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, 2002 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] Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of voting common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold as of June 28, 2002, the last business day of the registrant's most recently completed second fiscal quarter, was $46,637,052. The total number of shares of common stock outstanding at March 17, 2003 was 5,829,780. 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, 2002. 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", "intend", "assume", "should", "will", 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 and 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. Any forward-looking statements contained in this report were based on information, plans and estimates at the date of this report, and the Company assumes no obligation to update any forward-looking statements to reflect new information, future events or other changes. -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 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 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 20 PART III - -------- Item 10. Directors and Executive Officers 21 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 28 Item 14. Controls and Procedures 28 PART IV - ------- Item 15. Exhibits and Financial Statements 29 Exhibit Index 30 SIGNATURES 32 CERTIFICATIONS 34 SUPPLEMENTAL INFORMATION 36 -ii- PART I ------ ITEM 1. BUSINESS Community Bancorp, Inc., a Massachusetts corporation (the "Company"), is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Company has one subsidiary, Community National Bank, a national banking association (the "Bank"). The Company owns all the outstanding shares of the Bank. At present, the 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, travelers' checks, safe deposit boxes and other customary bank services to its customers. 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. In 2002, the Bank was licensed by the Massachusetts Insurance Commissioner's office to sell insurance products directly to the public. To date, the Bank's activities in trust services and insurance sales have not been significant. 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 -------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Interest and fees on loans 49% 50% 52% 53% 52% Interest and dividends on securities and federal funds sold 33 33 33 31 31 Charges, fees and other sources 18 17 15 16 17 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === === COMPETITION - ----------- The Bank generally concentrates its activities within a 25 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, a consumer lending office and a remote ATM facility in the Town of Hudson. The banking business in the Bank's market area is highly competitive, and the bank faces considerable competition for loan originations and for the attraction and retention of deposits. Competition for loan originations comes primarily from other commercial banks, thrift institutions, credit unions and -1- mortgage companies. The Bank also faces competition from numerous other financial institutions, both locally and nation-wide, which utilize the Internet to solicit and service customers. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement in the communities it serves, contributes to its ability to compete successfully. Under the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act"), effective March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The Company continues to monitor developments resulting from the passage of this legislation. 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. The passage by Congress of the Sarbanes-Oxley Act of 2002 (the "Act") and the resulting SEC rules adopted by the Securities and Exchange Commission pursuant to the implementation of the Act impose additional corporate governance requirements on public companies. These requirements include additional financial statement disclosures, CEO and CFO certification of financial statements and additional audit committee responsibilities. The Company is subject to many of those requirements. 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 ("OCC") 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 loss 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. Community Reinvestment Act: The Community Reinvestment Act ("CRA") requires the OCC to evaluate the Bank's performance in helping to meet the credit needs of the community. Management believes the Bank is currently in compliance with all CRA requirements. Customer Information Security: The OCC, the Federal Reserve Board and other bank -2- regulatory agencies have adopted guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Privacy: The Gramm-Leach-Bliley Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires the Company to explain to consumers the Company's policies and procedures regarding the disclosure of such nonpublic information, and, except as otherwise required by law, the Company is prohibited from disclosing such information except as provided in the Company's policies and procedures. USA Patriot Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depositary institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act requires financial institutions to implement additional policies and procedures with respect to money laundering, suspicious activities and currency transactions reporting. EMPLOYEES - --------- The Company and the Bank employ 128 full-time equivalent employees. -3- 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 years ended December 31, 2002, 2001 and 2000. