<PAGE>
COMPTROLLER OF THE CURRENCY
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ______________.
COMMUNITY BANCORP INC.(1)
-------------------------
(Exact name of registrant as specified in its charter)
000-26505
---------
(FILE NUMBER)
-------------
DELAWARE 33-0859334
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 WEST FALLBROOK STREET, FALLBROOK, CA 92028
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (760) 723-8811
--------------
NONE
----
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Number of shares of common stock outstanding as of August 12, 1999:
2,411,685 shares.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
- --------
(1) The Company is the successor registrant to Fallbrook National Bank which
previously filed reports pursuant to the Securities Exchange Act of 1934 with
the Comptroller of the Currency.
1
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,924 $ 6,064
Federal funds sold 20,760 10,250
Interest bearing deposits in financial institutions 800 800
Federal Reserve Bank stock 161 132
Investment securities held-to-maturity, at amortized cost 6,407 1,676
Loans:
Held for investment 104,339 103,101
Less allowance for loan losses (1,286) (992)
Held for sale, at lower of cost or market 7,653 6,600
----------------------
NET LOANS 110,706 108,709
Bank premises and equipment, net 2,496 2,460
Accrued interest and other assets 3,584 3,182
Servicing asset, net 2,770 2,950
----------------------
TOTAL ASSETS $ 155,608 $ 136,223
----------------------
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Interest bearing $ 114,339 $ 102,869
Non-interest bearing 25,583 21,286
----------------------
TOTAL DEPOSITS 139,922 124,155
Other borrowings 4,073 1,000
Accrued expenses and other liabilities 1,215 1,522
----------------------
TOTAL LIABILITIES 145,210 126,677
----------------------
----------------------
SHAREHOLDERS' EQUITY
Common stock, $0.625 par value; authorized 10,000,000 shares, issued and
outstanding, 2,412,000 at June 30, 1999 and
2,411,000 at December 31, 1998 1,507 1,505
Additional paid-in capital 3,869 3,856
Unearned ESOP contribution (898) (1,000)
Retained earnings 5,920 5,185
----------------------
TOTAL SHAREHOLDERS' EQUITY 10,398 9,546
----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,608 $ 136,223
----------------------
----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,841 $4,512 $3,003 $2,365
Interest on federal funds sold 233 436 170 213
Interest on interest bearing deposits in financial institutions 20 21 10 11
Interest on investment securities 62 25 20 15
---------------------------------
TOTAL INTEREST INCOME 6,156 4,994 3,203 2,604
---------------------------------
Interest expense - deposits 1,854 1,712 985 888
Interest expense - other borrowed money 43 60 21 30
---------------------------------
TOTAL INTEREST EXPENSE 1,897 1,772 1,006 918
---------------------------------
Net interest income before provision for loan losses 4,259 3,222 2,197 1,686
---------------------------------
Provision for loan losses 315 231 165 141
---------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,944 2,991 2,032 1,545
---------------------------------
Other operating income:
Customer service charges 178 179 96 92
Other fee income 665 462 362 195
Gain on sale of loans 1,713 593 849 448
Servicing fees, net 270 419 107 215
---------------------------------
TOTAL OTHER OPERATING INCOME 2,826 1,653 1,414 950
---------------------------------
Other operating expenses:
Salaries and employee benefits 3,145 2,105 1,574 1,106
Occupancy 554 357 283 194
Bank premises and equipment 243 144 119 78
Marketing and promotions 114 136 55 93
Data processing 362 282 181 136
Professional services 237 173 130 130
Other 864 644 455 443
---------------------------------
TOTAL OTHER OPERATING EXPENSES 5,519 3,841 2,797 2,180
---------------------------------
Income before income taxes 1,251 803 649 315
Income taxes 516 332 267 131
---------------------------------
NET INCOME $ 735 $ 471 $ 382 $ 184
---------------------------------
---------------------------------
Basic earnings per share $ 0.32 $ 0.21 $ 0.17 $ 0.09
Diluted earnings per share $ 0.31 $ 0.19 $ 0.16 $ 0.08
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months
ended June 30,
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 735 $ 471
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 665 279
Provision for loan losses 315 231
Gain on sale of loans (1,713) (593)
Proceeds from sale of loans 48,241 14,865
Increase in accrued interest and other assets (402) (47)
Increase (Decrease) in accrued expenses and other
liabilities (307) 180
------------------------
Net cash provided by operating activities 47,534 15,386
------------------------
Cash flows from Investing activities:
Net increase in loans outstanding (48,950) (31,015)
Net decrease (increase) in Federal funds sold (10,510) 2,600
Purchase of Federal Reserve Stock (29) -
Purchase of securities held-to-maturity (5,436) (201)
Maturities of securities held-to-maturity 700 -
Additions to bank premises and equipment (304) (239)
------------------------
Net cash used in investing activities (64,529) (28,855)
------------------------
Cash flows from financing activities:
Net increase in deposits:
Interest bearing 11,470 11,045
Non-interest bearing 4,297 2,922
Exercise of stock options 15 36
Cash dividends paid - (228)
Repayment of line of credit (102) -
Proceeds from line of credit 3,175 200
Advances to ESOP - (200)
------------------------
Net cash provided by financing activities 18,855 13,775
------------------------
Net increase in cash and due from banks 1,860 306
Cash and due from banks at beginning of period $ 6,064 $ 4,590
------------------------
Cash and due from banks at end of period $ 7,924 $ 4,896
------------------------
------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,958 $ 931
------------------------
Income Taxes $ 697 $ 406
------------------------
Supplemental disclosure of non-cash investing activities:
Loans transferred to other real estate owned $ - $ 835
------------------------
------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 BASIS OF PRESENTATION:
The interim financial statements included herein have been prepared by Community
Bancorp Inc. (the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). These interim
financial statements include the Company and its wholly owned subsidiary,
Fallbrook National Bank, as consolidated with the elimination of all
inter-company transactions. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations. Nevertheless, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in Fallbrook National Bank's latest Annual
Report. In the opinion of management, all adjustments, including normal
recurring adjustments necessary to present fairly the financial position of the
Company with respect to the interim financial statements and the results of its
operations for the interim period ended June 30, 1999, have been included.
Certain reclassifications may have been made to prior year amounts to conform to
the 1999 presentation. The results of operations for interim periods are not
necessarily indicative of results for the full year.
NOTE 2 LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES:
A summary of loans as of June 30, 1999 and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------------------
(dollars in thousands)
<S> <C> <C>
Construction loans $ 24,679 $ 18,461
SBA guaranteed portion held for sale construction(1) 3,471 2,585
Real estate one to four family 12,971 10,072
Real estate held for sale one to four family(1) 1,073 4,015
Real estate commercial and multi family 44,800 55,788
SBA guaranteed portion held for sale(1) 3,109 --
Consumer home equity lines of credit 2,329 2,033
Consumer other 7,296 6,166
Commercial(2) 14,275 13,517
--------------------------------
Total Gross loans 114,003 112,637
Deferred loan fees (379) (362)
Discount on unguaranteed portion of loans retained (1,632) (2,574)
Allowance for loan losses (1,286) (992)
--------------------------------
Net loans $ 110,706 $ 108,709
--------------------------------
--------------------------------
</TABLE>
- --------
(1) Valued at the lower of cost or market
(2) Includes $7.8 million and $6.0 million of loans secured by aircraft at
June 30, 1999 and December 31, 1998, respectively.
5
<PAGE>
The Company's lending activities are concentrated primarily in Southern
California. Although the Company seeks to avoid undue concentrations of loans to
a single industry based upon a single class of collateral, real estate and real
estate associated business areas are among the principal industries in the
Company's market area. As a result, the Company's loan and collateral portfolios
are, to some degree, concentrated in those industries. The Company evaluates
each credit on an individual basis and determines collateral requirements
accordingly. When real estate is taken as collateral, advances are generally
limited to a certain percentage of the appraised value of the collateral at the
time the loan is made, depending on the type of loan, the underlying property
and other factors.
NOTE 3 SALES AND SERVICING OF SBA LOANS:
The Company generates revenues from the origination of loans guaranteed by the
SBA and the sale of guaranteed and unguaranteed portions of those loans in the
secondary market. The Company retains the servicing on the sale of SBA loans
that creates loan servicing income. The Company measures the servicing asset by
discounting the respective cash flow for the estimated expected life of the
loans. The Company uses industry prepayment statistics in estimating the
expected life. Servicing assets are initially measured at market rates.
If the fair value of the servicing assets is less than the amortized carrying
value, the asset is considered impaired. A valuation allowance must be
established for the impaired asset by a charge against income for the difference
between the amortized carrying value and the fair value. As of June 30, 1999 and
December 31, 1998, there was no material difference between the Company's
amortized carrying value for the servicing assets and the fair value and the
Company had no valuation allowance established for these assets.
The activity for the servicing assets for the six months ended June 30, 1999 and
1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
(dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 2,950 $ 2,883
Servicing assets recognized on SBA loans sold 300 367
Amortization (480) (135)
-----------------------
Balance at end of period $ 2,770 $ 3,115
-----------------------
-----------------------
</TABLE>
NOTE 4 CONTINGENCIES:
The Company's wholly owned subsidiary, Fallbrook National Bank, has been
subject to a lawsuit by a former employee alleging, amongst other things,
breach of contract and fraud. Trial commenced on July 19, 1999, with the Jury
rendering a verdict on August 2nd, 1999. The Jury awarded compensatory
damages of approximately $65,000, punitive damages of $750,000, court costs
and legal fees. As of this date, the trial process is incomplete in as much
as the Judge has not made a final entry of judgement, and no post trial
motions can be filed until the entry has been made. The final judgement is
expected to occur during the quarter ending September 30, 1999. Subject to
the final judgement, the Bank anticipates appealing the judgement and making
an additional accrual. Because of the nature of its activities, the Company
is at all times subject to pending and threatened legal actions which arise
out of the normal course of its business. The Company is not aware of any
pending or threatened legal actions other than that stated above.
