---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




| |  | For the quarterly period ended March 31, 2002
| |  | ---------------------------------------------




| ̈ |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------




FOR





| |  | The transition period from  to
  .
| |  | ----------------------------------




Commission File No. 000-26505





---




COMMUNITY BANCORP INC.


(Exact name of registrant as specified in its charter)





Delaware

33-0859334(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)





900 Canterbury Place, Suite 300, CA

92025(Address of principal executive offices)

(Zip Code)





Issuers telephone number:    (760) 432-1100





(Former Address)


130 West Fallbrook St.


Fallbrook, CA 92028


(Former name, former address and former fiscal year, if changed since last report)





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





Number of shares of common stock outstanding as of March 31, 2002: 3,330,535





---



---




PART 1:    FINANCIAL INFORMATION





ITEM 1:    FINANCIAL STATEMENTS





COMMUNITY BANCORP INC.


CONSOLIDATED BALANCE SHEETS


(dollars in thousands,
except per share amounts)


(unaudited)





March 31,


December 31,2002


2001ASSETSCash and cash equivalents

$
43,139


$
38,946Interest bearing deposits in financial institutions


99



596Federal Reserve Bank & Federal Home Loan Bank stock, at cost


2,138



1,065Investment securities held-to-maturity, at amortized cost


24,176



10,626Interest-only strip, at fair value


389



354Loans held for investment


286,319



269,451Less allowance for loan losses


(3,039
)


(2,788
)Net loans held for investment


283,280



266,663Loans held for sale


43,566



39,023Premises and equipment, net


4,118



2,924Other repossessed assets


1,900



1,900Accrued interest and other assets


4,534



5,579Deferred tax asset


1,240



1,240Servicing asset, net


1,583



1,307Total Assets

$
410,162


$
370,223LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Interest bearing

$
303,145


$
295,076Non-interest bearing


41,080



38,258Total deposits


344,225



333,334Trust Preferred Securities


10,000



10,000Other borrowings


33,450



5,813Reserve for losses on commitments to extend credit


279



285Accrued expenses and other liabilities


4,236



4,290Total liabilities


392,190



353,722Shareholders equityCommon stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding, 3,331,000 at March 31, 2002 and 3,311,000 at
December 31, 2001


2,081



2,069Additional paid-in capital


9,363



9,162Unearned ESOP contribution






(668
)Retained earnings


6,528



5,938Total shareholders equity


17,972



16,501Total Liabilities and Shareholders Equity

$
410,162


$
370,223





See accompanying notes to unaudited consolidated financial statements.




2




---




COMMUNITY BANCORP INC.





CONSOLIDATED STATEMENTS OF INCOME


(dollars in thousands, except for per share amounts)


(unaudited)





For the three months ended March 31,2002

2001Interest income:Interest and fees on loans

$
5,596

$
6,257Interest on cash equivalents


58


184Interest on interest bearing deposits in financial institutions


3


11Interest on investment securities


191


123Total interest income


5,848


6,575Interest expense on deposits


2,008


3,075Interest expense on other borrowed money


340


305Total interest expense


2,348


3,380Net interest income before provision for loan losses


3,500


3,195Provision for loan losses


246


19Net interest income after provision for loan losses


3,254


3,176Other operating income:Net gain on sale of loans


887


70Loan servicing fees, net


88


110Customer service charges


140


114Other fee income


215


263Total other operating income


1,330


557Other operating expenses:Salaries and employee benefits


2,129


1,830Occupancy


314


216Telephone


71


78Premises and equipment


178


162Marketing and promotions


54


84Data processing


290


232Professional services


181


198Director, officer and employee expenses


100


124Office expenses


108


144ESOP loan expense





51Other expenses


150


127Total other operating expenses


3,575


3,246Income before income taxes


1,009


487Income taxes


419


185Net Income

$
590

$
302Comprehensive Income

$
590

$
302Basic earnings per share


$0.18


$0.11Diluted earnings per share


$0.18


$0.11





See accompanying notes to unaudited consolidated financial statements.




3




---




COMMUNITY BANCORP INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in thousands)


(unaudited)





For the three months ended March 31,2002


2001Cash flows from operating activities:Net income

$
590


$
302Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization


(55
)


147ESOP Compensation






51Provision for loan losses


246



19Net gain on sale of loans


(887
)


(70
)Loans originated for sale


(31,995
)


(12,258
)Unrealized (gain) / loss on interest-only strips


(50
)


12Amortization of interest-only strips


15



17Capitalization of servicing asset


(267
)


Amortization of servicing asset


57



57Change in valuation allowance for servicing asset


(66
)


9Proceeds from sale of loans


29,130



8,045Increase (decrease) in reserve for losses on commitments to extend credit


(6
)


27Decrease (increase) in accrued interest and other assets


1,045



(31
)Decrease in accrued expenses and other liabilities


(54
)


(441
)Net cash used in operating activities


(2,297
)


(4,114
)Cash flows from investing activities:Net increase in loans


(17,655
)


(15,413
)Net maturities of interest bearing time deposits


497



293Maturities of securities held-to-maturity


651



1,251Purchase of securities held-to-maturity


(13,987
)


(655
)Purchase of Federal Reserve & Federal Home Loan Bank stock


(1,073
)Net additions to premises and equipment


(1,352
)


(138
)Net cash used in investing activities


(32,919
)


(14,662
)





See accompanying notes to unaudited consolidated financial statements.




4




---

CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)


(dollars
in thousands)


(unaudited)





For the three months ended March 31,2002


2001Cash flows from financing activities:Net increase (decrease) in deposits:Interest bearing


8,069



24,619Non-interest bearing


2,822



(1,938
)Purchase of treasury stock






Exercise of stock options


68



Repayment of line of credit


(813
)


(51
)Proceeds from sale of unallocated ESOP shares


813



Proceeds from other borrowings


28,450



13,100Net cash provided by financing activities


39,409



35,730Net increase in cash and cash equivalents


4,193



16,954Cash and cash equivalents at beginning of period

$
38,946


$
17,830Cash and cash equivalents at end of period

$
43,139


$
34,784Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
2,286


$
3,454Income Taxes

$
355


$
200Supplemental disclosure of non-cash investing activities:Loans held for investment transferred to held for sale

$
1,350


$
4,348





See accompanying notes to unaudited consolidated financial statements.




5




---




COMMUNITY BANCORP INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2002


(unaudited)





Note 1    Basis of Presentation:





The interim financial statements included herein have been prepared by Community Bancorp Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). The interim financial statements include Community Bancorp Inc. and its wholly owned subsidiaries Community National Bank (formerly Fallbrook National Bank) (the Bank) and
Community (CA) Capital Trust I (the Trust), (collectively, the Company) as consolidated with the elimination of all intercompany transactions. Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys latest Annual Report as found on Form 10K. In
the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim financial statements and the results of its operations for the interim
period ended March 31, 2002, have been included. Certain reclassifications may have been made to prior year amounts to conform to the 2002 presentation. The results of operations for interim periods are not necessarily indicative of results for the
full year.





