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%
====
<FN>
(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%
====
<FN>
(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%
====
<FN>
(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
========= ========= =========
<FN>
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%
<FN>
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
===== ===== ===== ===== =====
<FN>
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%
===== ===== ===== ===== =====
<FN>
(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%
===== ===== ===== =====
<FN>
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%
<FN>
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
<FN>
(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
<FN>
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
<FN>
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%
<FN>
(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
<FN>
(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
<FN>
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)
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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
<FN>
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-