6
<PAGE>
NOTE 5 FORMATION OF HOLDING COMPANY:
The Company was formed through a holding company reorganization of Fallbrook
National Bank, wherein Fallbrook National Bank became the wholly owned
subsidiary of Community Bancorp Inc. as of June 25, 1999. The transaction was
based on a one for one exchange of shares of Fallbrook National Bank stock for
shares of common stock of Community Bancorp Inc., and was not considered a
taxable event for IRS purposes. All references to periods prior to June 30, 1999
are references to financial statements of the Bank.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced the financial performance of Community Bancorp Inc. (the "Company")
and its subsidiary Fallbrook National Bank (the "Bank") for the six months and
three months ended June 30, 1999. This analysis should be read in conjunction
with the Bank's 1998 Annual Report and with the unaudited financial
statements and notes as set forth in this report.
Community Bancorp Inc. was formed through a holding company reorganization of
Fallbrook National Bank, wherein Fallbrook National Bank became the wholly owned
subsidiary of Community Bancorp Inc. as of June 25, 1999. The transaction was
based on a one for one exchange of shares of Fallbrook National Bank stock for
shares of common stock of Community Bancorp Inc., and was not considered a
taxable event for IRS purposes. At the same time, Community Bancorp Inc. was
listed on the NASDAQ national markets under the symbol CMBC, and Fallbrook
National Bank was removed from public trading on the same date.
Statements concerning future performance, developments or events concerning
expectation for growth and market forecasts, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties which might cause actual results to differ materially
from stated expectations.
RESULTS OF OPERATIONS
NET INCOME
Net income increased 56.1% to $735,000 for the six months ended June 30, 1999
compared to $471,000 for the six months ended June 30, 1998. Basic earnings
per share were $0.32 and $0.21 for the six months ended June 30, 1999 and
1998, respectively. Diluted earnings per share were $0.31 and $0.19 for the
six months ended June 30, 1999 and 1998, respectively. Earnings per share for
the six months ended June 30, 1998 were adjusted for the effects of a stock
dividend paid in December 1998. The increase in net income was mainly due to
increases in net interest income after provision for loan losses and in other
operating income, partially offset by an increase in other operating
expenses. Interest income increased due to an increase in average interest
earning assets, and other operating income increased during the six months
ended June 30, 1999 due to the sale of $10.2 million in the unguaranteed
portion of SBA 7A loans which resulted in a gain of $1.2 million.
Return on average assets for the six months ended June 30, 1999 was 1.04%
compared to 0.86% for the six months ended June 30, 1998. The increase in the
return on average assets from 1998 to 1999 was due to the increase in net
income, as noted above. The return on average equity was 14.79% for the six
months ended June 30, 1999 compared to 11.09% for the six months ended June
30, 1998.
Net income increased 107.6% to $382,000 for the three months ended June 30,
1999 compared to $184,000 for the three months ended June 30, 1998. Basic
earnings per share were $0.17 and $0.09 for the three months ended June 30,
1999 and 1998, respectively. Diluted earnings per share were $0.16 and $0.08
for the three months ended June 30, 1999 and 1998, respectively. Earnings per
share for the three months ended June 30, 1998 were adjusted for the effects
of a stock dividend paid in December 1998. The increase in net income was
mainly due to increases in net interest income after provision for loan
losses and in other operating income, partially offset by an
8
<PAGE>
increase in other operating expenses. Interest income increased due to an
increase in average interest earning assets and other operating income increased
during the three months ended June 30, 1999 due to the sale of $5.1 million in
the unguaranteed portion of SBA 7A loans which resulted in a gain of $590,000.
Return on average assets for the three months ended June 30, 1999 was 1.03%
compared to 0.64% for the three months ended June 30, 1998. The increase in the
return on average assets from 1998 to 1999 was due to the increase in net
income, as noted above. The return on average equity was 14.97% for the three
months ended June 30, 1999 compared to 8.57% for the three months ended June 30,
1998.
INTEREST INCOME
Net interest income is the most significant component of the Bank's income from
operations. Net interest income is the difference (the "interest rate spread")
between the gross interest and fees earned on the loan and investment portfolios
and the interest paid on deposits and other borrowings. Net interest income
depends on the volume of and interest rate earned on interest earning assets and
the volume of and interest rate paid on interest bearing liabilities.
9
<PAGE>
The following table sets forth a summary of average balances with corresponding
interest income and interest expense as well as average yield and cost
information for the periods presented. Average balances are derived from daily
balances, and nonaccrual loans are included as interest bearing loans for the
purpose of this table.
<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Rate/Yield Balance Earned/Paid Rate/Yield
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Securities and time deposits at other
Banks........................................ $ 2,883 $ 82 5.74% $ 1,643 $ 46 5.65%
Federal funds sold.............................. 10,067 233 4.67 15,540 436 5.66
Loans:
Commercial................................... 52,959 2,712 10.33 38,567 2,076 10.85
Real estate.................................. 57,354 2,875 10.11 42,218 2,236 10.68
Consumer..................................... 5,558 255 9.25 3,797 200 10.62
--------- --------- --------- --------
Total loans..................................... 115,871 5,842 10.17 84,582 4,512 10.76
--------- --------- --------- --------
Total earning assets............................ 128,821 6,157 9.64 101,765 4,994 9.90
Non earning assets.............................. 14,056 9,289
--------- ---------
Total average assets............................ $ 142,877 $ 111,053
--------- ---------
--------- ---------
Average liabilities and shareholders' Equity:
Interest bearing deposits:
Savings and interest bearing
Accounts................................... $ 62,683 $ 767 2.47 $ 60,771 $ 1,053 3.49
Time deposits ............................... 44,385 1,087 4.94 23,556 659 5.64
--------- --------- --------- --------
Total interest bearing deposits................. 107,068 1,854 3.49 84,327 1,712 4.09
Demand deposits................................. 23,471 -- -- 16,172 -- --
Other borrowings................................ 949 43 9.14 1,153 60 10.49
--------- --------- --------- --------
Total interest bearing liabilities............. 131,488 1,897 2.91 101,652 1,772 3.52
Accrued expenses and other liabilities 1,353 837
Net shareholders' equity........................ 10,035 8,564
--------- ---------
Total average liabilities and shareholders'
equity........................................ $ 142,877 $ 111,053
--------- ---------
--------- ---------
Net interest rate spread........................ 6.73% 6.38%
---- ----
---- ----
Net interest income............................. $ 4,259 $ 3,222
--------- --------
--------- --------
Net yield on interest-earning assets............ 6.67% 6.38%
---- ----
---- ----
</TABLE>
Interest income for the six months ended June 30, 1999 increased to $6.2
million, compared to $5.0 million for the six months ended June 30, 1998. This
increase was due to an increase in the average balance of interest earning
assets, partially offset by a decrease in the yield on those assets. Average
interest earning assets increased to $128.8 million for the six months ended
June 30, 1999 compared to $101.8 million for the six months ended June 30, 1998.
The yield on interest earning assets decreased to 9.64% for the six months ended
June 30, 1999 compared to 9.90% for the six months ended June 30, 1998. The
largest single component of interest earning assets was loans receivable, which
had an average balance of $115.9 million with a yield of 10.17% for the six
months ended June 30, 1999 compared to $84.6 million with a yield of 10.76% for
the six months ended June 30, 1998. The increase in the average balance of loans
receivable was attributable to the expansion of the Bank as part of the Bank's
strategic plan.
Interest expense for the six months ended June 30, 1999 increased to $1.9
million compared to $1.8 million for the six months ended June 30, 1998. This
increase was due to an increase in average deposits and other borrowings,
combined with a change in the composition of those liabilities, and was
partially offset by a decrease in the cost of those liabilities. Average
interest-bearing liabilities increased to $131.5 million for the six months
ended June 30, 1999 compared to $101.7 million for the six months ended June 30,
1998. Average time deposits increased to
10
<PAGE>
$44.4 million with a cost of 4.94% for the six months ended June 30, 1999
compared to $23.6 million with a cost of 5.64% for the six months ended June 30,
1998.