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a taxable equivalent basis. (Dollars in thousands) 2002 - ---------------------- ------------------------------------- Interest & Average Dividend Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ----- Federal funds sold $ 23,400 $ 338 1.44% Deposits with banks 841 9 1.07% Securities: Taxable (1) 147,906 7,380 4.99% Non-taxable (2) 19,806 1,435 7.25% Preferred stock 6,432 403 6.27% Total loans and leases (2)(3) 193,559 13,607 7.03% ------- ------ ---- Total earning assets 391,944 23,172 5.91% ------- ------ ---- Reserve for loan losses (2,725) Other non interest- bearing assets 30,149 ------- Total average assets $419,368 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $146,362 $ 1,064 0.73% Time deposits 105,812 3,732 3.53% Repurchase agreements 34,688 437 1.26% Federal Home Loan Bank of Boston advances 13,521 403 2.98% ------- ------ ---- Total interest-bearing liabilities 300,383 5,636 1.88% ------- ------ ---- Non interest-bearing deposits 77,929 Other non interest-bearing liabilities 2,586 Stockholders' equity 38,470 ------- Total average liabilities and stockholders' equity $419,368 ======= Net interest income $17,536 ====== Net yield on interest earning assets 4.47% ==== (1) Includes Federal Home Loan Bank of Boston stock. (2) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $598,000. A federal tax rate of 34% was used in performing this calculation. (3) 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) (Dollars in thousands) 2001 - ---------------------- ------------------------------------- Interest & Average Dividend Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ----- Federal funds sold $ 34,507 $ 1,305 3.78% Deposits with banks 432 15 3.47% Securities: Taxable (1) 123,416 7,325 5.94% Non-taxable (2) 18,298 1,343 7.34% Preferred stock 4,613 306 6.63% Total loans and leases (2)(3) 180,533 14,998 8.31% ------- ------ ---- Total earning assets 361,799 25,292 6.99% ------- ------ ---- Reserve for loan losses (2,773) Other non interest- bearing assets 26,559 ------- Total average assets $385,585 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $142,606 $ 2,243 1.57% Time deposits 97,452 5,111 5.24% Repurchase agreements 37,165 1,275 3.43% Federal Home Loan Bank of Boston advances 219 5 2.48% ------- ------ ---- Total interest-bearing liabilities 277,442 8,634 3.11% ------- ------ ---- Non interest-bearing deposits 70,877 Other non interest-bearing liabilities 2,754 Stockholders' equity 34,512 ------- Total average liabilities and stockholders' equity $385,585 ======= Net interest income $16,658 ====== Net yield on interest earning assets 4.60% ==== (1) Includes Federal Home Loan Bank of Boston stock. (2) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $556,000. A federal tax rate of 34% was used in performing this calculation. (3) 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) (Dollars in thousands) 2000 - ---------------------- ------------------------------------- Interest & Average Dividend Yield/ ASSETS Balance Inc./Exp. Rate ------------ ----------- ----- Federal funds sold $ 26,891 $ 1,682 6.25% Deposits with banks 258 14 5.43% Securities: Taxable (1) 114,423 7,188 6.28% Non-taxable (2) 13,138 949 7.22% Preferred stock -- -- -- Total loans and leases (2)(3) 169,014 14,852 8.79% ------- ------ ---- Total earning assets 323,724 24,685 7.63% ------- ------ ---- Reserve for loan losses (2,914) Other non interest- bearing assets 27,064 ------- Total average assets $347,874 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings, money market and NOW $133,045 $ 3,164 2.38% Time deposits 84,386 4,497 5.33% Repurchase agreements 32,247 1,693 5.25% Federal Home Loan Bank of Boston advances -- -- -- ------- ------ ---- Total interest-bearing liabilities 249,678 9,354 3.75% ------- ------ ---- Non interest-bearing deposits 66,238 Other non interest-bearing liabilities 2,117 Stockholders' equity 29,841 ------- Total average liabilities and stockholders' equity $347,874 ======= Net interest income $15,331 ====== Net yield on interest earning assets 4.74% ==== (1) Includes Federal Home Loan Bank of Boston stock. (2) Interest income and yield are stated on a fully taxable-equivalent basis. The total amount of adjustment is $358,000. A federal tax rate of 34% was used in performing this calculation. (3) The average balances of non-accruing loans and loans held for sale are included in the loan balance. -6- 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. 2002 as compared to 2001, Due to a change in: ------------------------------------- (Dollars in thousands) Volume Rate Total - ---------------------- ------ ------ ------ Interest and dividend income from: Federal funds sold $ (160) $ (807) $ (967) Deposits with banks 4 (10) (6) Securities: Taxable (1) 1,227 (1,172) 55 Non-taxable 108 (16) 92 Preferred stock 114 (17) 97 Loans & leases 920 (2,311) (1,391) ----- ----- ----- Total 2,213 (4,333) (2,120) ----- ------ ----- Interest expense on: Interest-bearing deposits: Savings, money market and NOW 19 (1,198) (1,179) Time deposits 287 (1,666) (1,379) Repurchase agreements (32) (806) (838) FHLBB advances 396 2 398 ----- ------ ----- Total 670 (3,668) (2,998) ----- ------ ----- Net interest income $1,543 $ (665) $ 878 ===== ===== ===== 2001 as compared to 2000, Due to a change in: ------------------------------------- (Dollars in thousands) Volume Rate Total - ---------------------- ------ ------ ------ Interest and dividend income from: Federal funds sold $ 287 $ (664) $ (377) Deposits with banks 6 (5) 1 Securities: Taxable (1) 526 (389) 137 Non-taxable 378 16 394 Preferred stock 306 -- 306 Loans & leases 957 (811) 146 ----- ----- ----- Total 2,460 (1,853) 607 ----- ------ ----- Interest expense on: Interest-bearing deposits: Savings, money market and NOW 157 (1,078) (921) Time deposits 690 (76) 614 Repurchase agreements 169 (587) (418) FHLBB advances 5 -- 5 ----- ------ ----- Total 1,021 (1,741) (720) ----- ------ ----- Net interest income $1,439 $ (112) $1,327 ===== ===== ===== Note: The change due to the volume/rate variance has been allocated to volume. (1) Includes Federal Home Loan Bank of Boston stock. -7- SECURITIES PORTFOLIO - -------------------- The following table indicates the carrying value of the Company's consolidated securities portfolio at December 31, 2002, 2001 and 2000. (Dollars in thousands) 2002 2001 2000 - ---------------------- ------- ------- ------- U.S. Government agencies .......... $148,683 $137,772 $125,009 Obligations of states and political subdivisions .................... 19,118 20,348 16,273 Preferred stock ................... 6,356 6,635 -- Corporate debt securities ......... 5,153 5,208 -- Other securities .................. 154 175 175 ------- ------- ------- Total ............... $179,464 $170,138 $141,457 ======= ======= ======= The following table shows the maturities, carrying value and weighted average yields of the Company's consolidated securities portfolio at December 31, 2002. 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 ------------- ------------- ------------- ------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------- ------ ----- ------ ----- ------ ----- ------ ----- U.S. Govt. agencies held to maturity $7,450 4.20% $10,816 4.11% $5,140 3.16% -- -- U.S. Govt. agencies available for sale 6,015 3.90% 47,788 4.54% -- -- -- -- State and political subdivi- sions held to maturity 305 6.44% -- -- 10,465 7.50% $8,348 7.39% Mortgage-backed securities held to maturity 22,204 5.33% 37,174 5.33% 7,644 5.33% -- -- Mortgage-backed securities available for sale 3,527 5.17% 925 6.00% -- -- -- -- Corporate debt securities -- -- 5,153 5.70% -- -- -- -- Current estimated prepayment speed assumptions were used in estimating the maturities of mortgage-backed securities in the above table. At December 31, 2002, 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. -8- LOAN PORTFOLIO - -------------- The following table summarizes the distribution of the Bank's loan portfolio, net of unearned discount and unearned net loan origination fees, as of December 31 for each of the years indicated: (Dollars in thousands) 2002 2001 2000 1999 1998 - ---------------------- ------ ------ ------ ------ ------ Commercial and industrial $ 26,180 $ 26,993 $ 24,206 $ 23,419 $ 21,127 Real estate - residential 80,654 81,231 76,945 66,788 55,055 Real estate - commercial 79,416 64,436 57,870 58,485 47,399 Real estate - construction 2,474 1,628 2,077 1,454 2,795 Loans to individuals 12,063 13,548 14,165 13,544 13,197 Other 602 617 766 670 651 ------- ------- ------- ------- ------- Total loans $201,389 $188,453 $176,029 $164,360 $140,224 ======= ======= ======= ======= ======= Loan maturities for commercial and real estate (construction) loans only at December 31, 2002 were as follows: $14.4 million due in one year or less; $11.6 million due after one year through five years; $2.7 million due after five years. Of the Bank's commercial and real estate (construction) loans due after one year, $4.9 million have floating or adjustable rates and $9.4 million 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: (Dollars in thousands) 2002 2001 2000 1999 1998 - ---------------------- ---- ---- ---- ---- ---- Nonaccrual loans $235 $320 $558 $684 $913 Accruing loans past due 90 days or more 10 13 2 -- 2 Restructured loans -- -- -- -- -- --- --- --- --- --- Total $245 $333 $560 $684 $915 === === === === === For the period ended December 31, 2002, the reduction of interest income associated with nonaccrual and restructured loans was $20,000. The interest on these loans that was included in interest income for 2002 was $22,000. POTENTIAL PROBLEM LOANS - ----------------------- As of December 31, 2002 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, 2002, except as disclosed in the above table, there were no concentrations of loans exceeding 10% of total loans. -9- SUMMARY OF LOAN LOSS EXPERIENCE - ------------------------------- The following table summarizes historical data with respect to loans outstanding (including loans held for sale), loan losses and recoveries, and the allowance for loan losses at December 31 for each of the years indicated: (Dollars in thousands) 2002 2001 2000 1999 1998 - ---------------------- ------- ------- ------- ------- ------- Average outstanding loans (1) $193,559 $180,533 $169,014 $154,304 $138,311 ======= ======= ======= ======= ======= ALLOWANCE FOR LOAN LOSSES - ------------------------- (Dollars in thousands) 2002 2001 2000 1999 1998 - ---------------------- ------- ------- ------- ------- ------- Balance - beginning of year $ 2,685 $ 2,812 $ 3,042 $ 2,981 $ 3,216 ===== ===== ===== ===== ===== Charge-offs: Commercial and industrial (89) (85) (111) (36) (37) Real estate - residential -- -- (42) -- (132) Real estate - commercial -- (70) (118) -- (59) Real estate - construction -- -- -- -- -- Loans to individuals (161) (107) (200) (76) (76) ----- ----- ----- ----- ----- Total charge-offs (250) (262) (471) (112) (304) Recoveries: Commercial and industrial 19 115 58 153 48 Real estate - residential 39 -- 27 1 6 Real estate - commercial 