**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**Form10-QSB**

 

| **ý** | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the quarterly period ended September 30,  2001** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **o** | **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**

**COMMUNITYBANCORP INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                   |   | **33-0859334**                        |
|------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation |   | (I.R.S.  Employer Identification No.) |
| or  organization)                              |   |                                  |
| **130  West Fallbrook Street, Fallbrook, CA**  |   | **92028**                             |
| (Address  of principal executive offices)      |   | (Zip  Code)                           |

 

Issuer’stelephone number:     **(760)723-8811**

 

## **None**

(Formername, former address and former fiscal year, if changed

sincelast report)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý   No o

 

Number of shares ofcommon stock outstanding as of September 30, 2001: 3,154,054

 

Transitional SmallBusiness Disclosure Format (check one): Yes o No ý

 

####  

#### **PART 1: FINANCIALINFORMATION**

**Item 1: FINANCIAL STATEMENTS**

** **
| **COMMUNITY BANCORP INC.**                                                                                                                                       |   |              |        |             |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|------------------|--------|
| **CONSOLIDATED BALANCE SHEETS**                                                                                                                                  |   |              |        |             |   |
| **(dollars in thousands)**                                                                                                                                       |   | **September 30,** |        | **December 31,** |   |
| **(unaudited)**                                                                                                                                                  |   | **2001**          |        | **2000**         |   |
| **ASSETS**                                                                                                                                                       |   |              |        |             |   |
|                                                                                                                                                             |   |              |        |             |   |
| Cash and cash equivalents                                                                                                                                        |   | $                 | 49,504      |             | $      | 17,830 |   |
| Interest bearing deposits in financial institutions                                                                                                              |   | 497               |        | 790              |   |
| Federal Reserve Bank & FHLB stock                                                                                                                            |   | 782               |        | 425              |   |
| Investment securities held-to-maturity, at amortized cost                                                                                                        |   | 5,073             |        | 6,819            |   |
| Interest-only strip, at fair value                                                                                                                               |   | 374               |        | 509              |   |
| Loans held for investment                                                                                                                                        |   | 245,294           |        | 234,306          |   |
| Less allowance for loan losses                                                                                                                                   |   | (2,833            | )           | (2,226           | )      |
| Net loans held for investment                                                                                                                                    |   | 242,461           |        | 232,080          |   |
| Loans held for sale                                                                                                                                              |   | 38,266            |        | 13,119           |   |
| Premises and equipment, net                                                                                                                                      |   | 2,338             |        | 2,313            |   |
| Accrued interest and other assets                                                                                                                                |   | 3,944             |        | 4,364            |   |
| Deferred tax asset                                                                                                                                               |   | 672               |        | 672              |   |
| Servicing asset, net                                                                                                                                             |   | 1,274             |        | 1,537            |   |
| Total Assets                                                                                                                                                     |   | **$**             | **345,185** |             | **$**  | **280,458** |   |
|                                                                                                                                                             |   |              |        |             |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                         |   |              |        |             |   |
|                                                                                                                                                             |   |              |        |             |   |
| Deposits:                                                                                                                                                        |   |              |        |             |   |
| Interest bearing                                                                                                                                                 |   | $                 | 272,489     |             | $      | 219,371 |   |
| Non-interest bearing                                                                                                                                             |   | 38,564            |        | 33,326           |   |
| Total deposits                                                                                                                                                   |   | 311,053           |        | 252,697          |   |
| Other borrowings                                                                                                                                                 |   | 13,812            |        | 10,916           |   |
| Accrued expenses and other liabilities                                                                                                                           |   | 4,146             |        | 4,609            |   |
| Total liabilities                                                                                                                                                |   | 329,011           |        | 268,222          |   |
|                                                                                                                                                             |   |              |        |             |   |
| **Shareholders' equity**                                                                                                                                         |   |              |        |             |   |
| Common stock, $0.625 par value; authorized 10,000,000  shares, issued and outstanding, 3,154,054 at September  30, 2001 and 2,670,406 at December 31,  2000 |   | 1,971             |        | 1,669            |   |
| Additional paid-in capital                                                                                                                                       |   | 8,310             |        | 5,551            |   |
| Unearned ESOP contribution                                                                                                                                       |   | (694              | )           | (797             | )      |
| Retained earnings                                                                                                                                                |   | 6,587             |        | 5,813            |   |
| Total shareholders' equity                                                                                                                                       |   | 16,174            |        | 12,236           |   |
|                                                                                                                                                             |   |              |        |             |   |
| Total Liabilities and Shareholders' Equity                                                                                                                       |   | **$**             | **345,185** |             | **$**  | **280,458** |   |

 

 

See accompanying notes to unauditedconsolidated financial statements.

 
| **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)**                                                  |   | **2001**                |   | **2000**                 |   | **2001** |   | **2000** |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Interest income:                                                 |   |                    |   |                     |   |     |   |     |   |
| Interest and fees on loans                                       |   | $                       | 18,013 |                     | $      | 13,687   |   | $        | 5,679  |   | $ | 5,501 |   |
| Interest on cash equivalents                                     |   | 750                     |   | 542                      |   | 350      |   | 197      |   |
| Interest on interest bearing deposits in financial  institutions |   | 24                      |   | 37                       |   | 6        |   | 13       |   |
| Interest on investment securities                                |   | 332                     |   | 303                      |   | 100      |   | 100      |   |
| **Total interest income**                                        |   | 19,119                  |   | 14,569                   |   | 6,135    |   | 5,811    |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Interest expense on deposits                                     |   | 8,786                   |   | 5,847                    |   | 2,766    |   | 2,360    |   |
| Interest expense on other borrowed money                         |   | 955                     |   | 736                      |   | 323      |   | 312      |   |
| **Total interest expense**                                       |   | 9,741                   |   | 6,583                    |   | 3,089    |   | 2,672    |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Net interest income before provision for loan losses             |   | 9,378                   |   | 7,986                    |   | 3,046    |   | 3,139    |   |
| Provision for loan losses                                        |   | 764                     |   | 537                      |   | 670      |   | 200      |   |
| **Net interest income after provision for  loan losses**         |   | 8,614                   |   | 7,449                    |   | 2,376    |   | 2,939    |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Other operating income:                                          |   |                    |   |                     |   |     |   |     |   |
| Net gain on sale of loans                                        |   | 597                     |   | 127                      |   | 246      |   | 34       |   |
| Loan servicing fees, net                                         |   | 287                     |   | 486                      |   | 84       |   | 163      |   |
| Customer service charges                                         |   | 361                     |   | 285                      |   | 134      |   | 87       |   |
| Other fee income                                                 |   | 663                     |   | 739                      |   | 189      |   | 266      |   |
| **Total other operating income**                                 |   | 1,908                   |   | 1,637                    |   | 653      |   | 550      |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Other operating expenses:                                        |   |                    |   |                     |   |     |   |     |   |
| Salaries and employee benefits                                   |   | 4,987                   |   | 4,187                    |   | 1,325    |   | 1,559    |   |
| Occupancy                                                        |   | 679                     |   | 623                      |   | 227      |   | 224      |   |
| Telephone                                                        |   | 220                     |   | 206                      |   | 69       |   | 75       |   |
| Premises and equipment                                           |   | 497                     |   | 422                      |   | 166      |   | 137      |   |
| Marketing and promotions                                         |   | 249                     |   | 239                      |   | 83       |   | 87       |   |
| Data processing                                                  |   | 715                     |   | 617                      |   | 243      |   | 207      |   |
| Professional services                                            |   | 554                     |   | 522                      |   | 162      |   | 170      |   |
| Director, officer and employee expenses                          |   | 368                     |   | 369                      |   | 97       |   | 130      |   |
| Office expenses                                                  |   | 323                     |   | 240                      |   | 81       |   | 86       |   |
| ESOP compensation expense                                        |   | 153                     |   | 154                      |   | 51       |   | 52       |   |
| Other non-recurring expense                                      |   | -                       |   | 69                       |   | -        |   | 69       |   |
| Other expenses                                                   |   | 454                     |   | 474                      |   | 126      |   | 137      |   |
| **Total other operating expenses**                               |   | 9,199                   |   | 8,122                    |   | 2,630    |   | 2,933    |   |
|                                                             |   |                    |   |                     |   |     |   |     |   |
| Income before income taxes                                       |   | 1,323                   |   | 964                      |   | 399      |   | 556      |   |
| Income taxes                                                     |   | 549                     |   | 397                      |   | 166      |   | 230      |   |
| **Net Income**                                                   |   | $                       | 774    |                     | $      | 567      |   | $        | 233    |   | $ | 326 |   |
| **Comprehensive Income**                                         |   | $                       | 774    |                     | $      | 567      |   | $        | 233    |   | $ | 326 |   |
| Basic earnings per share                                         |   | $                       | 0.29   |                     | $      | 0.22     |   | $        | 0.08   |   | $ | 0.14 |   |
| Diluted earnings per share                                       |   | $                       | 0.28   |                     | $      | 0.22     |   | $        | 0.08   |   | $ | 0.13 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 
| **COMMUNITY BANCORP INC.**                                                     |   |                    |   |     |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|----------|--------|
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                                      |   |                    |   |     |   |
| **(dollars in thousands)**                                                     |   | **For the nine months** |   |
| **(unaudited)**                                                                |   | **ended September 30,** |   |
|                                                                           |   | **2001**                |   | **2000** |   |
| **Cash flows from operating activities:**                                      |   |                    |   |     |   |
| Net income                                                                     |   | $                       | 774    |     | $      | 567 |   |
| Adjustments to reconcile net income to net cash used in  operating activities: |   |                    |   |     |   |
| Depreciation and amortization                                                  |   | 454                     |   | 413      |   |
| ESOP compensation                                                              |   | 153                     |   | 154      |   |
| Provision for loan losses                                                      |   | 764                     |   | 537      |   |
| Net gain on sale of loans                                                      |   | (597                    | )      | (127     | )      |
| Loans originated for sale                                                      |   | (44,530                 | )      | (23,498  | )      |
| (Gain)/Loss on interest-only strips                                            |   | 81                      |   | (2       | )      |
| Amortization of interest-only strips                                           |   | 54                      |   | 59       |   |
| Capitalization of servicing asset                                              |   | (96                     | )      | -        |   |
| Amortization of servicing asset                                                |   | 170                     |   | 199      |   |
| Writedown of servicing asset                                                   |   | 189                     |   | 31       |   |
| Proceeds from sale of loans                                                    |   | 44,771                  |   | 12,915   |   |
| Decrease (increase) in accrued interest and other assets                       |   | 420                     |   | (879     | )      |
| Increase (decrease) in accrued expenses and other  liabilities                 |   | (463                    | )      | 1,056    |   |
| **Net cash provided by (used in) operating  activities**                       |   | 2,144                   |   | (8,575   | )      |
|                                                                           |   |                    |   |     |   |
| **Cash flows from investing activities:**                                      |   |                    |   |     |   |
| Net increase in loans                                                          |   | (35,952                 | )      | (69,556  | )      |
| Net maturities of interest bearing time deposits                               |   | 293                     |   | 16       |   |
| Maturities of securities held-to-maturity                                      |   | 1,754                   |   | 500      |   |
| Purchase of securities held-to-maturity                                        |   | (357                    | )      | (6       | )      |
| Net additions to premises and equipment                                        |   | (472                    | )      | (305     | )      |
| **Net cash used in investing activities**                                      |   | (34,734                 | )      | (69,351  | )      |
|                                                                           |   |                    |   |     |   |
| **Cash flows from financing activities:**                                      |   |                    |   |     |   |
| Net increase in deposits:                                                      |   |                    |   |     |   |
| Interest bearing                                                               |   | 53,118                  |   | 77,933   |   |
| Non-interest bearing                                                           |   | 5,238                   |   | 5,149    |   |
| Purchase of treasury stock                                                     |   | -                       |   | (5       | )      |
| Exercise of stock options                                                      |   | 35                      |   | 25       |   |
| Stock offering (net of expenses)                                               |   | 3,026                   |   | -        |   |
| Repayment of other borrowings                                                  |   | (4,153                  | )      | (3,329   | )      |
| Proceeds from other borrowings                                                 |   | 7,000                   |   | 9,700    |   |
| **Net cash provided by financing activities**                                  |   | 64,264                  |   | 89,473   |   |
| **Net increase in cash and cash equivalents**                                  |   | 31,674                  |   | 11,547   |   |
| **Cash and cash equivalents at beginning of  period**                          |   | 17,830                  |   | 15,376   |   |
| **Cash and cash equivalents at end of  period**                                |   | $                       | 49,504 |     | $      | 26,923 |   |