<TABLE>
<CAPTION>
For the three months ended June 30,
------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Rate/Yield Balance Earned/Paid Rate/Yield
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Securities and time deposits at other
Banks........................................ $ 3,157 $ 30 3.81% $ 1,648 $ 26 6.33%
Federal funds sold.............................. 14,535 170 4.69 15,191 213 5.62
Loans:
Commercial................................... 51,761 1,384 10.72 39,945 1,080 10.84
Real estate.................................. 58,814 1,485 10.13 44,982 1,185 10.57
Consumer..................................... 5,840 134 9.20 3,821 100 10.50
--------- --------- --------- --------
Total loans..................................... 116,415 3,003 10.35 88,748 2,365 10.69
--------- --------- --------- --------
Total earning assets............................ 134,107 3,203 9.58 105,587 2,604 9.89
Non earning assets.............................. 15,174 9,833
--------- ---------
Total average assets............................ $ 149,281 $ 115,420
--------- ---------
--------- ---------
Average liabilities and shareholders' Equity:
Interest bearing deposits:
Savings and interest bearing
Accounts................................... $ 64,769 $ 399 2.47 $ 63,788 $ 553 3.48
Time deposits ............................... 46,494 586 5.06 23,825 335 5.64
--------- --------- --------- --------
Total interest bearing deposits................. 111,263 985 3.55 87,613 888 4.07
Demand deposits................................. 25,380 -- -- 17,214 -- --
Other borrowings................................ 922 21 9.14 1,208 30 9.96
--------- --------- --------- --------
Total interest bearing liabilities............. 137,565 1,006 2.93 106,035 918 3.47
Accrued expenses and other liabilities 1,482 775
Net shareholders' equity........................ 10,234 8,610
--------- ---------
Total average liabilities and shareholders'
equity........................................ $ 149,281 $ 115,420
--------- ---------
--------- ---------
Net interest rate spread........................ 6.65% 6.42%
---- ----
---- ----
Net interest income............................. $ 2,197 $ 1,686
-------- --------
-------- --------
Net yield on interest-earning assets............ 6.57% 6.40%
---- ----
---- ----
</TABLE>
Interest income for the three months ended June 30, 1999 increased to $3.2
million, compared to $2.6 million for the three months ended June 30, 1998. This
increase was due to an increase in the average balance of interest earning
assets, partially offset by a decrease in the yield on those assets. Average
interest earning assets increased to $134.1 million for the three months ended
June 30, 1999 compared to $105.6 million for the three months ended June 30,
1998. The yield on interest earning assets decreased to 9.58% for the three
months ended June 30, 1999 compared to 9.89% for the three months ended June 30,
1998. The largest single component of interest earning assets was loans
receivable, which had an average balance of $116.4 million with a yield of
10.35% for the three months ended June 30, 1999 compared to $88.7 million with a
yield of 10.69% for the three months ended June 30, 1998. The increase in the
average balance of loans receivable was attributable to the expansion of the
Bank as part of the Bank's strategic plan.
Interest expense for the three months ended June 30, 1999 increased to $1.0
million compared to $918,000 for the three months ended June 30, 1998. This
increase was due to an increase in average deposits and other borrowings,
combined with a change in the composition of those liabilities, and was
partially offset by a decrease in the cost of those liabilities. Average
interest-bearing liabilities increased to $137.6 million for the three months
ended June 30, 1999 compared to $106.0 million for the three months ended June
30, 1998. Average time deposits increased to $46.5 million with a cost of 5.06%
for the three months ended June 30, 1999 compared to $23.8 million with a cost
of 5.64% for the three months ended June 30, 1998.
11
<PAGE>
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the six
months ended June 30, 1999 was $4.3 million, compared to $3.2 million for the
six months ended June 30, 1998. This increase was primarily due to the increase
in average interest earning assets combined with an increase in the net interest
margin. Average interest earning assets were $128.8 million for the six months
ended June 30, 1999 with a net interest margin of 6.67% compared to $101.8
million with a net interest margin of 6.38% for the six months ended June 30,
1998.
Net interest income before provision for estimated loan losses for the three
months ended June 30, 1999 was $2.2 million, compared to $1.7 million for the
three months ended June 30, 1998. This increase was primarily due to the
increase in average interest earning assets combined with an increase in the net
interest margin. Average interest earning assets were $134.1 million for the
three months ended June 30, 1999 with a net interest margin of 6.57% compared to
$105.6 million with a net interest margin of 6.40% for the three months ended
June 30, 1998.
PROVISION FOR LOAN LOSSES
Net charge offs totaled $21,000 for the six months ended June 30, 1999
compared to $127,000 for the six months ended June 30, 1998. Due to the
growth in loans and the historical loss experience associated with the
various loan types, the provision for loan losses totaled $315,000 for the
six months ended June 30, 1999 compared to $231,000 for the six months ended
June 30, 1998. Loan balances have increased to $110.7 million as of June 30,
1999 compared to $108.7 million as of December 31, 1998 and $89.3 million as
of June 30, 1998, a 24.0% increase during the 12 month period. In addition,
the loan portfolio composition has changed, which causes a change in overall
risk of the portfolio. Construction loans, not including SBA guaranteed
portions, have increased to 21.6% of total gross loans as of June 30, 1999,
compared to 16.4% of total gross loans as of December 31, 1998. Additionally,
the Bank has entered into two new business lines during the latter half of
1998; Aircraft lending and Business Manager (an accounts receivable financing
business). As a result of the increase and diversification in total loans
outstanding, management increased the allowance for loan losses to $1.3
million as of June 30, 1999 compared to $754,000 as of June 30, 1998. As of
June 30, 1999, the allowance was 1.13% of total gross loans compared to 0.81%
as of June 30, 1998. The allowance for loan losses as a percentage of
non-performing loans was 120.07% as of June 30, 1999 compared to 55.20% as of
June 30, 1998.
For the three months ended June 30, 1999, net charge offs totaled $21,000
compared to $127,000 for the three months ended June 30, 1998. Provisions for
loan losses totaled $165,000 for the three months ended June 30, 1999 compared
to $141,000 for the three months ended June 30, 1998.
Nonaccrual loans as of June 30, 1999 increased to $1.1 million, of which
$166,000 is guaranteed by the SBA, compared to $969,000 with $293,000
guaranteed by the SBA as of December 31, 1998 and $177,000, with $177,000
guaranteed by the SBA as of June 30, 1998.
12
<PAGE>
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual impaired
loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, nonaccrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
judgments which differ from those of management.
OTHER OPERATING INCOME
Other operating income represents non-interest types of revenue and is
comprised primarily of gains from the sale of loans, other fee income, loan
servicing fees and service charges on deposit accounts. Other operating
income totaled $2.8 million for the six months ended June 30, 1999 compared
to $1.7 million for the six months ended June 30, 1998. This represents an
increase of $1.2 million, or 71.0%, when comparing the six month period ended
June 30, 1999 to the six month period ended June 30, 1998. The increase was
mainly due to an increase in the gain on sale of loans, which totaled $1.7
million for the six month period ended June 30, 1999 compared to $593,000 for
the six month period ended June 30, 1998. The increase in gain on sale of
loans was due to the sale of $18.5 million in mortgage loans and $25.9
million in SBA loans, including $10.2 million in the unguaranteed portion of
SBA 7A loans during the six months ended June 30, 1999 compared to $4.8
million in mortgage loans and $9.3 million in SBA loans during the six month
period ended June 30, 1998.
A major portion of other operating income is generated through the sale of
loans consisting of SBA loans and mortgage loans. During the six months ended
June 30, 1999, the Company originated $22.3 million in SBA government
guaranteed loans compared to $16.4 million during the six months ended June
30, 1998. The Company originated $15.6 million in mortgage loans during the
six months ended June 30, 1999 compared to $9.9 million for the six months
ended June 30, 1998. The Company sold approximately $25.9 million in SBA
loans, including $10.2 million in unguaranteed portions resulting in a gain
of $1.2 million, and $18.5 million in mortgage loans during the six month
period ended June 30, 1999. This is an increase compared to $9.3 million in
SBA loans and $4.8 million in mortgage loans during the six month period
ended June 30, 1998. The sales for the six month period ended June 30, 1999
resulted in a gain of $1.7 million, compared to $593,000 for the six month
period ended June 30, 1998. Prior to 1999, the Company had not sold any
unguaranteed portions of SBA loans. The sale of unguaranteed portions of SBA
loans during the six months ended June 30, 1999 was for the purpose of
liquidity and capital management and reducing concentrations in hotel
lending. In the future, the Company may, from time to time, sell unguaranteed
portions of SBA loans in order to manage its asset growth, capital and
liquidity.
For the three months ended June 30, 1999, the Company originated $10.3
million in SBA loans and $5.6 million in mortgage loans, compared to $9.2
million in SBA loans and $7.5 million in mortgage loans for the three months
ended June 30, 1998. The decline in mortgage loan production was due to the
rise in interest rates during the second quarter of 1999, and therefore the
decline in mortgage refinancing during the same period. The Company sold
$11.2 million in SBA loans, including $5.1 million in unguaranteed portions,
and $6.9 million in mortgage loans during the three months ended June 30,
1999, compared to $4.5 million in SBA loans and $3.4 million in mortgage
loans during the three months ended June 30, 1998. Prior to 1999, the Company
had not sold any unguaranteed portions of SBA loans. The sales generated
gains of $849,000 for the three months ended June 30, 1999 compared to
$448,000 for the three months ended June 30, 1998.
13
<PAGE>
Other fee income totaled $665,000 for the six months ended June 30, 1999
compared to $462,000 for the six months ended June 30, 1998. For the three
months ended June 30, 1999, other fee income totaled $362,000, compared to
$195,000 for the three months ended June 30, 1998. This increase is directly
related to the increase in SBA and mortgage loan production, including fees from
the brokering of SBA loans to third party investors, as well as the additional
volume of other types of loans.
Servicing fees, net, decreased to $270,000 for the six months ended June 30,
1999 compared to $419,000 for the six months ended June 30, 1998. For the three
months ended June 30, 1999, servicing fees decreased to $107,000 compared to
$215,000 for the three months ended June 30, 1998. The decrease in servicing
fees was due to the increase in SBA loan payoffs experienced by the Company
during the first two quarters of 1999. Total SBA servicing for others was $90.2
million at June 30, 1999 compared to $71.3 million at June 30, 1998.
