UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File Number 000-51044

 

 

 

 

COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

 

(702) 878-0700

(Registrant’s telephone number)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o     No þ

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ     No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

                                                            (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of June 29, 2007, the aggregate market value of the common stock held by non-affiliates of the Company was: $271,828,000

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

The information required in Part III, Items 10-14 is incorporated by reference to the registrant’s proxy statement for the 2008 Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A.

 

 

COMMUNITY BANCORP

 

TABLE OF CONTENTS

 

Forward-Looking Statements

 

Statements concerning future performance, developments or events, expectations for growth and income forecasts, and any other guidance on future periods constitute forward-looking statements that are subject to a number of risks and uncertainties. Actual results may differ materially from stated expectations. Specific factors include, but are not limited to the recent fluctuations in the U.S. capital and credit markets, loan production, balance sheet management, the economic condition of the markets in Las Vegas, Nevada, or Phoenix, Arizona and their deteriorating real estate sectors, net interest margin, loan quality, the ability to control costs and expenses, interest rate changes and financial policies of the United States government, our ability to manage systemic risks and control operating risks, and general economic conditions. Additional information on these and other factors that could affect financial results are included in Item 1A. Risk Factors, herein, and our other Securities and Exchange Commission filings.

 

When used in this document, the words or phrases such as “will likely result in,” “management expects that,” “will continue,” “is anticipated,” “estimate,” “projected,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements 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 we operate, 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 our business, economic, political and global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other factors referenced in this Report, including in “Item 1A. Risk Factors.” Readers should not place undue reliance on the forward-looking statements, which reflect management’s view only as of the date hereof. Community Bancorp undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. This statement is included for the express purpose of protecting Community Bancorp under the PSLRA’s safe harbor provisions. When relying on forward-looking statements to make decisions with respect to our Company, investors and others are cautioned to consider these and other risks and uncertainties.

 

 

Community Bancorp

 

Community Bancorp is the bank holding company for Community Bank of Nevada, a Nevada State chartered bank headquartered in Las Vegas, and Community Bank of Arizona, an Arizona state chartered bank headquartered in Phoenix, Arizona (collectively “the Company”). Through its subsidiary banks Community Bancorp delivers an array of commercial bank products and services with an emphasis on customer relationships and personalized service. At December 31, 2007, the Company had total assets of $1.7 billion, gross loans of $1.4 billion, total deposits of $1.2 billion and stockholders’ equity of $235.1 million.

 

Community Bank of Nevada was organized in July 1995 by local community leaders and experienced bankers with the purpose of providing superior community banking services to the greater Las Vegas area. Community Bancorp was formed in 2002 and Community Bank of Nevada became its wholly-owned subsidiary. As a result of this reorganization, shareholders of Community Bank of Nevada became shareholders of Community Bancorp. In the fourth quarter of 2004, Community Bancorp successfully completed its initial public offering (“IPO”) and concurrent listing of common stock on the NASDAQ Global Market. In the offering, $39.3 million was raised, net of expenses, and certain selling shareholders received net proceeds of $16.5 million.

 

In September 2006, Community Bank of Arizona (formerly Cactus Commerce Bank) was acquired adding the Company’s first full-service bank outside of Nevada. Community Bank of Arizona was established in November 2003, primarily to serve small business and professional customers.

 

The Company focuses on meeting the banking needs associated with the population and economic growth of the greater Las Vegas and Phoenix areas. Customers are generally small to medium size businesses (e.g., less than $50 million in annual revenues) that desire personalized commercial banking products and services, with an emphasis on relationship banking and prefer locally-managed banking institutions that provide personalized service.

 

Historically, the Company has focused its lending activities on commercial real estate loans, construction loans and land acquisition and development loans, which comprised 81.7% of its loan portfolio at December 31, 2007. While this continues to be a large part of the Company’s business, management believes significant opportunities for growth exist in commercial and industrial (C&I) and Small Business Administration (SBA) loans.

 

As of December 31, 2007, the Company had thirteen full-service branches and various administrative offices located in greater Las Vegas, Nevada and three full-service branches, one administrative office and one loan production office (LPO) located in greater Phoenix, Arizona. Six of the branches located in greater Las Vegas were opened as de novo branches (one in 2007), three branches were added in 2005 with the acquisition of Bank of Commerce and four branches were added in 2006 with the acquisition of Valley Bancorp. The Company’s Arizona operations commenced with the purchase of Community Bank of Arizona, which consisted of one branch. During 2007, the Company expanded its Arizona operations through the opening of two de novo branches and an administrative office.

 

The Company’s headquarters are located at 400 South 4th Street, Suite 215, Las Vegas, Nevada 89101 and its telephone number is (702) 878-0700. The Company’s website can be accessed at www.communitybanknv.com. None of the information on or hyperlinked from the Company’s website is incorporated herein.

 

Strategies

 

The Company’s growth and operating strategies are centered on creating long term benefit to our shareholders, customers and employees. The key elements of the Company’s growth and operating strategies are:

 

Growth Strategies

 

 

 

Operating Strategies

 

 

Market Area

 

The Company currently operates in what management believes to be some of the most attractive markets in the western United States. The market areas have historically reported high per capita income and experienced some of the fastest population growth in the country.

 

Nevada

 

The primary market area served by Community Bank of Nevada is Clark County, Nevada. Clark County is one of the fastest growing areas in the United States. According to the Center for Business and Economic Research based at the University of Nevada, Las Vegas, or the CBER, between 2002 and 2007, Clark County’s population grew from approximately 1.5 million to 2.0 million. This growth has been driven by a variety of factors, including growth in the service economy associated with the hospitality and gaming industries, affordable housing, the benefits of no state income tax, a growing base of senior and retirement communities, and general recreational opportunities associated with a favorable climate.

 

Arizona

 

The primary market area served by Community Bank of Arizona is the greater Phoenix metropolitan area, in Maricopa County. According to the Economic and Business Research Center based at The Eller College of Management, The University of Arizona, Tucson, the greater Phoenix population is in excess of 3.9 million persons at December 31, 2007. The Phoenix metropolitan area contains companies operating in the following industries: 1) aerospace, 2) high-tech, 3) manufacturing, 4) construction, 5) energy, 6) transportation, 7) minerals and mining and 8) financial services.

