classified as available for sale are sold, using the specific identification method, the adjusted cost of each specific security sold is used to calculate gains or losses on sale, which are included in earnings. Dividend and interest income, including amortization of premiums and discounts, is included in earnings for all categories of investment securities. Discounts and premiums related to debt securities are amortized using a method that approximates the level-yield method, adjusted for estimated prepayments in the case of mortgage-backed securities. Declines in the fair value of held to maturity and available for sale securities below their cost, that are determined to be other than temporary, are reflected in earnings as realized losses. The Company evaluates individual securities that have fair values below cost for six months or longer to determine if their decline is other than temporary. Loans Loans are stated at the amount of unpaid principal, net of unearned discounts and unearned net loan origination fees. It is the policy of the Company to discontinue the accrual of interest on loans when, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income is reversed. Management may elect to continue the accrual of interest when the estimated net -9- realizable value of collateral is sufficient to cover the principal balance and accrued interest. Otherwise, interest income is subsequently recognized only to the extent cash payments are received. Interest on loans is accrued and included in income as earned based upon contractual interest rates applied to outstanding principal balances. Nonrefundable loan origination fees and related costs are deferred and amortized as an adjustment to the related loan yield over the contractual life of the loan. When loans are sold or fully repaid, any unamortized fees, discounts and costs are recognized in income. Mortgage loans held for sale are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgages are recognized at the time of sale. A loan is considered to be impaired when it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are individually evaluated for impairment, except for smaller balance homogenous residential and consumer loans which are evaluated in aggregate, according to the Company's normal loan review process, including overall credit evaluation, nonaccrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment. Impaired loans are measured based on the present value of expected future cash flows, discounted at each loan's effective interest rate, or the fair value of the collateral for certain collateral-dependent loans. For collateral-dependent loans, the extent of impairment is the shortfall, if any, between the collateral value, less costs to dispose of such collateral, and the carrying value of the loan. The allowance for loan losses is based on management's estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. The methodology for assessing the appropriateness of the allowance consists of a review of the following three key elements: * The valuation allowance for loans specifically identified as impaired * The formula allowance for the various loan portfolio classifications * The imprecision allowance The valuation allowance reflects specific estimates of potential losses on individually impaired loans. When each impaired loan is evaluated, if the net present value of the expected cash flows (or fair value of the collateral if the loan is collateral-dependent) is lower than the recorded loan balance, the difference represents the valuation allowance for that loan. The formula allowance is a percentage-based estimate based on historical loss experience and assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances. The formula allowance employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. When a loan's credit quality becomes suspect, it is placed on the Company's internal "watch list" and its allowance allocation is increased. For the remainder of the loan portfolio, appropriate allowance levels are estimated based on judgments regarding the type of loan, economic conditions and trends, potential exposure to loss and other factors. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. In addition to the valuation allowance and the formula allowance, there is an imprecision allowance that is determined based on the totals of the valuation and formula allowances. The imprecision allowance reflects the measurement imprecision inherent in determining the valuation allowance and the formula allowance. It represents 15% - 25% of the valuation and formula allowances, depending on management's evaluation of various conditions, the effects of which are not directly measured in determining the valuation and formula allowances. The evaluation of the inherent loss resulting from these conditions involves a higher level of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the imprecision allowance include the following: * Levels of and trends in delinquencies and impaired loans * Levels of and trends in charge-offs and recoveries * Trends in loan volume and terms * Effects of changes in credit concentrations * Effects of and changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices * National and local economic conditions * Trends and duration of the present business cycle * Findings of internal and external credit review examiners -10- When an evaluation of these conditions signifies a change in the level of risk, the Company adjusts the formula allowance. Periodic credit reviews enable further adjustment to the formula allowance through the risk rating of loans and the identification of loans requiring a valuation allowance. In addition, the formula allowance model is designed to be self-correcting by taking into consideration recent actual loss experience. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", the Company capitalizes the rights to service mortgage loans for others and assesses those rights for impairment based on the fair value of those rights. The loan servicing asset, included in other assets, represents the estimated present value of the servicing income resulting from the sale of loans with servicing rights retained. This amount is amortized over the estimated lives of the underlying loans serviced. The loan servicing asset totaled $199,174 and $187,066 at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the Company was servicing mortgage loans for others of approximately $80,189,000 and $88,944,000, respectively. Amortization of these servicing rights totaled $70,541 and $66,475 for the years ended December 31, 2001 and 2000, respectively. Bank premises and equipment Land, buildings, leasehold improvements and furniture and equipment held for banking purposes are stated at cost, less accumulated depreciation. Depreciation is computed principally on the straight-line method over the shorter of the estimated useful lives of the assets or the related lease term. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Premises and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Securities sold under repurchase agreements The Company sells securities under open-ended repurchase agreements with certain customers. The principal balance of the repurchase agreements changes daily. Specific securities are not sold and securities are not transferred to the name of the customers. Instead, the Company has granted the customer an interest in a portion of the U.S. Government securities and U.S. Government agency securities held in the Company's investment portfolio. The Company also sells term repurchase agreements that generally mature within 365 days from the transaction date. Income taxes The Company records income taxes under the liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities. Deferred taxes are measured using enacted tax rates that are expected to be in effect when the amounts related to such temporary differences are realized or settled. The Company's deferred tax asset is reviewed quarterly and adjustments are recognized in the provision for income taxes based on management's judgments related to its realizability. Earnings per share The Company adopted SFAS No. 128, "Earnings Per Share", effective December 31, 1997. SFAS No. 128 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. Earnings per share is based on the weighted average number of shares outstanding during the year. Reclassifications Certain amounts in prior year's financial statements have been reclassified to be consistent with the current year's presentation. The reclassifications have no effect on net income. -11- Recent accounting pronouncements In March 2000, the Emerging Issues Task Force reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs," ("EITF Issue No. 00-2") to be applicable to all Web site development costs incurred for fiscal quarters beginning after June 30, 2000. The consensus states that for specific Web site development costs, the accounting for such costs should be based generally on a model consistent with AICPA SOP 98-1. The adoption of EITF Issue No. 00-2 did not have any material effect on the Company's financial statements or results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualified hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has adopted SFAS No. 133 as of January 1, 2001 and there was no material impact on the Company's financial statements or results of operations upon adoption. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill And Other Intangible Assets". SFAS No. 141 addresses the accounting for acquisitions of business and is effective for acquisitions occurring on or after July 1, 2001. SFAS No. 142 addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of existing goodwill, and requires periodic evaluations of impairment of goodwill balances. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Upon adoption, SFAS No. 142 will not have an impact on the financial position or the results of the Company as the Company currently does not have any goodwill or intangible assets. Going forward, should the Company enter into an acquisition, these statements would be applicable. In October 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets'. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for the Company beginning on January 1, 2002. The Company does not believe the adoption of this statement will have a material impact on its financial statements or results of operations. 2. Operating segments 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 identified its reportable operating segment as "Community Banking". The Company's community banking segment consists of commercial and retail banking. The community banking segment is managed as a single strategic unit and derives its revenues from a wide range of banking services, including investing and lending activities and the acceptance of demand, savings and time deposits. Nonreportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the thresholds requiring separate disclosure are included in the "Other" category in the disclosure of business segments below. The nonreportable segment represents the holding company financial information. (Note 12) -12- The accounting policies used in the disclosure of operating segments are the same as those described in the summary of significant accounting policies (Note 1). The consolidation adjustments reflect certain eliminations of intersegment revenue, cash and investments in the subsidiary. Reportable segment-specific information, and the reconciliation to consolidated financial information, are as follows (dollars are in thousands):
Community Other Adjustments Banking Other and Eliminations Consolidated --------- ---------- ----------------- ------------ December 31, 2001 Investment securities $171,383 $ -- $ -- $ 171,383 Net loans 185,768 -- -- 185,768 Total assets 402,706 36,690 (36,690) 402,706 Total deposits 319,844 -- (778) 319,066 Total liabilities 367,173 379 (1,157) 366,393 Net interest income 16,861 13 -- 16,874 Provision for loan losses -- -- -- -- Total noninterest income 4,142 1,913 (1,913) 4,142 Total noninterest expense 13,248 390 (388) 13,250 Net income 5,070 5,081 (5,070) 5,081 - --------------------------------------------------------------------------------------- December 31, 2000 Investment securities 142,552 -- -- 142,552 Net loans 173,217 -- -- 173,217 Total assets 374,868 32,098 (32,098) 374,868 Total deposits 307,656 -- (527) 307,129 Total liabilities 343,628 283 (858) 343,053 Net interest income 15,599 11 -- 15,610 Provision for loan losses -- -- -- -- Total noninterest income 3,488 1,597 (1,597) 3,488 Total noninterest expense 12,061 366 (365) 12,062 Net income 4,527 4,532 (4,527) 4,532 - --------------------------------------------------------------------------------------- December 31, 1999 Investment securities 128,033 -- -- 128,033 Net loans 161,319 -- -- 161,319 Total assets 327,997 28,558 (28,558) 327,997 Total deposits 277,053 -- (631) 276,422 Total liabilities 300,351 247 (913) 299,685 Net interest income 14,000 11 -- 14,011 Provision for loan losses -- -- -- -- Total noninterest income 3,216 1,420 (1,420) 3,216 Total noninterest expense 11,136 352 (351) 11,137 Net income $ 3,910 $ 3,915 $ (3,910) $ 3,915 - ---------------------------------------------------------------------------------------
-13- 3. Securities The amortized cost and fair values of securities at December 31, 2001 and 2000 were as follows:
2001 ----------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government agencies $ 18,343,989 $ 109,765 $ 62 $ 18,453,692 Corporate debt securities 5,208,056 131,974 -- 5,340,030 Obligations of states and political subdivisions 20,348,183 744,808 -- 21,092,991 Mortgage-backed securities 53,365,859 877,368 54,493 54,188,734 ------------ ---------- ---------- ----------- $ 97,266,087 $ 1,863,915 $ 54,555 $ 99,075,447 ============ ========== ========== =========== Gross Gross Securities Held Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government agencies $ 51,363,841 $ 1,177,560 $ 114,195 $ 52,427,206 Mortgage-backed securities 13,435,629 212,795 13,672 13,634,752 Preferred stock 6,569,675 65,250 -- 6,634,925 FHLBB stock 1,244,800 -- -- 1,244,800 Other securities 175,056 -- -- 175,056 ------------ ---------- ---------- ----------- $ 72,789,001 $ 1,455,605 $ 127,867 $ 74,116,739 ============ ========== ========== =========== 2000 ----------------------------------------------------------- Gross Gross Securities Held Amortized Unrealized Unrealized Fair to Maturity Cost Gains Losses Value --------------- --------- ---------- ---------- ----- U.S. Government agencies $ 41,315,639 $ 15,009 $ 199,275 $ 41,131,373 Obligations of states and political subdivisions 16,273,263 244,910 24,242 16,493,931 Mortgage-backed securities 34,852,620 60,814 235,925 34,677,509 ------------ ---------- ---------- ----------- $ 92,441,522 $ 320,733 $ 459,442 $ 92,302,813 ============ ========== ========== =========== Gross Gross Securities Held Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ --------- ---------- ---------- ----- U.S. Government agencies $ 29,871,868 $ 309,898 $ 4,904 $ 30,176,862 Mortgage-backed securities 18,834,380 89,566 260,362 18,663,584 FHLBB stock 1,094,700 -- -- 1,094,700 Other securities 175,056 -- -- 175,056 ------------ ---------- ---------- ----------- $ 49,976,004 $ 399,464 $ 265,266 $ 50,110,202 ============ ========== ========== ===========
-14- The amortized cost and fair value of securities at December 31, 2001 by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Held to Maturity Securities Available for Sale --------------------------- ----------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- Within one year $ 1,230,000 $ 1,230,000 $ 4,993,595 $ 5,105,620 One to five years 23,677,045 23,918,722 46,370,246 47,321,586 Five to ten years -- -- -- -- Ten to fifteen years 18,993,183 19,737,991 -- -- Mortgage-backed securities 53,365,859 54,188,734 13,435,629 13,634,752 Other securities -- -- 7,989,531 8,054,781 ----------- ---------- ---------- ---------- $97,266,087 $99,075,447 $72,789,001 $74,116,739 ========== =========== ========== ==========
Securities with a book value of $54,668,000 and $53,387,000 at December 31, 2001 and 2000, respectively, were pledged to secure public funds on deposit and for other purposes. Proceeds from sales of securities available for sale in 2001 were $9,200. There were no sales of securities in 2000 or 1999. Gross realized gains and losses on sales of securities in 2001 were $9,200 and $0, respectively. 4. Loans The composition of the loan portfolio at December 31, 2001 and 2000 was as follows:
2001 2000 ---- ---- Commercial and industrial $ 26,992,523 $ 24,206,232 Real estate - residential 81,230,647 76,945,192 Real estate - commercial 64,436,576 57,869,786 Real estate - residential construction 1,628,221 2,076,868 Loans to individuals 13,547,871 14,165,381 Other 616,865 765,836 ----------- ----------- Total loans $188,452,703 $176,029,265 ============ ===========
The Company's lending activities are conducted primarily in central Massachusetts, where commercial loans, commercial real estate loans, single family and multifamily residential loans and a variety of consumer loans are originated. The Company generally requires collateral when extending credit and, with respect to loans secured by real estate, Company policy requires appropriate appraisals and repayment sources. The ability and willingness of the Company's borrowers to honor their repayment commitments are impacted by many factors, including the level of overall economic activity within the borrowers' geographic areas. A summary of changes in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 ------ ------ ------ Balance at beginning of year $2,812,392 $3,041,873 $2,981,012 Provision for possible losses -- -- -- Charge-offs (262,967) (470,934) (112,538) Recoveries 135,092 241,453 173,399 --------- --------- --------- Balance at end of year $2,684,517 $2,812,392 $3,041,873 ========= ========= =========
-15- Total impaired loans at December 31, 2001 and 2000 that required a related allowance were $0 and $143,000, respectively, and the allowance allocated to such loans was $0 and $30,000 respectively. In addition, at December 31, 2001 and 2000, the Company had impaired loans of $320,032 and $415,354, respectively, that did not require a related allowance. Interest payments on impaired loans are recorded as principal reductions if the remaining loan balance is not expected to be repaid in full. If full collection of the remaining loan balance is expected, interest payments are recognized as interest income on a cash basis. Impaired loans averaged $469,236 and $685,623 during 2001 and 2000, respectively. The Company recorded interest income on impaired loans of $79,020 $37,370 and $100,081 during 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, accruing loans 90 days or more past due totaled $12,949 and $1,940, respectively, and nonaccruing loans totaled $320,032 and $558,354, respectively. Troubled debt restructurings were $0 and $57,611 at December 31, 2001 and 2000, respectively, and were included in impaired loans. The reduction of interest income associated with nonaccrual and restructured loans for the years ended December 31, 2001, 2000 and 1999 was as follows:
2001 2000 1999 ---- ---- ---- Interest income per original terms $ 96,624 $ 83,654 $ 154,141 Income recognized 79,020 37,370 100,081 -------- -------- -------- Foregone interest income $ 17,604 $ 46,284 $ 54,060 ======== ======== ========
5. Bank Premises and Equipment A summary of bank premises and equipment at December 31, 2001 and 2000 follows:
Estimated 2001 2000 Useful Life ---------- ---------- ----------- Land $ 1,069,062 $ 1,069,062 Buildings 5,120,562 5,008,907 30 - 40 years Land and leasehold improvements 683,328 664,901 1 - 15 years Furniture and equipment 3,751,880 3,723,277 3 - 10 years ----------- ----------- 10,624,832 10,466,147 Less accumulated depreciation and amortization 4,484,355 4,231,506 ----------- ----------- $ 6,140,477 $ 6,234,641 =========== ===========