Customer service charges were approximately the same, totaling $178,000 for the
six months ended June 30, 1999 compared to $179,000 for the six months ended
June 30, 1998, and were $96,000 for the three months ended June 30, 1999
compared to $92,000 for the three months ended June 30, 1998.
OTHER OPERATING EXPENSES
Other operating expenses are non-interest types of expenses and are incurred by
the Bank in its normal course of business. Salaries and employee benefits,
occupancy, bank premises and equipment, marketing and promotions, data
processing, professional services and other expenses are the major categories of
other operating expenses. Other operating expenses increased to $5.5 million for
the six months ended June 30, 1999 compared to $3.8 million for the six months
ended June 30, 1998. For the three months ended June 30, 1999, other operating
expenses increased to $2.8 million compared to $2.2 million for the three months
ended June 30, 1998. Subsequent to March 31, 1998, the Bank expanded its
operating territories for both SBA loan production as well as branch operations,
and has added two new product lines, aircraft lending and business manager. A
new branch was opened in Vista, California in August 1998, and two new loan
production offices ("LPOs") were opened during the latter half of 1998, one in
Sacramento and the other in Los Angeles, California. In addition, the Bank has
added commercial lenders to each of its three banking branches, and has expanded
mortgage operations with the addition of both originators and back office
personnel.
The efficiency ratio is the ratio of operating expenses to net interest
income plus non-interest income. A decline in the efficiency ratio indicates
a more efficient period, while an increase in the efficiency indicates a less
efficient period. The Company's efficiency ratio decreased to 77.9% for the
six months ended June 30, 1999 compared to 78.8% for the six months ended
June 30, 1998, and were 77.5% for the three months ended June 30, 1999
compared to 82.7% for the three months ended June 30, 1998. The majority of
the cost increase can be attributed to loan production and to the Bank's
growing balance sheet. Salary and benefit expenses increased to $3.1 million
for the six months ended June 30, 1999 compared to $2.1 million for the six
months ended June 30, 1998, and were $1.6 million for the three months ended
June 30, 1999 compared to $1.1 million for the three months ended June 30,
1998. The majority of the increase can be attributable to the Company's
expansion during 1998, discussed previously.
Occupancy, premises and equipment, data processing, professional services, and
other expenses increased to $554,000, $243,000, $362,000, $237,000 and $864,000,
respectively, for the six months ended June 30, 1999 compared to $357,000,
$144,000, $282,000, $173,000 and $644,000 for the six months ended June 30,
1998. Marketing an promotions expense declined to $114,000 for the six months
ended June 30, 1999 compared to $136,000 for the six months ended June 30, 1998.
For the three months ended June 30, 1999, occupancy, premises and
14
<PAGE>
equipment, data processing, professional services, and other expenses
increased to $283,000, $119,000, $181,000, $130,000 and $455,000,
respectively, compared to $194,000, $78,000, $136,000, $130,000 and $443,000
for the three months ended June 30, 1998. Marketing and promotions expense
declined to $55,000 for the three months ended June 30, 1999 compared to
$93,000 for the three months ended June 30, 1998. These increases in
operating expenses are a direct result of the implementation of the Bank's
strategic plan, including the addition of the new branch, two new LPOs and
the new product lines, along with the one time expense of $64,000 due to the
formation of the holding company which was incurred during the second quarter
of 1999.
PROVISION FOR INCOME TAXES
The effective income tax rate was 41.2% for the six months ended June 30, 1999
compared to 41.3% for the six months ended June 30, 1998, and was 41.1% for the
three months ended June 30, 1999 compared to 41.6% for the three months ended
June 30, 1998. Provisions for income taxes totaled $516,000 and $332,000 for the
six months ended June 30, 1999 and 1998, respectively, and were $267,000 and
$131,000 for the three months ended June 30, 1999 and 1998, respectively.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 COMPARED TO DECEMBER 31, 1998
Total assets of the Bank increased to $155.6 million as of June 30, 1999
compared to $136.2 million as of December 31, 1998 and $121.5 million as of
June 30, 1998. This increase was due to the growth in net loans to $110.7
million as of June 30, 1999, compared to $108.7 million as of December 31,
1998, and $89.3 million as of June 30, 1998.
Deposits grew to $139.9 million as of June 30, 1999 compared to $124.2
million as of December 31, 1998 and $110.3 million as of June 30, 1998. The
Bank opened a third branch in Vista, California in August 1998, and the
Bank's main office in Fallbrook, California obtained the largest market share
(percentage of FDIC insured deposits) in deposits as of June 30, 1998 for its
geographic territory. Federal funds sold increased to $20.8 million as of
June 30, 1999, compared to $10.3 million as of December 31, 1998, and were
$16.8 million as of June 30, 1998. The balance of Fed Funds varies with
changes in loan demand, origination volume and loan payoffs.
Shareholders' equity increased to $10.4 million as of June 30, 1999 compared to
$9.5 million as of December 31, 1998 and $8.6 million as of June 30, 1998.
Please refer to the capital section of this discussion for further information.
INVESTMENTS
The Bank's investment portfolio consists primarily of certificates of deposit
with other financial institutions, US Treasury and agency securities and
overnight investments in the Federal Funds market. As of June 30, 1999, December
31, 1998 and June 30, 1998, certificates of deposit with other financial
institutions were $800,000, of which $500,000 are securing the Employee Stock
Ownership Plan ("ESOP") loan from another California bank which is funding the
Bank's ESOP. As of June 30, 1999, the Company held $200,000 in US Treasury
Securities and $6.2 million in US Government and other securities compared to
$900,000 and $776,000,
15
<PAGE>
respectively, as of December 31, 1998. The additional $5.4 million investment in
U.S. Government and other securities have maturities ranging from 3 months to 5
years. As of June 30, 1998 the Company held $901,000 in US Treasury securities
and $5,000 in US Government and other securities. A portion of these securities
are held as collateral for public funds and treasury, tax and loan deposits.
Average Federal Funds sold for the three months ended June 30, 1999 was $14.5
million compared to $15.2 million for the three months ended June 30, 1998.
LOANS
Loan balances, net of the allowance for loan losses, increased to $110.7
million as of June 30, 1999 compared to $108.7 million as of December 31,
1998 and $89.3 million as of June 30, 1998. The growth was primarily in
construction loans, which was partially offset by a reduction in real estate
commercial and multi family loans. Demand for construction loans resulted in
a 67.5% annualized growth rate for the six months ended June 30, 1999,
including both residential and SBA portions. The Company sold $10.2 million
in unguaranteed portions of SBA loans during the six months ended June 30,
1999, for the purpose of liquidity and reducing concentrations in hotel
lending. The total servicing portfolio, which consists primarily of SBA loans
sold to other investors, being serviced by the Bank was $93.4 million as of
June 30, 1999 compared to $82.8 million as of December 31, 1998 and $73.2
million as of June 30, 1998.
LOAN ORIGINATION AND SALE. The following table sets forth the Bank's loan
originations by category and purchases, sales and principal repayments of loans
for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS AT OR FOR THETHREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $ 108,709 $ 73,884 $ 115,803 $ 80,799
Loans originated:
Commercial loans................................... 10,274 4,133 6,065 2,300
Real estate:
Construction loans................................ 24,761 15,846 16,227 6,825
One- to four-family............................... 25,882 12,310 11,297 8,682
Commercial........................................ 23,433 18,001 8,490 10,785
Consumer............................................ 2,326 1,123 1,069 727
-------------------------------------------------------------
Total loans originated............................ 86,676 51,413 43,148 29,319
Loans sold.............................................
Real estate:
One- to four-family.......................... 18,515 4,780 6,902 3,422
Commercial................................... 28,730 9,260 13,986 4,543
-------------------------------------------------------------
Total loans sold................................. 47,245 14,040 20,888 7,965
Less:
Principal repayments................................ 36,803 22,394 27,128 13,014
Other net changes1.................................. 631 (424) 229 (148)
-------------------------------------------------------------
Total loans:...................................... $ 110,706 $ 89,287 $ 110,706 $ 89,287
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
- --------------
(1) Other net changes include changes in allowance for loan losses, deferred
loan fees, loans in process and unamortized premiums and discounts.
NONPERFORMING ASSETS. Nonperforming assets consists of nonperforming loans and
other real estate owned ("OREO"). Nonperforming loans are those loans which have
(i) been placed on nonaccrual status, (ii) been subject to troubled debt
restructurings, or (iii) become contractually past due 90 days or more with
respect to principal or interest and have not been restructured or placed on
nonaccrual status.