 

 

 

See accompanying notes to unauditedconsolidated financial statements.

 

**COMMUNITY BANCORP INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**September 30, 2001**

**(unaudited)**

 

**Note 1 Basis of Presentation:**

 

The interim financial statements includedherein have been prepared by Community Bancorp Inc. without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission (the“SEC”).  The interim financialstatements include Community Bancorp Inc. and its wholly owned subsidiariesCommunity National Bank (formerly Fallbrook National Bank) (the"Bank") and Community (CA) Capital Trust I (the "Trust"),(collectively, the "Company") as consolidated with the elimination ofall intercompany transactions.  Certaininformation and footnote disclosures, normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America, have been condensed or omitted pursuant to such SECrules and regulations.   Nevertheless,the Company believes that the disclosures are adequate to make the informationpresented not misleading.  Thesefinancial statements should be read in conjunction with the audited financialstatements and notes thereto included in the Company’s latest Annual Report onForm 10KSB.  In the opinion ofmanagement, all adjustments, including normal recurring adjustments necessaryto present fairly the financial position of the Company with respect to theinterim financial statements and the results of its operations for the interimnine month period ended September 30, 2001, have been included.  Certain reclassifications may have been madeto prior year amounts to conform to the 2001 presentation.  The results of operations for interimperiods are not necessarily indicative of results for the full year.

 

On October 10, 2000, Fallbrook NationalBank, subsidiary of Community Bancorp Inc., officially changed its name toCommunity National Bank.

 

**Note 2 Loans and Related Allowance for Loan Losses:**

 

A summaryof loans as of September 30, 2001 and December 31, 2000 is as follows:

 
|                                                |   | **September 30,**          |    | **December 31,** |   |
|-----------------------------------------------------|--------|----------------------------|---------|------------------|--------|
|                                                |   | **2001**                   |    | **2000**         |   |
|                                                |   | **(dollars in thousands)** |    |
| Construction loans                                  |   | $                          | 49,031  |             | $      | 51,700 |   |
| Real estate one- to four-family                     |   | 28,791                     |    | 25,407           |   |
| Real estate commercial and multi-family             |   | 157,333                    |    | 120,118          |   |
| Consumer home equity lines of credit                |   | 2,734                      |    | 2,912            |   |
| Consumer other                                      |   | 10,803                     |    | 11,417           |   |
| Aircraft                                            |   | 25,015                     |    | 24,761           |   |
| Commercial                                          |   | 9,561                      |    | 11,024           |   |
| Total gross loans                                   |   | 283,268                    |    | 247,339          |   |
| Deferred loan fees                                  |   | 799                        |    | 767              |   |
| Discounts on unguaranteed portion of loans retained |   | (507                       | )       | (681             | )      |
| Allowance for loan losses                           |   | (2,833                     | )       | (2,226           | )      |
| Net loans                                           |   | $                          | 280,727 |             | $      | 245,199 |   |

 

The Company’s lending activities areconcentrated primarily in Southern California. Although the Company seeks to avoid undue concentrations of loans to asingle industry based upon a single class of collateral, real estate and realestate associated business areas are among the principal industries in theCompany’s market area.  As a result, theCompany’s loan and collateral portfolios are, to some degree, concentrated inthose industries.  The Company evaluateseach 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 valueof 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 ofSBA 7a loans until a certain asset mix had been reached.  The Company recently announced that it willreturn to selling a portion of the guaranteed portion of SBA 7a loans beginningin the third quarter of 2001.  TheCompany generates revenues from the origination of loans guaranteed by the SBAand the sale of guaranteed and unguaranteed portions of those loans in thesecondary market.  The Company retainsthe servicing on the sale of SBA loans that creates loan servicing income.  The Company measures the servicing asset bydiscounting the respective cash flow for the estimated expected life of theloans.  The Company uses industryprepayment statistics in estimating the expected life.

 

If the fair value of the servicing assetsis less than the amortized carrying value, the asset is consideredimpaired.  A valuation allowance must beestablished for the impaired asset by a charge against income for thedifference between the amortized carrying value and the fair value.  As of September 30, 2001, an impairmentallowance of $189,000 had been provided for, representing the differencebetween the Company’s amortized carrying value for the servicing assets and thefair value.

 

**Note 4 Contingencies:**

 

Because of the nature of its activities,the Company is at all times subject to pending and threatened legal actionswhich arise out of the normal course of its business.  In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financialposition, results of operations or liquidity.

 

**Note 5 Earnings per share:**

 

Thefollowing tables are a reconciliation of the numerators and denominators of theaverage basic and diluted EPS computations for the net earnings for the Company(dollars in thousands, except share data):

 

 
|                                                                            |   | **For the nine months ended  September 30,** |
|---------------------------------------------------------------------------------|--------|----------------------------------------------|
|                                                                            |   | **2001**                                     |   | **2000** |
|                                                                            |   | **Earnings**                                 |   | **Shares** |   | **Per Share** |   | **Earnings** |   | **Shares** |   | **Per Share** |
|                                                                            |   | **(Numerator)**                              |   | **(Denominator)** |   | **Amount** |   | **(Numerator)** |   | **(Denominator)** |   | **Amount** |
| Net Earnings                                                                    |   | $                                            | 774 |   |   |   |   |   | $ | 567 |   |   |   |   |
| Basic EPS Earnings  available to common shareholders                            |   | $                                            | 774 |   | 2,643,422 |   | $ | 0.29 |   | $ | 567 |   | 2,527,364 |   | $ | 0.22 |
| Effect of Dilutive  Securities Options                                          |   | -                                            |   | 80,536 | ** ** | **-** |   | - |   | 40,647 |   | - |
| Diluted EPS Earnings  available to common Shareholders plus assumed Conversions |   | $                                            | 774 |   | 2,723,958 |   | $ | 0.28 |   | $ | 567 |   | 2,568,011 |   | $ | 0.22 |

 
|                                                                            |   | **For the three months ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                            |   | **2001**                                      |   | **2000** |   |
|                                                                            |   | **Earnings**                                  |   | **Shares** |   | **Per Share** |   | **Earnings** |   | **Shares** |   | **Per Share** |   |
|                                                                            |   | **(Numerator)**                               |   | **(Denominator)** |   | **Amount** |   | **(Numerator)** |   | **(Denominator)** |   | **Amount** |   |
| Net Earnings                                                                    |   | $                                             | 233    |   |   |   |   |   | $ | 326 |   |   |   |   |   |
| Basic EPS Earnings  available to common shareholders                            |   | $                                             | 233    |   | 2,857,878 |   | $ | 0.08 |   | $ | 326 |   | 2,382,710 |   | $ | 0.14 |   |
| Effect of Dilutive  Securities Options                                          |   | -                                             |   | 68,774 | ** ** | **-** |   | - |   | 50,698 |   | - |   |
| Diluted EPS Earnings  available to common shareholders plus assumed conversions |   | $                                             | 233    |   | 2,926,652 |   | $ | 0.08 |   | $ | 326 |   | 2,433,408 |   | $ | 0.13 |   |

 

**Note 6 Segment Information:**

 

The following disclosure about segmentsof the Company is made in accordance with the requirements of Statement ofFinancial Accounting Standards ("SFAS") No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.”  The Company segregates its operations into two primary segments:Banking Division and SBA Lending Division. The Company determines operating results of each segment based on aninternal management system that allocates certain expenses to each.