36 -- 18 8 2 Real estate - construction -- -- -- -- -- Loans to individuals 24 20 138 11 13 ----- ----- ----- ----- ----- Total recoveries 118 135 241 173 69 Net (charge-off) recovery (132) (127) (230) 61 (235) Provision for loan losses 180 -- -- -- -- ----- ----- ----- ----- ----- Balance - end of year $ 2,733 $ 2,685 $ 2,812 $ 3,042 $ 2,981 ===== ===== ===== ===== ===== Ratio of net charge-offs to average loans .07% .07% .14% (.00)% .17% ===== ===== ===== ===== ===== (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. -10- 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: 2002 2001 2000 1999 1998 ------------------- ------------------- ------------------ ------------------- ----------------- Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in (Dollars in category to category to category category to category to thousands) Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans - ------------ ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ --------- Commercial & industrial $ 891 13.3% $ 755 14.7% $ 398 14.2% $ 263 14.7% $ 238 15.5% Real estate - residential 206 40.0% 208 43.1% 249 43.7% 596 40.6 197 39.3% Real estate - commercial 908 39.5% 965 34.1% 815 32.9% 227 35.6% 518 33.8% Real estate - construction -- 1.2% 21 0.9% 41 1.2% 15 0.9% 35 2.0% Loans to individuals 242 6.0% 259 7.2% 170 8.0% 128 8.2% 130 9.4% Imprecision 486 N/A 477 N/A 1,139 N/A 1,813 N/A 1,863 N/A ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total $2,733 100.0% $2,685 100.0% $2,812 100.0% $2,981 100.0% $2,981 100.0% ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== 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. DEPOSITS - -------- The following table shows the average deposits and average interest rate paid for each of the last three years: 2002 2001 2000 ----------------- ----------------- ----------------- (Dollars in Average Average Average Average Average Average thousands) Balance Rate Balance Rate Balance Rate - ------------ ------- ------- ------- ------- ------- ------- Demand deposits $ 77,929 0.00% $ 70,877 0.00% $ 66,238 0.00% NOW/FlexValue deposits 50,629 0.22% 42,566 0.40% 36,010 0.85% Money market deposits 35,177 1.34% 34,410 2.20% 35,211 3.08% Savings deposits 60,556 0.80% 65,630 2.01% 61,824 2.83% Time deposits 105,812 3.53% 97,452 5.24% 84,386 5.33% ------- ---- ------- ---- ------- ---- Total $330,103 1.45% $310,935 2.37% $283,669 2.70% ======= ==== ======= ==== ======= ==== -11- As of December 31, 2002, the Bank had certificates of deposit in amounts of $100,000 or more aggregating $53.6 million. These certificates of deposit mature as follows: (Dollars in thousands) - ---------------------- Maturity Amount -------- ------- 3 months or less $20,105 Over 3 months through 6 months 8,131 Over 6 months through 12 months 12,560 Over 12 months 12,815 ------ Total $53,611 ====== 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, ---------------------------- 2002 2001 2000 ---- ---- ---- Return on average total assets (net income divided by average total assets) 1.32% 1.32% 1.30% Return on average stockholders' equity (net income divided by average stockholders' equity) 14.44% 14.72% 15.19% Dividend payout ratio (total declared dividends per share divided by diluted earnings per share 33.01% 29.88% 27.14% Equity to assets (average stockholders' equity as a percentage of average total assets) 9.17% 8.95% 8.58% -12- BORROWINGS - ---------- The Bank engages in certain borrowing agreements throughout the year. These are in the ordinary course of the Bank's business. Such borrowings consist of securities sold under repurchase agreements (which are borrowings from customers) and advances from the Federal Home Loan Bank of Boston. The following table summarizes such 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 (Dollars in end of end of at any out- during thousands) the year the year month-end standing the year - ------------ ------- -------- --------- -------- -------- Year ended 12/31/02 - ---------- Repurchase agreements $24,969 1.15% $39,241 $34,688 1.26% Federal Home Loan Bank advances 14,395 2.52% 15,000 13,521 2.98% Year ended 12/31/01 - ---------- Repurchase agreements $34,023 1.69% $40,284 $37,165 3.43% Federal Home Loan Bank advances 10,000 2.48% 10,000 219 2.48% Year ended 12/31/00 - ---------- Repurchase agreements $33,463 5.78% $44,089 $32,247 5.25% Federal Home Loan Bank advances -- -- -- -- -- -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, 2002. 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 457 as of March 17, 2003. 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 ended December 31, 2002 and 2001: 2002 2001 ---- ---- First quarter $ .073 $ .058 Second quarter .075 .062 Third quarter .078 .066 Fourth quarter .081 .071 ---- ---- Total $ .307 $ .257 ==== ==== -14- For a discussion of restrictions on the ability of the Bank to pay dividends to the Company, see footnote 11 on page 19 of the Annual Report to Shareholders for the year ended December 31, 2002, which is hereby incorporated by reference. On May 21, 2002 the Company sold 16,612 unregistered shares of its common stock to the Community Bancorp, Inc. 401(k) Savings Plan and 6,667 unregistered shares of its common stock to the Community Bancorp, Inc. Employee Profit Sharing Plan (which is a component of the 401(k) Savings Plan) at a per-share price of $10.50. The aggregate cash price of these sales was $244,000. 