<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 SEPTEMBER 30, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ______________.
COMMISSION FILE NO. 000 - 26505
COMMUNITY BANCORP INC.
(Exact name of registrant as specified in its charter)
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 September 30,
2000: 2,544,257
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [x]
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMMUNITY BANCORP INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
(UNAUDITED) 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 26,923 $ 15,376
Interest bearing deposits in financial institutions 784 800
Federal Reserve Bank stock 253 253
Investment securities held-to-maturity, at amortized cost 6,220 6,710
Loans held for investment 212,481 142,667
Less allowance for loan losses (1,823) (1,327)
---------- ---------
Net loans held for investment 210,658 141,340
Loans held for sale 13,566 2,854
Premises and equipment, net 2,278 2,392
Accrued interest and other assets 3,836 2,957
Deferred tax asset 744 744
Servicing asset, net 1,566 1,796
Interest-only strip, at fair value 494 551
---------- ---------
Total Assets $ 267,322 $ 175,773
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 207,728 $ 129,795
Non-interest bearing 33,486 28,337
---------- ---------
Total deposits 241,214 158,132
Other borrowings 10,967 3,971
Accrued expenses and other liabilities 3,389 2,333
---------- ---------
Total liabilities 255,570 164,436
SHAREHOLDERS' EQUITY
Common stock, $0.625 par value; authorized 10,000,000 shares, issued and
outstanding, 2,544,000 at September 30, 2000 and
2,537,000 at December 31, 1999 1,590 1,585
Additional paid-in capital 4,733 4,713
Unearned ESOP contribution (967) (796)
Retained earnings 6,401 5,835
Treasury stock, at cost - 883 shares (5) -
---------- ---------
Total shareholders' equity 11,752 11,337
---------- ---------
Total Liabilities and Shareholders' Equity $ 267,322 $ 175,773
========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS FOR THE THREE MONTHS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(UNAUDITED) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $13,687 $8,874 $5,501 $3,033
Interest on cash equivalents 542 416 197 183
Interest on interest bearing deposits in financial institutions 37 30 13 10
Interest on investment securities 303 167 100 105
------- ------ ------ ------
TOTAL INTEREST INCOME 14,569 9,487 5,811 3,331
------- ------ ------ ------
Interest expense on deposits 5,847 2,875 2,360 1,021
Interest expense on other borrowed money 736 138 312 95
------- ------ ------ ------
TOTAL INTEREST EXPENSE 6,583 3,013 2,672 1,116
------- ------ ------ ------
Net interest income before provision for loan losses 7,986 6,474 3,139 2,215
Provision for loan losses 537 385 200 70
------- ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,449 6,089 2,939 2,145
Other operating income:
Customer service charges 317 282 98 104
Other fee income 707 989 255 324
Net gain on sale of loans 127 1,844 34 131
Loan servicing fees, net 486 432 163 162
------- ------ ------ ------
TOTAL OTHER OPERATING INCOME 1,637 3,547 550 721
------- ------ ------ ------
Other operating expenses:
Salaries and employee benefits 4,187 4,555 1,559 1,410
Occupancy 623 635 224 208
Telephone 206 194 75 67
Premises and equipment 422 376 137 133
Marketing and promotions 239 174 87 19
Data processing 617 562 207 200
Professional services 522 403 170 166
Director, officer and employee expenses 369 367 130 123
Office expenses 240 277 86 88
ESOP loan expense 154 153 52 51
Other non-recurring expense 69 362 69 342
Other expenses 474 395 137 127
------- ------ ------ ------
TOTAL OTHER OPERATING EXPENSES 8,122 8,453 2,933 2,934
------- ------ ------ ------
Income before income taxes 964 1,183 556 (68)
Income taxes 397 488 230 (28)
------- ------ ------ ------
NET INCOME $ 567 $ 695 $ 326 $ (40)
======= ====== ====== =======
COMPREHENSIVE INCOME $ 567 $ 695 $ 326 $ (40)
======= ====== ====== =======
Basic earnings per share $ 0.24 $ 0.29 $ 0.14 $(0.02)
Diluted earnings per share $ 0.23 $ 0.28 $ 0.13 $(0.02)
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE NINE MONTHS
(UNAUDITED) ENDED SEPTEMBER 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 567 $ 695
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 413 1,116
Provision for loan losses 537 385
Net gain on sale of loans (127) (1,844)
Loans originated for sale (23,498) (61,209)
Unrealized gain on interest-only strips (2) -
Capitalization of interest-only strips - (7)
Amortization of interest-only strips 59 165
Capitalization of servicing asset - (390)
Amortization of servicing asset 199 263
Writedown of servicing asset 31 420
Proceeds from sale of loans 12,915 57,732
Increase in accrued interest and other assets (879) (564)
Increase (decrease) in accrued expenses and other liabilities 1,056 (327)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (8,729) (3,565)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (69,727) (12,968)
Net maturities of interest bearing time deposits 16 -
Maturities of securities held-to-maturity 500 900
Purchase of securities held-to-maturity (6) (5,963)
Net additions to premises and equipment (305) (387)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (69,522) (18,418)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits:
Interest bearing 77,933 11,518
Non-interest bearing 5,149 4,380
Purchase of treasury stock (5) -
Exercise of stock options 25 32
Repayment of line of credit (3,329) (153)
Advances to ESOP 325 -
Proceeds from other borrowings 9,700 3,175
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 89,798 18,952
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,547 (3,031)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 15,376 $ 16,314
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,923 $ 13,283
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
COMMUNITY BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION:
The interim financial statements included herein have been prepared by
Community Bancorp Inc. without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). The interim financial
statements include Community Bancorp Inc. and its wholly owned subsidiaries
Community National Bank (formerly Fallbrook National Bank) (the "Bank") and
Community (CA) Capital Trust I (the "Trust"), (collectively, the "Company")
as consolidated with the elimination of all intercompany transactions.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America, 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 the Company's
latest Annual Report as found on Form 10KSB. 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 September 30, 2000, have been included. Certain reclassifications may
have been made to prior year amounts to conform to the 2000 presentation. The
results of operations for interim periods are not necessarily indicative of
results for the full year.
On October 10, 2000, Fallbrook National Bank, subsidiary of Community Bancorp
Inc., officially changed its name to Community National Bank.