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





Note 2    Loans and Related Allowance for Loan Losses:





A summary of loans as of March 31, 2002 and December 31, 2001 is as follows:





March 31, 2002


December 31, 2001(dollars in thousands)Construction loans

$
71,975


$
60,264Real estate one-to four-family


12,045



11,358Real estate commercial and multi-family


200,997



189,395Consumer home equity lines of credit


3,001



2,615Consumer other


4,147



5,635Aircraft


24,866



23,929Commercial


13,134



15,332Total gross loans


330,165



308,528Deferred loan fees


207



617Discounts on unguaranteed portion of loans retained


(487
)


(671
)Allowance for loan losses


(3,039
)


(2,788
)Net loans

$
326,846


$
305,686





Included in net loans are $4.2 million and $3.7 million of mortgage loans and $39.3 million and $35.3
million of SBA loans held for sale at March 31, 2002 and December 31, 2001, respectively.





The Companys lending activities
are concentrated primarily in Southern California. Although the Company seeks to avoid undue concentrations of loans to a single industry based upon a single class of collateral, real estate and real estate associated business areas are among the
principal industries in the Companys market area. As a result, the Companys loan and collateral portfolios are, to a significant degree, concentrated in those industries. The Company evaluates each credit on an individual basis and
determines collateral requirements accordingly. When real estate is taken as collateral, advances are




6




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COMMUNITY BANCORP INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




generally limited to a certain percentage of the appraised value of the collateral at the time the loan is made, depending on the type of loan, the
underlying property and other factors.





Note 3    Sales and Servicing of SBA Loans:





The Company originates loans to customers under a SBA program that generally provides for SBA guarantees of 70% to 90% of each loans. Beginning in 2000,
the Company retained both the guaranteed and unguaranteed portions of SBA 7a loans originated. Prior to 2000, the Company routinely sold the guaranteed portion of these loans to third parties and retained the unguaranteed portion of the loans sold.
During the latter half of 2001, the Company reached certain targets with regards to concentrations in SBA loans in the portfolio, and again began selling a portion of the SBA 7a loans originated. On loans sold, the Company allocates the carrying
value of such loans between the portion sold and the portion retained, based upon estimates of their relative fair value at the time of sale. The difference between the adjusted carrying value and the face amount of the portion retained is amortized
to interest income over the life of the related loans using the interest method.





Servicing assets are recognized when loans are
sold with servicing retained. Servicing assets are amortized in proportion to and over the period of estimated future net servicing income. The fair value of servicing assets is estimated by discounting the future cash flows at estimated future
market rates for the expected life of the loans. The Company uses industry prepayment statistics in estimating the expected life of the loan.





If the fair value of the servicing assets is less than the amortized carrying value, the asset is considered impaired. A valuation allowance must be established for the impaired asset by a charge against income for
the difference between the amortized carrying value and the fair value. As of March 31, 2002 and December 31, 2001, the valuation allowance for the servicing assets were $183,000 and $249,000, respectively.





Note 4    Contingencies:





Because of the nature of its activities, the Company is from time to time subject to pending and threatened legal actions which arise out of the normal course of its business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Companys financial position, results of operations or liquidity.





Note
5    Earnings per share





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





For the three months ended March 31,2002

2001Earnings (Numerator)

Shares (Denominator)

Per Share Amount

Earnings (Numerator)

Shares (Denominator)

Per Share AmountNet Earnings

$
590






$
302Basic EPS Earnings available to common shareholders

$
590

3,267,032

$
0.18

$
302

2,661,028

$
0.11Effect of Dilutive Securities Options




88,714







96,443


Diluted EPS Earnings Available to common Shareholders plus assumed Conversions

$
590

3,355,746

$
0.18

$
302

2,757,471

$
0.11




7




---



COMMUNITY BANCORP INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 6    Segment Information





The following disclosure about segments of the Company is made in accordance with the requirements of Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company changed its internal reporting in 1999, and now segregates its operations into two primary segments: Banking Division and SBA
Division. The Company determines operating results of each segment based on an internal management system that allocates certain expenses to each.





For the three months ended March 31,2002

2001Banking Division

Small Business Administration Division (SBA)

Total Company

Banking Division


Small Business Administration Division (SBA)

Total Company(dollars in thousands)Interest income

$
4,196

$
1,652

$
5,848

$
4,479


$
2,096

$
6,575Interest expense


1,531


817


2,348


2,100



1,280


3,380Net interest income before provision


2,665


835


3,500


2,379



816


3,195Provision for (reversal of ) loan losses


178


68


246


(40
)


59


19Other income


345


985


1,330


305



252


557Other expenses


2,650


925


3,575


2,413



833


3,246Income before income taxes


182


827


1,009


311



176


487Income taxes


75


344


419


112



73


185Net income

$
107

$
483

$
590

$
199


$
103

$
302Asset employed at quarter end

$
304,034

$
106,128

$
410,162

$
245,571


$
70,547

$
316,118





Note 7    Recent Accounting Developments





SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the financial
position, results of operations, or cash flows of the Company.





SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of
SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material effect on the Companys financial position, results of
operations or cash flows.





SFAS No. 141, Business Combinations, requires that all business combinations be accounted
for by a single methodthe purchase method. The provisions of this SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. The adoption of the provisions of SFAS No. 141 did not have a material impact on the Companys financial condition, results of operations or cash flows.




8




---



COMMUNITY BANCORP INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







SFAS No. 142, Goodwill and Other Intangible Assets, requires that, upon its adoption,
amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121). SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001.
The Company has determined that this statement will not have a material impact on the Companys financial condition, results of operations or cash flows.





SFAS No. 143, Accounting for Asset Retirement Obligations, requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a
reasonable estimate of fair value can be made. The associated asset retirement cost would be capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002. The
Company has determined that this statement will not have a material impact on the Companys financial condition, results of operations or cash flows.





SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, replaces SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The
Company has determined that this statement will not have a material impact on the Companys financial condition, results of operations or cash flows.





Note 8    Termination of Employee Stock Ownership Plan





In 1997 the Company implemented an
Employee Stock Ownership Plan (ESOP) funded with borrowings of $1,000,000 that year. In 2000, the loan was refinanced, with an additional $325,000 being advanced on the line during 2000 and another $50,000 in 2001. As of December 31,
2001 and March 31, 2001 the indebtedness of the ESOP was $813,000 and $746,000, respectively. As of September 30, 2001, the Board of Directors elected to terminate the ESOP. In February of 2002, the Company sold the remaining unallocated shares at a
price of $6.50 per share, with total proceeds of $822,000, and repaid principal totaling $813,000, resulting in the elimination of the unearned ESOP contribution.




9




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|ITEM 2: |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------




The following is managements discussion and analysis of the major factors that influenced the financial performance of the Company for the three months ended March 31, 2002. This
analysis should be read in conjunction with the Companys 2001 Annual Report as filed on form 10K and with the unaudited financial statements and notes as set forth in this report.