** **
|                                 |   | **For the nine months ended September 30,** |    |
|--------------------------------------|--------|---------------------------------------------|---------|
|                                 |   | **2001**                                    |    | **2000** |   |
|                                 |   | **Banking**                                 |    | **Small Business** |   | **Total** |   | **Banking** |   | **Small Business** |   | **Total** |   |
|                                 |   | **Division**                                |    | **Administration** |   | **Company** |   | **Division** |   | **Administration** |   | **Company** |   |
|                                 |   |                                        |    | **Lending** |   |   |   |   |   | **Lending** |   |   |   |
|                                 |   |                                        |    | **Division** |   |   |   |   |   | **Division** |   |   |   |
|                                 |   |                                        |    | **("SBA")** |   |   |   |   |   | **("SBA")** |   |   |   |
|                                 |   | (dollars in thousands)                      |    |
| Interest income                      |   | $                                           | 12,970  |   | $ | 6,149 |   | $ | 19,119 |   | $ | 10,795 |   | $ | 3,774 |   | $ | 14,569 |   |
| Interest expense                     |   | 6,339                                       |    | 3,402 |   | 9,741 |   | 3,869 |   | 2,714 |   | 6,583 |   |
| Net interest income before provision |   | 6,631                                       |    | 2,747 |   | 9,378 |   | 6,926 |   | 1,060 |   | 7,986 |   |
| Provision for loan losses            |   | 559                                         |    | 205 |   | 764 |   | 530 |   | 7 |   | 537 |   |
| Other income                         |   | 941                                         |    | 967 |   | 1,908 |   | 849 |   | 788 |   | 1,637 |   |
| Other expenses                       |   | 6,871                                       |    | 2,328 |   | 9,199 |   | 5,968 |   | 2,154 |   | 8,122 |   |
| Income before income taxes           |   | 142                                         |    | 1,181 |   | 1,323 |   | 1,277 |   | (313 | ) | 964 |   |
| Income taxes                         |   | 61                                          |    | 488 |   | 549 |   | 526 |   | (129 | ) | 397 |   |
| Net income                           |   | $                                           | 81      |   | $ | 693 |   | $ | 774 |   | $ | 751 |   | $ | (184 | ) | $ | 567 |   |
| Assets employed at quarter end       |   | $                                           | 250,741 |   | $ | 94,444 |   | $ | 345,185 |   | $ | 196,775 |   | $ | 70,547 |   | $ | 267,322 |   |

 
|                                 |   | **For the three months ended September 30,** |    |
|--------------------------------------|--------|----------------------------------------------|---------|
|                                 |   | **2001**                                     |    | **2000** |   |
|                                 |   | **Banking**                                  |    | **Small Business** |   | **Total** |   | **Banking** |   | **Small Business** |   | **Total** |   |
|                                 |   | **Division**                                 |    | **Administration** |   | **Company** |   | **Division** |   | **Administration** |   | **Company** |   |
|                                 |   |                                         |    | **Lending** |   |   |   |   |   | **Lending** |   |   |   |
|                                 |   |                                         |    | **Division** |   |   |   |   |   | **Division** |   |   |   |
|                                 |   |                                         |    | **("SBA")** |   |   |   |   |   | **("SBA")** |   |   |   |
|                                 |   | (dollars in thousands)                       |    |
| Interest income                      |   | $                                            | 4,188   |   | $ | 1,947 |   | $ | 6,135 |   | $ | 4,120 |   | $ | 1,691 |   | $ | 5,811 |   |
| Interest expense                     |   | 2,092                                        |    | 997 |   | 3,089 |   | 1,492 |   | 1,183 |   | 2,672 |   |
| Net interest income before provision |   | 2,096                                        |    | 950 |   | 3,046 |   | 2,631 |   | 508 |   | 3,139 |   |
| Provision for loan losses            |   | 470                                          |    | 200 |   | 670 |   | 262 |   | (62 | ) | 200 |   |
| Other income                         |   | 211                                          |    | 442 |   | 653 |   | 299 |   | 251 |   | 550 |   |
| Other expenses                       |   | 1,891                                        |    | 739 |   | 2,630 |   | 2,250 |   | 680 |   | 2,933 |   |
| Income (loss) before income taxes    |   | (54                                          | )       | 453 |   | 399 |   | 415 |   | 141 |   | 556 |   |
| Income taxes                         |   | (21                                          | )       | 187 |   | 166 |   | 171 |   | 59 |   | 230 |   |
| Net income                           |   | $                                            | (33     | ) | $ | 266 |   | $ | 233 |   | $ | 244 |   | $ | 82 |   | $ | 326 |   |
| Assets employed at quarter end       |   | $                                            | 250,741 |   | $ | 94,444 |   | $ | 345,185 |   | $ | 196,775 |   | $ | 70,547 |   | $ | 267,322 |   |

 

**Note 7 Recent Accounting Developments:**

 

SFAS No. 133, "Accounting for DerivativeInstruments and Hedging Activities", is effective for all fiscal yearsbeginning after June 15, 2000.  SFAS No.133, as amended, establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly consideredderivatives may now meet the definition of a derivative.  The Company adopted SFAS No. 133 effectiveJanuary 1, 2001.  The adoption of SFASNo. 133 did not have a significant impact on the financial position, results ofoperations, or cash flows of the Company.

 

In September 2000, the FinancialAccounting Standards Board (FASB) issued SFAS No. 140 "Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities", which revises the standards for accounting forsecuritizations and other transfers of financial assets and collateral andrequires certain disclosures, but carries over most of the provisions of SFASNo. 125 without reconsideration.  SFASNo. 140 is effective for transfers and servicing of financial assets andextinguishments of liabilities occurring after March 31, 2001.  The Statement is effective for recognitionand reclassification of collateral and for disclosures relating tosecuritization transactions and collateral for fiscal years ending afterDecember 15, 2000.  The adoption of SFASNo. 140 did not have a material effect on the Company's financial position,results of operations or cash flows.

 

SFAS No. 141,“Business Combinations” (“SFAS No. 141”), requires that all businesscombinations be accounted for by a single method – the purchase method.  The provisions of this SFAS No. 141 apply toall business combinations initiated after June 30, 2001.  SFAS No. 141 also applies to all businesscombinations accounted for using the purchase method for which the date ofacquisition is July 1, 2001, or later. The adoption of the provisions of SFAS No. 141 is not expected to have amaterial impact on the Company's financial condition, results ofoperations or cash flows.

 

In July 2001, the FASB issued StatementNo. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).  SFAS No. 142 requires that, upon itsadoption, amortization of goodwill will cease and instead, the carrying valueof goodwill will be evaluated for impairment on an annual basis.  Identifiable intangible assets will continueto be amortized over their useful lives and reviewed for impairment inaccordance with SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 121”).  SFAS No. 142 will be effective for fiscalyears beginning after December 15, 2001. The Company has determined that this statement will not have a material impact on the Company'sfinancial condition, results of operations or cash flows.

 

In July 2001, the FASB issued StatementNo. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”).  SFAS No. 143 requires that the fair value ofa liability for an asset retirement obligation be recognized in the period inwhich it is incurred, if a reasonable estimate of fair value can be made.  The associated asset retirement cost wouldbe capitalized as part of the carrying amount of the long-lived asset.  SFAS No. 143 will be effective for fiscalyears beginning after June 15, 2002. The Company has determined that this statement will not have a material impact on the Company'sfinancial condition, results of operations or cash flows.

 

In October 2001, the FASB issuedStatement No. 144, “Accounting for the Impairment or Disposal of Long LivedAssets” (“SFAS No. 144”), that replaces SFAS No. 121.  SFAS No. 144 requires that long-lived assets be measured at thelower of carrying amount or fair value less cost to sell, whether reported incontinuing operations or in discontinued operations.  SFAS No. 144 also broadens the reporting of discontinuedoperations to include all components of an entity with operations that can bedistinguished from the rest of the entity and that will be eliminated from theongoing operations of the entity in a disposal transaction.  The provisions of SFAS No. 144 are effectivefor financial statements issued for fiscal years beginning after December 15,2001.  The Company has determined thatthis statement will not have a materialimpact on the Company's financial condition, results of operations orcash flows.

 

**Note 8 Private Placement:**

 

On July 27, 2001, the Company completedthe private placement of 473,504 shares of common stock at an average price of$6.63 per share to certain “accredited investors” including certain directorsand an officer of the Company and the Bank and their related interests.  Gross proceeds were $3,137,498.

 

The sale of the common stock is exemptfrom the registration provisions of the Securities Act of 1933 by virtues ofSection 4(2) of such Act and Regulation D promulgated pursuant thereto inasmuchas the sale was limited to 14 investors of which all were “accreditedinvestors” within the meaning of Regulation D. No underwriter or placement agent was used in the transaction.

 

**Note 9 Subsequent Events:**

 

TheCompany has ceased making contributions under the ESOP effective September 30,2001.  The remaining unallocated shareswill be sold in order to reduce the debt outstanding, and the ESOP plan will beterminated.  The sale of the remainingshares will take place over the next two quarters.

 

A 5% stock dividend was declared onOctober 17, 2000 and was paid on November 30, 2000 to shareholders of record asof November 15, 2000.  An additional 5%stock dividend was declared on October 24, 2001 to be paid on November 30, 2001to shareholders of record as of November 15, 2001.

 

**ITEM 2:  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following is management’s discussionand analysis of the major factors that influenced the financial performance ofthe Company for the nine and three months ended September 30, 2001.  This analysis should be read in conjunction withthe Company’s 2000 Annual Report as filed on Form 10KSB and with the unauditedfinancial statements and notes as set forth in this report.

 

Statements concerning future performance,developments or events, expectations for growth and income forecasts, and anyother guidance on future periods, constitute forward-looking statements thatare subject to a number of risks and uncertainties.  Actual results may differ materially from stated expectations.Specific factors include, but are not limited to, increased profitability, theability to control costs and expenses, interest rates and financial policies ofthe United States government, and general economic conditions.  Additional information on these and otherfactors that could affect financial results are included in its Securities andExchange Commission filings. The Company disclaims any obligation to update anysuch factors or to publicly announce the results of any revisions to anyforward-looking statements contained herein to reflect future events ordevelopments.

 

**RESULTS OF OPERATIONS**

 

**Net Income**

 

Net income increased 37% to $774,000 forthe nine months ended September 30, 2001 compared to $567,000 for the ninemonths ended September 30, 2000.  Basicearnings per share were $0.29 and $0.22 for the nine months ended September 30,2001 and 2000, respectively.  Dilutedearnings per share were $0.28 and $0.22 for the nine months ended September 30,2001 and 2000, respectively.  Earningsper share for the nine months ended September 30, 2000 were adjusted for theeffects of a stock dividend paid in November 2000.  The increase in net income was mainly due to the increase in netinterest income and other operating income, partially offset by an increase inother operating expenses, and the impact of a $189,000 impairment allowanceprovided for the servicing asset. Interest income increased due to an increase in average interest earningassets, and other operating income increased during the nine months endedSeptember 30, 2001 due to an increase in gain on sale of loans combined with anincrease in customer service charges.