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. On October 1, 2002 the Company implemented an offer to purchase up to 222,222 shares (representing approximately 3.7% of the outstanding shares) of its common stock through a tender offer at a price of $13.50 per share, payable in cash. The offer to purchase expired at 5:00 P.M. on November 1, 2002. A total of 134,505 shares of common stock were tendered in conjunction with the offer. There was no proration of shares. 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, 2002 and is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains certain statements that may be considered "forward-looking statements". Forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, those factors described under the caption "Cautionary Statement For Purposes of The Private Securities Litigation Reform Act of 1995" on page "i" of this report. The following discussion should be read in conjunction with the accompanying consolidated financial statements included, or incorporated by reference, within this report. Because the Company's principal activity currently is the ownership of the Bank, for ease of reference the term "Company" in this discussion generally will refer to the activities of both the Company and the Bank, except where otherwise noted. Management's Discussion and Analysis of Financial Condition and Results of Operations is contained on pages 24 through 27 of the Annual Report to Shareholders for the year ended December 31, 2002 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. -15- The Company's significant accounting policies are described in Note 1 to the consolidated financial statements, which is contained on pages 8 through 13 of the Annual Report to Shareholders for the year ended December 31, 2002. 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. * 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 that assigns required allowance allocations by loan classification based on fixed percentages of all outstanding loan balances. -16- 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. 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. -17- 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 positive one-year cumulative gap position at December 31, 2002, which represents the excess of rate-sensitive assets versus rate-sensitive liabilities, was 2.2% expressed as a percentage of total assets. The following table presents rate-sensitive assets and rate-sensitive liabilities as of December 31, 2002: 1 to 6 7 to 12 1 to 2 2 to 5 Over 5 (Dollars in thousands) Months Months Years Years Years Total - --------------------- ---------- ---------- ---------- --------- --------- ---------- RATE-SENSITIVE ASSETS Federal funds sold $ 19,557 $ -- $ -- $ -- $ -- $ 19,557 Cash letter 18,500 -- -- -- -- 18,500 Securities 28,633 24,069 37,598 61,447 27,717 179,464 FHLBB stock -- -- -- -- 1,442 1,442 Adjustable-rate loans 62,741 13,761 15,020 38,416 13,850 143,788 Fixed-rate loans 7,450 5,331 7,379 15,096 22,345 57,601 Loans held for sale 2,531 -- -- -- -- 2,531 --------- --------- ---------- ---------- -------- --------- Total $ 139,412 $ 43,161 $ 59,997 $ 114,959 $ 65,354 $ 422,883 --------- --------- ---------- --------- -------- --------- RATE-SENSITIVE LIABILITIES Demand deposits $ -- $ -- $ -- $ -- $ 83,445 $ 83,445 Money market accounts 10,313 -- -- -- 28,150 37,533 NOW/FlexValue accounts 16,188 -- -- -- 48,565 64,753 Cash management accounts 14,315 -- -- -- -- 14,315 Savings accounts 10,547 -- -- -- 31,640 42,187 Certificates of deposit 59,643 26,652 6,165 19,445 144 112,049 Repurchase agreements 20,873 3,518 -- 578 -- 24,969 Borrowed funds 468 10,485 973 2,469 -- 14,395 --------- --------- ---------- --------- -------- --------- Total $ 132,347 $ 40,655 $ 7,138 $ 22,492 $ 191,014 $ 393,646 --------- --------- ---------- --------- -------- --------- Gap $ 7,065 $ 2,506 $ 52,859 $ 92,467 $(125,660) $ 29,237 ========== ========= ========= ========= ======== ========= Cumulative Gap $ 7,065 $ 9,571 $ 62,430 $ 154,897 $ 29,237 ========== ========= ========= ========= ======== Gap as a percent of total assets 1.62% 0.58% 12.13% 21.22% (28.84%) ==== ==== ===== ===== ===== Cumulative gap as a percent of total assets 1.62% 2.20% 14.33% 35.55% 6.71% ==== ==== ===== ===== ===== 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 day to convert from a rate-insensitive asset the day it is sent for collection to a rate-sensitive 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 -18- 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 (the "Fed") reduced the overnight federal funds target rate eleven times, and in November of 2002 the Fed reduced the federal funds target rate again. At December 31, 2002, the federal funds target rate stood at 1.25%. The Company's management believes it is highly unlikely that overnight interest rates could fall more than an additional 100 basis points during 2003. Therefore, for purposes of this December 31, 2002 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 2.45% -100 (0.48%) The reductions in short-term interest rates implemented by the Federal Reserve Board during 2001 and 2002 reduced the Company's average net yield on earning assets from 4.74% in 2000 to 4.60% in 2001 and 4.47% in 2002. This reduction in the Company's net earning asset yield has resulted primarily from an elevated incidence of fixed-rate home mortgage and commercial loan refinancings, and the Company's limited ability to reduce interest rates on deposit accounts and securities sold under agreements to repurchase due to competitive factors. The Fed's 50 basis point reduction in the federal funds target rate in November of 2002 is expected to place continued pressure on the Company's net interest margin in 2003. Any further reduction in the federal funds target rate during 2003 could place additional pressure on the net interest margin. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements are included on pages 4 through 23 of the Annual Report to Shareholders for the year ended December 31, 2002 and are hereby incorporated by reference. -19- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective May 21, 2002, the Company's Board of Directors dismissed Arthur Andersen LLP as the Company's independent accountant for the fiscal year ended December 31, 2002. This event was reported to the Securities and Exchange Commission on May 21, 2002 on Form 8-K. Effective June 6, 2002, the Company's Audit Committee of the Board of Directors engaged Wolf & Company, P.C. as the Company's independent accountant for the fiscal year ended December 31, 2002. This event was reported to the Securities and Exchange Commission on June 6, 2002 on Form 8-K. There were no disagreements between the Company and its present or former independent accountants on accounting or financial disclosure during the 24 months ended December 31, 2002 or in any period subsequent to the most recent financial statements. -20- 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. Messrs. Gould, Huehmer, Langway, Murphy and Poplin have been Directors of the Company since 1984. Mr. Frias has been a Director of the Company since 1985, Mr. Parker has been a Director of the Company since 1986, Messrs. Hughes and Webster have been Directors of the Company since 1995, and Ms. Colosi has been a Director of the Company since 1999. Mr. Durkin was elected a Director of the Company effective January 1, 2003. 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 48 Senior Vice Senior Vice President, President of Community National Bank, Bank; Assistant Assistant Clerk, Clerk of Company Community Bancorp, Inc. Jennie Lee 47 Director of 2003 President and Treasurer, Colosi (1) Company and E. T.& L. Construction Bank Corp. Edward M. Durkin (1,2) 42 Director of 2003 Vice President and CFO, Company and Sockeye Networks, Inc.; Bank formerly Vice President and CFO, Open Market, Inc., Vice President and CFO, Radview Software Ltd., Vice President and CFO, StarBurst Communications Corporation Antonio Frias (1) 63 Director of 2003 President and Treasurer, Company and S & F Concrete Contractors, Bank Inc. John P. Galvani 46 Exec. Vice Executive Vice President and President & Chief Operating Officer, COO of Bank Community National Bank I. George 86 Director of 2005 Chairman, Gould's, Inc. Gould Company and Bank Horst Huehmer 75 Director of 2004 Retired Company and Bank Donald R. 53 Treasurer, Clerk 2004 Treasurer, Clerk and Chief Hughes, Jr. and CFO of Company; Financial Officer, Community Executive Vice Bancorp, Inc.; Executive Vice President, CFO President, Chief Financial and Cashier of Officer and Cashier, Community Bank; Director of National Bank Company and Bank -21- James A. 63 President & CEO 2005 President and Chief Executive Langway of Company and Bank; Officer, Community Bancorp, Inc. Director of Company and Community National Bank and Bank Robert E. Leist 49 Senior Vice President Senior Vice President, Community of Bank National Bank Dennis F. 65 Chairman of the 2003 President and Treasurer, D. F. Murphy, Jr. (1) Board of Company Murphy Insurance Agency, Inc. and Bank David L. 74 Director of 2005 Chairman of the Board, Larkin Parker (3) Company and Lumber Co. Bank Mark Poplin 79 Director of 2004 President and Treasurer, Company and Poplin Supply Co. Bank David W. 61 Director of 2004 President & Treasurer, Knight Webster (3) Company and Fuel Co., Inc. Bank (1) Ms. Colosi and Messrs. Durkin, Frias and Murphy have been nominated for election at the 2003 Annual Meeting to serve until 2006. (2) Mr. Durkin has been designated by the Company's Board of Directors as the "audit committee financial expert" as defined by the SEC's final rules pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Durkin is independent of management. (3) Mr. Parker and Mr. Webster's wife 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. -22- 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 $100,000 during 2002. Long-Term Compensation Annual Compensation Awards ----------------------- ------------ (a) (b) (c) (d) (g) (i) (1) Securities Underlying All Other Name and Salary Bonus Options Compensation Principal Position Year ($) ($) (#) ($) - ------------------ ---- ------ ------- ------------ ------------ James A. Langway 2002 $247,403 $ 98,961 20,617 $ 9,733 President and CEO 2001 237,888 103,800 23,789 10,022 of the Company and 2000 226,562 75,000 -- 8,974 the Bank Donald R. Hughes, Jr. 2002 146,191 40,933 12,183 9,055 Treasurer and Clerk of 2001 140,568 51,844 14,057 8,855 Company; Executive Vice 2000 133,874 25,000 -- 8,493 President and Cashier of the Bank John P. Galvani 2002 125,000 28,000 10,417 6,283 Executive Vice President 2001 114,800 18,900 10,500 5,948 and Chief Operating 2000 98,730 16,000 -- 5,536 Officer of the Bank Grace L. Blunt 2002 120,200 21,876 10,002 5,927 Senior Vice President 2001 96,750 18,772 9,100 5,280 of the Bank 2000 84,240 15,036 -- 5,713 Robert E. Leist 2002 106,445 18,380 8,870 3,673 Senior Vice President 2001 96,546 16,944 9,482 3,789 of the Bank 2000 91,948 15,723 -- 3,622 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. Effective December 31, 2001, the ESOP was merged into the 401(k) Plan as a profit-sharing component of the 401(k) Plan. Messrs. Langway, Hughes, Galvani, and Leist and Ms. Blunt are participants in the Company's 401(k) Plan, and they were also participants in the