 

Business Activities

 

The Company provides full-service banking services primarily in the Las Vegas and Phoenix metropolitan markets with a focus on small to medium size businesses. Many of these businesses provide goods and services, directly or indirectly, for the development of the infrastructure that services the growing population specific to the aforementioned markets. Customers include developers, contractors, professionals, distribution and service businesses, local residential home builders and manufacturers. Further, a broad range of traditional banking services and

products are offered to individuals, including personal checking and savings accounts and other consumer banking products, including electronic banking, as well as lending products.

 

The Company originates a variety of loans, including commercial real estate and construction loans, secured and unsecured C&I loans, residential real estate loans, SBA loans, and, to a lesser extent, consumer loans. In addition to direct loan origination, the Company utilizes relationships within the banking industry to participate in loans that meet its credit criteria. The amount of purchased (bought) participation loans at December 31, 2007 constituted approximately 11.8% of the Company’s total loan portfolio.

 

Management has emphasized the utilization of variable rate pricing for the majority of loan commitments. Among the variety of credit products provided, only the permanent commercial real estate loans have competitive pressures to provide a fixed rate pricing. The Company has remained competitive in the fixed rate market with a rate product that adjusts every 36 to 60 months, tied to recognized indexes (e.g., Prime and LIBOR).

 

The Company manages its loan portfolio to provide for an adequate return and a diversification of risk. The Company has consistently maintained strong asset quality.

 

The Company’s lending activities are concentrated in three main categories, as described below.

 

Real Estate Loans.  The Company’s real estate loan portfolio consists of: 1) commercial, 2) residential and 3) construction and land development loans. Commercial real estate (“CRE”) loans totaled $370.5 million, or 30.8% of the real estate loan portfolio. Owner occupied commercial real estate loans were approximately 50.5% of the commercial category. Residential loans totaled $43.2 million, or 3.6% of the real estate portfolio, and include farmland loans and loans for custom homes to high net worth borrowers. This loan category does not contain any conventional mortgage or subprime loans. Construction and land development loans totaled $789.2 million, or 65.6% of the real estate portfolio, and includes loans for undeveloped land of $178.3 million.

 

To manage the concentration of loans in CRE and the inherently higher risk associated with construction lending (see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Allowance for Loan Losses”), diversification is sought through maintaining a broad base of borrowers and adjusting exposure to property types based on overall strength in a particular sector, which includes a variety of factors, such as vacancy trends. While the weakening economy during the second half of 2007 caused by the deterioration of the residential real estate sector has affected the office and retail segments of the Company’s markets, these market sectors have historically been high growth areas with markedly low vacancies. Currently, the majority of the Company’s CRE portfolio is in the retail and office sectors. As of December 31, 2007, CRE loan portfolio, including construction loans, was comprised of the following:

 

 

CRE loans are generally underwritten with a minimum equity position of 25% (or a maximum loan-to-value of 75%) and a minimum debt coverage ratio of 1.25:1. The Company generally lends to developers who have already entered into leases for more than 50% of the subject property. Construction and land loans are short term in nature and generally do not exceed 18 months. Permanent commitments are primarily restricted to no greater than 10-year maturities with rate adjustment periods every 36 months when fixed commitments exist.

 

Commercial and Industrial Loans.  A variety of C&I loan products are offered by the Company, including lines of credit for working capital, term loans for capital expenditures, and commercial stand-by letters of credit.

Lines of credit typically have a 12-month commitment and are secured by the asset financed. In cases of larger commitments, a borrowing base certificate may be required to determine eligible collateral and advance parameters. Term loans seldom exceed 60 months, but in no case, exceed the depreciable life of the tangible asset being financed.

 

The Company is a “Preferred Lender” with the U.S. Small Business Administration (SBA). SBA loan products offered by the Company consist of: 1) Express, 2) SBA 7a and 3) SBA 504 programs. Under the SBA Express program, loans or lines are offered for credit up to $350,000 with a guarantee of up to 50% by the SBA. Under the 7a program, loans up to $150,000 are guaranteed up to 85% by the SBA. Loans in excess of $150,000, but not in excess of $2,000,000, are guaranteed up to 75% by the SBA. Generally, the guarantee may become invalid only if the loan does not meet the SBA documentation guidelines.

 

Historically the Company has sold a portion of its SBA 7a originations. Based in part on liquidity requirements, loan concentrations, loan yields and market premiums, future SBA originations might be sold. In the event of a sale, the Company anticipates it will continue to service the loans.

 

Commercial credits less than $500,000 and consumer loan requests are underwritten by the Express Loan department. Credit scoring software is utilized to assist with the credit decision process. Borrowers realize a faster turnaround time on loan decisions and to date have been willing to pay a premium for this service.

 

As of December 31, 2007, the Company had $210.6 million of C&I loans outstanding and C&I commitments of $103.3 million.

 

Consumer Lending.  Consumer credit is offered as a complementary product to the Company’s primary product line and viewed by management as a “value added” product for business customers. Products offered include home equity credit lines, automobile loans, personal lines of credit and home improvement loans.

 

Lending and Credit Policies

 

The Board of Directors of Community Bancorp establishes lending policies. The three key principles of the Company’s lending policies are:

 

(1) Debt service coverage,

 

(2) Risk rating system and pricing for risk, and

 

(3) Managed concentration levels.

 

Debt Service Coverage.  The Company’s risk management philosophy is to extend credit only when an applicant has proven adequate equity, cash flow to service the proposed debt and demonstrated an independent secondary source of repayment.

 

Risk Rating System and Pricing for Risk.  Management has developed a risk rating system of eight categories, or grades, which clearly defines the fundamentals for each risk rating. At the time of origination, the underwriter assigns a risk rating which is subsequently reviewed on a periodic basis by the Credit Administration department. This system is used to manage levels of risk, pricing and a forward-thinking strategy for future extensions of certain loan categories.

 

Managed Concentration Levels.  The Company has established policy guidelines for loan concentration levels and return on equity by loan category. Management actively monitors these levels and can elevate the return on equity aspect of the loan category in the event the Company is approaching the maximum concentration level established by the Company’s policies and guidelines.