Certain statements contained in this Report, including, without limitation, statements containing the words believes, anticipates, intends,
expects, and words of similar import, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking
statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates,
changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Companys business, economic, political and global changes arising from the
terrorist attacks of September 11, 2001 and their aftermath, and other factors referenced in the 10K report for December 31, 2001 on file with the SEC, including in Item 1. BUSINESSFactors that May Affect Future Results of
Operations. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.





This discussion should be read in conjunction with the financial statements of the Company, including the notes thereto, appearing elsewhere
in this report.





RESULTS OF OPERATIONS





Net
Income





Net income increased to $590,000 for the three months ended March 31, 2002 compared to $302,000 for the three months
ended March 31, 2001. Basic earnings per share were $0.18 and $0.11 for the three months ended March 31, 2002 and 2001, respectively. Diluted earnings per share were $0.18 and $0.11 for the three months ended March 31, 2002 and 2001, respectively.
Earnings per share for the three months ended March 31, 2001 were adjusted for the effects of a stock dividend paid in November 2001. The increase in net income was mainly due to the increases in net interest income and non interest income,
partially offset by increases in provisions for loan losses and other operating expenses. Net interest income increased due to an increase in average interest earning assets, noninterest income increased due to an increase in the amount of loans
sold and other operating expenses increased during the three months ended March 31, 2001 due to the expansion of the Companys franchise and increased loan production.





Return on average assets for the three months ended March 31, 2002 was 0.64% compared to 0.42% for the three months ended March 31, 2001. The increase in the return on average assets
from 2001 to 2002 was due to the increase in net income noted above, which is the result of the 28.5% growth in average assets, in accordance with the Companys strategic plan. The return on average equity was 13.68% for the three months ended
March 31, 2002 compared to 10.00% for the three months ended March 31, 2001.





Interest Income





Net interest income is the most significant component of the Companys income from operations. Net interest income is the difference (the
interest rate spread) between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on
interest earning assets and the volume of and interest rate paid on interest bearing liabilities.




10




---

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average
yield and cost information for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are included as interest earning assets for purposes of this table.





For the three months ended March 31,2002


2001Balance

Earned/Paid

Rate/Yield


Balance

Earned/Paid

Rate/YieldAverage assetsSecurities and time at other banks

$
15,118

$
194

5.20
%

$
8,435

$
134

6.44
%Fed funds sold


13,889


58

1.69
%


13,385


184

5.58
%LoansCommercial


142,622


2,313

6.58
%


115,678


2,779

9.74
%Real Estate


171,954


3,142

7.41
%


130,799


3,298

10.23
%Consumer


6,992


141

8.18
%


8,231


180

8.87
%Total loans


321,568


5,596

7.06
%


254,708


6,257

9.96
%Total earning assets


350,575


5,848

6.77
%


276,528


6,575

9.64
%Non earning assets


24,349








15,316Total average assets

$
374,924







$
291,844Average liabilities and shareholders equityInterest bearing depositsSavings and interest bearing accounts

$
90,425


242

1.09
%

$
70,042


519

3.01
%Time deposits


203,948


1,766

3.51
%


163,683


2,556

6.33
%Total interest bearing deposits


294,373


2,008

2.77
%


233,725


3,075

5.34
%Demand deposits


39,743








30,442


Trust preferred debt


10,000


278

11.27
%


10,000


278

11.27
%Other borrowings


9,009


62

2.79
%


1,433


27

7.64
%Total interest bearing liabilities


353,125


2,348

2.70
%


275,600


3,380

4.97
%Accrued expenses and other liabilities


4,306








3,999Net shareholders equity


17,493








12,245Total average liabilities shareholders equity

$
374,924







$
291,844Net interest spread







4.07
%







4.67
%Net interest income




$
3,500







$
3,195Net yield on interest earnings assets







4.05
%







4.69
%








Interest income
for the three months ended March 31, 2002 decreased to $5.8 million, compared to $6.6 million for the three months ended March 31, 2001. This decrease was due to the 4.75% decrease in market interest rates during 2001 which resulted in a 2.87%
decrease in the yield on interest earning assets for the three months ended March 31, 2002 when compared to the three months ended March 31, 2001, and was partially offset by an increase in the average balance of interest earning assets. Average
interest earning assets increased to $350.6 million for the three months ended March 31, 2002 compared to $276.5 million for the three months ended March 31, 2001. The yield on interest earning assets decreased to 6.77% for the three months ended
March 31, 2002 compared to 9.64% for the three months ended March 31, 2001. The largest single component of interest earning assets was loans receivable, which had an average balance of $321.6 million with a yield of 7.06% for the three months ended
March 31, 2002 compared to $254.7 million with a yield of 9.96% for the three months ended March 31, 2001. The increase in the average balance of loans receivable was attributable to the expansion of the Company as part of the Companys
strategic plan.





Interest expense for the three months ended March 31, 2002 decreased to $2.3 million compared to
$3.4 million for the three months ended March 31, 2001. This decrease was due to the 4.75% decline in market interest rates in 2001, and was partially offset by an increase in average deposits and other borrowings. Due to the decline in market
interest rates, the cost of deposits declined from 4.97% for the three months ended March 31, 2001 to 2.70% for the three months ended March 31, 2002. Average interest-bearing




11




---

liabilities increased to $353.1 million for the three months ended March 31, 2002 compared to $275.6 million for the three months ended March 31, 2001. The
largest component of interest bearing liabilities is time deposits. Average time deposits increased to $203.9 million with a cost of 3.51% for the three months ended March 31, 2002 compared to $163.7 million with a cost of 6.33% for the three months
ended March 31, 2001. The increase in average interest bearing liabilities is a result of the Companys expansion as part of its strategic plan, including the addition of two new retail banking offices in 2001.





Other average borrowings increased to $19.0 million with a cost of 7.25% for the three months ended March 31, 2002, compared to $11.4 million with a
cost of 10.82% for the three months ended March 31, 2001. In March of 2001, the Company established a line of credit with the Federal Home Loan Bank (FHLB) collateralized by commercial loans. Funds from the credit line were used to increase
liquidity at the Company. In addition to FHLB advances, other lines of credit are utilized to increase capital at the Bank and, until February 14, 2002, to fund the Companys ESOP. The loan to the Companys ESOP was paid in full on
February 14, 2002. See Deposits and Borrowings in the FINANCIAL CONDITION section of this discussion for further information.





Net interest income before provision for estimated loan losses





Net interest income before provision for
estimated loan losses for the three months ended March 31, 2002 was $3.5 million, compared to $3.2 million for the three months ended March 31, 2001. This increase was primarily due to the increase in average interest earning assets and partially
offset by a decrease in the net interest margin. Average interest earning assets were $350.6 million for the three months ended March 31, 2002 with a net interest margin of 4.05% compared to $276.5 million with a net interest margin of 4.69% for the
three months ended March 31, 2001. The decline in the net interest margin was primarily due to the 4.75% decline in interest rates during 2001. For a discussion of the repricing of the Companys assets and liabilities, see ITEM
3QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.





Provision for Estimated Loan Losses





Due to the growth in loans the provision for estimated loan losses totaled $246,000 for the three months ended March 31, 2002 compared to $19,000 for
the three months ended March 31, 2001. For further information, please see the Loans discussion in the FINANCIAL CONDITION portion of this section.