Total depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 was $1,016,058, $974,945 and $906,015, respectively. 6. Deposits A summary of deposits at December 31, 2001 and 2000 follows:
2001 2000 ---- ---- Demand deposits $ 78,513,849 $ 75,969,408 Money-market deposits 32,721,406 34,688,800 NOW and FlexValue deposits 45,120,663 43,511,182 Cash management investment deposits 20,755,655 27,839,064 Savings deposit 40,610,123 38,470,706 Time certificates of deposit in denominations of $100,000 or more 42,178,527 30,611,400 Other time deposits 59,166,116 56,038,272 ----------- ----------- $319,066,339 $307,128,832 =========== ============
-16- The following is a summary of original maturities of time deposits as of December 31, 2001:
2002 $ 82,355,580 2003 7,684,768 2004 3,216,744 2005 4,842,770 2006 3,244,781 ----------- $ 101,344,643 ============
7. Borrowed Funds At December 31, 2001, borrowed funds totaled $10,000,000. This amount Represents a one-year advance from the Federal Home Loan Bank of Boston (FHLBB") at an interest rate of 2.48%. The advance is secured by FHLBB stock and a pledge of certain assets as collateral, and it matures in December of 2002. There were no FHLBB advances outstanding at December 31, 2000. 8. Income Taxes The components of income tax expense for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ---- ---- ---- Current: Federal $ 2,114,562 $ 2,050,453 $ 1,644,242 State 570,561 479,375 438,344 ---------- ---------- ---------- Total current 2,685,123 2,529,828 2,082,586 ---------- ---------- ---------- Deferred: Federal 85 (19,067) 68,392 State 29 (6,579) 25,599 ---------- ---------- ---------- Total deferred (prepaid) 114 (25,646) 91,991 ---------- ---------- ---------- Total $ 2,685,237 $ 2,504,182 $ 2,174,577 ========== ========== ==========
The difference between the income tax provision computed by applying the statutory federal income tax rate of 34% to income before income taxes and the actual income tax provision is summarized below:
2001 2000 1999 ---- ---- ---- Income tax expense at statutory rates $ 2,640,466 $ 2,392,342 $ 2,070,524 State income taxes, net of federal income tax benefit 376,589 312,045 304,883 Tax-exempt interest (286,696) (209,009) (206,274) Other, net (45,122) 8,804 5,444 --------- ---------- ---------- $ 2,685,237 $ 2,504,182 $ 2,174,577 ========= ========== ==========
The Company has recorded in other assets a net deferred tax asset of $64,698. Realization is dependent on the generation of sufficient taxable income in future years. Although realization is not assured, management believes it is more likely than not that the full amount of the net deferred tax asset will be realized. However, the amount realizable could be reduced if estimates of future taxable income are reduced. -17- At December 31, 2001 and 2000, the Company's net deferred tax asset, included in other assets in the accompanying consolidated balance sheets, consisted of the following components:
2001 2000 ---- ---- Gross deferred tax asset: Provision for possible loan losses $ 821,916 $ 874,255 Employee benefits and other compensation arrangements 255,057 327,280 Other 23,822 19,883 --------- --------- 1,100,795 1,221,418 Gross deferred tax liability: Accelerated tax depreciation (102,523) (133,516) SFAS No. 115 adjustment (543,444) (55,287) Other (390,130) (479,287) --------- --------- (1,036,097) (668,090) --------- --------- Net deferred tax asset $ 64,698 $ 553,328 ========= =========
9. Employee Benefits The Company has a defined benefit pension plan covering all eligible employees. The benefits are based on years of service and the employees' compensation as defined in the Plan agreement. The Company's funding policy is to make annual contributions to the Plan equal to at least the minimum amount required for actuarial purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those to be earned in the future. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 2001 and 2000:
2001 2000 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $(3,832,387) $(3,315,486) Service cost (273,486) (230,182) Interest cost (281,078) (251,629) Plan amendments (34,834) -- Actuarial (loss) (205,083) (265,815) Benefits paid 21,497 230,725 --------- --------- Benefit obligation at end of year (4,605,371) (3,832,387) --------- --------- Change in plan assets: Fair value of assets at beginning of year 3,477,799 3,317,895 Actual return on plan assets (97,812) 78,121 Employer contributions 437,686 312,508 Benefits paid (21,497) (230,725) --------- --------- Fair value of plan assets at end of year 3,796,176 3,477,799 --------- --------- Funded status (806,195) (354,588) Unrecognized net loss 1,314,142 745,348 Unrecognized prior service cost 41,730 8,276 Unrecognized net asset (17,908) (26,861) --------- --------- Prepaid benefit cost $ 531,769 $ 372,175 ========= =========
-18- The following weighted-average assumptions were used in accounting for the Company's pension plan for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Discount rate 7.00% 7.25% 7.50% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.00% 4.00% 4.00%
Net periodic benefit cost for the years ended December 31, 2001, 2000 and 1999 included the following components:
2001 2000 1999 ---- ---- ---- Service cost $ 273,486 $ 230,182 $ 249,962 Interest cost 281,078 251,629 233,992 Expected return on plan assets (293,994) (272,190) (244,119) Amortization of prior service cost 1,380 1,380 1,380 Amortization of transition obligation (8,953) (8,953) (8,953) Recognized net (gain) loss 25,095 3,043 26,977 -------- --------- --------- Net periodic benefit cost $ 278,092 $ 205,091 $ 259,239 ========= ========= =========
The Company has a 401(k) Savings Plan that covers all eligible employees. The Company matches a percentage of each participant's annual contribution to the plan as determined by the Board of Directors each year. Compensation expense recorded in 2001, 2000 and 1999 related to this plan was approximately $97,400 $81,400 and $85,800, respectively. The Company had an Employee Stock Ownership Plan ("ESOP") that enabled eligible employees to own common stock. Annual cash contributions of $70,000 were made to the ESOP in 2001, 2000 and 1999. The ESOP was merged into the 401(k) Savings Plan effective December 31, 2001. The Company has a post-retirement medical plan covering all eligible employees, for which an accrued liability of $43,139 and $30,775 was recorded at December 31, 2001 and 2000, respectively. The net periodic benefit cost of this plan was $15,240, $13,890 and $12,397 in 2001, 2000 and 1999, respectively. During 2001 the Company implemented two stock option plans, the 2001 Incentive Stock Option Plan for Key Employees and the 2001 Directors' Plan. These plans provide for the granting of options to employees and directors to purchase shares of