 

If a potential credit falls outside of the guidelines set forth in the Company’s lending policies, the loan is reviewed by a higher level of credit approval authority, which has three levels, as listed below from lowest to highest level. Based on the historically strong emphasis on business development, the Company’s policies were written to ensure a high degree of secondary review for a credit consideration. Any conditions placed on loans in the approval process must be satisfied before the Credit Administration department releases the loan documentation for

execution. The Company’s Credit Administration department works entirely independent of loan production personnel and has full responsibility for all loan disbursements.

 

 

Loan Grading and Loan Review.  The Company seeks to quantify the risk in its loan portfolio by maintaining a loan grading system consisting of eight different categories (Grades 1-8). The grading system is used to determine, in part, the provision for loan losses. The first four grades in the system are considered satisfactory. The other four grades range from a “Watch/Pass” category to a “Doubtful” category. These four grades are further discussed below under the section subtitled “Loan classifications.”

 

During the loan origination and approval process an initial grade is assigned to each loan (generally by the loan officer). After funding, all loans over a specified dollar amount are reviewed by the Executive Vice President/Credit Administrator who may assign a different grade to the credit. The grade on each individual loan is reviewed at least annually by the loan officer overseeing the loan. Monthly, the Board of Directors of the subsidiary bank reviews the aggregate amount of all loans graded as “Special Mention”, “Substandard” or “Doubtful”, and each individual loan over a certain dollar amount that has a grade within such range. Changes in the grade of a loan may occur through any of the following means:

 

 

Loan Delinquencies.  When a borrower fails to make a committed payment, attempts are made to alleviate the deficiency by contacting the borrower to seek payment. Habitual delinquencies and loans that are delinquent 30 days or more are reviewed at the monthly credit risk managers meeting for possible changes in grading.

 

Loan Classifications.  Federal guidelines require that each insured bank classify its assets on a regular basis. In addition, relating to examinations of insured institutions, examiners have authority to identify problem assets, and, if appropriate, classify them. Grades 5-8 of the loan grading system are used to identify potential problem assets with grades 7 and 8 (“Substandard” and “Doubtful” ) considered classified loans. Classified loans were $14.5 million, $2.9 million and $2.3 million at December 31, 2007, 2006 and 2005, respectively.

 

Operating Segments

 

The Company’s operations are managed along two reportable operating segments consisting of Community Bank of Nevada and Community Bank of Arizona. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Segment Reporting” and Note 21 — Segment Information” in the Notes to Consolidated Financial Statements.

Risk Management

 

The Company’s strategic plan promotes a growth rate commensurate with the growth of the Southern Nevada and Phoenix metropolitan markets. Management is equally committed to maintaining internal controls to manage the risk associated with such growth. The Company has identified credit risk and operational risk as the two areas that could have the greatest impact on capital.

 

To mitigate and proactively manage these areas of risk, the Company has enhanced three departmental functions:

 

 

Investment Activities

 

The Company’s investment strategy is designed to be complementary to and interactive with its other activities (e.g., cash position; borrowed funds; quality, maturity, stability and earnings of loans; nature and stability of deposits; capital and tax planning). At December 31, 2007, the investment portfolio represented 5.3% of total assets.

 

General objectives with respect to the Company’s investment portfolio are:

 

 

Investment securities consist primarily of U.S. Government Agency issues, municipal bonds, mortgage-backed securities and SBA loan pools. In addition, the Company’s subsidiary banks hold stock with the Federal Home Loan Bank, Federal Reserve Bank and Pacific Coast Bankers’ Bank, as a member of these systems.

 

The Company’s investment securities are generally classified as “available-for-sale” or “held-to-maturity” pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and instead reported as a separate component of stockholders’ equity. Held-to-maturity securities are those securities the Company has both the intent and the ability to hold until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount.

 

The securities portfolio is managed in accordance with guidelines set by the Company’s Investment Policy. Specific day-to-day transactions affecting the securities portfolio are managed by the Chief Financial Officer of the Holding Company. The activities within the investment portfolio are reviewed monthly, or more often, as needed, by the Company’s Asset/Liability Committee (“ALCO”) and are reported monthly to the Company’s Board of Directors.

The Investment Policy addresses strategies, types and levels of allowable investments and is reviewed and approved annually by the Company’s Board of Directors. The policy also places limits on: 1) the amount invested in various types of securities, 2) the average life and duration of securities and 3) securities dealers with whom the Company can conduct business.

 

Concentrations/Customers

 

Assets

 

No individual or single group of related accounts is considered material in relation to the Company’s assets or in relation to its overall business. However, approximately 84.8% of the loan portfolio at December 31, 2007 consisted of real estate loans, including commercial loans secured by real estate, construction and land loans and residential real estate loans. Generally, the Company does not originate nor retain term residential mortgage loans. The Company’s business is dependent on the trends of the regional economies in which it operates, particularly in the commercial and residential real estate markets. At December 31, 2007, the Company had 302 loans in excess of $1 million each, totaling $1.2 billion. These loans comprise approximately 16.5% of the loan portfolio by number of loans and 84.7% by total gross loans outstanding. Not including credit card and consumer overdraft lines and purchased participation loans, the average loan size is approximately $952,000.

 

Liabilities

 

At December 31, 2007, one wholesale customer balance totaling $131.2 million comprised 10.7% of total deposits and all wholesale customer balances (seven customers in total), totaling $320.0 million, comprised 26.0% of total deposits. The wholesale deposits are comprised of money market accounts and have a floating interest rate indexed to the federal funds rate and brokered certificates of deposits that can have terms ranging from 90 days to two years at a fixed rate of interest. While a viable market for these wholesale deposits currently exists, if these products are unavailable in the future, management might have to secure alternative funding liabilities under terms and conditions (e.g., rates and duration) that could increase the Company’s cost of funds.

 

Deposit Products and Other Sources of Funds

 

The Company’s primary sources of funds for use in its lending and investing activities consist of:

 

 

Management closely monitor rates and terms of competing sources of funds and utilize those sources that it believes to be the most cost effective, consistent with the Company’s asset and liability policies.