Other Operating Income





Other operating income represents non-interest types of revenue
and is comprised of net gain on sale of loans, loan servicing fees, customer service charges and other fee income. Other operating income was $1,330,000 for the three months ended March 31, 2002 compared to $557,000 for the three months ended March
31, 2001. The increase was due to a substantial increase in net gain on sale of loans with a small change in customer service charges, and was partially offset by a decline in loan servicing fees and other fee income.





Net gain on sale of loans increased from $70,000 for the quarter ended March 31, 2001 to $887,000 for the quarter ended March 31, 2002. During the three
months ended March 31, 2002, the Company originated $19.1 million in SBA loans compared to $18.1 million during the three months ended March 31, 2001. The Company originated $16.0 million in mortgage loans during the three months ended March 31,
2002 compared to $8.5 million during the three months ended March 31, 2001. The Company sold $14.0 million in SBA loans and $14.2 million in mortgage loans during the three months ended March 31, 2001 compared to $2.7 million in SBA 504 loans and
$5.2 million in mortgage loans during the three month period ended March 31, 2001. The Company did not sell any SBA 7a loans during the three months ended March 31, 2001. The Company intends to maintain SBA loans in a range of 30% to 40% of total
gross loans. Therefore, there will continue to be SBA loan sales in future periods, as the Company controls its asset growth to a target of 15% to 20% per year. The additional SBA loan sales should further enhance gain on sale of loans.





Loan servicing income decreased to $88,000 for the three months ended March 31, 2002 compared to $110,000 for the three months
ended March 31, 2001. Loan servicing income is the result of the spread




12




---

between the interest rate paid by borrowers and the interest rate paid to third party investors, multiplied by the total volume of loans sold. The Company did
not sell any SBA 7a loans during the first and second quarter of 2001, and therefore did not increase its loan servicing portfolio. In addition, the Company and the industry incurred significant prepayments during 2001, further reducing its loan
servicing portfolio. Since the Company has reached its desired mix of SBA loans as a percentage of total gross loans, the Company is once again selling a portion of the loans it originates. As sales continue with servicing retained, loan servicing
income should stabilize and eventually increase in future periods.





Customer service charges increased from $114,000 for the
three months ended March 31, 2001 to $140,000 for the three months ended March 31, 2002. The increase is the result of a 29% increase in average savings and interest bearing accounts from $70.0 million for the three months ended March 31, 2001 to
$90.4 million for the three months ended March 31, 2002.





Other fee income decreased to $215,000 for the three months ended
March 31, 2002 compared to $263,000 for the three months ended March 31, 2001. The decrease in other fee income for the three month period reflect the decrease in fees from brokering of loans to other financial institutions which the Company does
not directly fund.





Other Operating Expenses





Other operating expenses are non-interest types of expenses and are incurred by the Company in its normal course of business. Salaries and employee benefits, occupancy, telephone, premises and equipment, marketing and
promotions, data processing, professional services, director/officer/employee expenses, office, ESOP loan and other expenses are the major categories of other operating expenses. Other operating expenses increased to $3.6 million for the three
months ended March 31, 2002 compared to $3.2 million for the three months ended March 31, 2001.





The increase in other operating
expenses is primarily due to the increase in salaries and employee benefits to $2.1 million for the three months ended March 31, 2002 compared to $1.8 million for the three months ended March 31, 2001. The Company opened two new branch offices in
2001. As a result of the increased loan origination, commissions have increased by $83,000 when comparing the quarter ended March 31, 2002 to March 31, 2001. In addition, employee insurance benefits rates increased by 16% from 2001 to 2002.





The Companys efficiency ratio, which is the ratio of recurring operating expenses to net interest income before provision
for loan losses plus non-interest income, decreased (improved) to 74.02% for the three months ended March 31, 2002 compared to 86.51% for the three months ended March 31, 2001. The decrease in efficiency ratio was due to the increase in net interest
and other operating income, partially offset by the increase in operating expenses. The increase in operating expenses is due to the expansion of the Companys business.





The following table compares each of the components of other operating expenses for the three months ended March 31, 2002 and 2001, respectively:





For the three months ended March 31,2002

2001

Change $Other operating expenses:Salaries and employee benefits

$
2,129

$
1,830

$
299Occupancy


314


216


98Telephone


71


78


(7
)Premises and equipment


178


162


16Marketing and promotions


54


84


(30
)Data processing


290


232


58Professional services


181


198


(17
)Director, officer and employee expense


100


124


(24
)Office expenses


108


144


(36
)ESOP loan expense





51


(51
)Other expenses


150


127


23Total other operating expenses

$
3,575

$
3,246

$
329




13




---

Occupancy expense is expected to increase beginning in the second quarter of 2002 due to the completion and occupancy of the
Companys new corporate headquarters in Escondido. This increase is expected to be partially offset through the sublease of a portion of the space being leased. The ESOP loan expense decreased due to the termination of the ESOP in September,
2001. No further expense is expected to be incurred in future periods as a result of the termination of the ESOP.





Provision for Income Taxes





The effective income tax rate was 41.5% for the three months ended March 31, 2002 compared to 38.0% for the three months
ended March 31, 2001. Provisions for income taxes totaled $419,000 and $185,000 for the three months ended March 31, 2002 and 2001, respectively.





FINANCIAL CONDITION





Summary of Changes in Consolidated Balance Sheets


March 31, 2002 compared to December 31, 2001 and March 31, 2001





Total assets of the Company increased to $410.2
million as of March 31, 2002 compared to $370.2 million as of December 31, 2001 and $316.4 million as of March 31, 2001. The increase in total assets was due to the growth in net loans to $326.8 million as of March 31, 2002, compared to $305.7
million as of December 31, 2001, and $265.1 million as of March 31, 2001. Loan growth is expected to slow during the remainder of 2002 as management intends to sell more of the loans it originates in order to maintain the annual growth rate to
between 15% and 20%. Deposit growth is expected to slow during the remainder of 2002 as management intends to reduce wholesale deposits as retail deposits increase.





Deposits grew to $344.2 million as of March 31, 2002 compared to $333.3 million as of December 31, 2001 and were $275.4 million as of March 31, 2001. Cash and cash equivalents increased
to $43.1 million as of March 31, 2002 compared to $38.9 million as of December 31, 2001 and were $34.8 million as of March 31, 2001. The increase in cash and cash equivalents was due to the increase in deposits and other borrowed money, including
FHLB advances. During the three months ended March 31, 2001, the Company became a member of the FHLB.





Shareholders equity
was $18.0 million as of March 31, 2002 compared to $16.5 million as of December 31, 2001, and was $12.6 million as of March 31, 2001. Please refer to the CAPITAL section of this discussion for further information.





