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-