COMMUNITY BANCORP INC - 10-Q Quarterly Report

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 September 30, 2002

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

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, Escondido, CA		92025

(Address of principal executive offices)		(Zip Code)

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

None
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Number of shares of common stock outstanding as of September 30, 2002: 3,342,145

PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

COMMUNITY BANCORP INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts) (unaudited)			September 30, 2002			December 31, 2001
			September 30, 2002			December 31, 2001

ASSETS
Cash and cash equivalents			$	28,386		$	38,946
Interest bearing deposits in financial institutions				99			596
Federal Reserve Bank & Federal Home Loan Bank stock, at cost				2,284			1,065
Investment securities held-to-maturity, at amortized cost				24,676			10,626
Interest-only strip, at fair value				432			354
Loans held for investment				271,256			269,451
	Less allowance for loan losses			(3,607	)		(2,788	)

		Net loans held for investment		267,649			266,663
Loans held for sale				51,063			39,023
Premises and equipment, net				4,354			2,924
Other repossessed assets				—			1,900
Other real estate owned				197			—
Accrued interest and other assets				5,121			5,579
Deferred tax asset				1,240			1,240
Servicing asset, net				2,343			1,307

		Total Assets	$	387,844		$	370,223

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Interest bearing		$	286,450		$	295,076
	Non-interest bearing			49,692			38,258

		Total deposits		336,142			333,334
Trust Preferred Securities				10,000			10,000
Other borrowings				18,088			5,813
Reserve for losses on commitments to extend credit				145			285
Accrued expenses and other liabilities				3,959			4,290

		Total liabilities		368,334			353,722
Commitments and contingencies (Note 4)
Shareholders’ equity
Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding, 3,342,000 at September 30, 2002 and 3,311,000 at December 31, 2001				2,089			2,069
Additional paid-in capital				9,405			9,162
Unearned ESOP contribution				—			(668	)
Retained earnings				8,016			5,938

		Total shareholders’ equity		19,510			16,501

		Total Liabilities and Shareholders’ Equity	$	387,844		$	370,223

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME

			For the nine months ended September 30,					For the three months ended September 30,

(dollars in thousands, except for per share amounts) (unaudited)			2002			2001		2002		2001

Interest income:
	Interest and fees on loans		$	17,256		$	18,013	$	5,845	$	5,679
	Interest on cash equivalents			226			750		80		350
	Interest on interest bearing deposits in financial institutions			5			24		1		6
	Interest on investment securities			874			332		344		100

		Total interest income		18,361			19,119		6,270		6,135

Interest expense on deposits				5,590			8,786		1,712		2,766
Interest expense on other borrowed money				1,140			955		400		323

		Total interest expense		6,730			9,741		2,112		3,089

Net interest income before provision for loan losses				11,631			9,378		4,158		3,046
Provision for loan losses				785			764		306		670

Net interest income after provision for loan losses				10,846			8,614		3,852		2,376
Other operating income:
	Net gain on sale of loans			3,362			597		1,008		246
	Loan servicing fees, net			333			287		137		84
	Customer service charges			435			361		160		134
	Loss on other repossessed assets			(49	)		—		—		—
	Other fee income			649			701		259		238

		Total other operating income		4,730			1,946		1,564		702

Other operating expenses:
	Salaries and employee benefits			6,618			4,987		2,268		1,325
	Occupancy			1,076			679		351		227
	Telephone			230			220		75		69
	Premises and equipment			770			497		212		166
	Marketing and promotions			207			248		60		82
	Data processing			545			464		174		157
	Professional services			721			554		303		162
	Director, officer and employee expenses			334			368		105		97
	Office expenses			398			323		148		81
	ESOP loan expense			—			153		—		51
	Other expenses			1,119			744		392		262

		Total other operating expenses		12,018			9,237		4,088		2,679

Income before income taxes				3,558			1,323		1,328		399
Income taxes				1,480			549		553		166

Net Income			$	2,078		$	774	$	775	$	233

Comprehensive Income			$	2,078		$	774	$	775	$	233

Basic earnings per share			$	0.63		$	0.28	$	0.23	$	0.08
Diluted earnings per share			$	0.61		$	0.27	$	0.22	$	0.08

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the nine months ended September 30,

(dollars in thousands) (unaudited)			2002			2001

Cash flows from operating activities:
Net income			$	2,078		$	774
Adjustments to reconcile net income to net cash used in operating activities:
	Depreciation and amortization			735			445
	ESOP Compensation			—			153
	Provision for loan losses			785			764
	Net accretion of discount on investment securities			(183	)		9
	Net gain on sale of loans			(3,362	)		(597	)
	Loss on sale of other repossessed asset			49			—
	Loans originated for sale			(80,689	)		(44,530	)
	Unrealized (gain) loss on interest-only strips			(99	)		81
	Capitalization of interest-only strips			(22	)		—
	Amortization of interest-only strips			43			54
	Capitalization of servicing asset			(1,115	)		(96	)
	Amortization of servicing asset			187			170
	Change in valuation allowance for servicing asset			(108	)		189
	Proceeds from sale of loans held for sale			89,002			39,525
	Increase (decrease) in reserve for losses on commitments to extend credit			(140	)		42
	Decrease in accrued interest and other assets			458			420
	Decrease in accrued expenses and other liabilities			(331	)		(463	)

		Net cash provided by operating activities		7,288			(3,060	)
Cash flows from investing activities:
	Net increase in loans held for investment			(18,959	)		(30,748	)
	Decrease in other repossessed assets			1,851			—
	Net maturities of interest bearing time deposits			497			293
	Maturities of securities held-to-maturity			2,540			1,754
	Purchase of securities held-to-maturity			(16,407	)		(357	)
	Sale of Federal Home Loan Bank Stock			104			—
	Purchase of Federal Reserve & Federal Home Loan Bank stock			(1,323	)		—
	Net additions to premises and equipment			(2,165	)		(472	)

		Net cash used in investing activities		(33,862	)		(29,530	)

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

										For the nine months ended September 30,

(dollars in thousands) (unaudited)										2002			2001

Cash flows from financing activities:
				Net increase(decrease) in deposits:
									Interest bearing		(8,626	)		53,118
									Non-interest bearing		11,434			5,238
				Stock offering (net of expenses)							—			3,026
			Exercise of stock options								118			35
			Repayment of line of credit								(813	)		(4,153	)
			Proceeds from sale of unallocated ESOP shares								813			—
		Proceeds from other borrowings									13,088			7,000