 

Deposits.  An important balance sheet component impacting the Company’s net interest margin is the composition and cost of its deposit base. The Company can improve its net interest margin to the extent that growth in deposits can be focused in the less volatile and somewhat more traditional core deposits, which are total deposits less CDs greater than $100,000 (commonly referred to as Jumbo CDs). Management attempts to price the Company’s deposit products in a manner that will promote deposit growth and satisfy liquidity requirements and customers’ needs. To meet the varied needs of deposit customers, the Company provides a wide array of deposit products, including regular checking, savings, negotiable order of withdrawal (“NOW”) accounts and money market accounts; fixed-rate, fixed maturity retail CDs ranging in terms from 30 days to two years; and individual retirement accounts. For business or large cash customers, the Company often provides special services (e.g., courier service to pick up non-cash deposits and armored car and vault service). Escrow deposits constituted 2% of total deposits as of December 31, 2007.

 

The Company intends to continue its efforts in attracting deposits from business lending relationships as a means to reducing its cost of funds and improving its net interest margin. In the event loan demand should exceed the Company’s current liquidity levels and/or other borrowing capacity, management believes that sufficient

additional funding could be obtained by re-pricing the yields on the Company’s CDs and/or securing additional wholesale deposits (e.g., insured money market accounts and/or brokered CD’s).

 

Other Borrowings.  The Company regularly borrows from the Federal Home Loan Bank, or FHLB, pursuant to an agreement to obtain advances based on collateral of either a blanket lien on all loans secured by real estate and all business loans or securities, to meet its liquidity requirements. As of December 31, 2007, the Company had $132.4 million outstanding in FHLB debt with a remaining borrowing capacity of $33.4 million.

 

The Company may occasionally use its Federal Funds lines of credit to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short term purposes. The Company has Federal Funds lines with other financial institutions to which it can borrow up to $103.0 million on an unsecured basis. These lines may be terminated by the respective lending institutions at any time.

 

Employees

 

The Company had a total of 279 full-time and 10 part-time employees at December 31, 2007.

 

Competition

 

The banking and financial services business in Clark County, Nevada and Maricopa County, Arizona, generally, and in the greater Las Vegas and Phoenix market areas, in particular, are highly competitive. This increasingly competitive environment primarily comes as a result of growth in community banks, changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. As a result, the Company competes for loans, deposits, and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company can offer. The Company generally competes on the basis of customer service and responsiveness to customer needs, available loan and deposit products, the rates of interest charged on loans, and the rates of interest paid for funds.

 

Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive. Additionally, competition has intensified due to federal, state and interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past. These laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in our market.

 

Technological innovation continues to contribute to greater competition in domestic and international financial services markets. Many customers now expect a choice of several delivery systems and channels, including telephone, e-mail, personal online banking and ATMs.

 

Effect of Governmental Policies and Recent Legislation

 

Banking is a business that depends on rate differentials. In general, the difference between the interest rate the Company pays on deposits and other borrowings and the interest rate received on loans and securities comprise the major portion of net earnings. These rates are highly sensitive to many factors that are beyond the Company’s control. Accordingly, earnings and growth are subject to the influence of economic conditions, including inflation, recession and unemployment.

 

The commercial banking business is not only affected by general economic conditions but is also influenced by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) by operating in the open market through United States Government securities, by adjusting the required level of reserves for financial institutions that are subject to reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.

From time-to-time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the State legislatures and before various banking regulatory and other professional agencies.

 

Supervision and Regulation

 

The Company is extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors rather than shareholders. The discussion below describes and summarizes certain statutes and regulations. These descriptions and summaries are qualified in their entirety by reference to the particular statute or regulation. Changes in applicable laws or regulations may have a material effect on the Company’s business and prospects. The Company’s operations may also be affected by changes in the policies of banking and other government regulators. Management cannot accurately predict the nature or extent of the effects on the Company’s business and earnings that changes in fiscal or monetary policies, or new federal or state laws and regulations, may have in the future.

 

Compliance

 

In order to ensure the Company is in compliance with the laws and regulations that apply to its operations, including those summarized below, a Chief Risk Manager was hired in 2005 and personnel levels in internal audit and the compliance department have expanded. The Company is regularly reviewed to assess its compliance with applicable laws and regulations by the Board of Governors of the Federal Reserve System, or the Federal Reserve, the FDIC, and the bank subsidiaries are reviewed by their respective state regulatory agencies — the Nevada Department of Business and Industry, Financial Institutions Division (“Nevada FID”) and the Arizona State Banking Department (“Arizona SBD”). Management believes the Company has complied with all of the laws and regulations applicable to its operations.

 

Federal Bank Holding Company Regulation

 

Community Bancorp is a registered financial holding company as defined in the Bank Holding Company Act of 1956, as amended, or the Bank Holding Company Act, and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the Bank Holding Company Act limits the business of bank holding companies that are not financial holding companies to owning or controlling banks and engaging in other activities closely related to banking. Community Bancorp must file reports with the Federal Reserve and must provide any additional information as required.

 

The Federal Reserve may require Community Bancorp to terminate an activity or terminate control or liquidate or divest certain subsidiaries, affiliates or investments when the Federal Reserve believes the activity or the control of the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

 

The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, Community Bancorp must file written notice and obtain Federal Reserve approval prior to purchasing or redeeming its equity securities. Additionally, Community Bancorp is required by the Federal Reserve to maintain certain levels of capital. See “Capital Adequacy” below in this section for a discussion of the applicable federal capital requirements.

 

Financial Holding Company Status.  Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature. Community Bancorp was approved as a financial holding company on May 5, 2004.

As a financial holding company, Community Bancorp may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. Activities that are financial in nature include:

 

 

In order to remain a financial holding company, the Company’s subsidiary banks must be well capitalized, well managed, and, except in limited circumstances, in satisfactory compliance with the Community Reinvestment Act. Failure to sustain compliance with such requirements or correct any noncompliance within a fixed time period could lead to divesture of subsidiary banks or require conformity of all of activities to those permissible for a bank holding company as described above.

 

Holding Company Bank Ownership.  The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

(1) Acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares;

 

(2) Acquiring all or substantially all of the assets of another bank or bank holding company; or

 

(3) Merging or consolidating with another bank holding company.