the Company's common stock. A total of 119,374 options were granted during the year, having a weighted average exercise price of $10.00. Of the total granted options, 21,308 options were forfeited during the year. At December 31, 2001 a total of 98,066 options were outstanding at a weighted average exercise price of $10.00, with a weighted average remaining contractual life of nine years. A total of 317,934 shares were available for future grant. The FASB has issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation", ("SFAS No. 123"), which requires stock-based compensation to be either recorded or disclosed at its fair value. As permitted by SFAS No. 123, the Company has elected to account for stock-based compensation under Accounting Principles Board Opinion No. 25. Had compensation cost for awards made in 2001 under the Company's stock option plans been determined based on the fair value at the grant dates, consistent with the method set forth under SFAS No. 123, the Company's pro forma net income would have been reduced from $5,080,838 to $5,027,910, and basic earnings per share and diluted earnings per share would each have been reduced from $.86 to $.85. Pro forma compensation expense for options granted is reflected over the vesting period. Therefore, future pro forma compensation expense may be greater as additional options are granted. Because the Company's two stock option plans were implemented in 2001, there is no pro forma impact on net income or earnings per share in 2000 or 1999. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. For purposes of those estimates, the following weighted-average assumptions were used in 2001: 1) volatility = 20.4%, 2) dividend yield = 2.14%, 3) risk-free interest rate = 4.41%, and 4) expected option life = 6 years. The weighted average fair value of options granted during the year was $2.23. -19- 10. Commitments The Company leases branch offices and equipment under noncancelable agreements expiring at various dates through 2008 that require various minimum annual rentals. Rental expense totaled approximately $283,000, $262,000 and $246,000, for 2001, 2000 and 1999, respectively. The total future minimum rental commitments at December 31, 2001 aggregate $1,091,283. Rental commitments for each of the next five fiscal years and thereafter are as follows: 2002 $277,340 2003 242,894 2004 166,400 2005 166,400 2006 87,049 Thereafter 151,200 The Company is not party to any legal proceedings. The Bank is involved in various routine legal actions arising in the normal course of business, none of which is believed by management, based on its knowledge of the pertinent facts and opinions of legal counsel, to be material to the financial condition or operations of the Company. 11. Loans to Related Parties The schedule below discloses indebtedness of certain parties related to the Company:
Balance Balance January 1 New Loans Repayments December 31 ---------- --------- ---------- ----------- 2000 $ 5,873,747 $2,906,641 $ 1,262,575 $ 7,517,813 2001 $ 7,517,813 $2,493,049 $ 1,556,509 $ 8,454,353 These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility.
-20- 12. Condensed Financial Information of Community Bancorp, Inc. The following tables disclose certain parent-company-only financial information at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001:
Balance Sheets 2001 2000 ---- ---- Assets: Cash and cash equivalents $ 779,889 $ 527,417 Investment in subsidiary, at equity 35,488,957 31,239,102 Other assets 421,619 331,209 ---------- ---------- Total assets $ 36,690,465 $ 32,097,728 =========== ========== Liabilities and stockholders' equity: Other liabilities $ 379,466 $ 282,857 ---------- ---------- Total liabilities 379,466 282,857 ---------- ---------- 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, 6,398,436 shares issued, 5,940,606 shares outstanding, (5,914,441 shares outstanding at December 31, 2000) 15,996,090 15,996,090 Surplus 219,120 101,378 Undivided profits 21,608,513 18,052,893 Treasury stock at cost, 457,830 shares (483,995 shares at December 31, 2000) (2,297,019) (2,414,762) Accumulated other comprehensive income 784,295 79,272 ---------- ---------- Total stockholders' equity 36,310,999 31,814,871 ---------- ---------- Total liabilities and stockholders' equity $36,690,465 $32,097,728 =========== ==========
Statements of Income Years ended December 31, ----------------------------------------- 2001 2000 1999 ---- ---- ---- Income: Dividends from subsidiary $ 1,525,218 $ 1,236,481 $ 1,073,397 Other income 400,319 371,680 357,592 ----------- ----------- ---------- Total income 1,925,537 1,608,161 1,430,989 ----------- ----------- ---------- Expenses: Other 389,530 366,231 352,237 ----------- ----------- ---------- Total expenses 389,530 366,231 352,237 ----------- ----------- ---------- Income before undistributed net income of subsidiary 1,536,007 1,241,930 1,078,752 Equity in undistributed net income of subsidiary 3,544,831 3,290,189 2,836,465 ----------- ----------- ---------- Net income $ 5,080,838 $ 4,532,119 $ 3,915,217 =========== =========== ===========
-21-
Statements of Cash Flows Years ended December 31, ----------------------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 5,080,838 $ 4,532,119 $ 3,915,217 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary bank (3,544,831) (3,290,189) (2,836,465) Increase in other assets (90,411) (49,903) (30,996) Increase in other liabilities 96,609 35,823 29,356 ---------- ---------- ---------- Total adjustments (3,538,633) (3,304,269) (2,838,105) ---------- ---------- ---------- Net cash provided by operating activities 1,542,205 1,227,850 1,077,112 ---------- ---------- ---------- Cash flows from financing activities: Purchase of treasury stock -- (327,132) (630) Reissuance of treasury stock 235,485 231,720 261,744 Dividends declared (1,525,218) (1,236,481) (1,073,397) ---------- ---------- ---------- Net cash used in financing activities (1,289,733) (1,331,893) (812,283) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 252,472 (104,043) 264,829 Cash and cash equivalents at beginning of year 527,417 631,460 366,631 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 779,889 $ 527,417 $ 631,460 ========== ========== ===========