								Net cash provided by financing activities			16,014			64,264

								Net increase in cash and cash equivalents			(10,560	)		31,674
Cash and cash equivalents at beginning of period											38,946			17,830

Cash and cash equivalents at end of period										$	28,386		$	49,504

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
							Interest			$	6,550		$	9,374

						Income Taxes				$	2,535		$	620

Supplemental disclosure of non-cash investing activities:
						Loans held for investment transferred to held for sale				$	22,853		$	33,501

					Loans to facilitate the sale of repossessed assets					$	1,615		$	—

					Loans transferred to other real estate owned					$	197		$	—

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 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 September 30, 2002 and December 31, 2001 is as follows:

	September 30, 2002			December 31, 2001

	(dollars in thousands)
Construction loans	$	65,515		$	60,264
Real estate one- to four-family		15,182			11,358
Real estate commercial and multi-family		191,618			189,395
Consumer home equity lines of credit		3,155			2,615
Consumer other		3,797			5,635
Aircraft		28,434			23,929
Commercial		16,194			15,332

Total gross loans		323,895			308,528
Deferred loan (fees) costs		(122	)		617
Discounts on unguaranteed portion of loans retained		(1,454	)		(671	)
Allowance for loan losses		(3,607	)		(2,788	)

Net loans	$	318,712		$	305,686

Included in net loans are $3.7 million and $3.0 million of mortgage loans, and $47.4 million and $35.3 million of SBA loans held for sale at September 30, 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 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 loan. 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. The Company allocates the carrying value of loans sold 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 September 30, 2002 and December 31, 2001, the valuation allowance for the servicing assets was $141,000 and $249,000, respectively.

Note 4 Commitments and 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.

During the nine months ended September 30, 2002, the Company increased its advances from the FHLB in the amount of $12.0 million, all of which mature in six months or less.

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 nine months ended September 30,

	2002										2001

	Earnings (Numerator)		Shares (Denominator)				Per Share Amount				Earnings (Numerator)			Shares (Denominator)				Per Share Amount

Net Earnings	$	2,078									$		774

Basis EPS Earnings available to common shareholders	$	2,078			3,314,364		$		0.63		$		774	$		2,798,663		$		0.28
Effect of Dilutive Securities Options	$	—			102,399				0.02				—			84,431				0.01

Diluted EPS Earnings Available to common Shareholders plus assumed Conversions	$	2,078			3,416,763		$		0.61		$		774			2,883,094		$		0.27


	For the three months ended September 30,

	2002										2001

	Earnings (Numerator)		Shares (Denominator)				Per Share Amount				Earnings (Numerator)			Shares (Denominator)				Per Share Amount

Net Earnings	$	775								$		233

Basis EPS Earnings available to common shareholders	$	775		3,340,837		$		0.23		$		233			3,023,046		$		0.08
Effect of Dilutive Securities Options		—		118,154				0.01				—			72,092				—

Diluted EPS Earnings Available to common Shareholders plus assumed Conversions	$	775		3,458,991		$		0.22		$		233			3,095,138		$		0.08

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 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 nine months ended September 30,

	2002						2001

	Banking Division		Small Business Administration Division (“SBA”)		Total Company		Banking Division		Small Business Administration Division (“SBA”)		Total Company

	(dollars in thousands)
Interest income	$	13,429	$	4,932	$	18,361	$	12,970	$	6,149	$	19,119
Interest expense		4,285		2,445		6,730		6,339		3,402		9,741

Net interest income before provision		9,144		2,487		11,631		6,631		2,747		9,378
Provision for loan losses		684		101		785		559		205		764
Other income		1,077		3,653		4,730		979		967		1,946
Other expenses		8,917		3,101		12,018		6,909		2,328		9,237

Income before income taxes		620		2,938		3,558		142		1,181		1,323
Income taxes		258		1,222		1,480		61		488		549

Net income	$	362	$	1,716	$	2,078	$	81	$	693	$	774

Assets employed at quarter end	$	299,190	$	88,654	$	387,844	$	250,741	$	94,444	$	345,185

	For the three months ended September 30,

	2002									2001

	Banking Division			Small Business Administration Lending Division (“SBA)			Total Company			Banking Division				Small Business Administration Lending Division (“SBA)			Total Company

	(dollars in thousands)
Interest income	$	4,737	$		1,533	$		6,270	$		4,188		$		1,947	$		6,135
Interest expense		1,272			840			2,112			2,092				997			3,089

Net interest income before provision		3,465			693			4,158			2,096				950			3,046
Provision for loan losses		280			26			306			470				200			670
Other income		388			1,176			1,564			260				442			702
Other expenses		3,069			1,019			4,088			1,940				739			2,679

Income before income taxes		504			824			1,328			(54	)			453			399
Income taxes		210			343			553			(21	)			187			166

Net income	$	294	$		481	$		775	$		(33	)	$		266	$		233

Assets employed at quarter end	$	299,190	$		88,654	$		387,844	$		250,741		$		94,444	$		345,185

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.

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. 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 did 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 adoption of SFAS No. 144 did 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 September 30, 2001 the indebtedness of the ESOP was $813,000. 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. The $9,000 excess of proceeds over loan balance is to be allocated to the beneficiaries of the ESOP.

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 and the nine months ended September 30, 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 $775,000 for the three months ended September 30, 2002 compared to $233,000 for the three months ended September 30, 2001. Basic earnings per share were $0.23 and $0.08 for the three months ended September 30, 2002 and 2001, respectively. Diluted earnings per share were $0.22 and $0.08 for the three months ended September 30, 2002 and 2001, respectively. Earnings per share for the three months ended September 30, 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, non-interest income and a decrease in the provision for loan losses, partially offset by increases in other operating expenses. Net interest income increased due to an increase in average interest earning assets, non-interest income increased due to an increase in the amount of loans sold and other operating expenses increased during the three months ended September 30, 2002 due to the expansion of the Company’s franchise and increased loan production.

The return on average equity was 15.97% for the three months ended September 30, 2002 compared to 5.88% for the three months ended September 30, 2001. Return on average assets for the three months ended September 30, 2002 was 0.78% compared to 0.28% for the three months ended September 30, 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 17.8% growth in average interest earning assets and an increase of 67 basis points in net interest margin, combined with the 122.8% increase in non-interest income, and partially offset by the 52.6% increase in non-interest expense.