NOTE 2 LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES:
A summary of loans as of September 30, 2000 and December 31, 1999 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------------
(dollars in thousands)
<S> <C> <C>
Construction loans $ 43,742 $ 27,661
Real estate one- to four-family 28,577 21,601
Real estate commercial and multi-family 106,939 61,263
Consumer home equity lines of credit 2,567 2,649
Consumer other 11,544 9,342
Aircraft 23,124 17,113
Commercial 9,556 6,064
-------------- ----------------
Total gross loans 226,049 145,693
Deferred loan fees 703 688
Discounts on unguaranteed portion of loans retained (705) (860)
Allowance for loan losses (1,823) (1,327)
-------------- ----------------
Net loans $ 224,224 $ 144,194
============== ================
</TABLE>
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
5
<PAGE>
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:
Starting in the first quarter of 2000, the Company changed its policy to hold
to maturity the guaranteed portion of SBA 7a loans. In the past, the Company
generated 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 retained 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
September 30, 2000, 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.
NOTE 4 CONTINGENCIES:
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. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
NOTE 5 FORMATION OF HOLDING COMPANY:
The Company was formed through a holding company reorganization of the Bank,
wherein the Bank became the wholly owned subsidiary of the Company as of June
25, 1999. The transaction was based on a one for one exchange of shares of
Bank stock for shares of common stock of the Company, and was not considered
a taxable event for IRS purposes. Such business combination was accounted for
at historical cost, similar to a pooling of interest. All references to
periods prior to September 30, 1999 are references to financial statements of
the Bank.
6
<PAGE>
NOTE 6 EARNINGS PER SHARE
The following tables are a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the net earnings for the
Company (dollars in thousands, except share data):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------- ----------------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- -------------- ------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $567 $ 695
=============== ===============
Basic EPS Earnings available
to common shareholders $567 2,406,691 $ 0.24 $ 695 2,399,648 $ 0.29
Effect of Dilutive Securities
Options - 38,711 - 58,242
--------------- -------------- ------------ --------------- -------------- ---------------
Diluted EPS Earnings
Available to common
Shareholders plus assumed
Conversions $567 2,445,402 $ 0.23 $ 695 2,457,890 $ 0.28
=============== ============== ============ =============== ============== ===============
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------- ----------------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- -------------- ------------ --------------- -------------- ---------------
Net Earnings $326 $ (40)
=============== ===============
Basic EPS Earnings available
to common shareholders $326 2,382,710 $ 0.14 $ (40) 2,402,999 $ (0.02)
Effect of Dilutive Securities
Options - 48,282 - 58,534
--------------- -------------- ------------ --------------- -------------- ---------------
Diluted EPS Earnings
Available to common
shareholders plus assumed
conversions $326 2,430,992 $ 0.13 $ (40) 2,461,533 $ (0.02)
=============== ============== ============ =============== ============== ===============
</TABLE>
7
<PAGE>
NOTE 7 SEGMENT INFORMATION
The following disclosure about segments of the Company is made in accordance
with the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company changed its internal reporting in 1999, and now
segregates its operations into two primary segments: Banking Division and SBA
Lending Division. The Company determines operating results of each segment
based on an internal management system that allocates certain expenses to
each.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------
BANKING SMALL BUSINESS TOTAL BANKING SMALL BUSINESS TOTAL
DIVISION ADMINISTRATION COMPANY DIVISION ADMINISTRATION COMPANY
LENDING LENDING
DIVISION DIVISION
("SBA") ("SBA")
-----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 10,795 $ 3,774 $ 14,569 $ 6,658 $ 2,829 $ 9,487
Interest expense 3,869 2,714 6,583 1,642 1,371 3,013
-----------------------------------------------------------------------------------------
Net interest income before provision 6,926 1,060 7,986 5,016 1,458 6,474
Provision for loan losses 530 7 537 385 - 385
Other income 849 788 1,637 1,133 2,414 3,547
Other expenses 5,968 2,154 8,122 6,447 2,006 8,453
-----------------------------------------------------------------------------------------
Income before income taxes 1,277 (313) 964 (683) 1,866 1,183
Income taxes 526 (129) 397 (283) 771 488
-----------------------------------------------------------------------------------------
Net income $ 751 $ (184) $ 567 $ (400) $ 1,095 $ 695
=========================================================================================
Asset employed at quarter end $196,775 $ 70,547 $267,322 $120,967 $ 34,729 $ 155,696
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------
BANKING SMALL BUSINESS TOTAL BANKING SMALL BUSINESS TOTAL
DIVISION ADMINISTRATION COMPANY DIVISION ADMINISTRATION COMPANY
LENDING LENDING
DIVISION DIVISION
("SBA") ("SBA")
-----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 4,120 $ 1,691 $ 5,811 $ 2,530 $ 801 $ 3,331
Interest expense 1,492 1,183 2,675 812 304 1,116
-----------------------------------------------------------------------------------------
Net interest income before provision 2,628 508 3,136 1,718 497 2,215
Provision for loan losses 262 (62) 200 70 - 70
Other income 299 251 550 553 168 721
Other expenses 2,250 680 2,930 2,326 608 2,934
-----------------------------------------------------------------------------------------
Income before income taxes 415 141 556 (125) 57 (68)
Income taxes 171 59 230 (52) 24 (28)
-----------------------------------------------------------------------------------------
Net income $ 244 $ 82 $ 326 $ (73) $ 33 $ (40)
=========================================================================================
Asset employed at quarter end $196,775 $ 70,547 $267,322 $120,967 $ 34,729 $155,696
=========================================================================================
</TABLE>
8
<PAGE>
NOTE 8 RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133, as amended by SFAS 137, is effective for all fiscal
quarters beginning after June 15, 2000. Earlier application is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that
begins after June 1998. In June 2000, SFAS No. 138 was issued, which amends
certain provisions of SFAS No. 133 to clarify areas causing difficulties in
implementation. The Company will adopt SFAS No. 133 and the corresponding
amendments under SFAS No. 138 on January 1, 2001. The adoption of SFAS No.
133 as amended by SFAS No. 138, is not expected to have a material impact on
the results of operations, the financial position, or cash flows of the
Company.
In December 1999, the Securities and Exchange Committee issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101, which was delayed by the issuance of SAB 101A on
March 27, 2000 and SAB 101B on June 26, 2000 is required by the fourth
quarter of 2000. It is not expected that the adoption of SAB 101, as amended,
will have a material impact on the Company's results of operations, financial
position or cash flows.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement No. 125" was issued. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of Statement 125's
provisions without reconsideration. It is not expected that the adoption of
SFAS No. 140 will have a material impact on the Company's results of
operations, financial position or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions Involving Stock Compensation". FIN 44 is an
interpretation of Accounting Principal Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Among other matters, FIN 44
clarifies the application of APB 25 regarding the definition of employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as noncompensatory and the accounting consequences of modifications
to the terms of a previously issued stock options or similar awards. The
Company adopted the provisions of FIN 44 in the third quarter of 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
condition or results of operations.