Investments





The Companys
investment portfolio consists primarily of certificates of deposit with other financial institutions, agency securities and overnight investments in the Federal Funds market. As of March 31, 2002, certificates of deposit with other financial
institutions totaled $99,000, compared to $596,000 as of December 31, 2001 and $497,000 as of March 31, 2001. As of December 31, 2001 and March 31, 2001, $500,000 and $497,000, respectively, was pledged as collateral for the Employee Stock Ownership
Plan (ESOP) loan from another California bank, which was funding the Companys ESOP. The ESOP was terminated as of September 30, 2001, and the remaining undistributed shares were sold in February 2002, eliminating the Companys
borrowings for the leveraged ESOP. Therefore, no certificates of deposit were pledged as of March 31, 2002. US Government and other securities totaled $24.2 million as of March 31, 2002 compared to $10.6 million as of December 31, 2001 and were $5.6
million as of March 31, 2001. During the quarter ended March 31, 2002, the Company invested an additional $14.1 million in agency securities, which were pledged as collateral for FHLB advances. A portion of the other $10.1 million in securities as
of March 31, 2002 are held as collateral for public funds and treasury, tax and loan deposits. Average Federal Funds sold for the three months ended March 31, 2002 was $13.9 million compared to $13.4 million for the three months ended March 31,
2001.





Loans





Loan
balances, net of the allowance for loan losses, increased to $326.8 million as of March 31, 2002 compared to $305.7 million as of December 31, 2001 and $265.1 million as of March 31, 2001. A healthy




14




---

loan demand resulted in a 23.7% growth rate in total gross loans since March 31, 2001. The Company services SBA 7a loans sold to other investors. As of March
31, 2002, the Company serviced $79.4 million SBA 7a loans for other investors compared to $69.6 million as of December 31, 2001 and $73.5 million as of March 31, 2001.





Loan Origination and Sale.    The following table sets forth the Companys loan originations by category and purchases, sales and principal repayments of
loans for the periods indicated:





At or for the three months ended March 31,2002


2001(dollars in thousands)Beginning balance

$
305,686


$
245,437Loans originated: (1)Commercial loans


5,287



2,037Real estate:Construction loans


11,490



18,457One-to four-family


16,881



10,813Commercial


32,819



22,828Consumer


765



1,225Total loans originated


67,242



55,360Loans soldReal estate:One-to four-family


14,216



5,243Commercial


14,021



2,731Total loans sold


28,237



7,974Less:Principal repayments


18,322



27,351Other net charges(2)


(477
)


341Total Loans

$
326,846


$
265,131


---

|(1) |  | Included in total loans originated are $14.7 million and $7.8 million of mortgage loans and $17.3 and $4.5 million of SBA loans originated for sale for the three months ended
March 31, 2002 and March 31, 2001, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Other net changes include changes in allowance for loan losses, deferred loan fees, loans in process and unamortized premiums and discounts.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------




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





Certain financial institutions have elected to use Special
Purpose Vehicles (SPV) to dispose of problem assets. A SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from their reported impaired and nonperforming assets. The Company does not use those vehicles, or any other accounting structures, to dispose of problem assets.




15




---




The following table sets forth the Companys non-performing assets at the dates indicated:





March 31, 2002


December 31, 2001


March 31, 2001(dollars in thousands)Non-accrual loans

$
3,576


$
3,174


$
1,668Troubled debt restructurings










Loans contractually past due 90 days or more with respect to either principalor interest and still accruing
interest






29



Total non-performing loans


3,576



3,203



1,668Other repossessed assets


1,900



1,900



Total non-performing assets

$
5,476


$
5,103


$
1,668SUPPLEMENTAL DATALoans 90 days or more delinquent

$
1,302


$
2,434


$
502Loans 90 days or more delinquent, net of government guarantees

$
237


$
487


$
157Total Assets

$
410,162


$
370,223


$
316,383Total gross loans

$
330,165


$
308,528


$
266,872Total loans held for investment

$
286,319


$
269,451


$
244,610Undisbursed portion of construction and other loans

$
61,914


$
63,867


$
60,323Government guaranteed portion of total loans

$
50,488


$
48,598


$
44,214Non-performing loans, net of government guarantees

$
1,096


$
1,140


$
485Allowance for loan losses

$
3,039


$
2,788


$
1,977Reserves for losses on commitments to extend credit

$
279


$
285


$
265Allowance for loan losses and reserves for losses on commitments toextend credit

$
3,318


$
3,073


$
2,242Loan loss allowance to loans, gross


0.92
%


0.90
%


0.74
%Loan loss allowance to loans held for investment, net of government guarantees


1.29
%


1.26
%


0.99
%Allowance for loan losses to non accrual loans


84.98
%


87.84
%


118.53
%Allowance for loan losses, including reserves for losses on commitments to extend credit, to:Total loans


1.00
%


1.00
%


0.84
%Total loans held for investment, net of government guarantees


1.41
%


1.39
%


1.12
%Non-accrual loans


93
%


97
%


134
%Non-performing loans


93
%


96
%


134
%Non-performing loans, net of government guarantees


303
%


270
%


462
%Non-performing assets


61
%


60
%


134
%Total non-performing assets to total assets


1.34
%


1.38
%


0.53
%Total non-performing loans, net of government guarantees to total assets


0.27
%


0.31
%


0.15
%Total non-performing loans to total loans


1.08
%


1.04
%


0.63
%Total non-performing loans, net of government guarantees to total loans


0.33
%


0.37
%


0.18
%





Nonaccrual Loans.    Nonaccrual loans are impaired
loans where the original contractual amount may not be fully collectible. The Company measures its impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows
discounted at the loans effective interest rate if the loan is not collateral-dependent. As of March 31, 2002, December 31, 2001 and March 31, 2001 all impaired or nonaccrual loans were collateral-dependent. The Company places loans on
nonaccrual status that are delinquent 90 days or more or when a reasonable doubt exists as to the collectibility of interest and principal. As of March 31, 2002 the Company had thirteen loans on nonaccrual status totaling $3.6 million with $2.5
million, or 69%, guaranteed by the SBA. As of December 31, 2001, the Company had twelve loans on nonaccrual status totaling $3.2 million. Of this total, $2.1 million, or 65%, was guaranteed by the SBA. As of March 31, 2001, the Company had nine
loans on nonaccrual status totaling $1.7 million. Of this total $1.2 million, or 71%, was guaranteed by the SBA.




16




---




Included in nonaccrual loans are loans less than 90 days delinquent. Loans 90 days or more
delinquent totaled $1.3 million as of March 31, 2002, compared to $2.4 million as of December 31, 2001 and $502,000 as of March 31, 2001. Net of government guarantees, loans 90 days or more delinquent as of March 31, 2002 were $237,000 compared to
$487,000 as of December 31, 2001 and $157,000 as of March 31, 2001.





Classified Assets.    From time
to time, management has reason to believe that certain borrowers may not be able to repay their loans within the parameters of the present repayment terms, even though, in some cases, the loans are current at the time. These loans are graded in the
classified loan grades of substandard, doubtful, or loss and include non-performing loans. Each classified loan is monitored monthly. Classified assets (consisting of nonaccrual loans, loans graded as substandard
or lower and other repossessed assets) at March 31, 2002 and December 31, 2001 were $3.5 million compared to $1.5 million at March 31, 2001.