Net income increased to $2.1 million for the nine months ended September 30, 2002 compared to $774,000 for the nine months ended September 30, 2001. Basic earnings per share were $0.63 and $0.28 for the nine months ended September 30, 2002 and 2001, respectively. Diluted earnings per share were $0.61 and $0.27 for the nine months ended September 30, 2002 and 2001, respectively. Earnings per share for the nine months ended September 30, 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, non-interest income

increased due to an increase in the net gain on sale of loans and other operating expenses increased during the nine months ended September 30, 2002 due to the expansion of the Company’s franchise and increased loan production.

The return on average equity was 15.16% for the nine months ended September 30, 2002 compared to 7.72% for the nine months ended September 30, 2001. Return on average assets for the nine months ended September 30, 2002 was 0.71% compared to 0.33% for the nine months ended September 30, 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 24.7% growth in average interest earning assets, combined with the 143.1% increase in non-interest income, and partially offset by the 30.1% increase in non-interest expense. The net interest margin was approximately the same for the nine months ended September 30, 2002 and 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.

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 September 30,

							2002							2001

							Average Balance		Interest Earned/Paid		Average Rate/Yield			Average Balance		Interest Earned/Paid		Average Rate/Yield

Average assets
			Securities and time deposits at other banks				$	27,337	$	345		5.01	%	$	6,893	$	106		6.10	%
			Fed funds sold					19,080		80		1.66	%		39,696		350		3.50	%
		Loans
						Commercial		134,266		2,306		6.81	%		127,935		2,489		7.72	%
					Real Estate			179,761		3,399		7.50	%		134,572		3,035		8.95	%
				Consumer				7,009		140		7.92	%		7,322		155		8.40	%

		Total loans						321,036		5,845		7.22	%		269,829		5,679		8.35	%

		Total earning assets						367,453		6,270		6.77	%		316,418		6,135		7.69	%
		Non earning assets						26,776							18,235

		Total average assets					$	394,229						$	334,653

Average liabilities and shareholders’ equity
		Interest bearing deposits
				Savings and interest bearing accounts			$	93,547		219		0.93	%	$	82,670		418		2.01	%
				Time deposits				202,667		1,493		2.92	%		183,316		2,348		5.08	%

	Total interest bearing deposits							296,214		1,712		2.29	%		265,986		2,766		4.13	%
	Demand deposits							46,091		—					35,322		—
	Trust preferred debt							10,000		278		11.03	%		10,000		278		11.03	%
	Other borrowings							17,282		122		2.80	%		3,096		45		5.77	%

	Total interest bearing liabilities							369,587		2,112		2.27	%		314,404		3,089		3.90	%
	Accrued expenses and other liabilities							5,386							4,534
	Net shareholders’ equity							19,256							15,715

	Total average liabilities and shareholders’ equity						$	394,229						$	334,653

	Net interest spread											4.50	%						3.79	%

	Net interest income								$	4,158						$	3,046

	Net yield on interest earning assets											4.49	%						3.82	%

Interest income for the three months ended September 30, 2002 increased to $6.3 million, compared to $6.1 million for the three months ended September 30, 2001. This increase was due to the increase in average interest earning assets from $316.4 million for the three months ended September 30, 2001 to $367.5 million for the three months ended September 30, 2002, and was partially offset by the 4.75% decrease in the prime rate during 2001 which resulted in a 0.92% decrease in the yield on interest earning assets for the three months ended September 30, 2002 when compared to the three months ended September 30, 2001. The yield on interest earning assets decreased to 6.77% for the three months ended September 30, 2002 compared to 7.69% for the three months ended September 30, 2001. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $179.8 million with a yield of 7.50% for the three months ended September 30, 2002 compared to $134.6 million with a yield of 8.95% for the three months ended September 30, 2001. The increase in the average balance of real estate 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 September 30, 2002 decreased to $2.1 million compared to $3.1 million for the three months ended September 30, 2001. This decrease was due to the 4.75% decline in the prime rate during 2001, and was partially offset by an increase in average deposits and other borrowings. Due to the decline in the prime rate, the cost of deposits declined from 4.13% for the three months ended September 30, 2001 to 2.29% for the three months ended September 30, 2002. Average interest-bearing liabilities increased to $369.6 million for the three months ended September 30, 2002 compared to $314.4 million for the three months ended September 30, 2001. The largest component of interest bearing liabilities is time deposits. Average time deposits increased to $202.7 million with a cost of 2.92% for the three months ended September 30, 2002 compared to $183.3 million with a cost of 5.08% for the three months ended September 30, 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.

Average borrowings increased to $27.3 million with a cost of 5.82% for the three months ended September 30, 2002, compared to $13.1 million with a cost of 9.79% for the three months ended September 30, 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.

							For the nine months ended September 30,

							2002							2001

							Average Balance		Interest Earned/Paid		Average Rate/Yield			Average Balance		Interest Earned/Paid		Average Rate/Yield

Average assets
			Securities and time deposits at other banks				$	23,056	$	879		5.10	%	$	7,540	$	356		6.31	%
			Fed funds sold					17,836		226		1.69	%		24,501		750		4.09	%
		Loans
						Commercial		139,393		7,034		6.75	%		123,237		8,141		8.83	%
					Real Estate			175,917		9,799		7.45	%		132,042		9,376		9.49	%
					Consumer			7,111		423		7.95	%		7,733		496		8.58	%

		Total loans						322,421		17,256		7.16	%		263,012		18,013		9.16	%

		Total earning assets						363,313		18,361		6.76	%		295,053		19,119		8.66	%
		Non earning assets						26,171							17,320

	Total average assets						$	389,484						$	312,373

Average liabilities and shareholders’ equity
	Interest bearing deposits
				Savings and interest bearing accounts			$	91,380		672		0.98	%	$	74,722		1,341		2.40	%
				Time deposits				206,556		4,918		3.18	%		174,763		7,445		5.70	%

	Total interest bearing deposits							297,936		5,590		2.51	%		249,485		8,786		4.71	%
	Demand deposits							43,302		—					32,410		—
	Trust preferred debt							10,000		834		11.15	%		10,000		834		11.15	%
	Other borrowings							15,283		306		2.68	%		2,722		121		5.94	%