9
<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 the Company for the nine and
three months ended September 30, 2000. This analysis should be read in
conjunction with the Company's 1999 Annual Report as filed on form 10KSB and
with the unaudited financial statements and notes as set forth in this report.
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 decreased 18.42% to $567,000 for the nine months ended September
30, 2000 compared to $695,000 for the nine months ended September 30, 1999.
Basic earnings per share were $0.24 and $0.29 for the nine months ended
September 30, 2000 and 1999, respectively. Diluted earnings per share were
$0.23 and $0.28 for the nine months ended September 30, 2000 and 1999,
respectively. Earnings per share for the nine months ended September 30, 1999
were adjusted for the effects of a stock dividend paid in November 1999. The
decrease in net income was mainly due to the decrease in other operating
income, partially offset by an increase in net interest income after
provision for loan losses and a decrease in other operating expenses.
Interest income increased due to an increase in average interest earning
assets, and other operating income decreased during the nine months ended
September 30, 2000 due to the Company's change in policy from selling the
guaranteed and unguaranteed portions of SBA 7a loans to retention of the SBA
7a loans. This change in policy became effective January 1, 2000.
Non-recurring expense negatively impacted the net income for the nine months
ended September 30, 1999, and the nine months ended September 30, 2000.
During the nine months ended September 30, 1999, the Company accrued $298,000
in connection with a lawsuit, and $64,000 in connection with the formation of
the holding company. During the nine months ended September 30, 2000 the Bank
incurred expenses totaling $69,000 in connection with the name change of its
Bank subsidiary. (See "Part II, Other Information, Item 1, Legal Proceedings")
Return on average assets for the nine months ended September 30, 2000 was
0.34% compared to 0.63% for the nine months ended September 30, 1999. The
decrease in the return on average assets from 1999 to 2000 was due to the
reduction in net income noted above, combined with the 49.31% growth in
average assets, which was part of the Company's strategic plan. The return on
average equity was 6.61% for the nine months ended September 30, 2000
compared to 9.39% for the nine months ended September 30, 1999.
Net income increased to $326,000 for the three months ended September 30,
2000 compared to a loss of $40,000 for the three months ended September 30,
1999. Basic earnings per share were $0.14 and a loss per share of $0.02 for
the three months ended September 30, 2000 and 1999, respectively. Diluted
earnings per share were $0.13 and a loss per share of $0.02 for the three
months ended September 30, 2000 and 1999, respectively. Earnings per share
for the three months ended September 30, 1999 were adjusted for the effects
of a stock dividend paid in November 1999. The increase in net income was
mainly due to an increase in net interest income after provision for loan
loss offset by a decrease in other operating income, and a decrease in other
operating expenses. Interest income increased due to an increase in average
interest earning assets, and other operating income decreased during the
three months ended September 30, 2000 due to the Company's change in policy
from selling the guaranteed and unguaranteed portions of SBA 7a loans to
retention of the SBA 7a loans. This change in policy became effective January
1, 2000. During the three months ended September 30, 1999, the Company
accrued $278,000 in connection with a lawsuit, and incurred $64,000 in
expenses as a
10
<PAGE>
result of the formation of the holding company. During the three months ended
September 30, 2000 the Bank incurred expenses totaling $69,000 in connection
with the name change of its Bank subsidiary. (See "Part II, Other
Information, Item 1, Legal Proceedings").
Return on average assets for the three months ended September 30, 2000 was
0.52% compared to a loss on average assets of 0.10% for the three months
ended September 30, 1999. The increase in the return on average assets from
1999 to 2000 was due to the increase in net income, as noted above. The
return on average equity was 11.18% for the three months ended September 30,
2000 compared to a loss on average equity of 1.54% for the three months ended
September 30, 1999.
INTEREST INCOME
Net interest income is the most significant component of the Company'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.
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 earning
assets for purposes of this table.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
BALANCE EARNED/PAID RATE/YIELD BALANCE EARNED/PAID RATE/YIELD
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average assets
Securities and time at other banks 7,898 340 5.75% 4,520 197 5.83%
Fed funds sold 12,120 542 5.97% 11,608 416 4.79%
Loans
Commercial 80,027 5,608 9.36% 52,970 3,994 10.08%
Real Estate 97,101 7,572 10.42% 58,865 4,480 10.18%
Consumer 7,406 507 9.14% 5,845 400 9.15%
--------------------- -----------------------
Total loans 184,534 13,687 9.91% 117,680 8,874 10.08%
--------------------- -----------------------
Total earning assets 204,552 14,569 9.51% 133,808 9,487 9.48%
Non earning assets 16,145 14,000
--------- ---------
Total average assets $ 220,697 $ 147,808
========= =========
Average liabilities and
shareholders equity
Interest bearing deposits
Savings and interest
bearing accounts 59,002 969 2.19% 64,909 1,184 2.44%
Time deposits 109,164 4,878 5.97% 45,170 1,691 5.01%
--------------------- -----------------------
Total interest bearing deposits 168,166 5,847 4.64% 110,079 2,875 3.49%
Demand deposits 29,788 - - 24,129 - -
Sub-debt 6,971 590 11.31% - - -
Other borrowings 1,906 146 10.23% 2,342 138 7.88%
--------------------- -----------------------
Total interest bearing liabilities 206,831 6,583 4.25% 136,550 3,013 2.95%
Accrued expenses and other
liabilities 2,407 1,361
Net shareholders equity 11,459 9,897
--------- ---------
Total average liabilities
shareholders equity 220,697 147,808
========= =========
Net interest spread 5.26% 6.53%
======== =======
Net interest income 7,986 6,474
======= ========
Net yield on interest earnings assets 5.22% 6.47%
======== ============
</TABLE>
11
<PAGE>
Interest income for the nine months ended September 30, 2000 increased to
$14.6 million, compared to $9.5 million for the nine months ended September
30, 1999. This increase was due to an increase in the average balance of
interest earning assets, and an increase in the yield on those assets.