 

Holding Company Control of Nonbanks.  With some exceptions, the Bank Holding Company Act also prohibits a bank holding company that is not a financial holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

 

Transactions with Affiliates.  Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its other subsidiaries, on investments in their securities, and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit Community Bancorp’s ability to obtain funds from Community Bank of Nevada and/or Community Bank of Arizona for its cash needs, including funds for payment of dividends, interest and operational expenses.

 

Tying Arrangements.  The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither Community Bancorp nor Community Bank of Nevada or Community Bank of Arizona may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by us; or (2) an agreement by the customer to refrain from obtaining other services from a competitor.

 

Support of Subsidiary Banks.  Under Federal Reserve policy, Community Bancorp is expected to act as a source of financial and managerial strength to Community Bank of Nevada and Community Bank of Arizona. This means that Community Bancorp is required to commit, as necessary, resources to support Community Bank of Nevada and Community Bank of Arizona. Any capital loans that a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

State Law Restrictions.  As a Nevada corporation, Community Bancorp is subject to certain limitations and restrictions under applicable Nevada corporate law. For example, state law restrictions in Nevada include limitations and restrictions relating to indemnification of directors, maintenance of books, records and minutes, and observance of certain corporate formalities.

 

Regulation as a Public Company.  Community Bancorp’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended. Community Bancorp is listed on the NASDAQ Global Market (“NASDAQ”) under the trading symbol “CBON,” and is subject to the rules of NASDAQ for listed companies. As such, Community Bancorp is subject to the requirements of information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions.

 

Federal and State Regulation of Community Bank of Nevada and Community Bank of Arizona

 

General.  Community Bank of Nevada and Community Bank of Arizona are FDIC-insured, state-chartered banking corporations and are subject to various statutory requirements and rules and regulations promulgated and enforced primarily by the Nevada FID and the Federal Reserve in the case of Community Bank of Nevada, and the FDIC and Arizona SBD in the case of Community Bank of Arizona. These statutes, rules, and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the business of Community Bank of Nevada and Community Bank of Arizona. The FDIC, in the case of Community Bank of Arizona, and the Federal Reserve, in the case of Community Bank of Nevada, have broad authority in prohibiting unsafe or unsound banking practices. In addition, federal law imposes a number of restrictions on state-chartered, FDIC-insured banks, and their subsidiaries. These restrictions range from prohibitions against engaging as a principal in certain activities to the requirement of prior notification of branch closings.

 

Lending Limits.  Nevada state banking law generally limits the amount of funds that a bank may lend to a single borrower to 25% of stockholders’ equity and allowance for loan and lease losses. Under Arizona law, the obligations of one borrower to a bank may not exceed 20% of the bank’s capital.

 

Liability of Commonly Controlled Institutions.  Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because Community Bancorp controls each of Community Bank of Nevada and Community Bank of Arizona, the banks are commonly controlled for purposes of these provisions of federal law.

 

Control of Financial Institutions.  Nevada banking laws require that changes in ownership of 10% or more of a bank’s outstanding voting stock must be reported to the Nevada FID within three business days. If 20% or more of the bank’s voting power is acquired by a natural person, or 10% or more is acquired by an entity, then the acquisition may be deemed as a change in control requiring prior approval of the Nevada FID. Arizona banking law provides that no person may acquire control of an Arizona bank without the prior approval of the Arizona Superintendent. A person who has the power to vote 15% or more of the voting stock of an Arizona bank is presumed to control the bank.

 

Community Reinvestment.  The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, a bank’s primary federal regulator evaluate the record of the financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

 

Insider Credit Transactions.  Banks are also subject to certain Federal Reserve restrictions on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons (commonly referred to as insiders). Extensions of credit (1) must be made on substantially the same terms and pursuant to the same credit underwriting procedures as those for comparable transactions with persons who are neither insiders nor employees; and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in regulatory sanctions on the bank or its insiders.

 

Regulation of Management.  Federal law sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency. Federal law also prohibits management personnel of a bank from serving as a director or in a management position of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

 

Safety and Soundness Standards.  Federal law imposes upon banks certain non-capital safety and soundness standards. These standards cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits. Additional standards apply to asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Under Nevada state law, if the stockholders’ equity of a Nevada state chartered bank becomes impaired, the Commissioner of the Nevada FID will require the bank to make the impairment good. Failure to make the impairment good may result in the Commissioner’s taking possession of the bank and liquidating it. Under Arizona law, the Superintendent is also authorized to take possession and control of a bank if the Superintendent finds that the bank is in such an unsafe or unsound condition that it is or will become unable to meet the anticipated demands of the depositors.

 

Dividends.  The primary source of Community Bancorp’s cash reserves are dividends received from its subsidiary banks. Nevada law imposes certain restrictions on Community Bank of Nevada’s ability to pay dividends and prohibits a bank from paying dividends if doing so would reduce its stockholders’ equity below (i) the initial stockholders’ equity of the bank; or (ii) 6% of the total deposit liability of the bank, as determined by the Nevada FID. Under section 6-187 of the Arizona Revised Statutes, Community Bank of Arizona may pay dividends on the same basis as any other Arizona corporation. Under section 10-640 of the Arizona Revised Statutes, a corporation may not make a distribution to shareholders if to do so would render the corporation insolvent or unable to pay its debts as they become due. However, an Arizona bank may not declare a non-stock dividend out of capital surplus without the approval of the Superintendent.

 

Notwithstanding the availability of funds for dividends, however, the FDIC may prohibit the payment of any dividends if the agency determines such payment would constitute an unsafe or unsound practice.

 

Regulations of the Federal Reserve also govern the payment of dividends by a state member bank. Community Bank of Nevada is a state member bank, although Community Bank of Arizona is not. Under Federal Reserve regulations, dividends may not be paid unless both capital and earnings limitations have been met. First, no dividend may be paid if it would result in a withdrawal of capital or exceed the member bank’s net profits then on hand, after deducting its losses and bad debts. Exceptions to this limitation are available only upon the prior approval of the Federal Reserve and the approval of two-thirds of the member bank’s shareholders which, in the case of Community Bank of Nevada, would require Community Bancorp’s approval, as the sole shareholder of Community Bank of Nevada. Second, a state member bank may not pay a dividend without the prior written approval of the Federal Reserve if the total of all dividends declared in one calendar year, including the proposed dividend, exceeds the total of net income for that year plus the preceding two calendar years less any required transfers to surplus under state or federal law.