 

Return on average assets for the ninemonths ended September 30, 2001 was 0.33% compared to 0.34% for the nine monthsended September 30, 2000.  The decreasein the return on average assets from 2000 to 2001 was due to the 41.5% growthin average assets, which was part of the Company’s strategic plan, and waspartially offset by an increase in net income noted above.  The return on average equity was 7.70% forthe nine months ended September 30, 2001 compared to 6.60% for the nine monthsended September 30, 2000.

 

Net income was $233,000 for the threemonths ended September 30, 2001 compared to $326,000 for the three months endedSeptember 30, 2000.  Basic earnings pershare were $0.08 for the three months ended September 30, 2001 compared to$0.14 for the three months ended September 30, 2000.  Diluted earnings per share were $0.08 and $0.13 for the threemonths ended September 30, 2001 and 2000, respectively.  Earnings per share for the three monthsended September 30, 2000 were adjusted for the effects of a stock dividend paidin November 2000.  The decrease in netincome was mainly due to an increase in the provision for loan losses, whichwas $670,000 for the three months ended September 30, 2001, compared to$200,000 for the three months ended September 30, 2000.  Interest income decreased due to a decreasein the net interest margin, partially offset by an increase in average interestearning assets.  Other operating incomeincreased due to an increase in the gain on sale of loans and an increase incustomer service charges, partially offset by a decrease in loan servicing feesand other fee income. Operating expenses decreased due to a decrease insalaries and employee benefits.

 

Return on average assets for the threemonths ended September 30, 2001 was 0.28% compared to 0.53% for the threemonths ended September 30, 2000.  Thedecrease in the return on average assets from 2000 to 2001 was due to theincrease in average assets combined with the decrease in net income.  The return on average equity was 5.93% forthe three months ended September 30, 2001 compared to 11.38% for the threemonths ended September 30, 2000. The decrease in the return on average equityfrom 2000 to 2001 was due to the increase in average equity combined with thedecrease in net income.

 

**Interest Income**

 

Net interest income is the mostsignificant 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 loanand investment portfolios and the interest paid on deposits and otherborrowings.  Net interest income dependson the volume of and interest rate earned on interest earning assets and thevolume of and interest rate paid on interest bearing liabilities.

** **

The following information applies to boththe three months and the nine months ended September 30, 2000 and thethree months and nine months ended September 30, 2001:

 

BORROWINGS: The Company borrowed $3.2million in June, 1999, of which $3.0 million was used to increase capital atits Bank subsidiary.  In March, 2000,the Company's subsidiary, Community (CA) Capital Trust I, issued $10 million of11.0% Fixed Rate Capital Trust Pass-through Securities ("TRUPS-RegisteredTrademark-"), with a liquidation value of $1,000 per share.  The Company used the proceeds to pay off$3.2 million in borrowed funds, and invest an additional $5.8 million in theBank. In March of 2001, the Company entered into a secured line of credit withthe Federal Home Loan Bank (“FHLB”), which had an average outstanding balanceof $1.8 million for the three months ended September 30, 2001.  In June of 2001, the Company obtained a $2.0million line of credit from a correspondent bank.  During the quarter ended June 30, 2001 the Company borrowed $1.0million on this line, which was used to increase capital at its Banksubsidiary.  The balance of this linewas paid with the proceeds from the Capital offering completed in July of 2001.

 

LOAN AND DEPOSIT GROWTH:  Loan growth beginning in early 2000 wasfunded by both retail and wholesale certificates of deposit, with the wholesaledeposits having a higher interest rate than the retail deposits.  Although the wholesale deposits have a higherinterest rate, there is limited operating costs associated with acquiring andmanaging these liabilities.  As ofSeptember 30, 2001 wholesale deposits totaled $65.1 million, compared to $10.0million as of December 31, 1999, and have maturities ranging from three monthsto one year.

Thefollowing table sets forth a summary of average balances with correspondinginterest income and interest expense as well as average yield and costinformation for the periods presented. Average balances are derived from daily balances, and nonaccrual loansare included as interest earning assets for purposes of this table.

 
|                                           |   | **For the nine months  ended September 30,** |    |
|------------------------------------------------|--------|----------------------------------------------|---------|
|                                           |   | **2001**                                     |    | **2000** |   |
|                                           |   | **Average**                                  |    | **Interest** |   | **Average** |   | **Average** |   | **Interest** |   | **Average** |   |
|                                           |   | **Balance**                                  |    | **Earned/Paid** |   | **Rate/Yield** |   | **Balance** |   | **Earned/Paid** |   | **Rate/Yield** |   |
| Average assets                                 |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Securities and time deposits at other  banks   |   | $                                            | 7,540   |   | $ | 356 |   | 6.31 | % | $ | 7,898 |   | $ | 340 |   | 5.75 | % |
| Fed funds sold                                 |   | 24,501                                       |    | 750 |   | 4.09 | % | 12,120 |   | 542 |   | 5.97 | % |
| Loans:                                         |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                                     |   | 123,237                                      |    | 8,141 |   | 8.83 | % | 80,027 |   | 5,608 |   | 9.36 | % |
| Real Estate                                    |   | 132,042                                      |    | 9,376 |   | 9.49 | % | 97,101 |   | 7,572 |   | 10.42 | % |
| Consumer                                       |   | 7,733                                        |    | 496 |   | 8.58 | % | 7,406 |   | 507 |   | 9.14 | % |
| Total loans                                    |   | 263,012                                      |    | 18,013 |   | 9.16 | % | 184,534 |   | 13,687 |   | 9.91 | % |
| Total earning assets                           |   | 295,053                                      |    | 19,119 |   | 8.66 | % | 204,552 |   | 14,569 |   | 9.51 | % |
| Non earning assets                             |   | 17,320                                       |    |   |   |   |   | 16,145 |   |   |   |   |   |
| Total average assets                           |   | $                                            | 312,373 |   |   |   |   |   | $ | 220,697 |   |   |   |   |   |
|                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
|                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Average liabilities and shareholders  equity   |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits:                     |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Savings and interest bearing accounts          |   | $                                            | 74,722  |   | 1,341 |   | 2.40 | % | $ | 59,002 |   | 969 |   | 2.19 | % |
| Time deposits                                  |   | 174,763                                      |    | 7,445 |   | 5.70 | % | 109,164 |   | 4,878 |   | 5.97 | % |
| Total interest bearing deposits                |   | 249,485                                      |    | 8,786 |   | 4.71 | % | 168,166 |   | 5,847 |   | 4.64 | % |
| Demand deposits                                |   | 32,410                                       |    | - |   |   |   | 29,788 |   | - |   |   |   |
| Borrowings:                                    |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Trust preferred debt                           |   | 10,000                                       |    | 834 |   | 11.15 | % | 6,971 |   | 590 |   | 11.31 | % |
| Other borrowings                               |   | 2,722                                        |    | 121 |   | 5.94 | % | 1,906 |   | 146 |   | 10.23 | % |
| Total borrowings                               |   | 12,722                                       |    | 955 |   | 10.04 | % | 8,877 |   | 736 |   | 11.07 | % |
| Total interest bearing liabilities             |   | 294,617                                      |    | 9,741 |   | 4.42 | % | 206,831 |   | 6,583 |   | 4.25 | % |
| Accrued expenses and other  liabilities        |   | 4,356                                        |    |   |   |   |   | 2,407 |   |   |   |   |   |
| Net shareholders equity                        |   | 13,400                                       |    |   |   |   |   | 11,459 |   |   |   |   |   |
| Total average liabilities  shareholders equity |   | $                                            | 312,373 |   |   |   |   |   | $ | 220,697 |   |   |   |   |   |
|                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                            |   |                                         |    |   |   | 4.24 | % |   |   |   |   | 5.26 | % |
|                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income                            |   |                                         |    | $ | 9,378 |   |   |   |   |   | $ | 7,986 |   |   |   |
| Net yield on interest earnings assets          |   |                                         |    |   |   | 4.25 | % |   |   |   |   | 5.22 | % |

 

Interest income for the nine months endedSeptember 30, 2001 increased to $19.1 million, compared to $14.6 million forthe nine months ended September 30, 2000. This increase was due to an increase in the average balance of interestearning assets, partially offset by a decrease in the yield on thoseassets.  Average interest earning assetsincreased to $295.1 million for the nine months ended September 30, 2001compared to $204.6 million for the nine months ended September 30, 2000.  The yield on interest earning assetsdecreased to 8.66% for the nine months ended September 30, 2001 compared to9.51% for the nine months ended September 30, 2000.  The largest single component of interest earning assets was loansreceivable, which had an average balance of $263.0 million with a yield of9.16% for the nine months ended September 30, 2001 compared to $184.5 millionwith a yield of 9.91% for the nine months ended September 30, 2000.  The increase in the average balance of loansreceivable was attributable to the expansion of the Company as part of theCompany’s strategic plan, including the retention of a portion of SBA 7aloans.  The decline in yield on averageassets was primarily due to the 3.50% decline in interest rates that hasoccurred during the first nine months of 2001.

 

Interest expense for the nine monthsended September 30, 2001 increased to $9.7 million compared to $6.6 million forthe nine months ended September 30, 2000. This increase was due to an increase in average deposits and otherborrowings, combined with a change in the composition of those liabilities, andby an increase in the cost of those liabilities.  Average interest-bearing liabilities increased to $294.6 million forthe nine months ended September 30, 2001 compared to $206.8 million for thenine months ended September 30, 2000. Average time deposits increased to $174.8 million with a cost of 5.70%for the nine months ended September 30, 2001 compared to $109.2 million with acost of 5.97% for the nine months ended September 30, 2000.  SEE “LOAN AND DEPOSIT GROWTH” AND“BORROWINGS” NOTED ABOVE.