Average interest earning assets increased to $204.6 million for the nine
months ended September 30, 2000 compared to $133.8 million for the nine
months ended September 30, 1999. The yield on interest earning assets
increased to 9.51% for the nine months ended September 30, 2000 compared to
9.48% for the nine months ended September 30, 1999. During the fourth quarter
of 1999, the Company changed its estimates as to the costs of originating a
loan, which resulted in a higher monthly amortization cost being charged
against interest income. This in turn reduced the yield on the loans
originated. In addition, increased competition by other financial
intermediaries has resulted in tighter margins than had previously been
experienced by the Company. The largest single component of interest earning
assets was loans receivable, which had an average balance of $184.5 million
with a yield of 9.91% for the nine months ended September 30, 2000 compared
to $117.7 million with a yield of 10.08% for the nine months ended September
30, 1999. The increase in the average balance of loans receivable was
attributable to the expansion of the Company as part of the Company's
strategic plan, including the retention of SBA 7a loans.
Interest expense for the nine months ended September 30, 2000 increased to
$6.6 million compared to $3.0 million for the nine months ended September 30,
1999. This increase was due to an increase in average deposits and other
borrowings, combined with a change in the composition of those liabilities,
and by an increase in the cost of those liabilities. Average interest-bearing
liabilities increased to $206.8 million for the nine months ended September
30, 2000 compared to $136.6 million for the nine months ended September 30,
1999. Average time deposits increased to $109.2 million with a cost of 5.97%
for the nine months ended September 30, 2000 compared to $45.2 million with a
cost of 5.01% for the nine months ended September 30, 1999. Beginning on
January 1, 2000, the Company changed its policy regarding the sale of SBA 7a
loans from one of selling the guaranteed and unguaranteed portions to
retaining the guaranteed and unguaranteed portions. The resulting increase in
total loans is being funded by both retail and wholesale certificates of
deposit, with the wholesale deposits having a higher interest rate than the
retail deposits. Although the wholesale deposits have a higher interest rate,
there is limited operating costs associated with acquiring and managing these
liabilities. As of September 30, 2000 wholesale deposits totaled $43.3
million and have maturities ranging from three months to one year. In
addition, interest rates in general have risen considerably from the third
quarter of 1999 to the third quarter of 2000.
Other average borrowings increased to $8.9 million with a cost of 11.08% for
the nine months ended September 30, 2000, compared to $2.3 million with a
cost of 7.88% for the nine months ended September 30, 1999. The Company
borrowed $3.2 million in June, 1999, of which $3.0 million was used to
increase capital at its Bank subsidiary. In March, 2000, the Company's
subsidiary, Community (CA) Capital Trust I, issued $10 million of 11.0% Fixed
Rate Capital Trust Pass-through Securities ("TRUPS-Registered Trademark-"),
with a liquidation value of $1,000 per share. The Company used the proceeds
to pay off the $3.2 million in borrowed funds, and invested an additional
$5.8 million in the Bank.
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
BALANCE EARNED/PAID RATE/YIELD BALANCE EARNED/PAID RATE/YIELD
<S> <C> <C> <C> <C> <C> <C>
Average Assets
Securities and time at other banks 7,847 113 5.73% 7,667 115 5.95%
Fed funds sold 21,191 197 3.70% 10,654 183 6.81%
Loans
Commercial 72,293 2,351 12.94% 53,231 1,282 9.55%
Real Estate 131,980 2,962 8.93% 64,039 1,606 9.95%
Consumer 7,696 188 9.72% 6,424 145 8.96%
----------------------- -----------------------
Total loans 211,969 5,501 10.32% 123,694 3,033 9.73%
----------------------- -----------------------
Total earning assets 232,007 5,811 9.96% 142,015 3,331 9.31%
Non earning assets 16,139 15,194
-------- --------
Total average assets $248,146 $157,209
======== ========
Average liabilities and shareholders equity
Interest bearing deposits
Savings and interest bearing accounts 59,502 315 2.11% 67,081 417 2.47%
Time deposits 131,193 2,045 6.20% 48,233 604 4.97%
----------------------- -----------------------
Total interest bearing deposits 190,695 2,360 4.92% 115,314 1,021 3.51%
Demand deposits 31,637 - 0.00% 26,179 - 0.00%
Sub-debt 10,000 285 11.34% - - 0.00%
Other borrowings 1,006 27 10.68% 4,039 95 9.33%
----------------------- -----------------------
Total interest bearing liabilities 233,648 2,672 4.55% 145,532 1,116 3.04%
Accrued expenses and other liabilities 3,212 1,402
Net shareholders Equity 11,596 10,275
-------- --------
Total average liabilities shareholders equity 248,146 157,209
======== ========
Net interest spread 5.41% 6.27%
======== =========
Net interest income 3,139 2,215
=========== ===========
Net yield on interest earnings assets 5.38% 6.19%
-------- ---------
</TABLE>
Interest income for the three months ended September 30, 2000 increased to
$5.8 million, compared to $3.3 million for the three months ended September
30, 1999. This increase was due to an increase in the average balance of
interest earning assets, and an increase in the yield on those assets.
Average interest earning assets increased to $232.0 million for the three
months ended September 30, 2000 compared to $142.0 million for the three
months ended September 30, 1999. The yield on interest earning assets
increased to 9.96% for the three months ended September 30, 2000 compared to
9.31% for the three months ended September 30, 1999. During the fourth
quarter of 1999, the Company changed its estimates as to the costs of
originating a loan, which resulted in a higher monthly amortization cost
being charged against interest income. This in turn reduced the yield on the
loans originated. In addition, increased competition by other financial
intermediaries has resulted in tighter margins than had previously been
experienced by the Company. The largest single component of interest earning
assets was loans receivable, which had an average balance of $212.0 million
with a yield of 10.32% for the three months ended September 30, 2000 compared
to $123.7 million with a yield of 9.73% for the three months ended September
30, 1999. The increase in the average balance of loans receivable was
attributable to the expansion of the Company as part of the Company's
strategic plan, including the retention of SBA 7a loans.
Interest expense for the three months ended September 30, 2000 increased to
$2.7 million compared to $1.1 million for the three months ended September
30, 1999. This increase was due to an increase in average deposits and other
borrowings, combined with a change in the composition of those liabilities,
and by an increase in the cost of those liabilities. Average interest-bearing
liabilities increased to $233.6 million for the three months ended September
30, 2000 compared to $145.5 million for the three months ended September 30,
1999. Average time deposits increased to $131.2 million with a cost of 6.20%
for the three months ended September 30, 2000 compared to $48.2 million with
a cost of 4.97% for the three months ended September 30, 1999. Beginning on
January 1, 2000, the Company changed its policy regarding the sale of SBA 7a
loans from one of selling the guaranteed and unguaranteed portions to
retaining the guaranteed and unguaranteed portions. The resulting increase in
total loans is being funded by
13
<PAGE>
both retail and wholesale certificates of deposit, with the wholesale
deposits having a higher interest rate than the retail deposits. Although the
wholesale deposits have a higher interest rate, there is limited operating
costs associated with acquiring and managing these liabilities. In addition,
interest rates in general have risen considerably from the third quarter of
1999 to the third quarter of 2000.