	Total interest bearing liabilities							366,521		6,730		2.45	%		294,617		9,741		4.42	%
	Accrued expenses and other liabilities							4,638							4,356
	Net shareholders’ equity							18,325							13,400

	Total average liabilities and shareholders’ equity						$	389,484						$	312,373

	Net interest spread											4.31	%						4.24	%

	Net interest income								$	11,631						$	9,378

	Net yield on interest earning assets											4.28	%						4.25	%

Interest income for the nine months ended September 30, 2002 decreased to $18.4 million, compared to $19.1 million for the nine months ended September 30, 2001. This decrease was due to the 4.75% decrease in the prime rate during 2001 which resulted in a 1.90% decrease in the yield on interest earning assets for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001, and was partially offset by an increase in the average balance of interest earning assets. Average interest earning assets increased to $363.3 million for the nine months ended September 30, 2002 compared to $295.1 million for the nine months ended September 30, 2001. The yield on interest earning assets decreased to 6.76% for the nine months ended September 30, 2002 compared to 8.66% for the nine months ended September 30, 2001. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $175.9 million with a yield of 7.45% for the nine months ended September 30, 2002 compared to $132.0 million with a yield of 9.49% for the nine months ended September 30, 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 nine months ended September 30, 2002 decreased to $6.7 million compared to $9.7 million for the nine months ended September 30, 2001. This decrease was due to the 4.75% decline in the prime rate in 2001, and was partially offset by an increase in average deposits and other borrowings. Due to the decline in the prime rate, the cost of deposits declined from 4.71% for the nine months ended September 30, 2001 to 2.51% for the nine months ended September 30, 2002. Average interest-bearing

liabilities increased to $366.5 million for the nine months ended September 30, 2002 compared to $294.6 million for the nine months ended September 30, 2001. The largest component of interest bearing liabilities is time deposits. Average time deposits increased to $206.6 million with a cost of 3.18% for the nine months ended September 30, 2002 compared to $174.8 million with a cost of 5.70% for the nine months ended September 30, 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 $25.3 million with a cost of 6.03% for the nine months ended September 30, 2002, compared to $12.7 million with a cost of 10.04% for the nine months ended September 30, 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 September 30, 2002 was $4.2 million, compared to $3.0 million for the three months ended September 30, 2001. This increase was primarily due to the increase in average interest earning assets coupled with an increase in the net interest margin. Average interest earning assets were $367.5 million for the three months ended September 30, 2002 with a net interest margin of 4.49% compared to $316.4 million with a net interest margin of 3.82% for the three months ended September 30, 2001. For a discussion of the repricing of the Company’s assets and liabilities, see “ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.”

Net interest income before provision for estimated loan losses for the nine months ended September 30, 2002 was $11.6 million, compared to $9.4 million for the nine months ended September 30, 2001. This increase was primarily due to the increase in average interest earning assets. Average interest earning assets were $363.3 million for the nine months ended September 30, 2002 with a net interest margin of 4.28% compared to $295.1 million with a net interest margin of 4.25% for the nine months ended September 30, 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 $306,000 for the three months ended September 30, 2002 compared to $670,000 for the three months ended September 30, 2001. The provision for estimated loan losses totaled $785,000 for the nine months ended September 30, 2002 compared to $764,000 for the nine months ended September 30, 2001. As a result of the increase in total loans outstanding, combined with the deteriorating economic conditions and the potential affects of the September 11, 2001 terrorist attacks, management increased the allowance for loan losses during the third quarter of 2001 to $2.8 million as of September 30, 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, and is adjusted by the net gain or loss on other repossessed assets. Other operating income was $1.6 million for the three months ended September 30, 2002 compared to $702,000 for the three months ended September 30, 2001. The increase was due to a substantial increase in net gain on sale of loans with a small increase in loan servicing, customer service charges and other fee income.

Net gain on sale of loans increased from $246,000 for the three months ended September 30, 2001 to $1.0 million for the three months ended September 30, 2002. During the three months ended September 30,

2002, the Company originated $22.3 million in SBA loans compared to $12.4 million during the three months ended September 30, 2001. The Company originated $11.2 million in mortgage loans during the three months ended September 30, 2002 compared to $7.7 million during the three months ended September 30, 2001. The Company sold $14.4 million, or approximately 65%, of the SBA loans originated and $9.3 million in mortgage loans during the three months ended September 30, 2002 compared to $6.9 million in SBA loans and $8.4 million in mortgage loans during the three months ended September 30, 2001. See “SBA FUNDING RESTRICTIONS AND IMPACT ON FUTURE RESULTS.”

Loan servicing income increased to $137,000 for the three months ended September 30, 2002 compared to $84,000 for the three months ended September 30, 2001. Loan servicing income is the result of the spread 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 approximately 60% to 65% of the SBA 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 $134,000 for the three months ended September 30, 2001 to $160,000 for the three months ended September 30, 2002. The increase is the result of a 18% increase in average demand deposits and savings and interest bearing accounts from $118.0 million for the three months ended September 30, 2001 to $139.6 million for the three months ended September 30, 2002.

Other fee income increased to $259,000 for the three months ended September 30, 2002 compared to $238,000 for the three months ended September 30, 2001. The increase in other fee income reflected the recovery of unrealized losses on the Company’s servicing asset during the three months ended September 30, 2002.

Other operating income was $4.7 million for the nine months ended September 30, 2002 compared to $1.9 million for the nine months ended September 30, 2001. The increase was due to a substantial increase in net gain on sale of loans with a small increase in loan servicing fees and customer service charges, and was partially offset by a decline in other fee income and a loss on other repossessed assets.

Net gain on sale of loans increased from $597,000 for the nine months ended September 30, 2001 to $3.4 million for the nine months ended September 30, 2002. During the nine months ended September 30, 2002, the Company originated $60.4 million in SBA loans compared to $39.4 million during the nine months ended September 30, 2001. The Company originated $36.8 million in mortgage loans during the nine months ended September 30, 2002 compared to $26.1 million during the nine months ended September 30, 2001. The Company sold $55.2 million in SBA loans and $33.7 million in mortgage loans during the nine months ended September 30, 2002 compared to $17.3 million in SBA loans and $24.9 million in mortgage loans during the nine months ended September 30, 2001. The Company did not sell any SBA 7a loans during the first six months of 2001. See “SBA FUNDING RESTRICTIONS AND IMPACT ON FUTURE RESULTS.”