 

Other average borrowings increased to$12.7 million with a cost of 10.04% for the nine months ended September 30,2001, compared to $8.9 million with a cost of 11.07% for the nine months endedSeptember 30, 2000. SEE “BORROWINGS” ABOVE.

 
|                                           |   | **For the three months  ended September 30,** |    |
|------------------------------------------------|--------|-----------------------------------------------|---------|
|                                           |   | **2001**                                      |    | **2000** |   |
|                                           |   | **Average**                                   |    | **Interest** |   | **Average** |   | **Average** |   | **Interest** |   | **Average** |   |
|                                           |   | **Balance**                                   |    | **Earned/Paid** |   | **Rate/Yield** |   | **Balance** |   | **Earned/Paid** |   | **Rate/Yield** |   |
| Average Assets                                 |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Securities and time deposits at other  banks   |   | $                                             | 6,893   |   | $ | 106 |   | 6.10 | % | $ | 7,847 |   | $ | 113 |   | 5.73 | % |
| Fed funds sold                                 |   | 39,696                                        |    | 350 |   | 3.50 | % | 12,191 |   | 197 |   | 6.43 | % |
| Loans:                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                                     |   | 127,935                                       |    | 2,489 |   | 7.72 | % | 72,293 |   | 2,351 |   | 12.94 | % |
| Real Estate                                    |   | 134,572                                       |    | 3,035 |   | 8.95 | % | 131,980 |   | 2,962 |   | 8.93 | % |
| Consumer                                       |   | 7,322                                         |    | 155 |   | 8.40 | % | 7,696 |   | 188 |   | 9.72 | % |
| Total loans                                    |   | 269,829                                       |    | 5,679 |   | 8.35 | % | 211,969 |   | 5,501 |   | 10.32 | % |
| Total earning assets                           |   | 316,418                                       |    | 6,135 |   | 7.69 | % | 232,007 |   | 5,811 |   | 9.96 | % |
| Non earning assets                             |   | 18,235                                        |    |   |   |   |   | 16,139 |   |   |   |   |   |
| Total average assets                           |   | $                                             | 334,653 |   |   |   |   |   | $ | 248,146 |   |   |   |   |   |
|                                           |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
|                                           |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Average liabilities and shareholders  equity   |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits:                     |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Savings and interest bearing accounts          |   | $                                             | 82,670  |   | 418 |   | 2.01 | % | $ | 59,502 |   | 315 |   | 2.11 | % |
| Time deposits                                  |   | 183,316                                       |    | 2,348 |   | 5.08 | % | 131,193 |   | 2,045 |   | 6.20 | % |
| Total interest bearing deposits                |   | 265,986                                       |    | 2,766 |   | 4.13 | % | 190,695 |   | 2,360 |   | 4.92 | % |
| Demand deposits                                |   | 35,322                                        |    | - |   |   |   | 31,637 |   | - |   |   |   |
| Borrowings:                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Trust preferred debt                           |   | 10,000                                        |    | 278 |   | 11.03 | % | 10,000 |   | 285 |   | 11.34 | % |
| Other borrowings                               |   | 3,096                                         |    | 45 |   | 5.77 | % | 1,006 |   | 27 |   | 10.68 | % |
| Total borrowings                               |   | 13,096                                        |    | 323 |   | 9.79 | % | 11,006 |   | 312 |   | 11.28 | % |
| Total interest bearing liabilities             |   | 314,404                                       |    | 3,089 |   | 3.90 | % | 233,338 |   | 2,672 |   | 4.56 | % |
| Accrued expenses and other  liabilities        |   | 4,534                                         |    |   |   |   |   | 3,212 |   |   |   |   |   |
| Net shareholders Equity                        |   | 15,715                                        |    |   |   |   |   | 11,596 |   |   |   |   |   |
| Total average liabilities  shareholders equity |   | $                                             | 334,653 |   |   |   |   |   | $ | 248,146 |   |   |   |   |   |
|                                           |   |                                          |    |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                            |   |                                          |    |   |   | 3.79 | % |   |   |   |   | 5.40 | % |
|                                           |   | .                                             |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income                            |   |                                          |    | $ | 3,046 |   |   |   |   |   | $ | 3,139 |   |   |   |
| Net yield on interest earnings assets          |   |                                          |    |   |   | 3.82 | % |   |   |   |   | 5.38 | % |

 

Interest income for the three monthsended September 30, 2001 increased to $6.1 million, compared to $5.8 millionfor the three months ended September 30, 2000. This increase was due to an increase in the average balance of interestearning assets, partially offset by a decrease in the yield on thoseassets.  Average interest earning assetsincreased to $316.4 million for the three months ended September 30, 2001compared to $232.0 million for the three months ended September 30, 2000.  The yield on interest earning assetsdecreased to 7.69% for the three months ended September 30, 2001 compared to9.96% for the three months ended September 30, 2000.  The largest single component of interest earning assets was loansreceivable, which had an average balance of $269.8 million with a yield of8.35% for the three months ended September 30, 2001 compared to $212.0 millionwith a yield of 10.32% for the three months ended September 30, 2000.  The increase in the average balance of loansreceivable was attributable to the expansion of the Company as part of theCompany’s strategic plan, including the retention of a portion of SBA 7aloans.  The decline in the yield onaverage assets was primarily due to the 3.50% decline in interest rates thathas occurred during the first nine months of 2001.  Since a significant portion of the loans are tied to prime, theseassets reprice immediately with changes in interest rates, or in the case ofSBA 7a loans, on the first day of the quarter following a change in interestrates.  Further decline in the yields onloans is expected to occur beginning in the fourth quarter of 2001, as the SBA7a loans will not adjust for the 0.75% decline in interest rates during thethird quarter of 2001 until October 1, 2001.

 

Interest expense for the three monthsended September 30, 2001 increased to $3.1 million compared to $2.7 million forthe three months ended September 30, 2000. This increase was due to an increase in average deposits and otherborrowings, combined with a change in the composition of those liabilities, andpartially offset by a decrease in the cost of those liabilities.  Average interest-bearing liabilities increasedto $314.4 million for the three months ended September 30, 2001 compared to$233.3 million for the three months ended September 30, 2000.  Average time deposits increased to $183.3million with a cost of 5.08% for the three months ended September 30, 2001compared to $131.2 million with a cost of 6.20% for the three months endedSeptember 30, 2000.  SEE “LOAN ANDDEPOSIT GROWTH” ABOVE.

 

Other average borrowings increased to$13.1 million with a cost of 9.79% for the three months ended September 30,2001, compared to $11.0 million with a cost of 11.28% for the three monthsended September 30, 2000.  SEE“BORROWINGS” ABOVE.

 

**Net interest income before provision for estimated loanlosses**

 

Net interest income before provision forestimated loan losses for the nine months ended September 30, 2001 was $9.4million, compared to $8.0 million for the nine months ended September 30,2000.  This increase was primarily dueto the increase in average interest earning assets and partially offset by adecrease in the net interest margin. Average interest earning assets were $295.1 million for the nine monthsended September 30, 2001 with a net interest margin of 4.25% compared to $204.6million with a net interest margin of 5.22% for the nine months ended September30, 2000.  The decline in the netinterest margin was primarily due to the falling interest rate environment,combined with the increased use of certificates of deposits as well as otherborrowed funds in order to support the Company’s expanding loan portfolio.

 

Net interest income before provision forestimated loan losses for the three months ended September 30, 2001 was $3.0million, compared to $3.1 million for the three months ended September 30,2000.  This decrease was primarily dueto the decrease in the net interest margin and was partially offset by anincrease in average interest earning assets. Average interest earning assets were $316.4 million for the three monthsended September 30, 2001 with a net interest margin of 3.82% compared to $232.0million with a net interest margin of 5.38% for the three months endedSeptember 30, 2000.  The decline in thenet interest margin was primarily due to the falling interest rate environment,combined with the increased use of certificates of deposits as well as otherborrowed funds in order to support its expanding loan portfolio.

 

**Provision for Loan Losses**

 

Net charge offs totaled $157,000 for thenine months ended September 30, 2001 compared to $41,000 during the nine monthsended September 30, 2000.  The provisionfor loan losses totaled $764,000 for the nine months ended September 30, 2001compared to $537,000 for the nine months ended September 30, 2000.  As a result of the increase in total loansoutstanding, combined with the deteriorating economic conditions, managementincreased the allowance for loan losses to $2.8 million as of September 30,2001 compared to $1.8 million as of September 30, 2000.  As of September 30, 2001, the allowance was1.00% of total gross loans compared to 0.81% as of September 30, 2000.  When excluding the guaranteed portions ofloans and loans held for sale, the allowance was 1.34% and 1.00% respectivelyas a percentage of total gross loans as of September 30, 2001 and September 30,2000.  The allowance for loan losses asa percentage of nonaccrual loans was 60% as of September 30, 2001 compared to154% as of September 30, 2000.  Whenexcluding the guaranteed portion of nonaccrual loans, the allowance for loanlosses as a percentage of nonaccrual loans was 92% as of September 30, 2001compared to 614% as of September 30, 2000.

 

For the three months ended September 30,2001, net charge offs totaled $67,000 compared to $14,000 for the three monthsended September 30, 2000.  Provisionsfor loan losses totaled $670,000 for the three months ended September 30, 2001compared to $200,000 for the three months ended September 30, 2000.

 

Nonaccrual loans as of September 30, 2001were $4.7 million, of which $1.6 million is guaranteed by the SBA, compared to$57,000, with $20,000 guaranteed by the SBA as of December 31, 2000 and$1.2 million, with $890,000 million guaranteed by the SBA as of September 30,2000. The increase in non-accrual loans was substantially impacted by a $2.2million aircraft loan, which became non-performing during the quarter.  Management believes it will be able toresolve this loan during the fourth quarter of 2001. Non-accrual loans wereunusually low as of December 31, 2000, as compared to non-accrual loans as ofDecember 31, 1999, which were $1.8 million.

 

In determining the adequacy of theallowance for loan losses, management initially considers the allowancesspecifically allocated to individual impaired loans, and next considers thelevel of general loss allowances deemed appropriate for the balance of theportfolio based on factors including the levels of classified assets, generalportfolio trends relative to asset and portfolio size, asset categories,potential credit concentrations, nonaccrual loan levels, historical lossexperience, risks associated with changes in economic and business conditions, andother factors.  In addition, variousregulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses.  Such agencies may require the Company tomake additional provisions for loan losses based upon judgments which differfrom those of management.

 

**Other Operating Income**

 

Other operating income representsnon-interest types of revenue and is comprised primarily of gains on sale ofloans, loan servicing fees, service charges on deposits (customer servicecharges), and other fee income.  Otheroperating income was $1.9 million for the nine months ended September 30, 2001compared to $1.6 million for the nine months ended September 30, 2000.  Other operating income was negativelyimpacted by a $189,000 impairment allowance provided for the servicingasset.  The increase was mainly due toan increase in the gain on sale of loans, which totaled $597,000 for the ninemonth period ended September 30, 2001 compared to $127,000 for the nine monthperiod ended September 30, 2000.  SEE“GAIN ON SALE OF LOANS AND LOAN ORIGINATIONS” BELOW.