Other average borrowings increased to $11.0 million with a cost of 11.28% for
the three months ended September 30, 2000, compared to $4.0 million with a
cost of 9.33% for the three months ended September 30, 1999. The Company
borrowed $3.2 million in June, 1999, of which $3.0 million was used to
increase capital at its Bank subsidiary. In March, 2000, the Company's
subsidiary, Community (CA) Capital Trust I, issued $10 million of 11.0% Fixed
Rate Capital Trust Pass-through Securities ("TRUPS-Registered Trademark-"),
with a liquidation value of $1,000 per share. The Company used the proceeds
to pay off the $3.2 million in borrowed funds, and invest an additional $5.8
million in the Bank.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the nine
months ended September 30, 2000 was $8.0 million, compared to $6.5 million
for the nine months ended September 30, 1999. This increase was primarily due
to the increase in average interest earning assets and partially offset by a
decrease in the net interest margin. Average interest earning assets were
$204.6 million for the nine months ended September 30, 2000 with a net
interest margin of 5.22% compared to $133.8 million with a net interest
margin of 6.47% for the nine months ended September 30, 1999. The decline in
the net interest margin was primarily due to the rising interest rate
environment, combined with the increased use of certificates of deposits as
well as other borrowed funds in order to support its expanding loan
portfolio. In addition, the decline in yield on interest earning assets
(specifically loans) due to the change of estimates regarding the cost of
originating a loan and the increased competition in the market place
contributed to the decreased margin. Management believes that a rising
interest rate environment will positively effect the yield on interest
earning assets in the future, while the increased cost of liabilities through
the additional use of wholesale deposits and borrowed funds will offset this
improvement, resulting in a slightly reduced margin in the future. However,
management believes that the increased volume of interest earning assets due
to the retention of SBA 7a loans will result in a significantly higher net
interest income in the future.
Net interest income before provision for estimated loan losses for the three
months ended September 30, 2000 was $3.1 million, compared to $2.2 million
for the three months ended September 30, 1999. This increase was primarily
due to the increase in average interest earning assets and partially offset
by a decrease in the net interest margin. Average interest earning assets
were $232.0 million for the three months ended September 30, 2000 with a net
interest margin of 5.38% compared to $142.0 million with a net interest
margin of 6.19% for the three months ended September 30, 1999. The decline in
the net interest margin was primarily due to the rising interest rate
environment, combined with the increased use of certificates of deposits as
well as other borrowed funds in order to support its expanding loan
portfolio. In addition, the decline in yield on interest earning assets due
to the change of estimates regarding the cost of originating a loan and the
increased competition in the market place contributed to the decreased margin.
PROVISION FOR LOAN LOSSES
Net charge offs totaled $41,000 for the nine months ended September 30, 2000
compared to $21,000 during the nine months ended September 30, 1999. Due to
the growth in loans and the historical loss experience associated with the
various loan types, the provision for loan losses totaled $537,000 for the
nine months ended September 30, 2000 compared to $385,000 for the nine months
ended September 30, 1999. As a result of the increase in total loans
outstanding, management increased the allowance for loan losses to $1.8
million as of September 30, 2000 compared to $1.4 million as of September 30,
1999. As of September 30, 2000, the allowance
14
<PAGE>
was 0.81% of total gross loans compared to 1.06% as of September 30, 1999.
When excluding the guaranteed portions of loans and loans held for sale, the
allowance was 1.00% and 1.17% respectively as a percentage of total gross
loans as of September 30, 2000 and September 30, 1999. The allowance for loan
losses as a percentage of nonaccrual loans was 153.58% as of September 30,
2000 compared to 76.36% as of September 30, 1999. When excluding the
guaranteed portion of nonaccrual loans, the allowance for loan losses as a
percentage of nonaccrual loans was 613.80% as of September 30, 2000 compared
to 162.71% as of September 30, 1999.
For the three months ended September 30, 2000, net charge offs totaled $14,000
compared to $1,000 for the three months ended September 30, 1999. Provisions for
loan losses totaled $200,000 for the three months ended September 30, 2000
compared to $70,000 for the three months ended September 30, 1999.
Nonaccrual loans as of September 30, 2000 were $1.2 million, of which
$890,000 is guaranteed by the SBA, compared to $1.8 million, with $1.4
million guaranteed by the SBA as of December 31, 1999 and $1.8 million, with
$943,000 guaranteed by the SBA as of September 30, 1999.
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 Company's allowance for
loan losses. Such agencies may require the Company 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 other fee income, loan servicing fees and service
charges on deposit accounts. Prior to January 1, 2000 gain on sale income
made up a significant portion of other fee income. Other operating income was
$1.6 million for the nine months ended September 30, 2000 compared to $3.5
million for the nine months ended September 30, 1999. This represents a
decrease of $1.9 million, or 54.29%, when comparing the nine month period
ended September 30, 2000 to the nine month period ended September 30, 1999.
The decrease was mainly due to a decrease in the gain on sale of loans, which
totaled $127,000 for the nine month period ended September 30, 2000 compared
to $1.8 million for the nine month period ended September 30, 1999. The
decrease in gain on sale of loans was due to a change in the Company's policy
to retain SBA 7a loans versus selling such loans in the secondary market. The
Company sold $9.9 million in mortgage loans and $2.9 million in SBA 504 loans
during the nine months ended September 30, 2000 compared to $22.8 million in
mortgage loans and $33.5 million in SBA 504 and 7a loans during the nine
month period ended September 30, 1999.
Other operating income was $550,000 for the three months ended September 30,
2000 compared to $721,000 for the three months ended September 30, 1999. This
represents a decrease of $171,000, or 24.72%, when comparing the three month
period ended September 30, 2000 to the three month period ended September 30,
1999. The decrease was mainly due to a decrease in the gain on sale of loans,
which totaled $34,000 for the three month period ended September 30, 2000
compared to $131,000 for the three month period ended September 30, 1999. The
decrease in gain on sale of loans was due to a change in the Company's policy
to retain SBA 7a loans versus selling such loans in the secondary market. The
Company sold $3.5 million in mortgage loans and $285,000 in SBA 504 loans
during the three months ended September 30, 2000 compared to $4.3 million in
mortgage loans and $4.8 million in SBA 504 and 7a loans during the three
month period ended September 30, 1999.