Loan servicing income increased to $333,000 for the nine months ended September 30, 2002, compared to $287,000 for the nine months ended September 30, 2001.

Customer service charges increased from $361,000 for the nine months ended September 30, 2001 to $435,000 for the nine months ended September 30, 2002. The increase is the result of a 26% increase in average demand deposits and savings and interest bearing accounts from $107.1 million for the nine months ended September 30, 2001 to $134.7 million for the nine months ended September 30, 2002.

Other fee income decreased to $649,000 for the nine months ended September 30, 2002 compared to $701,000 for the nine months ended September 30, 2001. The decrease in other fee income for the nine month period reflects the decrease in fees from brokering of loans to other financial institutions which the Company does not directly fund, and was partially offset by the recovery of the unrealized losses on the Company’s servicing asset.

During the nine months ended September 30, 2002, the Company sold a repossessed aircraft at a loss of $49,000.

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 $4.1 million for the three months ended September 30, 2002 compared to $2.7 million for the three months ended September 30, 2001. Other operating expenses increased to $12.0 million for the nine months ended September 30, 2002 compared to $9.2 million for the nine months ended September 30, 2001. During the nine months ended September 30, 2002, the Company incurred non-recurring expenses totaling $281,000 due to the relocation of the Company’s corporate headquarters and $136,000 in expenses associated with the refurbishment of a repossessed aircraft.

The increase in other operating expenses is primarily due to the increase in salaries and employee benefits to $2.3 million for the three months ended September 30, 2002 compared to $1.3 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, salaries and employee benefits were $6.6 million compared to $5.0 million for the nine months ended September 30, 2001. The Company opened two new branch offices in 2001. As a result of the increased loan origination and improved profitability, commissions, incentives and bonuses have increased by $528,000 when comparing the quarter ended September 30, 2002 to September 30, 2001. For the nine months ended September 30, 2002, commissions, incentives and bonuses have increased by $701,000 when compared with the nine months ended September 30, 2001. Full time equivalent employees increased to 145 as of September 30, 2002 compared to 136 as of September 30, 2001. In addition, employee insurance benefits rates increased by 16% from 2001 to 2002.

The Company’s efficiency ratio, which is the ratio of operating expenses to net interest income before provision for loan losses plus non-interest income and excluding gain or loss on repossessed assets, decreased (improved) to 71.43% for the three months ended September 30, 2002 compared to 71.48% for the three months ended September 30, 2001. For the nine months ended September 30, 2002, the Company’s efficiency ratio was 73.23% compared to 81.57% for the nine months ended September 30, 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 and nine months ended September 30, 2002 and 2001, respectively:

			For the nine months ended September 30,							For the three months ended September 30,

			2002		2001		Change $			2002		2001		Change $

Other operating expenses:
	Salaries and employee benefits		$	6,618	$	4,987	$	1,631		$	2,268	$	1,325	$	943
	Occupancy			1,076		679		397			351		227		124
	Telephone			230		220		10			75		69		6
	Premises and equipment			770		497		273			212		166		46
	Marketing and promotions			207		248		(41	)		60		82		(22	)
	Data processing			545		464		81			174		157		17
	Professional services			721		554		167			303		162		141
	Director, officer and employee expense			334		368		(34	)		105		97		8
	Office expenses			398		323		75			148		81		67
	ESOP loan expense			—		153		(153	)		—		51		(51	)
	Other expenses			1,119		744		375			392		262		130

		Total other operating expenses	$	12,018	$	9,237	$	2,781		$	4,088	$	2,679	$	1,409

The Company incurred non-recurring expenses as a result of the move of the Company’s headquarters and other expenses increased due to the refurbishment of a repossessed aircraft sold during the nine months

ended September 30, 2002. The non-recurring expenses are as follows: Occupancy, $42,000, premises and equipment, $202,000 and other expenses, $37,000. Other expenses also increased due to the $136,000 cost of refurbishing the aircraft. 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 41.6% for the three months ended September 30, 2002 and 2001. The effective income tax rate was 41.6% for the nine months ended September 30, 2002 compared to 41.5% for the nine months ended September 30, 2001. Provisions for income taxes totaled $553,000 and $166,000 for the three months ended September 30, 2002 and 2001, respectively. Provisions for income taxes totaled $1.5 million and $549,000 for the nine months ended September 30, 2002 and 2001, respectively.

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets
September 30, 2002 compared to December 31, 2001 and September 30, 2001

Total assets of the Company increased to $387.8 million as of September 30, 2002 compared to $370.2 million as of December 31, 2001 and $345.2 million as of September 30, 2001. The increase in total assets was due to the growth in net loans to $318.7 million as of September 30, 2002, compared to $305.7 million as of December 31, 2001 and $280.7 million as of September 30, 2001. Total assets decreased from June 30, 2002 due to a reduction in wholesale deposits and cash and cash equivalents. The Company took advantage of the opportunity to reduce wholesale deposits that were maturing with excess liquidity the Company had as of June 30, 2002, which assisted in improving the Company’s net interest margin. Growth for the calendar year is expected to be approximately 15%.

Deposits, including wholesale and retail deposits, increased to $336.1 million as of September 30, 2002 compared to $333.3 million as of December 31, 2001 and were $311.1 million as of September 30, 2001. Wholesale deposits decreased to $34.7 million as of September 30, 2002 compared to $81.7 million as of December 31, 2001 and were $65.1 million as of September 30, 2001. Cash and cash equivalents decreased to $28.4 million as of September 30, 2002 compared to $38.9 million as of December 31, 2001 and were $49.5 million as of September 30, 2001. The decrease in cash and cash equivalents was due to the increase in investment securities combined with an increase in net loans.

Shareholders’ equity was $19.5 million as of September 30, 2002 compared to $16.5 million as of December 31, 2001 and was $16.2 million as of September 30, 2001. Please refer to the “CAPITAL” section of this discussion for further information.

Investments

The Company’s investment portfolio consists primarily of agency securities, overnight investments in the Federal Funds market and certificates of deposit with other financial institutions. As of September 30, 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 September 30, 2001. As of December 31, 2001 and September 30, 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 September 30, 2002. US Government and other securities totaled $24.7 million as of September 30, 2002 compared to $10.6 million as of December 31, 2001 and were $5.1 million as of September 30, 2001. As of September 30, 2002, $4.9 million were pledged as collateral for public funds and treasury, tax and loan deposits. Average Federal Funds sold for the nine months ended September 30, 2002 were $17.8 million compared to $24.5 million for the nine months ended September 30, 2001.