16
<PAGE>
The following table sets forth the Bank's nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans..........................................$ 1,071 $ 969 $ 177
Troubled debt restructurings.............................. -- 723 724
Loans contractually past due 90 days or more with respect
to either principal or interest and still accruing
interest............................................. -- 203 465
-------- ------ -------
Total nonperforming loans............................ 1,071 1,895 1,366
Other real estate owned................................... -- -- 835
-------- -------- --------
Total nonperforming assets.............................. $1,071 $1,895 $2,201
-------- -------- --------
-------- -------- --------
Allowance for loan losses to total gross loans............ 1.13% 0.88% 0.81%
Allowance for loan losses to nonaccrual loans............. 120.07 102.37 425.99
Allowance for loan losses to nonperforming loans.......... 120.07 52.35 55.20
Allowance for loan losses to nonperforming assets......... 120.07 52.35 34.26
Total nonperforming assets to total assets................ 0.69 1.39 1.81
Total nonperforming loans to total gross loans............ 0.94% 1.68% 1.47%
</TABLE>
NONACCRUAL LOANS. Nonaccrual loans are impaired loans where the original
contractual amount may not be fully collectible. The Bank measures its impaired
loans by using the fair value of the collateral if the loan is
collateral-dependent and the present value of the expected future cash flows
discounted at the loan's effective interest rate if the loan is not
collateral-dependent. As of June 30, 1999, December 31, 1998 and June 30, 1998,
all impaired or nonaccrual loans were collateral-dependent. The Bank places
loans on nonaccrual status that are delinquent 90 days or more or when a
reasonable doubt exists as to the collectibility of interest and principal. The
Bank had six loans on nonaccrual status as of June 30, 1999, totaling $1.1
million. Of this total $166,000 is guaranteed by the SBA. As of December 31,
1998, the Bank had four loans on nonaccrual status, totaling $969,000, with
$293,000 guaranteed by the SBA. As of June 30, 1998 the Bank had three loans on
nonaccrual status, totaling $177,000 with $177,000 guaranteed by the SBA.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance is
increased by provisions charged against earnings and reduced by net loan
chargeoffs. Loans are charged off when they are deemed to be uncollectible, or
partially charged off when portions of a loan are deemed to be uncollectible.
Recoveries are generally recorded only when cash payments are received.
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual impaired
loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, nonaccrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
judgments which differ from those of management.
17
<PAGE>
The following table sets forth information regarding the Bank's allowance for
loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------------------
1999 1998
----------------------------------------
(dollars in thousands)
<S> <C> <C>
Balance at beginning of period................... $992 $650
Chargeoffs:
Real estate loans:
One- to four-family..................... -- 55
Commercial.............................. 19 72
Consumer.................................... 4 2
------- -------
Total chargeoffs........................ 23 129
Recoveries:
Real estate loans:
One- to four-family..................... -- --
Commercial.............................. 1 1
Consumer.................................... 1 1
------- -------
Total recoveries................. 2 2
------- -------
Net chargeoffs................................... 21 127
Provision for loan losses........................ 315 231
----- ------
Balance at end of period......................... $1,286 $754
------- -------
------- -------
Net charge offs to average loans (annualized).... 0.04% 0.30%
</TABLE>
As of June 30, 1999 the balance in the allowance for loan losses was $1.3
million compared to $754,000 as of June 30, 1998. As a percentage of total gross
loans the allowance was 1.13% as of June 30, 1999 compared to 0.81% as of June
30, 1998. Management believes the allowance at June 30, 1999 is adequate based
upon its ongoing analysis of the loan portfolio, historical loss trends and
other factors.
OTHER REAL ESTATE OWNED. The following table gives the major components of the
changes in OREO assets for the six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------------------
(dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ -- $ --
Additions -- 835
Sales -- --
---------------------------------
Balance at end of period $ -- $ 835
---------------------------------
---------------------------------
</TABLE>
CAPITAL
The Bank's capital increased $852,000 to $10.4 million as of June 30, 1999
compared to $9.5 million as of December 31, 1998. In 1997 the Bank implemented
an Employee Stock Ownership Plan which was funded with a $1.2 million line of
credit. As of June 30, 1999 the indebtedness of the ESOP in the amount of
$898,000 is shown as a deduction from shareholders' equity. In future years
capital will be increased as the unearned ESOP contributions are made by the
Bank. During the six month period ended June 30, 1999, the Bank repaid principal
totaling $102,000, and is planning to contribute approximately $192,000 annually
to this program.
As part of the Bank's strategic plan, during the third quarter of 1998 the Board
elected to eliminate cash dividends in favor of retaining earnings to support
future growth. The Bank declared a
18
<PAGE>
$114,000 dividend prior to this change in dividend policy during the three
months ended June 30, 1998. A 5% stock dividend was declared and paid to
shareholders of record as of November 30, 1998.
As of June 30, 1999, all Bank capital ratios were above all current Federal
capital guidelines for a "Well Capitalized" bank. As of June 30, 1999 and
December 31, 1998 the regulatory total capital to risk-weighted assets ratios
were 12.08% and 8.86%, respectively. The regulatory tier 1 capital to
risk-weighted assets ratio was 11.01% as of June 30, 1999 compared to 7.98% as
of December 31, 1998. The regulatory tier 1 capital to average assets ratio was
8.82% as of June 30, 1999 compared to 6.61% as of December 31, 1998. As part of
its strategic plan, a holding company was formed on June 25, 1999. The Company
obtained a $3.2 million loan from a correspondent bank, and invested $3.0
million of the proceeds into the Bank as additional paid in capital. The
Company's strategic plan addresses the future capital needs of the Bank through
increasing retained earnings and potential sources of additional capital such as
an equity offering and potential debt which qualifies for regulatory capital.
As of June 30, 1999, the Company's regulatory total capital to risk-weighted
assets ratio was 9.54%. The regulatory tier 1 capital to risk-weighted assets
ratio was 8.74% and the regulatory tier 1 capital to average assets ratio was
6.78%. The Company exceeded all minimum regulatory capital ratios as of June
30, 1999. The Company was formed on June 25, 1999, and therefore there are no
prior period capital ratios.
LIQUIDITY
The Bank closely monitors its liquidity so that the cash requirements for loans
and deposit withdrawals are met in an economical manner. Management monitors
liquidity in relation to trends of loans and deposits for short term and long
term requirements. Liquidity sources are cash, deposits with other banks,
overnight Federal Funds investments, unpledged interest bearing deposits at
other banks, investment securities and the ability to sell loans. As of June 30,
1999 liquid assets as a percentage of deposits were 18.7% compared to 13.4% as
of December 31, 1998.
The Company has borrowed $3.2 million from a correspondent bank, and has
reinvested $3.0 million into the Bank. The loan has provisions for interest only
payments on a quarterly basis for the first year, followed by a five year
amortization period. The Company relies on the Bank's cash dividends as its
source of repayment for the loan and other operating expenses. As of June 30,
1999, the Company had liquid assets of $143,000, or 41.4% of current
liabilities.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of Fallbrook National
Bank's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations. If the Bank or significant customers, suppliers or
other third parties fail to correct year 2000 issues, the Bank's ability to
operate could be affected. The Bank is addressing its year 2000 issues using a
five phase program. The five phases are awareness, assessment, renovation,
validation and implementation. A brief description of each phase and the Bank's
progress toward completing each phase follows.
The awareness phase identifies potential Year 2000 problems, develops an overall
strategy for addressing the issues, obtains support from the board of directors
and management, appoints a project team of employees to direct the Bank's
activities and implements an internal and external communication program to
raise awareness of the problems and issues. The Bank completed this phase as of
June 30, 1998.
19
<PAGE>
The assessment phase identifies all information technology systems such as
hardware, software, ATMs, and non-information technology systems such as alarm
and security systems and environmental controls that could be affected by a Year
2000 related issue. This phase also develops a system to evaluate and assess
borrower and vendor preparedness, including a tracking and monitoring system to
identify potential problems. The Bank has completed all of its information and
non-information technology system assessments. In addition, the Bank has
communicated with borrowers and vendors, established a monitoring system,
recorded responses and assigned risk factors. The Bank considers the Year 2000
risk factors associated with its borrowers when evaluating the adequacy of the
allowance for loan losses. This allocation process will be reviewed and revised
on a quarterly basis through at least the first quarter of 2000. Accordingly,
monitoring and communication with borrowers and vendors is ongoing.
The Bank has also made initial assessments of its liquidity position in relation
to the Year 2000 impact on large depositors and the deposit base, in general.
The Bank plans to review and appraise this issue on a quarterly basis and more
often commencing in the second quarter of 1999.
The renovation phase involves making the necessary information technology and
non-information technology changes and upgrades necessary to be Year 2000
compliant. The Bank has substantially completed this phase.
The validation phase is the testing phase. The Bank uses a third party data
processing vendor whose software is Year 2000 compliant. The Bank's testing
of mission critical systems was completed by March 31, 1999. As a part of the
validation phase, the Bank has prepared a contingency plan for each critical
system and product used by the Bank. The contingency plan describes how the
Bank will resume normal business operations if remediated systems do not
perform as planned either before or after the century date change.
Additionally, complete manual procedures for each mission critical function
will be in place by June 30, 1999. The business resumption portion of the
contingency plan will be validated according to FFIEC requirements. The
methodology for the validation was in place as of June 30, 1999 and the
testing of the contingency plan will be completed by September 30, 1999.
The implementation phase introduces system changes into an operating
environment. Once tested, year 2000 compliant systems are ready to be introduced
into the Bank's operating environment. This phase is substantially complete.
The Bank projects that total Year 2000 expenditures during 1999 will be
approximately $60,000, $40,000 of which has been spent during the six months
ended June 30, 1999. At this time, based on the assessments and testing to
date, the Bank does not foresee any Year 2000 issues that would materially
impair the Bank's ability to conduct business.
CASH DIVIDENDS
The Bank declared a $.05 per share cash dividend in the first and second quarter
of 1998, payable on April 1, 1998 with a record date of March 16, 1998 and
payable July 1, 1998 with a record date of June 14, 1998. Effective with the
third quarter of 1998, the Bank ceased paying cash dividends in favor of
retaining earnings to support future growth. The Bank declared a stock dividend
to shareholders of record as of November 30, 1998 which was paid on December 11,
1998.