15
<PAGE>
Prior to January 1, 2000, a major portion of other operating income was
generated through the sale of loans consisting of SBA loans and mortgage
loans. During the nine months ended September 30, 2000, the Company
originated $39.0 million in SBA government guaranteed loans compared to $23.0
million during the nine months ended September 30, 1999. The Company
originated $11.1 million in mortgage loans during the nine months ended
September 30, 2000 compared to $20.9 million for the nine months ended
September 30, 1999. The Company sold approximately $2.9 million in SBA 504
loans and $9.9 million in mortgage loans during the nine month period ended
September 30, 2000. This decrease reflects the change in the Company's
strategy when compared to sales of $33.5 million in SBA loans and $22.8
million in mortgage loans sold during the nine month period ended September
30, 1999. The sales for the nine month period ended September 30, 2000
resulted in a gain of $127,000, compared to $1.8 million for the nine month
period ended September 30, 1999. Prior to 1999, the Company had not sold any
unguaranteed portions of SBA loans. 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.
During the three months ended September 30, 2000, the Company originated
$10.7 million in SBA government guaranteed loans compared to $7.4 million
during the three months ended September 30, 1999. The Company originated $3.9
million in mortgage loans during the three months ended September 30, 2000
compared to $6.9 million for the three months ended September 30, 1999. The
Company sold approximately $285,000 in SBA 504 loans and $3.5 million in
mortgage loans during the three month period ended September 30, 2000. This
decrease reflects the change in the Company's strategy when compared to sales
of $4.8 million in SBA loans and $4.3 million in mortgage loans sold during
the three month period ended September 30, 1999. The sales for the three
month period ended September 30, 2000 resulted in a gain of $34,000, compared
to $131,000 for the three month period ended September 30, 1999. Prior to
1999, the Company had not sold any unguaranteed portions of SBA loans. 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.
Other fee income totaled $707,000 for the nine months ended September 30,
2000 compared to $989,000 for the nine months ended September 30, 1999. For
the three months ended September 30, 2000 and 1999 other fee income totaled
$255,000 and $324,000 respectively. The decrease in other fee income for the
three month and nine month periods reflect the decrease in fees from
brokering of loans which the Company does not directly fund.
Servicing fees, net, totaled $486,000 for the nine months ended September 30,
2000 compared to $432,000 for the nine months ended September 30, 1999. For
the quarter ended September 30, 2000 and 1999 servicing fees, remained
approximately the same at $163,000. In the future, servicing fees are
expected to decline as the remaining SBA loans being serviced for others
continue to payoff and are no longer being replaced by new originations being
sold to other investors.
Customer service charges increased to $317,000 for the nine months ended
September 30, 2000 compared to $282,000 for the nine months ended September
30, 1999. For the quarter ended September 30, 2000 customer service charges
decreased to $98,000 compared to $104,000 for the quarter ended September 30,
1999.
OTHER OPERATING EXPENSES
Other operating expenses are non-interest types of expenses and are incurred
by the Company in its normal course of business. Salaries and employee
benefits, occupancy, telephone, premises and equipment, marketing and
promotions, data processing, professional services, director, officer and
employee expenses, office, ESOP loan and other expenses are the major
categories of other operating expenses. Other operating expenses decreased to
$8.1 million for the nine months ended September 30, 2000 compared to $8.5
million for the nine months ended September 30, 1999. For the three months
ended September 30, 2000 and 1999, other operating expenses remained the same
at $2.9 million.
16
<PAGE>
The Company's efficiency ratio, which is the ratio of recurring operating
expenses to net interest income before provision for loan losses plus
non-interest income, increased to 83.68% for the nine months ended September
30, 2000 compared to 80.74% for the nine months ended September 30, 1999. The
increase in efficiency ratio was due to the decrease in other operating
income, and was partially offset by the increase in net interest income and
decrease in operating expenses. Management anticipates the efficiency ratio
will decline (improve) as the net interest income increases due to the
retention of SBA 7a loans and growth in other loans. The majority of the cost
decrease can be attributed to the change of estimates of the deferred cost
associated with loan production. The effect of change of estimates was to
decrease salary and benefit expense. Salary and benefit expenses decreased to
$4.2 million for the nine months ended September 30, 2000 compared to $4.6
million for the nine months ended September 30, 1999. The decrease in
salaries and benefit expenses was partially offset by an increase in other
recurring operating expenses, which were $3.9 million for the nine months
ended September 30, 2000 compared to $3.5 million for the nine months ended
September 30, 1999. The largest increase in other recurring operating
expenses was professional services, including legal, accounting and
regulatory expenses, which increased to $522,000 for the nine months ended
September 30, 2000, compared to $403,000 for the nine months ended September
30, 1999. The increase in professional expenses was due to additional costs
of operating a holding company, along with increased litigation expenses due
to the appeal of a lawsuit.
Non-recurring expense totaled $69,000 for the nine months ended September 30,
2000 compared to $362,000 for the nine months ended September 30, 1999. The
$69,000 represents the costs incurred to date on the name change of the Bank
subsidiary. The $362,000 non-recurring expense incurred in 1999 was due to the
accrual of $298,000 in connection with a lawsuit and $64,000 in connection with
the formation of the holding company. (See "Part II, Other Information, Item 1,
Legal Proceedings)
Non-recurring expenses totaled $69,000 for the three months ended September 30,
2000 compared to $342,000 for the three months ended September 30, 1999. The
$69,000 represents the costs incurred during the three months ended September
30, 2000 on the name change of the Bank subsidiary. The $342,000 represents
$64,000 in costs incurred in connection with the formation of the holding
company, and an accrual of $278,000 in connection with a lawsuit.
(See "Part II, Other Information, Item 1, Legal Proceedings)
The following table compares each of the components of other operating expenses
for the nine months ended September 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ----------------------------------------
2000 1999 CHANGE $ 2000 1999 CHANGE $
<S> <C> <C> <C> <C> <C> <C>
Other operating expenses:
Salaries and employee benefits $ 4,187 $ 4,555 $ (368) $ 1,559 $ 1,410 $ 149
Occupancy 623 635 (12) 224 208 16
Telephone 206 194 12 75 67 8
Premises and equipment 422 376 46 137 133 4
Marketing and promotions 239 174 65 87 19 68
Data processing 617 562 55 207 200 7
Professional services 522 403 119 170 166 4
Director, offcr and employee expense 369 367 2 130 123 7
Office expenses 240 277 (37) 86 88 (2)
ESOP loan expense 154 153 1 52 51 1
Other non-recurring expense 69 362 (293) 69 342 (273)
Other expenses 474 395 79 137 127 10
-------- -------- ------- ------- ------- -------
Total other operating expenses $ 8,122 $ 8,453 $ (331) $ 2,933 $ 2,934 $ (1)
======== ======== ======= ======= ======= =======
</TABLE>
17
<PAGE>
PROVISION FOR INCOME TAXES
The effective income tax rate was 41.2% for the nine months ended September
30, 2000 compared to 41.3% for the nine months ended September 30, 1999.