Allowance for Loan Losses.    The Company has established a methodology for the determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into
consideration the need for an overall allowance for loan losses as well as specific allowances that are tied to individual loans. The Companys methodology for assessing the appropriateness of the allowance consists of several key elements,
which include the formula allowance and a specific allowance for identified problem loans.





In originating loans, the Company
recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a
secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and reduced by net loan chargeoffs. Loans are charged off when they are deemed to be uncollectible, or partially charged
off when portions of a loan are deemed to be uncollectible.Recoveries are generally recorded only when cash payments are received.





The allowance for loan losses is maintained to cover losses inherent in the loan portfolio. The responsibility for the review of the Companys assets and the determination of the adequacy of the general valuation allowance lies with
the Directors Loan Committee. This committee assigns the loss reserve ratio for each type of asset and reviews the adequacy of the allowance at least quarterly based on an evaluation of the portfolio, past experience, prevailing market
conditions, amount of government guarantees, concentration in loan types and other relevant factors. Specific valuation allowances are established to absorb losses on loans for which full collectibility may not be reasonably assured as prescribed in
SFAS No. 114 (as amended by SFAS No. 118). The amount of the specific allowance is based on the estimated value of the collateral securing the loans and other analyses pertinent to each situation. Estimates of identifiable losses are reviewed
continually and, generally, a provision for losses is charged against operations on a monthly basis as necessary to maintain the allowance at an appropriate level. Management presents an analysis of the allowance for loan losses to the
Companys board of directors on a quarterly basis.





The Directors loan committee meets quarterly to review and
monitor conditions in the portfolio and to determine the appropriate allowance for loan losses. To the extent that any of these conditions are evidenced by identifiable problem credit or portfolio segment as of the evaluation date, the
committees estimate of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, the Company is able
to adjust specific and inherent loss estimates based upon the most recent information that has become available.




17




---




The following table sets forth information regarding the Companys allowance for loan
losses at the dates and for the periods indicated:





At or for the three months ended
March 31,2002


2001(dollars in thousands)Balance at beginning of period

$
2,788


$
1,988Chargeoffs:Real estate loans:






1One- to four- family






Commercial






9Consumer


3



1Total chargeoffs


3



10Recoveries:Real estate loans:One- to four-family






Commercial






6Consumer


2



1Total recoveries


2



7Net chargeoffs


1



3Reserve for losses on commitments to extend credit


6



(27
)Provision for loan losses


246



19Balance at end of period

$
3,039


$
1,977Net charge offs to average loans


0.00
%


0.00
%Reserve for losses on commitments to extend credit

$
279


$
265





As of March 31, 2002 the balance in the allowance for loans losses was $3.0
million compared to $2.8 million as of December 31, 2001 and $2.0 million as of March 31, 2001. In addition, the reserve for losses on commitments to extend credit was $279,000 as of March 31, 2002, compared to $285,000 as of December 31, 2001
and was $265,000 as of March 31, 2001. The balance of undisbursed construction and other loans was $61.9 million as of March 31, 2002 compared to $63.9 million as of December 31, 2001 and was $60.3 Million as of March 31, 2001. As of March 31, 2002
the allowance was 0.92% of total gross loans compared to 0.90% as of December 31, 2001 and was 0.74% as of March 31, 2001. Including the reserve for losses on commitments to extend credit, the allowance was a percentage of total gross loans the
allowance was 1.00% as of March 31, 2002 and December 31, 2001 compared to 0.84% as of March 31, 2001. The allowance for loan losses as a percentage of nonaccrual loans was 84.98% as of March 31, 2002 compared to 87.84% as of December 31, 2001 and
was 118.53% as of March 31, 2001. The allowance for loan losses, including reserves for losses on commitments to extend credit, to nonperforming loans, net of government guarantees was 303% as of March 31, 2002 compared to 270% as of December 31,
2001 and was 462% as of March 31, 2001. Management believes the allowance at March 31, 2002 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.





Other Repossessed assets.The repossessed asset totaling $1.9 million as of March 31, 2002 and December 31, 2001 was
an aircraft acquired through repossession. There were no repossessed assets as of March 31, 2001.





Deposits and Borrowings





Total deposits increased to $344.2 million as of March 31, 2002 compared to $333.3 million as of December 31, 2001 and $275.4 million as
of March 31, 2001. Interest bearing and non-interest bearing deposits increased to $303.1 million and $41.1 million, respectively, as of March 31, 2002 compared to $295.1 million and $38.3 million, respectively, as of December 31, 2001 and
$244.0 million and $31.4 million, respectively, as of March 31, 2001. Retail banking deposits increased to fund SBA loan retention




18




---

and loans held for sale, and reduce wholesale deposits. Total wholesale deposits were $76.5 million as of March 31, 2001, compared to $81.7 million as of
December 31, 2001 and $59.1 million as of March 31, 2001. Total retail banking deposits increased to $267.7 million as of March 31, 2002 compared to $251.6 million as of December 31, 2001 and $216.3 million as of March 31, 2001. Retail deposits
increased as part of the Companys overall expansion, including the addition of two retail banking offices in 2001.





During
the first quarter of 2000, the Company issued $10 million in Trust Preferred Securities, which are debt instruments that act as additional capital for regulatory purposes. The average balance outstanding was $10 million for the three months ended
March 31, 2002 and 2001, respectively. Proceeds from the issuance of Trust Preferred Securities were used to pay off debt and provide additional capital to the Bank subsidiary.





Other borrowings totaled $33.5 million as of March 31, 2002, compared to $5.8 million as of December 31, 2001 and $14.0 million as of March 31, 2001. The Company established a line of
credit with the FHLB collateralized by commercial loans and government securities. Funds from the credit line were used to purchase government securities and increase liquidity at the Company. In addition to the FHLB advances, other lines of credit
are utilized to increase capital at the Bank and, as of December 31 and March 31, 2001, to fund the Companys ESOP. The loan to the Companys ESOP was paid in full February 14, 2002. In June 2001, the Company borrowed $1.0 million from an
unaffiliated lender to contribute to the equity capital of the Bank.See the Capital discussion for further details on this loan.





In 1997, the Company formed an ESOP, which purchased shares of the Company for the future benefit of the employees. A line of credit was established with a correspondent bank to purchase the shares. The ESOP was
terminated in September 2001, and the unallocated shares were sold in February 2002, at which time the borrowed funds were paid in full. See the Capital discussion for further details on this loan.





Capital





The Companys capital increased to
$18.0 million as of March 31, 2002 compared to $16.5 million as of December 31, 2001 and was $12.6 million as of March 31, 2001. The $1.5 million increase in capital is a result of net income of $590,000 for the quarter ended March 31, 2002, plus
the repayment of $813,000 in borrowed funds as a result of the sale of unallocated shares in the ESOP combined with $68,000 in proceeds from the exercise of stock options.





In 1997 the Company implemented an ESOP funded with borrowings of $1,000,000 that year. In 2000, the loan was refinanced, with an additional $325,000 being advanced on the line during
2000 and another $50,000 in 2001. As of December 31, 2001 and March 31, 2001 the indebtedness of the ESOP was $813,000 and $746,000, respectively. As of September 30, 2001, the Board of Directors elected to terminate the ESOP. In February of 2002,
the Company sold the remaining unallocated shares and repaid principal totaling $813,000, resulting in an increase in capital. During the years ended December 31, 2001 and 2000, the Company repaid principal totaling $153,000 and $205,000,
respectively.