 

In addition, a bank may not pay cash dividends if doing so would reduce its capital below minimum applicable federal capital requirements. See “Capital Adequacy” below in this section for a discussion of the applicable federal capital requirements.

 

Predatory Lending

 

The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a

concise or a comprehensive definition. But predatory lending typically involves at least one, and perhaps all three, of the following elements:

 

 

Federal Reserve regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. The following triggers coverage under the Home Ownership and Equity Protection Act of 1994:

 

 

In addition, the Home Ownership and Equity Protection Act of 1994 bars “loan flipping” by the same lender or loan servicer within a year. Lenders also will be presumed to have violated the law, which states loans should not be made to those that are unable to repay them, unless documentation is maintained proving that the borrower has the ability to repay the loan. Lenders that violate these regulations face cancellation of loans and penalties equal to the finance charges paid. The Company does not expect these rules and potential state action in this area to have a material impact on its financial condition or results of operations.

 

Privacy

 

Federal banking laws limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide:

 

 

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Management believes the Company’s privacy policies have been implemented in accordance with the laws.

 

Interstate Banking and Branching

 

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Interstate Act, generally authorizes interstate branching. Currently, bank holding companies may purchase banks in any state, and banks may merge with banks in other states, as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

 

The State of Nevada has enacted “opting in” legislation authorizing interstate mergers pursuant to the Interstate Act. The Nevada statute permits out-of-state banks and bank holding companies meeting certain requirements to maintain and operate the Nevada branches of a Nevada bank with which the out-of-state company

engaged in an interstate combination. An out-of-state depository without a branch in Nevada, or an out-of-state holding company without a depository institution in Nevada, must first acquire the Nevada institution itself or its charter, before it can establish a de novo branch or acquire a Nevada branch through merger.

 

An out-of-state bank may establish branches in Arizona by acquiring a depository institution that is headquartered in the state or a branch of such an institution, provided that the institution or branch is more than five years old and the state in which the out-of-state bank is headquartered extends reciprocal rights. An out-of-state bank holding company without a subsidiary bank in Arizona may establish a de novo bank in the state, and thereafter may acquire additional banks.

 

Deposit Insurance

 

The Company’s deposits are currently insured to a maximum of $100,000 per depositor by the FDIC except for certain retirement accounts which are insured up to $250,000. Community Bank of Nevada and Community Bank of Arizona are required to pay deposit insurance premiums. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern. Effective January 1, 2007 the FDIC adopted a new rule for the insurance assessment on deposits. Under the new rule the charge for annual insurance deposit assessments will range from a minimum of 5 basis points to a maximum of 43 basis points per $100 of insured deposits depending upon the risk assessment category into which the institution falls. Insured institutions are not all allowed to disclose their risk assessment classification and no assurance can be given as what the future level of premiums will be.

 

Under the Federal Deposit Insurance Reform Act of 2005, the Community Bank Nevada received a one-time initial assessment credit to recognize past contributions to the insurance fund. Community Bank of Arizona was ineligible for the credit as it was not in existence on December 31, 1996. Community Bank of Nevada’s one-time assessment credit was $111,000. This credit can be used to offset assessments until exhausted. Community Bank of Nevada’s assessment credit was fully used by October 31, 2007.

 

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980’s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the year ended December 31, 2007 averaged 1.14 basis points of assessable deposits.

 

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums could have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what insurance assessment rates will be in the future.

 

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency.

 

Capital Adequacy

 

Regulatory Capital Guidelines.  Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are risk-based, meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

 

Tier I and Tier II Capital.  Under the capital adequacy guidelines, the capital of an institution is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments, and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratios.  The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. These risk-weighted assets are then compared with Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4%, and a minimum total risk-based ratio of 8%.

 

In March 2005, the Federal Reserve Bank adopted a final rule that allows the continued inclusion of trust preferred securities in the Tier I capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. Under the final ruling, qualifying mandatory preferred securities may be included in Tier I capital, subject to a limit of 25% of Tier I capital elements, net of goodwill. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier II capital. The quantitative limits become effective on March 31, 2009, after a four-year transition period. As of December 31, 2007, the junior subordinated debentures have been included in Tier I capital for regulatory capital purposes up to the specified limit, and the remainder is in Tier II capital.

 

Leverage Ratio.  The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly-rated bank holding companies and for bank holding companies seeking to expand, regulators generally expect an additional 1% to 2%.

 

Prompt Corrective Action.  Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are deemed to be “undercapitalized,” depending on the category to which they are assigned, are subject to certain mandatory supervisory corrective actions. Based on the most recent notification from federal banking agencies, Community Bank of Nevada and Community Bank of Arizona were categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed this categorization for each of the subsidiaries.

 

The FDIC and Federal Reserve Board risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “BIS”). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines that each country’s supervisors can use to determine the supervisory policies they apply. The BIS has been working for a number of years on revisions to the 1988 capital accord and in June 2004 released the final version of its proposed new capital framework, with an update in November 2005 (“BIS II”). BIS II provides two approaches for setting capital standards for credit risk — an internal ratings-based approach tailored to individual institutions’ circumstances (which for many asset classes is itself broken into a “foundation” approach and an “advanced” or “A-IRB” approach, the availability of which is subject to additional restrictions) and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. BIS II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.

 

The U.S. banking and thrift agencies are developing proposed revisions to their existing capital adequacy regulations and standards based on BIS II. In September 2006, the agencies issued a notice of proposed rulemaking setting forth a definitive proposal for implementing BIS II in the United States that would apply only to internationally active banking organizations — defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more — but that other U.S. banking organizations could elect but would not be required to apply. In December 2006 the agencies issued a notice of proposed rulemaking describing proposed amendments to their existing risk-based capital guidelines to make them more risk-sensitive, generally following aspects of the standardized approach of BIS II. These latter proposed amendments, often referred to as “BIS I-A”, would apply to banking organizations that are not internationally active banking organizations subject to the A-IRB approach for internationally active banking organizations and do not “opt in” to that approach. The comment periods for both of the agencies’ notices of proposed rulemakings expired

on March 26, 2007. The agencies have indicated their intent to have the A-IRB provisions for internationally active U.S. banking organizations first become effective in March 2009 and that those provisions and the BIS I-A provisions for others will be implemented on similar timeframes.