It is anticipated that the Company will continue the policy of paying stock
dividends from time to time.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
20
<PAGE>
On February 26, 1998, Lewis Randall, a former employee of Fallbrook National
Bank filed a lawsuit in Riverside County (California) Superior Court seeking
monetary damages against the Bank in connection with the pay out of an
incentive program offered by the Bank in 1996. On July 19, 1999, a trial
commenced in connection with such suit.
On August 2nd, 1999, the jury rendered a decision in favor of the former
employee for approximately $815,000 (of which $750,000 is for punitive
damages) plus court and legal costs.
For addditional information, see Note 4 to the Financial Statements.
ITEM 2 CHANGES IN SECURITIES
On June 25, 1999, a holding company reorganization was completed pursuant to
a Plan of Reorganization and Agreement of Merger (a copy of which is attached
to the Company's 8-K Report of June 25, 1999) approved by Fallbrook National
Bank's shareholders on May 26, 1999. Pursuant to such holding company
reorganization,
Fallbrook National Bank became a wholly-owned subsidiary of
the Company, and
each share of common stock of Fallbrook National Bank
outstanding immediately prior to the reorganization was
converted into one share of common stock of the Company
There were a total of 2,411,685 shares of Company common stock issued in the
holding company reorganization and such stock began trading on the NASDAQ
National Market under the symbol "CMBC." Shares of Company common stock
issued in the holding company reorganization were issued pursuant to the
exemption provided in Section 3(a)(12) of the Securities Act of 1933. There
were no cash proceeds received by the Company in connection with the issuance
of such shares.
Shareholders of the Company have substantially the same rights that they had
with respect to their shares of Fallbrook National Bank, other than as
required by Delaware law.
The Company's Restated Certificate of Incorporation (filed as an Exhibit to
this Report) authorizes the issuance of up to 10,000,000 shares of Common
Stock, $0.625 par value.
Holders of the Company's common stock are entitled to one vote, in person or
by proxy, for each share held of record in the shareholder's name on the
books of the Company as of the record date on any matter submitted to the
vote of the shareholders, except that, in connection with the election of
directors, the shares are entitled to be voted cumulatively.
Each share of common stock has the same rights, privileges and preferences as
every other share and will share equally in the Company's net assets upon
liquidation or dissolution. The Company's common stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all of the
issued and outstanding shares of common stock, when issued, will be fully
paid and nonassessable.
The Company's shareholders are entitled to dividends when, as and if declared
by the Company's Board of Directors out of funds legally available therefor
and after satisfaction of the prior rights of holders of outstanding
preferred stock, if any (subject to certain restrictions on
21
<PAGE>
payment of dividends imposed by the laws of Delaware).
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None to report
ITEM 4 SUBMISSION OF MATTERS TO SECURITY HOLDERS
On May 26, 1999, the Company's subsidiary, Fallbrook National Bank, held its
annual meeting of shareholders.
At such meeting, shareholders of the Bank were asked to vote upon the
formation of the Company and the Plan of Reorganization and Agreement of
Merger, (a copy of which is attached to the Company's 8-K Report of June 25,
1999) pursuant to which:
the Bank became a wholly-owned subsidiary of the Company, and
each share of common stock of the Bank outstanding immediately
prior to the reorganization was converted into one share of
common stock of the Company.
The number of shares voted in favor of the holding company reorganization was
1,703,517 with 243,105 shares voting against and 12,106 shares abstaining. The
holding company reorganization was completed on June 25, 1999. Thereafter, the
common stock of the Company began trading on the NASDAQ National Market under
the symbol "CMBC."
At the annual meeting, the shareholders of the Bank also elected the
following directors:
<TABLE>
<CAPTION>
Shares Voted:
-----------------------------------
Names For Withheld
- ----- --- --------
<S> <C> <C>
Merril J. Crow 2,141,011 87,306
Granger Haugh 2,192,103 36,214
Roy B. Hiscock 2,140,999 87,318
Robert H. S. Kirkpatrick 2,192,208 36,109
E. Steve LeFevre 2,171,565 56,752
Philip D. Oberhansley 2,192,313 63,724
Corey A. Seale 2,167,563 60,754
Thomas E. Swanson 2,190,633 65,404
Gordon T. Tucker 2,171,355 56,962
Gary M. Youmans 2,192,313 63,724
</TABLE>
All the foregoing persons also became directors of the Company.
ITEM 5 OTHER INFORMATION
None to report
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
3.1 Restated Certificate of Incorporation
3.2 Bylaws
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
On June 25, 1999, the Company filed an 8-K Report pursuant to item 5 of
such form. The Report concerned the holding company reorganization (as
discussed in Item 2 and 4 of this Report) and had the effect of
registering the common stock of the Company pursuant to Section 12(g)
of the Securities Exchange Act of 1934. As such, the Company became the
"successor registrant" to its subsidiary, Fallbrook National Bank,
which previously filed reports pursuant to the Securities Exchange Act
of 1934 with the Comptroller of the Currency.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Community Bancorp Inc.
----------------------
(Registrant)
Date August 13, 1999 /s/ Thomas E. Swanson
--------------- ----------------------
Thomas E. Swanson
President and Chief Executive Officer
Date August 13, 1999 /s/ L. Bruce Mills, Jr.
--------------- ------------------------
L. Bruce Mills, Jr.
Sr. Vice President, Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
3.1 Restated Certificate of Incorporation
3.2 Bylaws
27 Financial Data Schedule
</TABLE>
25
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE PAGE 1
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "COMMUNITY BANCORP INC.", FILED IN THIS OFFICE ON THE NINTH
DAY OF JUNE, A.D. 1999, AT 12:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ Edward J. Freel
------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2999936 8100 AUTHENTICATION: 9794034
991231392 DATE: 06-09-99
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
COMMUNITY BANCORP INC.
INCORPORATED MARCH 11, 1999
**********
PURSUANT TO SECTION 245 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
WE, THE UNDERSIGNED, Thomas E. Swanson, President, and L. Bruce Mills, Jr.,
Secretary, of Community Bancorp Inc. do hereby certify:
A. That the Certificate of Incorporation of Community Bancorp Inc. is
amended and restated in full to read as follows:
"1. The name of this corporation is:
COMMUNITY BANCORP INC.
2. The address of its registered office in the State of Delaware is
One Rodney Square, 10th Floor, 10th & King Streets, Wilmington, Delaware 19801
(New Castle County). The name of its registered agent at such address is RL&F
Service Corp.
3. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
4. The total number of shares of common stock which the corporation
shall have authority to issue is ten million (10,000,000) and the par value of
each of such shares is sixty-two and one half cents ($0.625) amounting in the
aggregate to six million two hundred and fifty thousand dollars ($6,250,000).
The holders of the common stock shall have no preemptive rights to subscribe for
any shares of any class of stock of the corporation whether now or hereafter
authorized.
5. The name and mailing address of the incorporator is as follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Thomas E. Swanson Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, CA. 92028
</TABLE>
6. The corporation is to have perpetual existence.
7. (a) The number of directors constituting the entire board of
directors shall be
<PAGE>
not less than three (3) nor more than twenty-five (25) as fixed from time to
time by vote of a majority of the entire board of directors; provided,
however, that the number of directors shall not be reduced as to shorten the
term of any director at the time in office, and provided further, that the
number of directors constituting the entire board of directors shall be ten
(10) until otherwise fixed by a majority of the entire board of directors.
(b) Directors shall be elected annually. Cumulative voting
shall apply in the election of directors. Any vacancies in the board of
directors for any reason, and any directorships resulting from any increase in
the number of directors, may be filled by the board of directors, acting by a
majority of the directors then in office, although less than a quorum, and any
directors so chosen shall hold office until their successors shall be elected
and qualified.
(c) Nominations for election to the board of directors of the
corporation may be made by the board of directors or by any stockholder of any
outstanding class of capital stock of the corporation entitled to vote for the
election of directors. Nominations, other than those made by the board of
directors, shall be made in writing and shall be delivered or mailed to the
president of the corporation, not less than 45 days nor more than 90 days prior
to any meeting of stockholders called for the election of directors, provided,
however, that if less than 45 days' notice of the meeting is given to
stockholders, such nomination shall be mailed or delivered to the president of
the corporation not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed. Such notification
shall contain the following information: (i) the name and address of each
proposed nominee; (ii) the principal occupation of each proposed nominee; (iii)
the consent, in writing, of each nominee to serve, if elected; (iv) any other
information relating to such nominee that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended; (v) the name and residence address of the notifying stockholder; and
(vi) the number of shares of capital stock of the corporation owned by the
notifying stockholder. Nominations not made in accordance herewith shall be
disregarded by the chairperson of the meeting, and upon his/her instructions,
the inspectors of election shall disregard all votes cast for each such nominee.
8. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide. Meetings of stockholders may be
held within or without the State of Delaware, as the by-laws may provide. The
books of the corporation may be kept (subject to any provision contained in the
statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the board of directors or in the by-laws of the
corporation.