Loans

Loan balances, net of the allowance for loan losses, increased to $318.7 million as of September 30, 2002 compared to $305.7 million as of December 31, 2001 and $280.7 million as of September 30, 2001. A healthy loan demand resulted in a 13.5% growth rate in net loans since September 30, 2001. The Company services SBA 7a loans sold to other investors. As of September 30, 2002, the Company serviced $109.6 million SBA 7a loans for other investors compared to$69.6 million as of December 31, 2001 and $71.5 million as of September 30, 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 nine months ended September 30,						At or for the three months ended September 30,

				2002			2001			2002			2001

				(dollars in thousands)						(dollars in thousands)
Beginning balance				$	305,686		$	245,437		$	306,114		$	262,581
Loans originated: (1)
	Commercial loans				18,857			13,831			7,079			7,474
	Real estate:
		Construction loans			63,867			61,887			31,564			27,622
		One-to four-family			37,688			39,215			11,174			15,344
		Commercial			87,788			64,147			31,295			26,561
	Consumer				2,460			3,375			851			746

			Total loans originated		210,660			182,455			81,963			77,747
Loans sold
	Real estate:
		Construction loans			464			1,783			464			—
		One-to four-family			33,699			24,853			9,246			8,353
		Commercial			51,200			11,860			14,394			4,231

			Total loans sold		85,363			38,496			24,104			12,584
Less:
	Principal repayments				114,622			108,845			46,375			47,734
	Other net changes (2)				(2,351	)		(459	)		(1,114	)		(1,000	)

			Total Loans	$	318,712		$	281,010		$	318,712		$	281,010

	(1)	Included in total loans originated are $10.0 million and $7.7 million of mortgage loans and $18.1 and $11.3 million of SBA loans originated for sale for the three months ended September 30, 2002 and 2001, respectively. Included in total loans originated are $34.0 million and $23.2 million of mortgage loans and $52.3 and $36.0 million of SBA loans originated for sale for the nine months ended September 30, 2002 and 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”) and other repossessed assets. 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.

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

	September 30, 2002			December 31, 2001			September 30, 2001

	(dollars in thousands)
Non-accrual loans	$	2,916		$	3,174		$	4,724
Troubled debt restructurings		—			—			—
Loans contractually past due 90 days or more with respect to either principal or interest and still accruing interest		—			29			—

Total non-performing loans		2,916			3,203			4,724
Other real estate owned		197			—			—
Other repossessed assets		—			1,900			—

Total non-performing assets	$	3,113		$	5,103		$	4,724

Total non-performing loans/gross loans		0.90	%		1.04	%		1.67	%
Total non-performing assets/total assets		0.80	%		1.38	%		1.37	%
Total non-performing loans net of guarantees/gross loans		0.32	%		0.37	%		1.09	%
Total non-performing assets net of guarantees/total assets		0.27	%		0.82	%		0.89	%
ALLOWANCE FOR LOAN LOSSES
Allowance for loan losses	$	3,607		$	2,788		$	2,550
Reserves for losses on commitments to extend credit		145			285			283

Total allowance and reserves for commitments	$	3,752		$	3,073		$	2,833

Loan loss allowance to loans, gross		1.11	%		0.90	%		0.90	%
Loan loss allowance, including reserves on commitments, to loans, gross		1.16	%		1.00	%		1.00	%
Loan loss allowance/non-performing loans		123.70	%		87.04	%		53.98	%
Loan loss allowance/non-performing assets		115.87	%		54.63	%		53.98	%
Loan loss allowance/non-performing loans, net of guarantees		350.19	%		244.56	%		82.63	%
Loan loss allowance/non-performing assets, net of guarantees		350.19	%		91.71	%		82.63	%

Nonaccrual Loans. Nonaccrual loans are impaired loans where the original contractual amount may not be fully collectible. The Company measures its impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loan’s effective interest rate if the loan is not collateral-dependent. As of September 30, 2002, December 31, 2001 and September 30, 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 September 30, 2002 the Company had fourteen loans on nonaccrual status totaling $2.9 million with $1.9 million, or 65%, 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 September 30, 2001, the Company had seventeen loans on nonaccrual status totaling $4.7 million. Of this total $1.6 million, or 35%, was guaranteed by the SBA.

Included in nonaccrual loans are loans less than 90 days delinquent. Loans 90 days or more delinquent totaled $1.0 million as of September 30, 2002, compared to $2.4 million as of December 31, 2001 and $2.5 million as of September 30, 2001. Net of government guarantees, loans 90 days or more delinquent as of September 30, 2002 were $164,000 compared to $487,000 as of December 31, 2001 and $2.3 million as of September 30, 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 September 30, 2002 were $2.2 million compared to $3.5 million as of December 31, 2001 and were $3.7 million at September 30, 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.

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 nine months ended September 30,

			2002			2001

			(dollars in thousands)
Balance at beginning of period			$	2,788		$	1,988
Chargeoffs:
	Real estate loans:
		One- to four- family		—			—
		Commercial		112			6
	Consumer			10			213

Total chargeoffs				122			219
Recoveries:
	Real estate loans:
		One- to four-family		—			—
		Commercial		11			60
	Consumer			4			2

Total recoveries				15			62

Net chargeoffs				107			157
Change in reserve for losses on commitments to extend credit				141			(45	)
Provision for loan losses				785			764

Balance at end of period			$	3,607		$	2,550

Net charge offs to average loans				0.04	%		0.08	%
Reserve for losses on commitments to extend credit			$	145		$	283

As of September 30, 2002 the balance in the allowance for loans losses was $3.6 million compared to $2.8 million as of December 31, 2001 and $2.6 million as of September 30, 2001. In addition, the reserve for losses on commitments to extend credit was $145,000 as of September 30, 2002, compared to $285,000 as of December 31, 2001 and was $283,000 as of September 30, 2001. The balance of undisbursed construction and other loans was $72.6 million as of September 30, 2002 compared to $63.9 million as of December 31, 2001 and was $64.1 million as of September 30, 2001.