 

Community Bancorp is not an internationally active banking organization and has not made a determination as to whether, as a stand-alone institution, it would opt to apply the A-IRB provisions applicable to internationally active U.S. banking organizations once they become effective.

 

Corporate Governance and Accounting Legislation

 

Sarbanes-Oxley Act of 2002.  On July 30, 2002, the Sarbanes-Oxley Act of 2002, or SOX, was signed into law to address corporate and accounting fraud. SOX establishes a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, SOX also:

 

(i) Requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC;

 

(ii) Imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions and pro forma (non-GAAP) disclosures;

 

(iii) Accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and

 

(iv) Requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one audit committee financial expert.

 

Under SOX, the SEC is required to regularly and systematically review corporate filings, based on certain enumerated factors. To deter wrongdoing, SOX:

 

(i) Subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct;

 

(ii) Prohibits an officer or director from misleading or coercing an auditor;

 

(iii) Prohibits insider trades during pension fund “blackout periods”;

 

(iv) Imposes new criminal penalties for fraud and other wrongful acts; and

 

(v) Extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

 

As a public reporting company, Community Bancorp (and its subsidiaries) is subject to the requirements of SOX and related rules and regulations issued by the SEC and NASDAQ. In 2005, Community Bancorp’s first full year as a public company, the Company implemented Section 404 of SOX, The Company has incurred, and anticipates it will continue to incur, additional expenses as a result of SOX, but does not expect that such compliance will have a material impact on its business. However, other non-interest expense items, including professional expenses and other costs related to compliance with the reporting requirements of the securities laws have increased significantly, and can be expected to continue to increase

 

Anti-terrorism Legislation

 

USA Patriot Act of 2001.  In October 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism of 2001 was signed. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to

verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. On March 9, 2006, the President signed the USA Patriot Improvement and Reauthorization Act, which extended and modified the original USA Patriot Act. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputation-related consequences for the institution.

 

Bank Secrecy Act

 

The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (the “Bank Secrecy Act”) is a disclosure law that forms the basis of the U.S. Federal Government’s framework to prevent and detect money laundering and to deter other criminal enterprises. Following the September 11, 2001 terrorist attacks, an additional purpose was added to the Bank Secrecy Act: “To assist in the conduct of intelligence or counter-intelligence activities, including analysis, to protect against international terrorism.” Under the Bank Secrecy Act, financial institutions such as Community Bank of Nevada and Community Bank of Arizona are required to maintain certain records and file certain reports regarding domestic currency transactions and cross-border transportations of currency. This, in turn, allows law enforcement officials to create a paper trail for tracing illicit funds that resulted from drug trafficking or other criminal activities.

 

Legislative Initiatives

 

From time-to-time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on its financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on its business.

 

Commercial Real Estate Lending

 

Federal banking regulators have issued final guidance regarding commercial real estate lending to address a concern that rising CRE lending concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the general commercial real estate market. This guidance suggests that institutions that are potentially exposed to significant CRE concentration risk will be subject to increased regulatory scrutiny. Institutions that have experienced rapid growth in commercial real estate lending; have notable exposure to a specific type of commercial real estate lending; or are approaching or exceed certain supervisory criteria that measure an institution’s CRE portfolio against its capital levels; may be subject to such increased regulatory scrutiny.

 

Nonbank Entities

 

Community Bancorp has two nonbank entities: Community Bancorp (NV) Statutory Trust II and Community Bancorp (NV) Statutory Trust III. Community Bancorp (NV) Statutory Trust II is a Connecticut statutory trust, and Community Bancorp (NV) Statutory Trust III is a Delaware statutory trust. These entities were formed solely for the purpose of issuing trust preferred securities and are subject to the laws and regulations of both the federal government and the state in which they conduct business. Community Bancorp (NV) Statutory Trust I was dissolved during 2007.

Recent Accounting Pronouncements

 

For information regarding the recently issued accounting standards, see Note 2, “Nature of Business and Summary of Significant Accounting Policies,” of the Company’s consolidated financial statements.

 

Where You Can Find More Information

 

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Current Report), and Form DEF 14A (Proxy Statement) and may, from time-to-time, file additional forms. The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. All forms filed with the SEC and additional shareholder information is available free of charge on the Company’s website: www.communitybanknv.com.  The Company posts these reports to its website as soon as reasonably practicable after filing them with the SEC. None of the information on or hyperlinked from the Company’s website is incorporated into this Report.

 

 

An investment in the Company’s common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes may affect the Company’s business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Report. The risks and uncertainties described below are not the only ones facing the Company’s business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s operations. This Report is qualified in its entirety by these risk factors.

 

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

 

Factors Relating to the Company’s Markets and Business

 

Continued deterioration in economic conditions in any of the Company’s market areas, and particularly a slowdown in either gaming and tourism activities or the real estate market in Las Vegas, could adversely affect the Company’s business, financial condition, results of operations and prospects. Such deterioration could result in a variety of adverse consequences to the Company, including a reduction in net income and the following:

 

 

The greater Las Vegas area economy has grown dramatically during the past several years. The failure of this economy to sustain such growth in the future could seriously affect the Company’s ability to grow and to be profitable.

 

The Company’s assets have grown to $1.7 billion as of December 31, 2007 compared to $400.6 million at December 31, 2002. This growth has been fueled, in part, by the significant growth in the greater Las Vegas area. Diminished growth of this market in the future could have a significant adverse impact on the Company’s continued growth and profitability.

The residential real estate market in Las Vegas deteriorated significantly during 2007 which has led to, among other things, a decrease in the Company’s ability to grow loans in the construction and commercial real estate sectors. Continuing economic weakness in the local economy and on the national level will adversely impact the Company’s profitability and its ability to sustain its historical growth rate.

 

The current changing economic environment poses significant challenges for the Company.