9. (a) Except as otherwise expressly provided in this Article 9,
the affirmative vote of the holders of at least 66 2/3% of the shares entitled
to vote thereon (and, if any class or series of shares is entitled to vote
thereon separately, the affirmative vote of the holders of at least 66 2/3% of
the outstanding shares of each such class or series) shall be required in order
to authorize any of the following:
(i) any merger or consolidation of the corporation with or into
another entity;
<PAGE>
(ii) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security
device, of all or any Substantial Part (as hereinafter defined)
of the assets of the corporation (including without limitation
any voting securities of a subsidiary) or of a subsidiary; and
(iii) any agreement, contract or other arrangement providing for any
of the transactions described in subparagraphs (i) - (ii).
The term "Business Combination" as used in this Article 9 shall mean any
transaction which is referred to in any one or more of subparagraphs (i) -
(iii), above. The term "Substantial Part" shall mean more than 25% of the total
assets of the corporation, as of the end of its most recent fiscal year ending
prior to the time the determination is made. The affirmative vote referred to
in this paragraph (a) shall be required notwithstanding any other provision of
this Certificate of Incorporation (except paragraph (b) of this Article), any
provision of law, or any agreement with any regulatory agency or national
securities exchange which might otherwise permit a lesser vote or no vote.
(b) The provisions of paragraph (a) shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by any other provision of this
Certificate of Incorporation, any provision of law, or any agreement with any
regulatory agency or national securities exchange, if the Business Combination
shall have been approved by a vote of not less than 66 2/3% of the board of
directors of the corporation.
10. No action required to be taken or which may be taken at any
annual or special meeting of stockholders of the corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically limited to those actions
to which all stockholders consent in writing.
11. Special meetings of the stockholders may be called by the board
of directors of the corporation or the president of the corporation or by the
holders of not less than 25% of the outstanding shares of stock entitled to vote
upon the election of directors generally.
12. (a) The corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding
the foregoing or any other provisions of this Certificate of Incorporation or
the by-laws of the corporation (and in addition to any other vote that may be
required by law, this Certificate of Incorporation or the by-laws), the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
the capital stock of the corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) shall be required to
amend, alter or repeal any provision of Article 9 or 12 of this Certificate of
Incorporation.
(b) All of the powers of this corporation, insofar as the
same may be lawfully vested by this Certificate of Incorporation in the board of
directors, are hereby conferred
<PAGE>
upon the board of directors of this corporation. In furtherance and not in
limitation of that power the board of directors shall have the power to make,
adopt, alter, amend and repeal from time to time by-laws made by the board of
directors; provided, however, that by-laws shall not be adopted, altered,
amended or repealed by the stockholders of the corporation except by the vote
of the holders of not less than a majority of the outstanding shares of stock
entitled to vote upon the election of directors.
13. A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction form which the director derived any improper
personal benefit."
B. That the Board of Directors of Community Bancorp Inc. has approved and
adopted the foregoing amendment and restatement of the Certificate of
Incorporation in accordance with Section 245 of Delaware General Corporation
Law.
C. That the stockholders of Community Bancorp have unanimously approved
and adopted the foregoing amendment and restatement of the Certificate of
Incorporation at a meeting held on May 19, 1999 in accordance with Sections 242
and 245 of Delaware General Corporation Law.
IN WITNESS WHEREOF, we have hereunto set our hands and seals this 4th day
of June, 1999 and hereby declare and certify that this is our act and deed and
the facts herein stated are true and correct.
/s/ Thomas E. Swanson
-------------------------
Thomas E. Swanson
President
/s/ L. Bruce Mills, Jr.
-------------------------
L. Bruce Mills, Jr.
Secretary
<PAGE>
BYLAWS
OF
COMMUNITY BANCORP INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1 DELAWARE OFFICE. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is RL&F Service Corp.,
Tenth Floor, One Rodney Square, Tenth and King Streets, Wilmington, Delaware.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time to
time require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's headquarters or at such other
locations outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or these Bylaws.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of
the Corporation shall be held at such date, place and/or time as may be fixed by
resolution of the Board of Directors.
SECTION 2.2 SPECIAL MEETING. Special meetings of the stockholders may
be called by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which the Corporation would have if
there were no vacancies (the "Entire Board"), or by the President of the
Corporation, or by the holders of not less than 25% of the outstanding shares of
stock entitled to vote upon the election of directors generally.
SECTION 2.3. PLACE OF MEETING. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation.
SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the
place, day and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be prepared and delivered by the Corporation not less
than ten days nor more than sixty days before the date of the meeting, either
personally, or by mail, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail with
<PAGE>
postage thereon prepaid, addressed to the stockholder at his or her address
as it appears on the stock transfer books of the Corporation. Such further
notice shall be given as may be required by law. Meetings may be held without
notice if all stockholders entitled to vote are present (except as otherwise
provided by law), or if notice is waived by those not present. Any previously
scheduled meeting of the stockholders may be postponed and (unless the
Certificate of Incorporation otherwise provides) any special meeting of the
stockholders may be canceled, by resolution of the Board of Directors upon
public notice given prior to the time previously scheduled for such meeting
of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by
law or by the Certificate of Incorporation, the holders of a majority of the
voting power of the outstanding shares of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock"), represented in
person or by proxy, shall constitute a quorum at a meeting of stockholders,
except that when specified business is to be voted on by a class or series
voting separately as a class or series, the holders of a majority of the voting
power of the shares of such class or series shall constitute a quorum for the
transaction of such business. The chairman of the meeting or a majority of the
shares of Voting Stock so represented may adjourn the meeting from time to time,
whether or not there is such a quorum (or, in the case of specified business to
be voted on by a class or series, the chairman or a majority of the shares of
such class or series so represented may adjourn the meeting with respect to such
specified business). No notice of the time and place of adjourned meetings need
be given except as required by law. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder
may vote by proxy executed in writing by the stockholder or as may be permitted
by law, or by his or her duly authorized attorney-in-fact. Such proxy must be
filed with the Secretary of the Corporation or his or her representative at or
before the time of the meeting.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting delivered
pursuant to Section 2.4 of these Bylaws, (b) by or at the direction of the Board
of Directors, or (c) by any stockholder of any class of capital stock of the
Corporation entitled to vote for the election of directors, who complied with
the notice procedures set forth in clause (2) of this paragraph (A) of this
Bylaw and who was a stockholder of record at the time such notice is delivered
to the President of the Corporation.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the President of the Corporation and such other business must otherwise be a
proper matter for stockholder action. Nominations not made in accordance
2
<PAGE>
herewith shall be disregarded by the chairperson of the meeting, and upon his or
her instructions, the inspectors of election shall disregard all votes cast for
each such nominee. To be timely, a stockholder's notice shall be delivered or
mailed to the President at the principal executive offices of the Corporation,
not less than forty-five (45) days nor more than ninety (90) days prior to any
meeting of stockholders called for the election of directors; PROVIDED, HOWEVER,
that if less than forty-five (45) days' notice of the meeting is given to
stockholders, such nomination shall be mailed or delivered to the President of
the Corporation not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director (i) the name and address of
each proposed nominee, (ii) the principal occupation of each proposed nominee,
(iii) the consent, in writing, of each nominee to serve, if elected, (iv) any
other information relating to such nominee that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended, (v) the name and residence address of the notifying stockholder, and
(vi) the number of shares of capital stock of the Corporation owned by the
notifying stockholder; (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner. In no event shall the public announcement of an adjournment of
an annual meeting commence a new time period for the giving of a stockholder's
notice as described above.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting pursuant to Section
2.4 of these Bylaws. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation's notice of meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors, who complies with the notice procedures set forth in this
Bylaw and who is a stockholder of record at the time such notice is delivered to
the Secretary of the Corporation. In no event shall the public announcement of
an adjournment of a special meeting commence a new time period for the giving of
a stockholder's notice as described above.
(C) GENERAL. (1) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
these Bylaws. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this Bylaw and, if any proposed nomination or business
3
<PAGE>
is not in compliance with this Bylaw, to declare that such defective proposal
or nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS. Election of directors
at all meetings of the stockholders at which directors are to be elected shall
be by written ballot, and, a plurality of the votes cast thereat shall elect
directors. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all matters other than the election of directors submitted to
the stockholders at any meeting shall be decided by the affirmative vote of a
majority of the voting power of the outstanding Voting Stock present in person
or represented by proxy at the meeting and entitled to vote thereon.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
(A) The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the General Corporation Law of the State of
Delaware.
(B) The chairman of the meeting shall fix and announce at the meeting
the date and time of the opening and the closing of the polls for each matter
upon which the stockholders will vote at a meeting.
SECTION 2.10. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. No action
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, and the power of
the stockholders to consent in writing, without a
4
<PAGE>
meeting, to the taking of any action is specifically limited to those actions
to which all stockholders consent in writing.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In addition to the powers and authorities by these Bylaws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not
by law, by the Certificate of Incorporation or by these Bylaws required to be
exercised or done by the stockholders.
SECTION 3.2. NUMBER, TENURE AND QUALIFICATIONS. The number of
directors shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the Entire Board, but shall consist of
not more than 25 nor less than 3 directors.
SECTION 3.3. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board, the
President or a majority of the Board of Directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the
place and time of the meetings.