During the quarter ended September 30, 2002, the Company reevaluated its method of determining the risk associated with undisbursed construction and other loans, which resulted in a reduction in the reserve as a percentage of liability outstanding to approximately 0.20%. The analysis was based on a review of historical losses on undisbursed construction and other loans, combined with a review of potential future losses on the Company’s liability outstanding. As of September 30, 2002 the allowance was 1.11% of total gross loans compared to 0.90% as of December 31, 2001 and September 30, 2001. Including the reserve for losses on commitments to extend credit, the allowance as a percentage of total gross loans was 1.16% as of September 30, 2002 compared to 1.00% as of December 31, 2001 and September 30, 2001. The allowance for loan losses as a percentage of nonaccrual loans was 123.70% as of September 30, 2002 compared to 87.04% as of December 31, 2001 and was 53.98% as of September 30, 2001. The allowance for loan losses, including reserves for losses on commitments to extend credit, to nonperforming loans, net of government guarantees was 364% as of September 30, 2002 compared to 270% as of December 31, 2001 and was 92% as of September 30, 2001. Management believes the allowance at September 30, 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 December 31, 2001 was an aircraft acquired through repossession. The aircraft was sold during the nine months ended September 30, 2002. The Company made a loan to facilitate the sale in the amount of $1.6 million at current market rates and terms. There was one OREO totaling $197,000 as of September 30, 2002.

Deposits and Borrowings

Total deposits increased to $336.1 million as of September 30, 2002 compared to $333.3 million as of December 31, 2001 and $311.1 million as of September 30, 2001. Interest bearing and non-interest bearing deposits increased to $286.5 million and $49.7 million, respectively, as of September 30, 2002 compared to $295.1 million and $38.3 million, respectively, as of December 31, 2001 and $272.5 million and $38.6 million, respectively, as of September 30, 2001. Retail banking deposits increased to fund SBA loan retention and loans held for sale, and reduce wholesale deposits. Total wholesale deposits were $34.7 million as of September 30, 2002, compared to $81.7 million as of December 31, 2001 and $65.1 million as of September 30, 2001. Total retail banking deposits increased to $301.4 million as of September 30, 2002 compared to $251.6 million as of December 31, 2001 and were $246.0 million as of September 30, 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 and nine months ended September 30, 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 $18.1 million as of September 30, 2002, compared to $5.8 million as of December 31, 2001 and $3.8 million as of September 30, 2001. Included in other borrowings are advances from the FHLB and other banks. 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. As of September 30, 2002, all advances from the FHLB had a maturity of six months or less. In addition to the FHLB advances, other lines of credit are utilized to increase capital at the Bank and, as of December 31, 2001 and September 30, 2001, to fund the Company’s ESOP. The loan to the Company’s ESOP was paid in full February 14, 2002. The Company borrowed $2.0 million from an unaffiliated lender and contributed $1.5 million of the proceeds 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 $19.5 million as of September 30, 2002 compared to $16.5 million as of December 31, 2001 and was $16.2 million as of September 30, 2001. The $3.0 million increase in capital is a result of net income of $2.1 million for the nine months ended September 30, 2002, plus the repayment of $813,000 in borrowed funds as a result of the sale of unallocated shares in the ESOP combined with $117,000 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 the indebtedness of the ESOP was $813,000. 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. On October 29, 2002 the Company declared a 5% stock dividend to shareholders of record as of November 15, 2002 which will be paid on November 29, 2002. 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. Growth for the calendar year is expected to be approximately 15%. Based on current projections, management believes that the Company will continue to remain well capitalized during 2002. Future asset growth is dependent upon many factors, including the Company’s access to capital markets, earnings growth, and overall economic conditions. 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.

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 September 30, 2002 and December 31, 2001, the outstanding balance on this line of credit was $2.0 million and $1.0 million, respectively. The proceeds of such loan were invested by the Company in the Bank in the form of equity capital, or used for other operating expenses. 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 September 30, 2002 and December 31, 2001, all capital ratios were above all current Federal capital guidelines for a “well capitalized” bank. As of September 30, 2002, the Bank’s regulatory Total Capital to risk-weighted assets ratio was 11.03% compared to 10.89% as of December 31, 2001. The Bank’s regulatory Tier 1 Capital to risk-weighted assets ratio was 9.85% as of September 30, 2002 compared to 9.82% as of December 31, 2001. The Bank’s regulatory Tier 1 Capital to average assets ratio was 8.00% as of September 30, 2002 compared to 7.94% as of December 31, 2001.

As of September 30, 2002, the Company’s regulatory Total capital to risk-weighted assets ratio was 10.33% compared to 10.30% as of December 31, 2001. The Company’s regulatory Tier 1 Capital to risk-weighted assets ratio was 8.04% as of September 30, 2002, compared to 7.65% as of December 31, 2001. The Company’s regulatory Tier 1 Capital to average assets ratio was 6.53% as of September 30, 2002 and 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 September 30, 2002 liquid assets as a percentage of deposits were 8.9% 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 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 September 30, 2002, the Company utilized a weighted average prepayment assumption of approximately 7.7% and a discount rate of 12%. In estimating fair values at December 31, 2001, the Company utilized a weighted average prepayment assumption of approximately 13.5% and a discount rate of 12%. In estimating fair values at September 30, 2001, the Company utilized a weighted average prepayment assumption of approximately 13.0% 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 September 30, 2002, December 31, 2001 and September 30, 2001. At September 30, 2002, December 31, 2001 and September 30, 2001, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 7.7%, 13.5% and 13.0%, 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 September 30, 2002 the OREO is a single family residence. There were no specific reserves on this asset as of September 30, 2002. At December 31, 2001, the repossessed asset is an aircraft. There were no specific reserves on this asset as of December 31, 2001.

SBA FUNDING RESTRICTIONS AND IMPACT ON FUTURE RESULTS

On October 1, 2002, the Small Business Administration (“SBA”) reduced the amounts of loans and the maximum loan size under its Section 7(a) loan program. The SBA has reduced the maximum Section 7(a) loan size it can guarantee from $1 million to $375,000.

The origination and subsequent sale of Section 7(a) loans have significantly and positively impacted the Company’s earnings for the nine months and the quarter ended September 30, 2002. During the first nine months of 2002, the Company originated approximately $48.8 million in Section 7(a) loans (approximately 80.8% of total SBA loan productions for the nine months) and sold approximately $50.4 million of such loans resulting in non-interest income of approximately $3.2 million. For the three months ended September 30, 2002, the Company originated approximately $14.2 million in Section 7(a) loans

(approximately 63.7% of total SBA loan production for the three months) and sold approximately $14.4 million of such loans resulting in non-interest income of approximately $964,000.