 

Other operating income was $653,000 forthe three months ended September 30, 2001 compared to $550,000 for the threemonths ended September 30, 2000.  Theincrease was mainly due to an increase in the gain on sale of loans, whichtotaled $246,000 for the three month period ended September 30, 2001 comparedto $34,000 for the three month period ended September 30, 2000.  SEE “GAIN ON SALE OF LOANS AND LOANORIGINATIONS” BELOW.

 

Prior to January 1, 2000, a major portionof other operating income was generated through the sale of loans consisting ofSBA loans and mortgage loans.  Beginningon January 1, 2000, the Company began its SBA 7a retention program in order toincrease interest income and decrease reliance on gain on sale of loans.  The Company recently announced that it isentering the next phase of this retention program, whereby a portion of the SBA7a guaranteed and unguaranteed loans will be sold in the future to maintain theSBA loans to under 40% of total loans in order to maintain a diversifiedbalance sheet.

 

GAIN ON SALE OF LOANS AND LOANORIGINATIONS

 

During the nine months ended September30, 2001, the Company originated $39.4 million in SBA government guaranteedloans compared to $39.0 million during the nine months ended September 30,2000.  The Company originated $26.1million in mortgage loans during the nine months ended September 30, 2001compared to $11.1 million for the nine months ended September 30, 2000.  The Company sold approximately $17.3 millionin SBA 504 and 7a loans and $24.9 million in mortgage loans during the ninemonth period ended September 30, 2001, compared to sales of $2.9 million in SBAloans and $9.9 million in mortgage loans sold during the nine month periodended September 30, 2000.  The sales forthe nine month period ended September 30, 2001 resulted in a gain of $597,000,compared to $127,000 for the nine month period ended September 30, 2000.

 

During the three months ended September30, 2001, the Company originated $12.4 million in SBA government guaranteedloans compared to $10.7 million during the three months ended September 30,2000.  The Company originated $7.7million in mortgage loans during the three months ended September 30, 2001compared to $3.9 million for the three months ended September 30, 2000.  The Company sold approximately $6.9 millionin SBA 504 and 7a loans and $8.4 million in mortgage loans during the threemonth period ended September 30, 2001, compared to sales of $285,000 in SBAloans and $3.5 million in mortgage loans sold during the three month periodended September 30, 2000.  The sales forthe three month period ended September 30, 2001 resulted in a gain of $246,000,compared to $34,000 for the three month period ended September 30, 2000.

 

LOAN SERVICING FEES

 

Loan servicing fees, net, totaled$287,000 for the nine months ended September 30, 2001 compared to $486,000 forthe nine months ended September 30, 2000. For the quarter ended September 30, 2001, loan servicing fees totaled$84,000 compared to $163,000 for the quarter ended September 30, 2000.  The decrease in loan servicing fees, net, isdue to the decrease in SBA loans serviced for others.  As of January 1, 2000, the Company implemented its SBA retentionprogram, whereby the Company retained a major portion of its SBA 7a loans inorder to increase its portfolio.  Theservicing portfolio, which generates loan servicing fees, has declined as theloans have paid off and no additional loans were sold until the third quarterof 2001.  The Company recently announcedthat it is entering the next phase of this program, whereby it intends to sella portion of its SBA 7a loans in order to diversify its lending portfolio, andkeep SBA loans under 40% of total loans. Accordingly, the servicing portfolio should increase as the loans arebeing sold.  Loans serviced for otherstotaled $92.0 million as of January 1, 2000, compared to $71.5 million as ofSeptember 30, 2001, resulting in the decrease in loan servicing income for thenine month and three month periods ended September 30, 2001 when compared tothe same periods in 2000.

 

CUSTOMER SERVICE CHARGES

 

Customer service charges totaled $361,000for the nine months ended September 30, 2001 compared to $285,000 for the ninemonths ended September 30, 2000.  Forthe three months ended September 30, 2001, customer service charges totaled$134,000 compared to $87,000 for the three months ended September 30, 2000.

 

OTHER FEE INCOME

 

Other fee income totaled approximately$663,000 for the nine months ended September 30, 2001 compared to $739,000 forthe nine months ended September 30, 2000. For the three months ended September 30, 2001 and 2000 other fee incometotaled $189,000 and $266,000 respectively. Other fee income for the nine months ended September 30, 2001 wasnegatively impacted by the $189,000 write down of the Company’s servicingasset.

 

**Other Operating Expenses**

 

Other operating expenses are non-interesttypes of expenses and are incurred by the Company in its normal course ofbusiness.  Salaries and employeebenefits, occupancy, telephone, premises and equipment, marketing andpromotions, data processing, professional services, director, officer andemployee expenses, office, ESOP compensation and other expenses are the majorcategories of other operating expenses. Other operating expenses increased to $9.2 million for the nine monthsended September 30, 2001 compared to $8.1 million for the nine months endedSeptember 30, 2000.  For the three monthsended September 30, 2001 other operating expenses totaled $2.6 million comparedto $2.9 million for the three months ended September 30, 2000.

 

The Company’s efficiency ratio, which isthe ratio of recurring operating expenses to net interest income beforeprovision for loan losses plus non-interest income, decreased (improved) to81.51% for the nine months ended September 30, 2001 compared to 83.68% for thenine months ended September 30, 2000. The decrease in efficiency ratio was due to the increase in otheroperating income, and was partially offset by the increase in operatingexpenses.  The most significantoperating expense is salary and benefit expenses, which increased to $5.0million for the nine months ended September 30, 2001 compared to $4.2 millionfor the nine months ended September 30, 2000. The increase in salaries and benefit expenses was due to the expansionof the Company’s operations, including increased commissions for mortgage loanproduction, the addition of a new branch in Escondido, California, which openedin April 2001, and the addition of SBA loan production offices in Los Angelesduring the latter half of 2000.

 

The Company’s efficiency ratio decreasedto 71.1% for the three months ended September 30, 2001 compared to 77.6% forthe three months ended September 30, 2000. The decrease in efficiency ratio was due to the decrease in operatingexpenses to $2.6 million for the quarter ended September 30, 2001 compared to$2.9 million for the quarter ended September 30, 2000.  The most significant operating expense issalary and benefit expenses, which decreased to $1.3 million for the threemonths ended September 30, 2001 compared to $1.6 million for the three monthsended September 30, 2000.  Salaries andemployee benefits for the quarter ended September 30, 2001 were reduced in partdue to the reversal of bonuses totaling $140,000 that had been previouslyaccrued during the first and second quarter of 2001.  The reduction was due to a change in projection for earnings for2001 as a result of the 3.50% decline in interest rates experienced in2001.  In spite of the addition of newbranches and loan production offices, operating expenses without salaries andemployee benefits remained flat at $1.3 million for the quarters ended September30, 2001 and 2000.  This is due tomanagement’s efforts to control expenses during the third quarter of 2001.

 

 

The following table compares each of thecomponents of other operating expenses for the nine months ended September 30,2001 and 2000, respectively:

 
|                                   |   | **For the nine months ended September 30,** |   | **For the three months ended September 30,** |   |
|----------------------------------------|--------|---------------------------------------------|--------|----------------------------------------------|--------|
|                                   |   | **2001**                                    |   | **2000**                                     |   | **Change $** |   | **2001** |   | **2000** |   | **Change $** |   |
| Other operating expenses:              |   |                                        |   |                                         |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits         |   | $                                           | 4,987  |                                         | $      | 4,187 |   | $ | 800 |   | $ | 1,325 |   | $ | 1,559 |   | $ | (234 | ) |
| Occupancy                              |   | 679                                         |   | 623                                          |   | 56 |   | 227 |   | 224 |   | 3 |   |
| Telephone                              |   | 220                                         |   | 206                                          |   | 14 |   | 69 |   | 75 |   | (6 | ) |
| Premises and equipment                 |   | 497                                         |   | 422                                          |   | 75 |   | 166 |   | 137 |   | 29 |   |
| Marketing and promotions               |   | 249                                         |   | 239                                          |   | 10 |   | 83 |   | 87 |   | (4 | ) |
| Data processing                        |   | 715                                         |   | 617                                          |   | 98 |   | 243 |   | 207 |   | 36 |   |
| Professional services                  |   | 554                                         |   | 522                                          |   | 32 |   | 162 |   | 170 |   | (8 | ) |
| Director, officer and employee expense |   | 368                                         |   | 369                                          |   | (1 | ) | 97 |   | 130 |   | (33 | ) |
| Office expenses                        |   | 323                                         |   | 240                                          |   | 83 |   | 81 |   | 86 |   | (5 | ) |
| ESOP compensation expense              |   | 153                                         |   | 154                                          |   | (1 | ) | 51 |   | 52 |   | (1 | ) |
| Other non-recurring expense            |   | -                                           |   | 69                                           |   | (69 | ) | - |   | 69 |   | (69 | ) |
| Other expenses                         |   | 454                                         |   | 474                                          |   | (20 | ) | 126 |   | 137 |   | (11 | ) |
| Total other operating expenses         |   | $                                           | 9,199  |                                         | $      | 8,122 |   | $ | 1,077 |   | $ | 2,630 |   | $ | 2,933 |   | $ | (303 | ) |

 

 

**Provision for Income Taxes**

 

Theeffective income tax rate was 41.5% for the nine months ended September 30,2001 compared to 41.2% for the nine months ended September 30, 2000.  Provisions for income taxes totaled $549,000and $397,000 for the nine months ended September 30, 2001 and 2000,respectively.

 

Forthe three months ended September 30, 2001 and 2000, the effective income taxrate was 41.6% and 41.4%, respectively. Provisions for income taxes totaled $166,000 and $230,000 for the threemonths ended September 30, 2001 and 2000, respectively.

 

 

**FINANCIAL CONDITION**

 

**Summary of Changes in Consolidated Balance Sheets**

**September 30, 2001 compared to December 31, 2000**

 

Total assets of the Company increased to$345.2 million as of September 30, 2001 compared to $280.5 million as ofDecember 31, 2000 and $267.3 million as of September 30, 2000.  This increase was due to the growth in netloans to $280.7 million as of September 30, 2001, compared to $245.2 million asof December 31, 2000, and were $224.2 million as of September 30, 2000.