Provisions for income taxes totaled $397,000 and $488,000 for the nine months
ended September 30, 2000 and 1999, respectively.
For the three months ended September 30, 2000 and 1999, the effective income
tax rate was 41.4% and 41.2%, respectively. Provisions for income taxes
totaled $230,000 and ($28,000) for the three months ended September 30, 2000
and 1999, respectively.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
Total assets of the Company increased to $267.3 million as of September 30,
2000 compared to $175.8 million as of December 31, 1999 and $155.7 million as
of September 30, 1999. This increase was due to the growth in net loans to
$224.2 million as of September 30, 2000, compared to $144.2 million as of
December 31, 1999, and were $126.4 million as of September 30, 1999.
Deposits grew to $241.2 million as of September 30, 2000 compared to $158.1
million as of December 31, 1999 and were $140.1 million as of September 30,
1999. Cash and cash equivalents increased to $26.9 million as of September
30, 2000 compared to $15.4 million as of December 31, 1999 and were $13.3
million as of September 30, 1999. The increase in cash and cash equivalents
was due to the increase in deposits combined with the proceeds received from
the Trust Preferred offering. See "Capital."
Shareholders' equity was $11.8 million as of September 30, 2000 compared to
$11.3 million as of December 31, 1999, and was $10.4 million as of September
30, 1999. Please refer to the capital section of this discussion for further
information.
INVESTMENTS
The Company's investment portfolio consists primarily of certificates of
deposit with other financial institutions, agency securities and overnight
investments in the Federal Funds market. As of September 30, 2000,
certificates of deposit with other financial institutions totaled $784,000,
compared to $800,000 as of December 31, 1999 and September 30, 1999. At each
of the periods $500,000 was pledged as collateral for the Employee Stock
Ownership Plan ("ESOP") loan from another California bank, which was funding
the Company's ESOP. US Government and other securities totaled $ 6.2 million
as of September 30, 2000 compared to $6.7 million as of December 31, 1999,
and September 30, 1999. These securities are held as collateral for public
funds and treasury, tax and loan deposits. Average Federal Funds sold for the
nine months ended September 30, 2000 was $12.1 million compared to $11.6
million for the nine months ended September 30, 1999.
LOANS
Loan balances, net of the allowance for loan losses, increased to $224.2
million as of September 30, 2000 compared to $144.2 million as of December
31, 1999 and $126.4 million as of September 30, 1999. A healthy loan demand
resulted in a 73.5% annualized growth rate in total gross loans for the nine
months ended September 30, 2000, led by a 99.4% annualized increase in real
estate commercial and multi-family loans. This rapid increase is due to the
retention of the SBA 7a loans, as part of the Company's change in strategy,
which became effective January 1, 2000. The servicing portfolio, which
consists primarily of SBA loans sold to other investors, being
18
<PAGE>
serviced by the Company was $79.9 million as of September 30, 2000 compared
to $92.2 million as of December 31, 1999 and $92.0 million as of September
30, 1999. In the future, the servicing portfolio is expected to decline as
the remaining loans serviced for others continue to pay off and are not
replaced.
LOAN ORIGINATION AND SALE. The following table sets forth the Company's loan
originations by category and purchases, sales and principal repayments of loans
for the periods indicated:
<TABLE>
<CAPTION>
At or for the nine months At or for the three months
ended September 30, ended September 30,
----------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance 144,194 108,709 195,722 110,706
Loans originated:
Commercial loans 18,269 17,628 8,583 7,354
Real estate:
Construction loans 54,803 39,788 15,523 15,027
One-to four-family 31,854 34,107 9,813 8,225
Commercial 60,189 42,045 19,057 18,612
Consumer 6,739 4,535 2,445 2,209
----------------------------------------------------------
Total loans originated 171,854 138,103 55,421 51,427
Loans sold
Real estate:
One-to four-family 9,900 22,843 3,528 4,328
Commercial 2,886 33,529 285 4,799
----------------------------------------------------------
Total loans sold 12,786 56,372 3,813 9,127
Less:
Principal repayments 79,364 63,143 23,169 26,340
Other net charges (1) (326) 939 (63) 308
----------------------------------------------------------
Total Loans 224,224 126,358 224,224 126,358
==========================================================
</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 consist 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.
19
<PAGE>
The following table sets forth the Company's non-performing assets
at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
--------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 1,187 $ 1,809 $ 1,777
Troubled debt restructurings - - -
Loans contractually past due 90 days or more with respect to
either principal or interest and still accruing interest - - -
-------- -------- --------
Total non-performing loans 1,187 1,809 1,777
Other real estate owned - - -
-------- -------- --------
Total non-performing assets $ 1,187 $ 1,809 $ 1,777
======== ======== ========
SUPPLEMENTAL DATA
Total Assets $267,322 $175,773 $155,696
Total loans $226,047 $145,521 $127,715
Total loans held for investment $212,481 $142,667 $116,278
Government guaranteed portion of total loans $ 30,173 $ 10,653 $ 4,264
Non-performing loans, net of government guarantees $ 297 $ 414 $ 834
Allowance for loan losses $ 1,823 $ 1,327 $ 1,357
Allowance for loan losses to total loans 0.81% 0.91% 1.06%
Allowance for loan losses to total loans held for investment,
net of government guarantees 1.00% 1.01% 1.21%
Allowance for loan losses to non-accrual loans 153.58% 73.36% 76.36%
Allowance for loan losses to non-performing loans 153.58% 73.36% 76.36%
Allowance for loan losses to non-performing loans, net of
government guarantees 613.80% 320.53% 162.71%
Allowance for loan losses to non-performing assets 153.58% 73.36% 76.36%
Total non-performing assets to total assets 0.44% 1.03% 1.14%
Total non-performing loans, net of government guarantees
to total assets 0.11% 0.24% 0.54%
Total non-performing loans to total loans 0.53% 1.24% 1.39%
Total non-performing loans, net of government guarantees,
to total loans 0.13% 0.28% 0.65%
</TABLE>
NONACCRUAL LOANS. Nonaccrual loans are impaired loans where the original
contractual amount may not be fully collectible. The Company 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 September 30, 2000, December 31, 1999 and
September 30, 1999 all impaired or nonaccrual loans were
collateral-dependent. The Company 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 Company had four loans on
nonaccrual status as of September 30, 2000, totaling $1.2 million. Of this
total $890,000 is guaranteed by the SBA. As of December 31, 1999, the Company
had eight loans on nonaccrual status, totaling $1.8 million, with $1.4
million guaranteed by the SBA. As of September 30, 1999 the Company had nine
loans on nonaccrual status, totaling $1.8 million with $943,000 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
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<PAGE>
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 Company's allowance for
loan losses. Such agencies may require the Company to make additional
provisions for loan losses based upon judgments which differ from those of
management.