There are efforts ongoing in the Congress to reverse these reductions, but Congress recessed until after the November election without taking any action on this matter. The results and timing of Congressional action to reverse these limitations cannot presently be predicted.

Management routinely monitors developments with the SBA and took certain actions at the end of the third quarter to mitigate any impact in the fourth quarter. As a result, the Company expects to maintain a flow of loans for the fourth quarter of 2002 that will not be adversely impacted by the SBA’s reduction. Based upon Management’s current information and analysis, the SBA’s reduction is not expected to have a material adverse impact upon either the production or sale of Section 7(a) loans during the fourth quarter of 2002. Accordingly, management currently estimates Section 7(a) loan sales to be generally in line with levels during the third quarter of this year.

If Congressional action to reverse the SBA’s reduction is not successful or the reductions are not otherwise reversed, the Company expects that its production of Section 7(a) loans will be adversely impacted starting in the first quarter of 2003 with an eventual reduction in non-interest income to follow as a result. In addition to monitoring the situation and taking an active role in trade groups seeking Congressional action, the Company is seeking to develop alternative plans with which to deal with this funding problem. However, it is currently impossible to predict accurately the impact this situation will have upon the Company’s Section 7(a) production and non-interest income in 2003.

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 September 30, 2002, 82.87% 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 September 30, 2002, 56.71% 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 September 30, 2002, 35.49% of the Company’s borrowings were fixed rate with a remaining term of 27 years. The fixed rate borrowings were the $10 million Trust Preferred Securities held at the parent holding company.

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. 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.

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 September 30, 2002, 66.55% of the Company’s interest-bearing deposits were comprised of certificate of deposit accounts, the majority of which have original terms averaging eleven months. The remaining, weighted average term to maturity for the Company’s certificate accounts approximated seven months at September 30, 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.

In addition to the certificates of deposits, the Company has $95.8 million in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of September 30, 2002, with rates being paid between 0.35% and 1.70%. Although the following table would indicate that declines in interest rates would result in a corresponding decline in the cost of 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.

The following table sets forth information concerning repricing opportunities for the Company’s interest-earning assets and interest bearing liabilities as of September 30, 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 September 30, 2002

(dollars in thousands)		0 - 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

Interest sensitive assets:
Loans receivable:
	Adjustable rate loans, gross	$	190,410		$	11,262		$	19,811		$	45,651		$	1,269		$	268,403
	Fixed rate loans, gross(2)		6,140			11,128			1,644			15,592			20,988			55,492
Investments:
	Investment securities held-to-maturity		8,260			499			498			3,506			11,913			24,676
	Federal funds sold		11,555			—			—			—			—			11,555
	Other investments		2,162			99			—			—			554			2,815

Total interest sensitive assets			218,527			22,988			21,953			64,749			34,724			362,941

Interest sensitive liabilities:
Deposits:
	Non-interest bearing		—			—			—			—			49,692			49,692
	Interest bearing		150,162			45,894			84,541			5,853			—			286,450
Other Borrowings			18,088			—			—			—			10,000			28,088

Total interest sensitive liabilities		$	168,250		$	45,894		$	84,541		$	5,853		$	59,692		$	364,230

GAP Analysis
Interest rate sensitivity gap		$	50,277		$	(22,906	)	$	(62,588	)	$	58,896		$	(24,968	)	$	(1,289	)
GAP as% of total interest sensitive assets			13.85	%		-6.31	%		-17.24	%		16.23	%		-6.88	%		-0.36	%
Cumulative interest rate sensitivity gap		$	50,277		$	27,371		$	(35,217	)	$	23,679		$	(1,289	)	$	(1,289	)
Cumulative gap as% of total interest sensitive assets			13.85	%		7.54	%		-9.70	%		6.52	%		-0.36	%		-0.36	%

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. On an annual basis, management expects to experience higher net interest income when rates rise, the opposite of what is indicated by the static Gap analysis.

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.

The following table shows the effects of changes in projected net interest income for the twelve months ending September 30, 2003 under the interest rate shock scenarios stated. The table was prepared as of September 30, 2002, at which time prime was 4.75%.

(dollars in thousands)

Changes in Rates		Projected Net interest Income		Change from base case			%change from base case

	+ 300 bp	$	24,263	$	4,421			22.28	%
	+ 200 BP	$	22,445	$	2,603			13.12	%
	+ 100 BP	$	20,733	$	891			4.49	%
	0 BP	$	19,842
	- 25 BP	$	19,671	$	(171	)		-0.86	%
	- 50 BP	$	19,485	$	(357	)		-1.80	%
	- 100 BP	$	19,028	$	(814	)		-4.10	%

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.

ITEM 4. CONTROLS AND PROCEDURES

(a)	Evaluation of disclosure controls and procedures

	Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

(b)	Changes in internal controls

	There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation

(c)	Asset-Backed issuers
	The Company is not an Asset-Backed issuer.

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

No matters were submitted to the security holders.

Item 5 Other information

None to report.

Item 6 Exhibits and Reports from 8-K

Exhibit 3.1 Amendment to the Certificate of Incorporation
Exhibit 99.1 Certification

SIGNATURES

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

		COMMUNITY BANCORP INC.

		(Registrant)


Date	November 12, 2002	/s/ THOMAS E. SWANSON

		Thomas E. Swanson
		President and Chief Executive Officer


Date	November 12, 2002	/s/ L. BRUCE MILLS, JR.

		L. Bruce Mills, Jr.
		Sr. Vice President, Chief Financial Officer

CERTIFICATION

I, Thomas E. Swanson, President and Chief Executive Officer of Community Bancorp Inc., certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Community Bancorp Inc;

	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date	November 12, 2002	/s/ THOMAS E. SWANSON

		Thomas E. Swanson
		President and Chief Executive Officer

I, L. Bruce Mills, Jr., Senior Vice President and Chief Financial Officer of Community Bancorp Inc., certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Community Bancorp Inc;

	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date	November 12, 2002	/s/ L. BRUCE MILLS, JR.

		L. Bruce Mills, Jr.
		Sr. Vice President, Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Exhibit

3.1		Amendment to the Certificate of Incorporation
99.1		Certification