Cash and cash equivalents consist of a money market demand deposit account on deposit with the subsidiary bank. The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. During 2002, Community National Bank can, under this formula, declare dividends to Community Bancorp, Inc. of approximately $6,835,000, plus an additional amount equal to the Bank's net profit for 2002, up to the date of any such dividend declaration, without the approval of the Comptroller of the Currency. 13. Financial Instruments With Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments primarily consist of commitments to extend credit and standby letters of credit. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They are primarily issued to guarantee other customer obligations. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral typically is obtained based on management's credit assessment of the customer. Loan commitments and standby letters of credit usually have fixed expiration dates or other termination clauses. Some commitments and letters of credit expire without being drawn upon. Accordingly, the total commitment amounts do not necessarily represent future cash requirements of the Company. -22- The Company's maximum exposure to credit loss for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding at December 31, 2001 and 2000 was as follows:
2001 2000 ---- ---- Commitments to extend credit: Fixed-rate (6.99% to 9.00%) $ 333,703 $ 504,621 Adjustable rate 46,346,842 46,344,615 Standby letters of credit $ 665,861 $ 469,287 =========== ===========
Commitments to extend credit on a fixed-rate basis expose the Company to a certain amount of interest rate risk if market rates of interest substantially increase during the commitment period. The Company has also sold mortgage loans with recourse in the event of the default of the borrower. Loans sold with recourse are accounted for as sales in the accompanying financial statements, with provisions made for anticipated losses under the recourse provisions. At December 31, 2001 and 2000, the outstanding balance of such mortgages totaled approximately $27,200 and $47,800, respectively. Fees associated with the Company's off-balance-sheet financial instruments are minimal; therefore, the fair value of off-balance-sheet financial instruments is not material. 14. Regulatory Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2001 and 2000, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. -23- The Company's and the Bank's actual capital amounts and ratios at December 31, 2001 and 2000 are presented in the following table (dollars are in thousands):
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2001: Company (consolidated): Total capital (to risk-weighted > assets) $38,191 17.07% $17,899 - 8.00% N/A N/A Tier 1 capital (to risk-weighted > assets) 35,507 15.87% 8,949 - 4.00% N/A N/A Tier 1 capital > (to average assets) 35,507 9.21% 15,423 - 4.00% N/A N/A Bank: Total capital (to risk-weighted > > assets) 37,369 16.70% 17,899 - 8.00% $22,373 - 10.00% Tier 1 capital (to risk-weighted > > assets) 34,685 15.50% 8,949 - 4.00% 13,424 - 6.00% Tier 1 capital > > (to average assets) 34,685 9.00% 15,423 - 4.00% 19,279 - 5.00% As of December 31, 2000: Company (consolidated): Total capital (to risk-weighted > assets) $34,213 17.16% $15,947 - 8.00% N/A N/A Tier 1 capital (to risk-weighted > assets) 31,717 15.91% 7,974 - 4.00% N/A N/A Tier 1 capital > (to average assets) 31,717 9.12% 13,915 - 4.00% N/A N/A Bank: Total capital (to risk-weighted > > assets) 33,637 16.87% 15,947 - 8.00% $19,934 - 10.00% Tier 1 capital (to risk-weighted > > assets) 31,141 15.62% 7,974 - 4.00% 11,960 - 6.00% Tier 1 capital > > (to average assets) 31,141 8.95% 13,915 - 4.00% 17,394 - 5.00%
-24- 15. Disclosures about Fair Value of Financial Instruments In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". This statement requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets' fair values. Securities (including mortgage-backed securities, securities held to maturity and securities available for sale): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain one-to-four family residential mortgages are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for credit card loans and other consumer loans are based on carrying values, as the loans reprice frequently at current market rates. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value. Off-balance-sheet instruments: The fair value of lending commitments discussed in Note 13 is not considered material nor has it been reflected in the estimation of the fair value of the related loans. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Commitments to extend credit/sell loans: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of customers. For fixed-rate loan commitments and obligations to deliver fixed-rate loans, fair value also considers the difference between committed rates and current levels of interest rates. Values not determined: SFAS No. 107 excludes certain financial instruments from its disclosure requirements, including real estate included in banking premises and equipment, the intangible value of the Bank's portfolio of loans serviced (both for itself and for others) and related servicing network and the intangible value inherent in the Bank's deposit relationships (i.e. core deposits) among others. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. -25- The carrying amount and estimated fair values of the Bank's financial instruments at December 31, 2001 and 2000 are as follows:
2001 ----------------------------- Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and due from banks $ 19,876,999 $ 19,876,999 Federal funds sold 12,912,746 12,912,746 Securities 171,382,826 173,192,186 Loans, including held for sale, net 187,678,099 193,421,254 Financial instrument liabilities: Deposits 319,066,339 320,944,948 Short-term borrowings 34,023,288 34,023,288 FHLBB borrowing 10,000,000 10,000,000 2000 ----------------------------- Carrying Estimated Amount Fair Value ------------ ----------- Financial instrument assets: Cash and due from banks $ 16,472,547 $ 16,472,547 Federal funds sold 31,136,266 31,136,266 Securities 142,551,724 142,413,015 Loans, including held for sale, net 173,512,615 176,915,858 Financial instrument liabilities: Deposits 307,128,832 307,295,190 Short-term borrowings 33,463,166 33,463,166