The following table sets forth information regarding the Company's allowance
for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the nine months
ended September 30,
-----------------------------------
2000 1999
-----------------------------------
(dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,327 $ 992
Chargeoffs:
Real estate loans:
One- to four- family - -
Commercial 65 19
Consumer 26 5
------- -------
Total chargeoffs 91 24
------- -------
Recoveries:
Real estate loans:
One- to four-family - -
Commercial 49 2
Consumer 1 2
------- -------
Total recoveries 50 4
------- -------
Net chargeoffs 41 20
Provision for loan losses 537 385
------- -------
Balance at end of period $ 1,823 $ 1,357
------- -------
Net charge offs to average loans 0.03% 0.02%
</TABLE>
As of September 30, 2000 the balance in the allowance for loan losses was
$1.8 million compared to $1.4 million as of September 30, 1999. As a
percentage of total loans the allowance was 0.81% as of September 30, 2000
compared to 1.06% as of September 30, 1999. As a percentage of total loans
held for investment, net of the government guarantees, the allowance was
1.00% as of September 30, 2000, compared to 1.21% as of September 30, 1999.
Management believes the allowance at September 30, 2000 is adequate based
upon its ongoing analysis of the loan portfolio, historical loss trends and
other factors.
OTHER REAL ESTATE OWNED. There was no other real estate owned at September
30, 2000 and 1999.
CAPITAL
The Company's capital was approximately $11.8 million as of September 30,
2000 compared to $10.4 million as of September 30, 1999 and $11.3 million as
of December 31, 1999. In 1997 the Company adopted an Employee Stock Ownership
Plan ("ESOP") which was funded with a $1.2 million line of credit. As of
September 30, 2000 the indebtedness of the ESOP in the amount of $967,000
million is shown as a deduction from shareholders' equity. In future years
capital will be increased as the unearned ESOP contributions are made by the
Company. During the three month period ended September 30, 2000, the Company
repaid principal totaling $52,000. The
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Company anticipates advancing an additional $130,000 during the fourth
quarter of 2000, and is planning to contribute approximately $204,000
annually to this program.
As part of the Company'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. A 5% stock dividend was declared on October 17, 2000
to be paid on November 30, 2000 to shareholders of record as of November 15,
2000.
The Company's strategic plan addresses the future capital needs of the
Company. During March, 2000, the Company's wholly owned subsidiary, Community
(CA) Capital Trust I (the "Trust"), a Delaware business trust, issued $10
million of 11.0% Fixed Rate Capital Trust Pass-through Securities
("TRUPS-Registered Trademark-"), with a liquidation value of $1,000 per
share. The securities have semi-annual interest payments, with principal due
at maturity in 2030. The Trust used the proceeds from the sale of the trust
preferred securities to purchase junior subordinated debentures of the
Company. The Company received $9.7 million from the Trust upon issuance of
the junior subordinated debentures, of which $3.2 million was used to pay off
borrowings of the Company, and $5.8 million was contributed to the Bank to
increase its capital. The $10 million is shown as other borrowings on the
books of the Company, while the net $6.5 million is in cash and cash
equivalents.
At September 30, 2000 and December 31, 1999, all capital ratios were above
all current Federal capital guidelines for a "well capitalized" bank. As of
September 30, 2000, the Bank's regulatory total capital to risk-weighted
assets ratio was 11.24% compared to 10.87% as of December 31, 1999. The
Bank's regulatory tier 1 capital to risk-weighted assets ratio was 10.36% as
of September 30, 2000 compared to 9.94% as of December 31, 1999. The Bank's
regulatory tier 1 capital to average assets ratio was 8.71% as of September
30, 2000 compared to 8.5% as of December 31, 1999.
As of September 30, 2000, the Company's regulatory total capital to
risk-weighted assets ratio was 11.06% compared to 8.71% as of December 31,
1999. The Company's regulatory tier 1 capital to risk-weighted assets ratio
was 7.33% as of September 30, 2000, compared to 7.78% as of December 31,
1999. The Company's regulatory tier 1 capital to average assets ratio was
6.28% as of September 30, 2000, compared to 6.67% as of December 31, 1999.
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 September 30, 2000 liquid assets as a percentage of deposits were 12.4%
compared to 12.1% as of December 31, 1999.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Lewis Randall vs Fallbrook National Bank
In connection with the above referenced legal matter, the Company announced
that on October 19, 2000, the District Court of Appeal of the State of
California reversed the judgement on the fraud cause of action, and has
directed the trial court to enter a judgement for the Bank on that claim.
Furthermore, on the breach-of-contract cause of action, the portion
determining the damages has been reversed and remanded for a new trial. The
ruling is subject to appeal.
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ITEM 2 CHANGES IN SECURITIES
None to report
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None to report
ITEM 4 SUBMISSION OF MATTERS TO SECURITY HOLDERS
None to report
ITEM 5 OTHER INFORMATION
None to report
ITEM 6 EXHIBITS AND REPORTS FROM 8-K
(a) Financial Data Schedule
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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 ___________ ______________________________
Thomas E. Swanson
President and Chief Executive Officer
Date ___________ ______________________________
L. Bruce Mills, Jr.
Sr. Vice President, Chief Financial Officer
24
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
27 Financial Data Schedule
FINANCIAL DATA SCHEDULE WORKSHEET ARTICLE 9
PART I - LEGEND
Legend No
PART 2 - TAGS REQUIRED WHEN APPLICABLE
1. RESTATED? No
2. CIK N/A
3. NAME N/A
4. MULTIPLIER 1,000
5. CURRENCY U.S. Dollars
6. PERIOD START JAN-01-2000
7. EXCHANGE RATE N/A
25