As part of the Companys strategic plan, during the third quarter of 1998 the Board elected to eliminate
cash dividends in favor of retaining earnings to support future growth. The Company declared a 5% stock dividend to shareholders of record as of November 15, 2001 which was paid on November 30, 2001. Whether or not stock dividends or any cash
dividends will be paid in the future will be determined by the Board of Directors after consideration of various factors. The Companys and the Banks profitability and regulatory capital ratios in addition to other financial conditions
will be key factors considered by the Board of Directors in making such determinations regarding the payment of dividends.





Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The
ability to obtain capital is dependent upon the capital markets as well as performance of the Company. In July 2001, the Company raised $3.0 million through a private placement of common stock. Management regularly evaluates sources of capital and
the timing required to meet its strategic objectives.




19




---




On June 28, 2001, the Company entered into a loan agreement with Pacific Coast Bankers
Bank pursuant to which the Company can borrow up to $2.0 million on a revolving line of credit. At March 31, 2002 and December 31, 2001, the outstanding balance on this line of credit was $1.0 million. The proceeds of such loan were invested by the
Company in the Bank in the form of equity capital. The loan provides for interest only payments until December 28, 2002, after which time the outstanding balance of the loan will begin amortizing over a 5 year period. The loan documents require the
Company to obtain the prior consent of the lender before paying any cash dividend and before incurring additional indebtedness in excess of an additional $2.0 million outside the normal course of business.





At March 31, 2002 and December 31, 2001, all capital ratios were above all current Federal capital guidelines for a well capitalized bank.
As of March 31, 2002, the Banks regulatory Total Capital to risk-weighted assets ratio was 10.38% compared to 10.89% as of December 31, 2001. The Banks regulatory Tier 1 Capital to risk-weighted assets ratio was 9.31% as of March 31,
2002 compared to 9.82% as of December 31, 2001. The Banks regulatory Tier 1 Capital to average assets ratio was 7.77% as of March 31, 2002 compared to 7.94% as of December 31, 2001.





As of March 31, 2002, the Companys regulatory Total capital to risk-weighted assets ratio was 9.96% compared to 10.30% as of December 31, 2001. The Companys regulatory
Tier 1 Capital to risk-weighted assets ratio was 7.62% as of March 31, 2002, compared to 7.65% as of December 31, 2001. The Companys regulatory Tier 1 Capital to average assets ratio was 6.35% as of March 31, 2002, compared to 6.18% as of
December 31, 2001.





Liquidity





The Company closely monitors its liquidity so that the cash requirements for loans and deposit withdrawals are met in an economical manner. Management monitors liquidity in relation to trends of loans and deposits for short term and long
term requirements. Liquidity sources are cash, deposits with other banks, overnight Federal Funds investments, unpledged interest bearing deposits at other banks, investment securities and the ability to sell loans. As of March 31, 2002 liquid
assets as a percentage of deposits were 9.2% compared to 10.6% as of December 31, 2001.





Critical Accounting Policies and Estimates





The Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found
elsewhere in this Form 10-Q, are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses, the valuation of the servicing assets and interest-only strips and the valuation of other repossessed assets. Actual results could differ from those estimates.








|· |  | Allowance for loan losses.    An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known
and inherent risks in the loan portfolio and other extensions of credit, including off-balance sheet credit extensions. The allowance is based upon a continuing review of the portfolio, past loan loss experience and current economic conditions,
which may affect the borrowers ability to pay, guarantees by government agencies and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. Changes in these
factors and conditions may cause managements estimate of the allowance to increase or decrease and result in adjustments to the Companys provision for loan losses.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· |  | Servicing assets and interest only strips.    Servicing assets are recognized when loans are sold with servicing retained. Servicing assets are
amortized in proportion to and over the period of estimated future net servicing income. The fair value of servicing assets is estimated by discounting the future cash flows at estimated future current market rates for the expected life of the
loans. The Company uses industry prepayment statistics in estimating the expected life of the
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20




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| |  |  | loan. Management periodically evaluates servicing assets for impairment. For purposes of measuring impairment, the rights are stratified based on original term to maturity. The
amount of impairment recognized is the amount by which the servicing asset for a stratum exceeds its fair value. In estimating fair values at March 31, 2002, the Company utilized a weighted average prepayment assumption of approximately 10% and a
discount rate of 12%. In estimating fair values at December 31, 2001, the Company utilized a weighted average prepayment assumption of approximately 13% and a discount rate of 12%. In estimating fair values at March 31, 2001, the Company utilized a
weighted average prepayment assumption of approximately 10% and a discount rate of 12%.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Rights to future interest income from serviced loans that exceeds contractually specified servicing fees are classified as interest-only strips. The interest-only strips are
accounted for as trading securities and recorded at fair value with any unrealized gains or losses recorded in earnings in the period of change of fair value. Unrealized gains or losses on interest-only strips were not material as of March 31, 2002,
December 31, 2001 and March 31, 2001. At March 31, 2002, December 31, 2001 and March 31, 2001, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 10%, 13% and 10%, respectively, and a
discount rate of 12%.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Changes in these assumptions and economic factors may result in increases or decreases in the valuation of our servicing assets and interest-only strips.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Real Estate Owned and Other Repossessed Assets.    Real estate or other assets acquired through foreclosure or deed-in-lieu of foreclosure are
initially recorded at the lower of cost or fair value less estimated costs to sell through a charge to the allowance for estimated loan losses. Subsequent declines in value are charged to operations. At March 31, 2002 and December 31, 2001, the
repossessed asset is an aircraft. There are no specific reserves on this asset as of March 31, 2002 and December 31, 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest rate risk (IRR)
and credit risk constitute the two greatest sources of financial exposure for insured financial institutions. Please refer to ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFINANCIAL
CONDITIONLOANS, for a thorough discussion of the Companys lending activities. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon the Companys net interest income
(NII). Changes in the NII are the result of the change in net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape
of the yield curve.





The Company realizes income principally from the differential or spread between the interest earned on
loans, investments, other interest-earning assets and the interest incurred on deposits. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of March 31, 2002, 82.33% of the Companys loan
portfolio was tied to adjustable rate indices. The majority of the loans are tied to prime and reprice immediately. The exception is SBA 7a loans, which reprice on the first day of the subsequent quarter after a change in prime. As of March 31,
2002, 61.42% of the Companys deposits were time deposits with a stated maturity (generally one year or less) and a fixed rate of interest. As of March 31, 2002, 23.01% of the Companys borrowings were fixed rate with a remaining term of
27 years.





Changes in the market level of interest rates directly and immediately affect the Companys interest spread, and
therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the
maturities (and therefore repricing) of the deposits and borrowings.





The Companys Asset/Liability Committee
(ALCO) is responsible for managing the Companys assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity.




21




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ALCO operates under policies and within risk limits prescribed by, reviewed and approved by the Board of Directors.