ESOP plan prior to December 31, 2001. Of the $9,733 reported above for 2002 in column (i) for Mr. Langway, $2,855 represents Company profit-sharing contributions, $5,972 represents Company 401(k) Plan contributions and $906 represents group life insurance premiums paid by the Company. Of the $9,055 reported above for 2002 in column (i) for Mr. Hughes, $2,672 represents Company profit-sharing contributions, $5,993 -23- represents Company 401(k) Plan contributions and $390 represents group life insurance premiums paid by the Company. Of the $6,283 reported above for 2002 in column (i) for Mr. Galvani, $2,239 represents Company profit-sharing contributions, $3,750 represents Company 401(k)Plan contributions and $294 represents group life insurance premiums paid by the Company. Of the $5,927 reported above for 2002 in column (i) for Ms. Blunt, $2,027 represents Company profit-sharing contributions, $3,606 represents Company 401(k) Plan contributions and $294 represents group life insurance premiums paid by the Company. Of the $3,673 reported above for 2002 in column (i) for Mr. Leist, $1,782 represents Company profit-sharing contributions, $1,597 represents Company 401(k) Plan contributions and $294 represents group life insurance premiums paid by the Company. STOCK OPTIONS GRANTED IN 2002 - ----------------------------- The following table sets forth certain information regarding stock options granted during 2002 to the named Executive Officers. The grants reflected in the table were made pursuant to the Company's 2001 Incentive Stock Option Plan for Key Employees. Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term - --------------------------------------------------------- ------------------------------ (a) (b) (c) (d) (e) (f) (g) % of Total Number of Options Securities Granted to Exercise Underlying Employees or Options in Fiscal Base Price Expiration 5% 10% Name Granted (#) Period ($/Share) Date ($) ($) - ---- ----------- ---------- ---------- ---------- -------- -------- James A. Langway 20,617 22.8% $12.00 02/18/12 $155,591 $394,298 Donald R. Hughes, Jr. 12,183 13.5% 12.00 02/18/12 91,942 232,999 John P. Galvani 10,417 11.5% 12.00 02/18/12 78,614 199,224 Grace L. Blunt 10,002 11.1% 12.00 02/18/12 75,482 191,287 Robert E. Leist 8,870 9.8% 12.00 02/18/12 66,940 169,638 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS - -------------------------------------------------------------------------- The following table sets forth certain information regarding stock options exercised during fiscal 2002 and stock options held at December 31, 2002, by the named Executive Officers. No stock appreciation rights ("SARS") are outstanding pursuant to the Company's 2001 Incentive Stock Option Plan for Key Employees. (a) (b) (c) (d) (e) Securities Value of Underlying Unexercised Unexercised In-The-Money Options at Options at Fiscal Year-End Fiscal Year-End Shares Value (#) ($) Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable (1) - ---- ------------ -------- -------------- ----------------- James A. Langway 0 $0 5,947 / 38,459 $20,815 / $93,373 Donald R. Hughes, Jr. 0 0 3,514 / 22,726 12,299 / 55,175 John P. Galvani 0 0 2,625 / 18,292 9,188 / 43,188 Grace L. Blunt 0 0 2,275 / 16,827 7,963 / 38,891 Robert E. Leist 0 0 2,371 / 15,982 8,299 / 38,194 -24- 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 $13.50, the most recent trade price of the Company's stock at December 31, 2002. COMPENSATION OF DIRECTORS - ------------------------- During 2002, Directors of the Bank received a fee of $918 per month and the Chairman of the Board of the Bank received a fee of $1,530 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 2002 each eligible director was granted options to purchase 2,000 shares of the Company's common stock at a price of $12.00 per share. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL - ------------------------------------------------------------------------ ARANGEMENTS - ----------- 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 -25- 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 life expectancy at the time he begins receiving payments. During 2002, the Company recorded $16,981 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. 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 14, 2003. 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 Jennie Lee Colosi 2,000 2,871 4,871 0.1% Stock ($2.50 Edward M. Durkin -- 150 150 -- par) Antonio Frias 108,001 2,120 110,121 1.9% I. George Gould 18,470 24,494 42,964 0.7% Horst Huehmer 1,400 44,114 45,514 0.8% Donald R. Hughes, Jr. 39,719 (4) 58,000 97,719 1.7% James A. Langway 248,306 (5) -- 248,306 4.3% Dennis F. Murphy, Jr. 387,120 464,596 851,716 14.6% David L. Parker 56,084 16,400 (6) 72,484 1.2% Mark Poplin 3,728 303,890 (7) 307,618 5.3% David W. Webster 1,940 140,168 142,108 2.4% All directors and executive officers of the Company and Bank as a group (14 persons) 866,768 1,076,591 1,943,359 33.3% (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. -26- (4) Includes 39,719 shares held by the Company's 401(k) Plan for which Mr. Hughes has voting power in certain circumstances. (5) Includes 63,118 shares held by the Company's 401(k) Plan for which Mr. Langway has voting power in certain circumstances. (6) Includes 4,000 shares held by the Unitarian Church of Marlboro and Hudson, MA, for which Mr. Parker is a trustee. (7) 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 14, 2003: 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 14.6% ($2.50 par) 188 Prospect Hill Rd. Still River, MA 01467 Cede & Co. 551,105 shares (1) 9.5% P.O. Box 20 Bowling Green Station New York, NY 10274 Community Bancorp, Inc 387,338 shares (2,3) 6.6% 401(k) Savings Plan 17 Pope Street Hudson, MA 01749 Mark Poplin 307,618 shares (1) 5.3% 6 Greenway Street, #306 Wayland, MA 01778 Einar P. Robsham 303,800 shares 5.2% 164 Cochituate Road Wayland, MA 01778 (1) Includes 105,366 shares held by the Mark Poplin Family Trust and 193,628 shares held by the Shirley E. Poplin Family Trust. (2) Includes 63,118 shares for which Mr. Langway has voting power in certain circumstances. (3) Includes 39,719 shares for which Mr. Hughes has voting power in certain circumstances. -27- The following table sets forth information regarding the Company's equity compensation plans as of December 31, 2002: Number of Securities Remaining Available Number of Securities For Future Issuance To Be Issued Upon Weighted-Average Under Equity Exercise of Exercise Price of Compensation Plans Outstanding Options, Outstanding Options, (Excluding Securities Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a)) - ------------- -------------------- ------------------- ------------------------ (a) (b) (c) - ------------- -------------------- ------------------- ------------------------ Equity Compensation Plans Approved By Security Holders (1) 179,479 $11.01 204,521 Equity Compensation Plans Not Approved By Security Holders (2) 23,750 $11.35 6,250 ------- ----- ------- 203,229 $11.05 210,771 ======= ===== ======= (1) The Company's 2001 Incentive Stock Option Plan for Key Employees was approved by the stockholders on April 10, 2001. (2) The Company's 2001 Directors' Plan, which is a non-qualified stock option plan for directors who are not also employees of the company, did not require stockholder approval. 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 (the "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 was 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 Agreement was terminated effective September 23, 2002, and it had no material affect on the Company's 2002 financial statements or results of operations. ITEM 14. CONTROLS AND PROCEDURES Within the 90 day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to -28- ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV ------- ITEM 15. 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, 2002, are hereby incorporated by reference: Annual Report to Shareholders Description page reference ----------- ---------------- Consolidated balance sheets at December 31, 2002 and 2001 4 Consolidated statements of income for the years ended December 31, 2002, 2001 and 2000 5 Consolidated statements of stockholders' equity for the years ended December 31, 2002, 2001 and 2000 6 Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000 7 Notes to consolidated financial statements 8 - 23 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, 2002 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, 2002. 3. Exhibits See accompanying Exhibit Index. (b) The Company did not file a Form 8-K during the quarter ended December 31, 2002. -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) 13. 2002 Annual Report to Shareholders -30- 21. Subsidiaries of Company 23.1 Consent of Independent Certified Public Accountants 23.2 Consent of Predecessor Independent Certified Public Accountants 99.1 Report of Predecessor Independent Certified Public Accountants 99.2 Certifications Pursuant to 18 U.S.C. Section 1350 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- 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: 3-17-03 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 ---- ----------------- 3-17-03 /s/ James A. Langway - ------------ ----------------------------------- James A. Langway, President & CEO Principal Executive Officer 3-17-03 /s/ Donald R. Hughes, Jr. - ------------ ----------------------------------- Donald R. Hughes, Jr., Treasurer & Clerk, Principal Financial Officer and Principal Accounting Officer 3-17-03 /s/ James A. Langway - ------------ ----------------------------------- James A. Langway, Director 3-17-03 /s/ Donald R. Hughes, Jr. - ------------ ----------------------------------- Donald R. Hughes, Jr., Director 3-17-03 /s/ Horst Huehmer - ------------ ------------------------------------ Horst Huehmer, Director 3-17-03 /s/ David W. Webster - ------------ ------------------------------------ David W. Webster, Director 3-19-03 /s/ I. George Gould - ------------ ------------------------------------ I. George Gould, Director -32- SIGNATURES (CONT.) ------------------ 3-24-03 /s/ Edward M. Durkin - ------------ ------------------------------------ Edward M. Durkin, Director -33- CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 ---------------------------------------------------- I, James A. Langway, certify that: 1. I have reviewed this annual report on Form 10-K of Community Bancorp, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ James A. Langway DATE: March 17, 2003 ---------------------------- James A. Langway President and Chief Executive Officer -34- CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 ---------------------------------------------------- I, Donald R. Hughes, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Community Bancorp, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Donald R. Hughes, Jr. DATE: March 17, 2003 ------------------------------ Donald R. Hughes, Jr. Treasurer, Clerk and Chief Financial Officer -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 2003 annual meeting of shareholders, to be held on April 8, 2003, 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-