SECTION 3.4. NOTICE. Notice of any special meeting shall be given to
each director at his or her business or residence in writing or by telegram
or by telephone communication. If mailed, such notice shall be deemed
adequately delivered when deposited in the United States mails so addressed,
with postage thereon prepaid, at least five days before such meeting. If by
telegram, such notice shall be deemed adequately delivered when the telegram
is delivered to the telegraph company at least twenty-four hours before such
meeting. If by facsimile transmission, such notice shall be transmitted at
least twenty-four hours before such meeting. If by telephone, the notice
shall be given at least twelve hours prior to the time set for the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice of
such meeting, except for amendments to these Bylaws as provided under Section
8.1 of Article VIII hereof. A meeting may be held at any time without notice
if all the directors are present (except as otherwise provided by law) or if
those not present waive notice of the meeting in writing, either before or
after such meeting.
SECTION 3.5. CONFERENCE TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
5
<PAGE>
SECTION 3.6. QUORUM. A whole number of directors equal to at least a
majority of the Entire Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
SECTION 3.7. VACANCIES. Unless the Board of Directors otherwise
determines, vacancies resulting from death, resignation, retirement,
disqualification, removal from office or other cause, and newly created
directorships resulting from any increase in the authorized number of directors,
may be filled only by the affirmative vote of a the board of directors, acting
by a majority of the directors then in office, although less than a quorum, and
any directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen and until their successors shall
be elected and qualified. No decrease in the number of authorized directors
constituting the Entire Board shall shorten the term of any incumbent director.
SECTION 3.8. COMMITTEES.
(A) The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he/she or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
(B) Unless the Board of Directors otherwise provides, each committee
designated by the Board of Directors may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of Directors conducts its
business pursuant to these Bylaws.
SECTION 3.9. REMOVAL. Notwithstanding any provisions of the Certificate
of Incorporation or these Bylaws (and notwithstanding the fact that some lesser
percentage may be specified by law, the Certificate of Incorporation or these
Bylaws), any director or the Entire Board may be removed at any time, but only
for cause and only by the affirmative vote of the holders of a majority or more
of the outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose; provided,
however, that if less than the Entire Board is to be removed, no director may be
removed without cause if the votes cast against such director's removal would be
sufficient to elect such director if then cumulatively voted at an election of
the Entire Board, or, if there be classes of directors, at an election of the
class of directors of which such director is part.
6
<PAGE>
ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation
shall be a Chairman of the Board, a President, a Secretary, a Treasurer, and
such other officers as the Board of Directors from time to time may deem proper.
The Chairman of the Board shall be chosen from the directors. All officers
chosen by the Board of Directors shall each have such powers and duties as
generally pertain to their respective offices, subject to the specific
provisions of this Article IV. Such officers shall also have powers and duties
as from time to time may be conferred by the Board of Directors or by any
committee thereof.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to Section
4.7 of these Bylaws, each officer shall hold office until his or her successor
shall have been duly elected and shall have qualified or until his or her death
or until he/she shall resign.
SECTION 4.3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the stockholders and of the Board of Directors.
SECTION 4.4. PRESIDENT. The President shall act in a general executive
capacity and shall be responsible for the general management of the affairs of
the Corporation and shall perform all duties incidental to his or her office
which may be required by law and all such other duties as are properly required
of him/her by the Board of Directors. He/she shall make reports to the Board of
Directors and the stockholders, and shall perform all such other duties as are
properly required of him/her by the Board of Directors. He/she shall see that
all orders and resolutions of the Board of Directors and of any committee
thereof are carried into effect. The President shall, in the absence of or
because of the inability to act of the Chairman of the Board, perform all duties
of the Chairman of the Board and preside at all meetings of stockholders and of
the Board of Directors. The President may sign, alone or with the Secretary, or
an Assistant Secretary, or any other proper officer of the Corporation
authorized by the Board of Directors, certificates, contracts, and other
instruments of the Corporation as authorized by the Board of Directors.
SECTION 4.5. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors and all other notices
required by law or by these Bylaws, and in case of his or her absence or refusal
or neglect so to do, any such notice may be given by any person thereunto
directed by the Chairman of the Board or the President, or by the Board of
Directors, upon whose request the meeting is called as provided in these Bylaws.
He/she shall record all the proceedings of the meetings of the Board of
Directors, any committees thereof and the stockholders of the Corporation in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned to him/her by the Board of Directors, the Chairman of the Board or the
President. He/she shall have the custody of the seal of the Corporation and
shall affix the same to all
7
<PAGE>
instruments requiring it, when authorized by the Board of Directors, the
Chairman of the Board or the President, and attest to the same.
SECTION 4.6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all moneys and other valuables in the name and to the credit of the Corporation
in such depositaries as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, the Chairman of the Board, or the President, taking proper
vouchers for such disbursements. The Treasurer shall render to the Chairman of
the Board, the President and the Board of Directors, whenever requested, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond for the faithful discharge of his or
her duties in such amount and with such surety as the Board of Directors shall
prescribe.
SECTION 4.7. REMOVAL. Any officer elected by the Board of Directors may
be removed by the Board of Directors whenever, in their judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his or her successor, his or
her death, his or her resignation or his or her removal, whichever event shall
first occur, except as otherwise provided in an employment contract or an
employee plan.
SECTION 4.8. VACANCIES. A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS.
(A) The interest of each stockholder of the Corporation shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Corporation may from time to time prescribe. The shares of the
stock of the Corporation shall be transferred on the books of the Corporation by
the holder thereof in person or by his or her attorney, upon surrender for
cancellation of certificates for the same number of shares, with an assignment
and power of transfer endorsed thereon or attached thereto, duly executed, and
with such proof of the authenticity of the signature as the Corporation or its
agents may reasonably require.
(B) The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who
8
<PAGE>
has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (an "Indemnitee") who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he or she, or a
person for whom he or she is the legal representative, is or was a director or
officer of the Corporation or, while a director or officer of the Corporation,
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust, enterprise or nonprofit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Indemnitee.
Notwithstanding the preceding sentence, except as otherwise provided in Section
6.3, the Corporation shall be required to indemnify an Indemnitee in connection
with a proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors of the Corporation.
SECTION 6.2. PREPAYMENT OF EXPENSES. The Corporation shall pay the
expenses (including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, PROVIDED, HOWEVER, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise.
SECTION 6.3. CLAIMS. If a claim for indemnification or payment of
expenses under this Article VI is not paid in full within sixty days after a
written claim therefor by the Indemnitee has been received by the Corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the Indemnitee is not entitled to the requested indemnification
or payment of expenses under applicable law.
SECTION 6.4. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders
or disinterested directors or otherwise.
SECTION 6.5. OTHER SOURCES. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer,
9
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust,
enterprise or nonprofit entity shall be reduced by any amount such Indemnitee
may collect as indemnification or advancement of expenses from such other
corporation, partnership, joint venture, trust, enterprise or nonprofit
enterprise.
SECTION 6.6. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
SECTION 6.7. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This
Article VI shall not limit the right of the Corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Indemnitees when and as authorized by appropriate corporate action.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall
begin on the first day of January and end on the thirty-first day of December of
each year.
SECTION 7.2. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Certificate of
Incorporation.
SECTION 7.3. SEAL. The corporate seal shall have inscribed the name of
the Corporation thereon and shall be in such form as may be approved from time
to time by the Board of Directors.
SECTION 7.4. WAIVER OF NOTICE. Whenever any notice is required to be
given to any stockholder or director of the Corporation under the provisions of
the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders of the Board of Directors need be
specified in any waiver of notice of such meeting.
SECTION 7.5. AUDITS. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be made annually.
SECTION 7.6. RESIGNATIONS. Any director or any officer, whether elected
or appointed, may resign at any time by serving written notice of such
resignation on the Chairman of the Board, the
10
<PAGE>
President or the Secretary, and such resignation shall be deemed to be
effective as of the close of business on the date said notice is received by
the Chairman of the Board, the President, or the Secretary or at such later
date as is stated therein. No formal action shall be required of the Board of
Directors or the stockholders to make any such resignation effective.
SECTION 7.7. CONTRACTS. Except as otherwise required by law, the
Certificate of Incorporation or these Bylaws, any contracts or other instruments
may be executed and delivered in the name and on the behalf of the Corporation
by such officer or officers of the Corporation as the Board of Directors may
from time to time direct. Such authority may be general or confined to specific
instances as the Board may determine. The Chairman of the Board, the President
or any Vice President may execute bonds, contracts, deeds, leases and other
instruments to be made or executed for or on behalf of the Corporation. Subject
to any restrictions imposed by the Board of Directors or the Chairman of the
Board, the President or any Vice President of the Corporation may delegate
contractual powers to others under his or her jurisdiction, it being understood,
however, that any such delegation of power shall not relieve such officer of
responsibility with respect to the exercise of such delegated power.
SECTION 7.8. PROXIES. Unless otherwise provided by resolution adopted
by the Board of Directors, the Chairman of the Board, the President or any Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes which the Corporation may be entitled to cast as the holder of stock
or other securities in any other corporation or other entity, any of whose stock
or other securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation or other entity, or
to consent in writing, in the name of the Corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
SECTION 8.1. AMENDMENTS. These Bylaws may be adopted, altered, amended,
or repealed at any meeting of the Board of Directors or of the stockholders,
provided notice of the proposed change was given in the notice of the meeting
and, in the case of a meeting of the Board of Directors, in a notice given no
less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER, that,
notwithstanding any other provisions of these Bylaws or any provision of law
which might otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of the stock
required by law, the Certificate of Incorporation or these Bylaws, the Bylaws
shall not be adopted, altered, amended or repealed by the stockholders of the
Corporation except by the vote of the holders of not less than a majority of the
outstanding shares of stock entitled to vote upon the election of directors.
11
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