ALCO seeks to stabilize the Companys NII by matching rate-sensitive assets and liabilities through maintaining the maturity and
repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted
by increasing rates and positively impacted by decreasing rates. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively
impacted by increasing rates and negatively impacted by decreasing rates. The speed and velocity of the repricing assets and liabilities will also contribute to the effects on the Companys NII, as will the presence or absence of periodic and
lifetime interest rate caps and floors.





The Company utilizes two methods for measuring interest rate risk, gap analysis and
interest income simulations. Gap analysis focuses on measuring absolute dollar amounts subject to repricing within certain periods of time, particularly the one year maturity horizon. Interest income simulations are produced using a software model
that is based on actual cash flows and repricing characteristics for all of the Companys financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial
instruments.





Interest rate simulations provide the Company with an estimate of both the dollar amount and percentage change in
NII under various rate scenarios. All assets and liabilities are normally subjected to up to 300 basis points in increases and decreases in interest rates in 100 basis point increments. However, under the current interest rate environment, decreases
in interest rates have been simulated at 25, 50 and 100 basis points. Under each interest rate scenario, the Company projects its net interest income. From these results, the Company can then develop alternatives in dealing with the tolerance
thresholds.





A traditional, although analytically limited measure, of a financial institutions IRR is the static
gap. Static gap is the difference between the amount of assets and liabilities (adjusted for any off-balance sheet positions) which are expected to mature or reprice within a specific period. Generally, a positive gap benefits an institution
during periods of rising interest rates, and a negative gap benefits an institution during periods of declining interest rates.





At March 31, 2002, 69.75% of the Companys interest-bearing deposits were comprised of certificate accounts, the majority of which have original terms averaging ten months. The remaining, weighted average term to maturity for the
Companys certificate accounts approximated five months at March 31, 2002. Generally, the Companys offering rates for certificate accounts move directionally with the general level of short term interest rates, though the margin may vary
due to competitive pressures. While the maturities of interest bearing deposits in the following gap table imply that declines in interest rates will result in further declines in interest rates paid on deposits, interest rates cannot drop below 0%,
and there is a behavioral limit somewhere above 0% as to how low the rates can be reduced before the Companys customers no longer will maintain the deposit with the Company.







22




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The following table sets forth information concerning repricing opportunities for the
Companys interest-earning assets and interest bearing liabilities as of March 31, 2002. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that
adjustable rate products are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or repricing date.





Contractual Static GAP Position as of March 31, 20020 - 3 months


Greater than 3 months to 6 months


Greater than 6 months to 12 months


Greater than 12 months to 5 years


Thereafter


Total balance(dollars in thousands)Interest sensitive assets:Loans receivable:Adjustable rate loans, gross

$
201,572


$
12,608


$
19,762


$
36,314


$
1,580


$
271,836Fixed rate loans, gross(2)


8,561



1,849



376



12,591



34,952



58,329Investments:Investment securities held-to-maturity


500







500



3,503



19,673



24,176Federal funds sold


27,700



















27,700Other investments


1,623















515



2,138Total interest sensitive assets


239,956



14,457



20,638



52,408



56,720



384,179Interest sensitive liabilities:Deposits:Non-interest bearing


















41,080



41,080Interest bearing


164,272



63,919



35,236



35,782



3,936



303,145Other Borrowings


20,000



13,450











10,000



43,450Total interest sensitive liabilities

$
184,272


$
77,369


$
35,236


$
35,782


$
55,016


$
387,675GAP AnalysisInterest rate sensitivity gap

$
55,684


$
(62,912
)

$
(14,598
)

$
16,626


$
1,704


$
(3,496
)GAP as % of total interest sensitive assets


14.49
%


-16.38
%


-3.80
%


4.33
%


0.44
%


-0.91
%Cumulative interest rate sensitivity gap

$
55,684


$
(7,228
)

$
(21,826
)

$
(5,200
)

$
(3,496
)

$
(3,496
)Cumulative gap as % of total interest sensitive assets


14.49
%


-1.88
%


-5.68
%


-1.35
%


-0.91
%


-0.91
%





During the quarter ended March 31, 2002, the Company invested $14.1 million in
agency securities, with a maturity in excess of five years. These securities were purchased with short term FHLB advances and deposits generated from the retail branch network. The investments were made to improve the liquidity of the Company. The
effect of the funding of longer term agencies with shorter term liabilities is to reduce the one year static maturity gap from -12.08% as of December 31, 2001 to -5.68% as of March 31, 2002. There are no current plans to decrease the negative one
year static maturity gap through additional investments in securities at this time.





Static Gap analysis has certain
limitations. Measuring the volume of repricing or maturing assets and liabilities does not always measure the full impact on net interest income. Static Gap analysis does not account for rate caps on products; dynamic changes such as increasing
prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources. The relation between product rate repricing and market rate changes (basis risk) is not the same for all products. The majority of the Companys
loan portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates in general move more slowly and usually incorporate only a fraction of the change in rates. Products categorized as non-rate sensitive,
such as noninterest-bearing demand deposits, in the static Gap analysis behave like long term fixed rate funding sources. Both of these factors tend to make the Companys behavior more asset sensitive than is indicated in the static Gap
analysis. Management expects to experience higher net interest income when rates rise, the opposite of what is indicated by the static Gap analysis.




23




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The following table shows the effects of changes in projected net interest income for the
twelve months ending March 31, 2003 under the interest rate shock scenarios stated. The table was prepared as of March 31, 2002, at which time prime was 4.75%.





Changes in Rates

Projected Net interest Income

Change from base case


% change from base case(dollars in thousands)+300 bp

$
18,789

$
3,201


20.54
%+200 bp

$
17,390

$
1,802


11.56
%+100 bp

$
16,337

$
749


4.80
%0 bp

$
15,588-25 bp

$
15,447

$
(141
)

-0.90
%-50 bp

$
15,174

$
(414
)

-2.66
%-100 bp

$
14,461

$
(1,127
)

-7.23
%





Assumptions are inherently uncertain, and, consequently, the model cannot
precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as
changes in market conditions and management strategy.




24




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PART II    OTHER INFORMATION





ITEM 1    LEGAL PROCEEDINGS





None to report.





ITEM 2    CHANGES IN SECURITIES





None to report.





ITEM 3    DEFAULTS UPON SENIOR SECURITIES





None to report.





ITEM
4    SUBMISSION OF MATTERS TO SECURITY HOLDERS





None to report.





ITEM 5    OTHER INFORMATION





None to report.





ITEM 6    EXHIBITS AND REPORTS FROM 8-K





None to report.




25




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(SIGNATURES)





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





COMMUNITY BANCORP INC. (Registrant)Date April 25, 2002

By:

/s/    THOMAS E. SWANSON Thomas E. Swanson President and Chief Executive OfficerDate April 25, 2002

By:

/s/    L. BRUCE MILLS, JR. L. Bruce Mills, Jr. Sr. Vice President, Chief Financial Officer




26




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EXHIBIT INDEX








Exhibit No.

Exhibit





None




27