 

Deposits grew to $311.1 million as ofSeptember 30, 2001 compared to $252.7 million as of December 31, 2000 andwere $241.2 million as of September 30, 2000. Cash and cash equivalents increased to $49.5 million as of September 30,2001 compared to $17.8 million as of December 31, 2000 and were $26.9 millionas of September 30, 2000.  The increasein cash and cash equivalents was due to the increase in deposits and otherborrowings, partially offset by the increase in total loans.

 

Shareholders’ equity was $16.2 million asof September 30, 2001 compared to $12.2 million as of December 31, 2000, andwas $11.8 million as of September 30, 2000. The Company completed a $3.1 million capital offering in July of2001.  Please refer to the capitalsection of this discussion for further information.

 

**Investments**

 

The Company’s investment portfolioconsists primarily of certificates of deposit with other financialinstitutions, agency securities and overnight investments in the Federal Fundsmarket.  As of September 30, 2001,certificates of deposit with other financial institutions totaled $497,000,compared to $790,000 as of December 31, 2000 and $784,000 as of September 30,2000.  At each of the periodsapproximately $500,000 was pledged as collateral for the Employee StockOwnership Plan (“ESOP”) loan from another California bank, which was fundingthe Company’s ESOP.  US Government andother securities totaled $5.1 million as of September 30, 2001 compared to $6.8million as of December 31, 2000, and were $6.2 million at September 30,2000.  These securities are held ascollateral for public funds and treasury, tax and loan deposits.  Average Federal Funds sold for the ninemonths ended September 30, 2001 was $24.5 million compared to $12.1 million forthe nine months ended September 30, 2000.

 

**Loans**

 

Loan balances, net of the allowance forloan losses, increased to $280.7 million as of September 30, 2001,compared to $245.2 million as of December 31, 2000 and $224.2 million as ofSeptember 30, 2000.  A healthy loandemand resulted in a 19.2% annualized growth rate in total gross loans for thenine months ended September 30, 2001, led by a 41.3% annualized increase inreal estate commercial and multi-family loans. This rapid increase is due to the retention of the SBA 7a loans, as partof the Company’s change in strategy, which became effective January 1,2000.  The Company recently announcedthat it is entering the next phase of the SBA 7a retention program, whereby aportion of the future production of SBA 7a loans will be sold in order tomaintain the SBA loan portfolio at under 40% of total loans.  The servicing portfolio, which consistsprimarily of SBA loans sold to other investors, being serviced by the Companywas $72.5 million as of September 30, 2001 compared to $77.6 million as ofDecember 31, 2000 and was $79.9 million as of September 30, 2000.  The future sales of SBA 7a loans shouldresult in increases in the servicing portfolio.

 

*Loan Origination and Sale.*  The following table sets forth the Company’sloan originations by category and purchases, sales and principal repayments ofloans for the periods indicated:

 
|                   |   | **At or for the nine months** |    | **At or for the three months** |   |
|------------------------|--------|-------------------------------|---------|--------------------------------|--------|
|                   |   | **ended September 30,**       |    | **ended September 30,**        |   |
|                   |   | **2001**                      |    | **2000**                       |   | **2001** |   | **2000** |   |
|                   |   | **(dollars in thousands)**    |    |
| Beginning balance      |   | $                             | 245,199 |                           | $      | 144,194 |   | $ | 262,340 |   | $ | 195,722 |   |
| Loans originated:      |   |                          |    |                           |   |   |   |   |   |
| Commercial loans       |   | 13,831                        |    | 18,269                         |   | 7,474 |   | 8,583 |   |
| Real estate:           |   |                          |    |                           |   |   |   |   |   |
| Construction loans     |   | 61,887                        |    | 54,803                         |   | 27,622 |   | 15,523 |   |
| One-to four-family     |   | 39,215                        |    | 31,854                         |   | 15,344 |   | 9,813 |   |
| Commercial             |   | 64,147                        |    | 60,189                         |   | 26,561 |   | 19,057 |   |
| Consumer               |   | 3,375                         |    | 6,739                          |   | 746 |   | 2,445 |   |
| Total loans originated |   | 182,455                       |    | 171,854                        |   | 77,747 |   | 55,421 |   |
| Loans sold             |   |                          |    |                           |   |   |   |   |   |
| Real estate:           |   |                          |    |                           |   |   |   |   |   |
| Construction loans     |   | 1,783                         |    | -                              |   | - |   | - |   |
| One-to four-family     |   | 24,853                        |    | 9,900                          |   | 8,353 |   | 3,528 |   |
| Commercial             |   | 17,290                        |    | 2,886                          |   | 6,885 |   | 285 |   |
| Total loans sold       |   | 43,926                        |    | 12,786                         |   | 15,238 |   | 3,813 |   |
| Less:                  |   |                          |    |                           |   |   |   |   |   |
| Principal repayments   |   | 103,222                       |    | 79,364                         |   | 44,881 |   | 23,169 |   |
| Other net charges (1)  |   | (221                          | )       | (326                           | )      | (759 | ) | (63 | ) |
| Total Loans            |   | $                             | 280,727 |                           | $      | 224,224 |   | $ | 280,727 |   | $ | 224,224 |   |

----

(1)   Other net changes include changes inallowance for loan losses, deferred loan fees, loans in process and unamortizedpremiums and discounts.

** **

*Nonperforming assets. *Nonperforming assets consist of nonperforming loans andother real estate owned (“OREO”). Nonperforming loans are those loans which have (i) been placed onnonaccrual status, (ii) been subject to troubled debt restructurings, or (iii)become contractually past due 90 days or more with respect to principal orinterest and have not been restructured or placed on nonaccrual status.

 

The following table sets forth the Company’snon-performing assets at the dates indicated:

 
|                                                                                                                   |   | **September 30,**          |      | **December 31,** |   | **September 30,** |      |
|------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|------------------|--------|-------------------|-----------|
|                                                                                                                   |   | **2001**                   |      | **2000**         |   | **2000**          |      |
|                                                                                                                   |   | **(dollars in thousands)** |      |
|                                                                                                                   |   |                       |      |             |   |              |      |
| Non-accrual loans                                                                                                      |   | $                          | 4,724     |             | $      | 57                |      | $ | 1,187 |   |
| 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                                                                                             |   | 4,724                      |      | 57               |   | 1,187             |      |
| Other real estate owned                                                                                                |   | -                          |      | -                |   | -                 |      |
| Total non-performing assets                                                                                            |   | $                          | 4,724     |             | $      | 57                |      | $ | 1,187 |   |
|                                                                                                                   |   |                       |      |             |   |              |      |
| SUPPLEMENTAL DATA                                                                                                      |   |                       |      |             |   |              |      |
| Total Assets                                                                                                           |   | $                          | 345,185   |             | $      | 280,458           |      | $ | 267,322 |   |
| Total gross loans                                                                                                      |   | $                          | 283,268   |             | $      | 247,339           |      | $ | 226,047 |   |
| Total loans held for investment                                                                                        |   | $                          | 245,294   |             | $      | 234,306           |      | $ | 212,481 |   |
| Government guaranteed portion of total loans                                                                           |   | $                          | 49,627    |             | $      | 35,058            |      | $ | 30,173 |   |
| Non-performing loans, net of government guarantees                                                                     |   | $                          | 3,086     |             | $      | 37                |      | $ | 297 |   |
| Allowance for loan losses                                                                                              |   | $                          | 2,833     |             | $      | 2,226             |      | $ | 1,823 |   |
| Allowance for loan losses to total loans                                                                               |   | 1.00                       | %         | 0.90             | %      | 0.81              | %         |
| Allowance for loan losses to total loans held for  investment, net of government guarantees                            |   | 1.34                       | %         | 1.12             | %      | 1.00              | %         |
| Allowance for loan losses to non-accrual loans                                                                         |   | 60                         | %         | 3905             | %      | 154               | %         |
| Allowance for loan losses to non-performing loans                                                                      |   | 60                         | %         | 3905             | %      | 154               | %         |
| Allowance for loan losses to non-performing loans, net of  government guarantees                                       |   | 92                         | %         | 6016             | %      | 614               |    % |
| Allowance for loan losses to non-performing assets                                                                     |   | 60                         | %         | 3905             | %      | 154               | %         |
| Total non-performing assets to total assets                                                                            |   | 1.37                       | %         | 0.02             | %      | 0.44              | %         |
| Total non-performing loans, net of government guarantees  to total assets                                              |   | 0.89                       |    % | 0.01             | %      | 0.11              | %         |
| Total non-performing loans to total loans                                                                              |   | 1.67                       | %         | 0.02             | %      | 0.53              | %         |
| Total non-performing loans, net of government guarantees,  to total loans                                              |   | 1.09                       | %         | 0.01             | %      | 0.13              | %         |

 

*Nonaccrual Loans.* Nonaccrual loans are impaired loans where theoriginal contractual amount may not be fully collectible.  The Company measures its impaired loans byusing the fair value of the collateral if the loan is collateral-dependent andthe present value of the expected future cash flows discounted at the loan’seffective interest rate if the loan is not collateral-dependent.  As of September 30, 2001, December 31, 2000and September 30, 2000 all impaired or nonaccrual loans werecollateral-dependent.  The Companyplaces loans on nonaccrual status that are delinquent 90 days or more or when areasonable doubt exists as to the collectibility of interest andprincipal.  The Company had seventeenloans on nonaccrual status as of September 30, 2001, totaling $4.7million.  Of this total, $1.6 million isguaranteed by the SBA.  As of December31, 2000, the Company had five loans on nonaccrual status, totaling $57,000,with $20,000 guaranteed by the SBA. The Company had four loans on nonaccrualstatus as of September 30, 2000, totaling $1.2 million.  Of this total, $890,000 was guaranteed bythe SBA.  The increase in nonaccrualloans was substantially impacted by a $2.2 million aircraft loan.  Management believes that this loan will beresolved during the fourth quarter of 2001. The nonaccrual totals as of December 31, 2000 were extremely low, ascompared to non-accrual loans as of December 31, 1999, which were $1.8 million.

 

*Allowance for Loan Losses*.  The allowance for loan losses is establishedthrough a provision for loan losses based on management’s evaluation of therisks inherent in its loan portfolio and the general economy.  The allowance is increased by provisionscharged against earnings and reduced by net loan chargeoffs.  Loans are charged off when they are deemedto be uncollectible, or partially charged off when portions of a loan aredeemed to be uncollectible.   Recoveriesare generally recorded only when cash payments are received.