-26- Report of Independent Public Accountants [The following report appears on Arthur Andersen LLP letterhead] Report of Independent Public Accountants To the Board of Directors and Stockholders of Community Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Community Bancorp, Inc. (a Massachusetts Corporation) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the three years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years then ended, in conformity with accounting principals generally accepted in the United States. /s/ Arthur Andersen LLP Boston, Massachusetts January 18, 2002 -27- Management's Discussion and Analysis of Financial Condition and Results of Operations Summary The Company recorded net income of $5,080,838 for the year ended December 31, 2001, representing an increase of $548,719 or 12.1% over $4,532,119 recorded in 2000. Earnings per share of $.86 for the current year compared to $.77 for the year ended December 31, 2000. The improvement in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest expense. Loans of $188,452,703 at December 31, 2001 increased by $12,423,438 or 7.1% from $176,029,265 at December 31, 2000. The increase took place primarily in the commercial loan and residential mortgage categories. Noncurrent loans (nonaccrual loans, troubled debt restructurings and loans 90 days or more past due but still accruing) totaled $332,981 and $560,295 at December 31, 2001 and 2000, respectively. Assets of $402,705,744 at December 31, 2001 represented a $27,838,233 or 7.4% increase over $374,867,511 at December 31, 2000. Deposits of $319,066,339 at December 31, 2001 increased by $11,937,507 or 3.9% from $307,128,832 at December 31, 2000. The increase occurred in both interest bearing and noninterest bearing deposit categories. 2001 Compared to 2000 Interest income for the year ended December 31, 2001 was $25,507,838, representing an increase of $543,173 or 2.2% over $24,964,665 for the year ended December 31, 2000, primarily due to a $38,332,844 or 11.9% increase in average earning assets, partially offset by lower average interest rates, during 2001. The weighted average taxable equivalent yield on net earning assets was 7.20% and 7.82% in 2001 and 2000, respectively. Interest expense of $8,634,144 in 2001 represented a decrease of $720,448 or 7.7% from $9,354,592 in 2000, primarily due to lower average interest rates, partially offset by a $27,764,693 or 11.1% increase in average interest bearing liabilities, during 2001. The weighted average cost of interest bearing liabilities was 3.11% in 2001 and 3.75% in 2000. Net interest income for 2001 was $16,873,694, representing an increase of $1,263,621 or 8.1% over $15,610,073 recorded in 2000. Noninterest income for the year ended December 31, 2001 was $4,142,300, representing an increase of $654,255 or 18.8% from $3,488,045 in 2000. This increase resulted primarily from increases in merchant credit card processing assessments, other charges, commissions and fees, and gains on sales of loans. Noninterest expense for the year ended December 31, 2001 of $13,249,919 represented an increase of $1,188,102 or 9.9% from $12,061,817 recorded during 2000. This increase was primarily the result of increases in salaries and employee benefits, information technology and ATM network, occupancy, credit card processing, professional fees and other expense, partially offset by reductions in printing, stationery and supplies and marketing and advertising expense. There was no provision for loan losses in 2001 or 2000, reflecting management's continuing evaluation of the adequacy of the allowance for loan losses and its belief that the allowance is adequate. Management will continue its ongoing assessment of the adequacy of the allowance for loan losses during 2002 and may adjust the provision for loan losses if necessary. Income tax expense was $2,685,237 for the year ended December 31, 2001, compared to $2,504,182 for 2000, resulting from an increase in taxable income during the current period. The Company's effective tax rate decreased to 34.6% in 2001 from 35.6% in 2000 due to favorable tax rates on certain investment income. Net income of $5,080,838 for the year ended December 31, 2001 represented an increase of $548,719 or 12.1% over $4,532,119 recorded in 2000. Earnings per share of $.86 in 2001 represented an increase of $.09 from $.77 in 2000. 2000 Compared to 1999 Interest income for the year ended December 31, 2000 was $24,964,665, representing an increase of $3,123,940 or 14.3% over $21,840,725 for the year ended December 31, 1999, primarily due to a $33,309,935 or 11.5% increase in average earning assets, and higher average interest rates, during 2000. The weighted average taxable equivalent yield on net earning assets was 7.82% and 7.61% in 2000 and 1999, respectively. Interest expense of $9,354,592 in 2000 represented an increase of $1,524,924 or 19.5% from $7,829,668 in 1999, primarily due to a $23,599,941 or 10.4% increase in average interest bearing liabilities, and higher average interest rates, during 2000. The weighted average cost of interest bearing liabilities was 3.75% in 2000 and 3.46% in 1999. Net interest income for 2000 was $15,610,073, representing an increase of $1,590,016 or 11.4% compared to $14,011,057 recorded in 1999. -28- Noninterest income for the year ended December 31, 2000 was $3,488,045, representing an increase of $272,299 or 8.5% from $3,215,746 in 1999. This increase resulted primarily from increases in merchant credit card processing assessments, service charges and gains on sales of loans, partially offset by a reduction in other charges, commissions and fees. Noninterest expense for the year ended December 31, 2000 of $12,061,817 represented an increase of $924,808 or 8.3% from $11,137,009 recorded during 1999. This increase was the result of increases in salaries and employee benefits, information technology and ATM network, occupancy, credit card processing and other expense, partially offset by reductions in printing, stationery and supplies, professional fees and marketing and advertising expense. There was no provision for possible loan losses in 2000 or 1999, reflecting management's continuing evaluation of the adequacy of the allowance for possible loan losses and its belief that the allowance is adequate. Income tax expense was $2,504,182 for the year ended December 31, 2000, compared to $2,174,577 for 1999, resulting from an increase in taxable income during the current period. The Company's effective tax rate declined slightly to 35.6% in 2000 from 35.7% in 1999 due to favorable tax rates on certain investment income. Net income of $4,532,119 for the year ended December 31, 2000 represented an increase of $616,902 or 15.8% over $3,915,217 recorded in 1999. Earnings per share of $.77 in 2000 represented an increase of $.11 from $.66 in 1999. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed by management to be adequate to absorb inherent losses in the loan portfolio. The allowance 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. The allowance is maintained at an adequate level through the provision for loan losses, which is a charge to operating income. At December 31, 2001 the allowance was $2,684,517, representing 1.4% of total loans, compared to $2,812,392, representing 1.6% of total loans at December 31, 2000. For a thorough description of the methodology used for determining the allowance for loan losses, please see Note 1 to the consolidated financial statements. Securities The Company's securities portfolio consists primarily of obligations of U.S. Government sponsored agencies, mortgage-backed securities, corporate debt securities and obligations of various municipalities. These assets are used in part to secure public deposits and as collateral for repurchase agreements. Total securities were $171,382,826 at December 31, 2001, representing an increase of $28,831,102 or 20.2% from $142,551,724 at December 31, 2000. Total securities averaged $146.3 million for 2001, representing an increase of $18.7 million or 14.7% over $127.6 million for 2000. All mortgage-backed securities in the Company's securities portfolio have been issued by U.S. Government sponsored agencies. Management believes no other-than-temporary impairment has occurred with regard to any security in the securities portfolio. Gains on sales of available for sale securities were $9,200 during 2001. Liquidity and Capital Resources The Company's principal sources of liquidity are customer deposits, amortization and pay-offs of loan principal and the amortization and maturities of securities. These sources provide funds for loan originations, the purchase of securities and other activities. Deposits are considered a relatively stable source of funds. At December 31, 2001 and 2000, deposits were $319.1 million and $307.1 million, respectively. Management anticipates that deposits will increase moderately during 2002. Of the Company's $171.4 million in securities at December 31, 2001, $6.3 million or 3.7% mature within one year. 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 of Boston ("FHLBB"), which provides additional borrowing opportunities. At December 31, 2001 and 2000, the Bank's total borrowings from the FHLBB were $10,000,000 and $0, respectively. Bank regulatory authorities have established a capital measurement tool called Tier 1 leverage capital. A 4.00% ratio of Tier 1 leverage capital to assets now constitutes the minimum capital standard for most banking organizations. At December 31, 2001 and 2000, the Company's Tier 1 leverage capital ratio was 8.82% and 8.46%, respectively. 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 December 31, 2001, the -29- Company's Tier 1 and total risk-based capital ratios were 15.87% and 17.07%, respectively. At December 31, 2000, the Company's Tier 1 and total risk-based capital ratios were 15.91% and 17.16%, respectively. The Bank is categorized as "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). Asset/Liability Management and Interest Rate Risk The Company has an Asset/Liability Management Committee which oversees all asset/liability management activities. The committee establishes general guidelines each year and meets regularly to review the Company's operating results, to measure and monitor interest rate risk 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 in an effort to prudently manage interest rate risk. 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 its interest rate sensitive assets in response to such changes. The Company's negative one year cumulative gap position at December 31, 2001, which represents the excess of repricing liabilities versus repricing assets, was 7.2% expressed as a percentage of total assets. -30- DIRECTORS & OFFICERS - -------------------- COMMUNITY BANCORP, INC. AND COMMUNITY NATIONAL BANK - ---------------------------------------------------- Chairman of the Board - --------------------- Dennis F. Murphy, Jr. President and Treasurer of D. Francis Murphy Insurance Agency, Inc. Directors: - --------- Alfred A. Cardoza Retired Jennie Lee Colosi President and Treasurer of E. T. & L. Construction, Inc. Antonio Frias President and Treasurer of S & F Concrete Contractors, Inc. I. George Gould Chairman of the Board of Gould's, Inc. Horst Huehmer Retired Donald R. Hughes, Jr. Treasurer and Clerk of Community Bancorp, Inc., Executive Vice President of Community National Bank James A. Langway President and Chief Executive Officer of Community Bancorp, Inc. and Community National Bank David L. Parker Chairman of the Board of Larkin Lumber Company Mark Poplin President and Treasurer of Poplin Supply Company David W. Webster President of Knight Fuel Company, Inc. Officers: - -------- James A. Langway President and Chief Executive Officer Donald R. Hughes, Jr. Treasurer and Clerk COMMUNITY NATIONAL BANK - ----------------------- Officers - -------- President and Chief Executive Officer James A. Langway Executive Vice President Donald R. Hughes, Jr. Auditor Patricia North-Martino Administrative Officer Joy A. Pare' Lending Division - ------------------ Executive Vice President John P. Galvani Vice Presidents Thomas J. Allain Christal M. Bjork Daniel L. Heney Gregory A. Pauplis Rocco Vallande Credit Officer AnnMarie Callahan Mortgage Officer Lynda L. D'Orlando Mortgage Underwriting Officer Sandra M. Borella Security Officer Clark Hooper Financial Division - ----------------- Senior Vice President Robert E. Leist Facilities Officer Raymond A. Murphy Sales, Service and Support Division - ----------------------------------- Senior Vice President Grace L. Blunt, Esq. Vice Presidents Jeffrey C. Barske Diane L. LeBlanc Janet A. Lyman James P. Vasquezi Assistant Vice Presidents Linda A. Benway Kelli A. Mason M. Jean Mickle Gail A. Plank Lois A. Seymour Nicole L. Sousa Michelle M. Temple Margaret M. Vasquezi Officers Joan Brigham Christopher P. Keene Lisa Pompeo Investment Management & Trust - ----------------------------- V.P. & Investment Officer R. Richard Wilson Assistant Vice President Paul Travis The Company's Securities and Exchange Commission filing on Form 10-K is available to our stockholders upon request. -31- [The following text appears on the back cover.] Community Bancorp, Inc. Parent company of Community National Bank [Community National Bank's logo appears in this space] 17 Pope Street Hudson, Massachusetts 01749 tel 978-568-8321 fax 978-568-7129 877-CNB-DIRECT Acton 270 Great Road tel 978-263-8376 fax 978-266-2610 Boxborough 629 Massachusetts Avenue tel 978-264-9092 fax 978-266-2600 Concord 1134 Main Street tel 978-369-5421 fax 978-371-6600 Framingham 35 Edgell Road tel 508-875-1333 fax 508-370-3885 Hudson South 177 Broad Street tel 978-568-8813 fax 978-568-2610 Internet Branch www.combanc.com cnb-mail@combanc.com Loan Center 12 Pope Street, Hudson tel 978-568-2468 fax 978-562-9984 Marlborough Center 96 Bolton Street tel 508-485-5003 fax 508-229-4602 Marlborough East 500 Boston Post Road tel 508-485-3599 fax 508-229-4601 Stow 159 Great Road tel 978-461-1600 fax 978-461-1610 Sudbury 450 Boston Post Road tel 978-443-1620 fax 978-443-1626 ATM LOCATIONS: New England Sports Center Donald Lynch Blvd., Marlborough Washington Square Plaza Rt. 85, Hudson Equal Opportunity Lender Member FDIC -----END PRIVACY-ENHANCED MESSAGE-----