 

In determining the adequacy of theallowance for loan losses, management initially considers the allowancesspecifically allocated to individual impaired loans, and next considers thelevel of general loss allowances deemed appropriate for the balance of theportfolio based on factors including the levels of classified assets, generalportfolio trends relative to asset and portfolio size, asset categories,potential credit concentrations, nonaccrual loan levels, historical lossexperience, risks associated with changes in economic and business conditions,and other factors.  In addition, variousregulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses.  Such agencies may require the Company tomake additional provisions for loan losses based upon judgments which differfrom those of management.

 

The following table sets forthinformation regarding the Company’s allowance for loan losses at the dates andfor the periods indicated:

 

|                             |   | **At or for the nine months** |   |
|----------------------------------|--------|-------------------------------|--------|
|                             |   | **ended September 30,**       |   |
|                             |   | **2001**                      |   | **2000** |   |
|                             |   | **(dollars in thousands)**    |   |
|                             |   |                          |   |   |   |
| Balance at beginning of period   |   | $                             | 2,226  |   | $ | 1,327 |   |
| Chargeoffs:                      |   |                          |   |   |   |
| Real estate loans:               |   |                          |   |   |   |
| One- to four- family             |   | 6                             |   | - |   |
| Commercial                       |   | 213                           |   | 65 |   |
| Consumer                         |   | -                             |   | 26 |   |
| Total chargeoffs                 |   | 219                           |   | 91 |   |
|                             |   |                          |   |   |   |
| Recoveries:                      |   |                          |   |   |   |
| Real estate loans:               |   |                          |   |   |   |
| One- to four-family              |   | -                             |   | - |   |
| Commercial                       |   | 60                            |   | 49 |   |
| Consumer                         |   | 2                             |   | 1 |   |
| Total recoveries                 |   | 62                            |   | 50 |   |
|                             |   |                          |   |   |   |
| Net chargeoffs                   |   | 157                           |   | 41 |   |
| Provision for loan losses        |   | 764                           |   | 537 |   |
| Balance at end of period         |   | $                             | 2,833  |   | $ | 1,823 |   |
| Net charge offs to average loans |   | 0.08                          | %      | 0.03 | % |

 

 

The balance in the allowance for loanlosses was $2.8 million as of September 30, 2001, compared to $2.2 million as ofDecember 31, 2000, and was $1.8 million as of September 30, 2000.  As a percentage of total loans the allowancewas 1.00% as of September 30, 2001 compared to 0.90% as of December 31, 2000and was 0.81% as of September 30, 2000. As a percentage of total loans held for investment, net of thegovernment guarantees, the allowance was 1.34% as of September 30, 2001,compared to 1.12% as of December 31, 2000 and was 1.00% as of September 30,2000.  Management believes the allowanceat September 30, 2001 is adequate based upon its ongoing analysis of the loanportfolio, historical loss trends and other factors, including the increase innon-performing loans during the third quarter of 2001.

 

*Other Real Estate Owned.*There was noother real estate owned at September 30, 2001 and December 31, 2000.

 

**Capital**

 

TheCompany’s capital was approximately $16.2 million as of September 30, 2001compared to $12.2 million as of December 31, 2000 and was $11.8 million as ofSeptember 30, 2000.  In 1997 the Companyadopted an Employee Stock Ownership Plan ("ESOP") which was fundedwith a $1.2 million line of credit.  Asof September 30, 2001 the indebtedness of the ESOP in the amount of $694,000 isshown as a deduction from shareholders’ equity.  During the three month period ended September 30, 2001, theCompany repaid principal totaling $51,000. The Company has ceased making contributions under the ESOP effectiveSeptember 30, 2001.  The remainingunallocated shares will be sold in order to reduce the debt outstanding, and theESOP plan will be terminated.  Thetermination of the plan will reduce expenses by $51,000 per quarter beginningin the fourth quarter of 2001.  Inaddition, interest expense on the outstanding balance of the loan will beeliminated, and capital of the Company will increase as the remaining sharesare sold and the loan is paid off.  Thesale of the remaining shares will take place over the next two quarters.

 

As part of the Company’s strategic plan,during the third quarter of 1998 the Board elected to eliminate cash dividendsin favor of retaining earnings to support future growth. A 5% stock dividendwas declared on October 17, 2000 to be paid on November 30, 2000 toshareholders of record as of November 15, 2000.  An additional 5% stock dividend was declared on October 24, 2001to be paid on November 30, 2001 to shareholders of record as of November 15,2001.

 

The Company’s strategic plan addressesthe 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 $1,000per share.  The securities havesemi-annual interest payments, with principal due at maturity in 2030.  The Trust used the proceeds from the sale ofthe trust preferred securities to purchase junior subordinated debentures ofthe Company.  The Company received $9.7million from the Trust upon issuance of the junior subordinated debentures, ofwhich $3.2 million was used to pay off borrowings of the Company, and $5.8million was contributed to the Bank to increase its capital. The $10 million isshown as other borrowings on the books of the Company.

 

In June of 2001, the Company obtained a$2.0 million line of credit from a correspondent bank.  At the end of June, $1.0 million wasadvanced on this line, and all of the proceeds from this line were invested inthe Bank subsidiary as additional paid in capital.

 

On July 27, 2001, the Company completedthe private placement of 473,504 shares of common stock at an average price of$6.63 per share to certain “accredited investors” including certain directorsand an officer of the Company and the Bank and their related interests.  An investment banking firm retained by theCompany issued a fairness opinion in connection with the transaction.

 

Of the $3,137,498 in gross proceeds fromthe sale of the stock, the Company used $1.0 million of the proceeds to repaydebt and $2.0 million of the proceeds were invested as equity capital in theBank.  The remaining net proceeds wereretained by the Company as working capital.

 

The sale of the common stock is exemptfrom the registration provisions of the Securities Act of 1933 by virtues ofSection 4(2) of such Act and Regulation D promulgated pursuant thereto inasmuchas the sale was limited to 14 investors of which all were “accreditedinvestors” within the meaning of Regulation D. No underwriter or placement agent was used in the transaction.

 

Management considers capital requirementsas part of its strategic planning process. The strategic plan calls for continuing increases in assets andliabilities, subject to market conditions and competition, and the capital requiredwill therefore be in excess of retained earnings. The ability to obtain capitalis dependent upon the capital markets as well as performance of theCompany.  Management regularly evaluatessources of capital and the timing required to meet its strategic objectives.

 

At September 30, 2001 and December 31,2000, all capital ratios were above all current Federal capital guidelines fora “well capitalized” bank.   As ofSeptember 30, 2001, the Bank’s regulatory Total Capital to risk-weighted assetsratio was 11.31% compared to 10.75% as of December 31, 2000.  The Bank’s regulatory Tier 1 Capital torisk-weighted assets ratio was 10.22% as of September 30, 2001 compared to9.76% as of December 31, 2000.  TheBank’s regulatory Tier 1 Capital to average assets ratio was 7.93% as ofSeptember 30, 2001 compared to 8.53% as of December 31, 2000.

 

As of September 30, 2001, the Company’sregulatory Total capital to risk-weighted assets ratio was 11.18% compared to10.68% as of December 31, 2000.  TheCompany’s regulatory Tier 1 Capital to risk-weighted assets ratio was 8.29% asof September 30, 2001, compared to 7.12% as of December 31, 2000.  The Company’s regulatory Tier 1 Capital toaverage assets ratio was 6.43% as of September 30, 2001, compared to 5.88% asof December 31, 2000.

 

**Liquidity**

 

The Company closely monitors itsliquidity so that the cash requirements for loans and deposit withdrawals aremet in an economical manner.  Managementmonitors liquidity in relation to trends of loans and deposits for short termand long term requirements.  Liquiditysources are cash, deposits with other banks, overnight Federal Fundsinvestments, unpledged interest bearing deposits at other banks, investmentsecurities and the ability to sell loans.  As of September 30, 2001 liquid assets as a percentage of deposits were13.00% compared to 8.4% as of December 31, 2000.

 

**Part II OTHER INFORMATION**

 

**Item 1 Legal Proceedings**

None to report

 

**Item 2 Changes in Securities**

 

On July 27, 2001, the Company completedthe private placement of 473,504 shares of common stock at an average price of$6.63 per share to certain “accredited investors” including certain directorsand an officer of the Company and the Bank and their related interests.  An investment banking firm retained by the Companyissued a fairness opinion in connection with the transaction.

 

Of the $3,137,498 in gross proceeds fromthe sale of the stock, the Company used $1.0 million of the proceeds to repaydebt and $2.0 million of the proceeds were invested as equity capital in theBank.  The remaining net proceeds wereretained by the Company as working capital.

 

The sale of the common stock is exemptfrom the registration provisions of the Securities Act of 1933 by virtues ofSection 4(2) of such Act and Regulation D promulgated pursuant thereto inasmuchas the sale was limited to 14 investors of which all were “accreditedinvestors” within the meaning of Regulation D. No underwriter or placement agent was used in the transaction.

 

**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**

 

On August 2, 2001, the Company filed an8-K under Item 5 announcing the completion of a $3.1 private placement ofcommon equity.

 

The Company did not file any other 8-Kreports during the third quarter of 2001.

 

(SIGNATURES)

 

Pursuant to therequirements of the Exchange Act, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |               |   |                                         |
|--------|--------------------|--------|----------------------------------------------|
|   |               |   | Community Bancorp Inc.                       |   |
|   |               |   | (Registrant)                                 |   |
|   |               |   |                                         |
|   |               |   |                                         |
|   |               |   |                                         |
|   |               |   |                                         |
| Date   | November  13, 2001 |   | /s/  Thomas E. Swanson                       |   |
|   |               |   | Thomas E. Swanson                            |
|   |               |   | President and Chief  Executive Officer       |
|   |               |   |                                         |
|   |               |   |                                         |
|   |               |   |                                         |
| Date   | November 13, 2001  |   | /s/ L. Bruce Mills,  Jr.                     |   |
|   |               |   | L. Bruce Mills, Jr.                          |
|   |               |   | Sr. Vice President,  Chief Financial Officer |
|        |                    |        |                                              |  |  |

 

**EXHIBIT INDEX**

 

 

**Exhibit No.****            Exhibit**

 

None