 

The Company is operating in a challenging and uncertain economic environment, including generally uncertain national and local conditions. Financial institutions continue to be affected by the softening of the real estate market and constrained financial markets. While the Company has very limited direct exposure to the residential real estate market and has no subprime residential loans or securities backed by such loans, the Company’s real estate portfolio as well as its commercial and industrial loans may continue to be adversely impacted by these trends. As a result, continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, interest rate resets on adjustable rate mortgage loans and other factors could have adverse effects on the Company’s borrowers which would adversely affect its financial condition and results of operations. This deterioration in economic conditions could result in losses beyond that which is provided for in the Company’s allowance for loan losses.

 

The Las Vegas market area is substantially dependent on gaming and tourism revenue, and a decrease in gaming or tourism could seriously hurt the Company’s business and prospects.

 

While the Company has operations in Arizona, its business is currently concentrated in the greater Las Vegas area, which has a unique economy in the United States for its level of dependence on services and industries related to gaming and tourism. Any event that negatively impacts the tourism or gaming industry will adversely impact the Las Vegas economy.

 

Gaming and tourism revenue (whether or not such tourism is directly related to gaming) is vulnerable to various factors. A prolonged national economic downturn could have a significant adverse effect on the economy of the Las Vegas area. Virtually any development or event that could dissuade travel or spending related to gaming and tourism, whether inside or outside of Las Vegas, could adversely affect the Las Vegas economy. In this regard, the Las Vegas economy may be more susceptible than the economies of other cities to issues such as higher gasoline and other fuel prices, increased airfares, unemployment levels, recession, rising interest rates, and other economic conditions, whether domestic or foreign.

 

An expansion of permissible gaming activities in other states, particularly in California, may lead to a decline in gaming revenue in Las Vegas, which could hurt the Company’s business and prospects.

 

Las Vegas competes with other areas of the country for gaming revenue, and it is possible that the expansion of gaming operations in other states, as a result of changes in laws or otherwise, could significantly reduce gaming revenue in the greater Las Vegas area. This is particularly true of gaming operations in California, a state from which Nevada generally, and Las Vegas in particular, draws substantial year-round visitors. Agreements negotiated between the State of California and certain Indian tribes as well as other proposals currently under consideration in California may result in substantial additional casinos throughout the state. In addition, other California legislative proposals could permit an expansion of gaming activities allowed in card clubs, including the addition of slot machines. A dramatic growth in casino gaming in California or other states could have a substantial adverse effect on gaming revenue in Nevada, including the Las Vegas area, which would adversely affect the Las Vegas economy and the Company’s business.

 

A terrorist act, or the mere threat of a terrorist act, may adversely affect the Las Vegas economy and may cause substantial harm to the Company’s business.

 

Gaming and tourism are also susceptible to certain political conditions or events, such as military hostilities and acts of terrorism, whether domestic or foreign. The effects of the terrorist attacks of September 11, 2001, on gaming and tourism in Las Vegas were substantial for a few months. Reduced civilian air traffic in large part caused a reduction in revenue and employee layoffs in many hotels and casinos. This resulted in a substantial loss of

revenues for these businesses. Any direct attack on locations in Las Vegas would likely have an even greater adverse impact on the Company’s local economy.

 

The Company has a high concentration of loans secured by real estate and further deterioration in the real estate market, for any reason, could hurt its business and prospects.

 

At December 31, 2007, 84.8% of the Company’s loan portfolio was comprised of real estate loans. Undeveloped land loans, which are included in the categories below, represent approximately 15% of total gross loans secured by real estate. Within the real estate loan portfolio, approximately:

 

 

These real estate loans are concentrated in the greater Las Vegas area. A further deterioration in the local economy could have a material adverse effect on a borrower’s ability to repay these loans due to either loss of the borrower’s employment or a reduction in the borrower’s business. Further, such reduction in the local economy could severely impair the value of the real property held as collateral. As a result, the value of real estate collateral securing the Company’s loans could be reduced. This could reduce the Company’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral which would increase the likelihood the Company may suffer losses on defaulted loans.

 

At December 31, 2007, 96% of the Company’s real estate loan portfolio consisted of commercial real estate loans, land development and construction loans. Most of the Company’s loan originations in recent years have been commercial real estate and land development and construction loans and management intends to continue to participate in this type of lending. Historically, commercial real estate loans and land development and construction loans generally expose a lender to a greater risk of loss than one- to four-family residential or certain other types of loans. Repayment of commercial real estate loans generally depends, in large part, on sufficient income from the property or the borrower’s business, respectively, to cover operating expenses and debt service. Commercial real estate loans and land development and construction loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to other types of loans. Changes in economic conditions that are beyond the control of the borrower and lender could affect the value of the collateral for the loan, the future cash flow of the affected property, or the marketability of a project with respect to loans originated for the acquisition, development and construction of a project.

 

In addition, federal banking regulators issued final guidance regarding commercial real estate lending. This guidance suggests that institutions that are potentially exposed to significant CRE concentration risk will be subject to increased regulatory scrutiny. Institutions that have experienced rapid growth in CRE lending, have notable exposure to a specific type of CRE lending, or are approaching or exceed certain supervisory criteria that measure an institution’s CRE portfolio against its capital levels, may be subject to such increased regulatory scrutiny. The Company’s CRE portfolio may be viewed as falling within one or more of the foregoing categories, and accordingly the Company may become subject to increased regulatory scrutiny. If it is determined by the regulators that the Company has an undue concentration in CRE lending, it may be required to maintain levels of capital in excess of the statutory minimum requirements and/or be required to reduce its concentration in CRE loans.

 

Factors Relating to the Company’s Business

 

The Company’s future success involves both its ability to grow and manage such growth. Management must also continue to manage the risks inherent in the banking business. The Company may not be able to sustain its historical growth rates, be able to grow at all, or successfully manage any growth, whether or not the greater Las Vegas or Phoenix area economies continue to grow. This could result in a variety of adverse consequences to the Company, including the following:

 

 

 

The Company may not be able to continue its historical growth rate.

 

As previously noted, the Company’s assets have grown to $1.7 billion as of December 31, 2007 from $400.6 million at December 31, 2002. The Company’s business strategies include, among other things:

 

 

However, the Company may encounter unanticipated obstacles in implementing these strategies, including the continued deterioration of the residential real estate sector in the Company’s market areas. If management is unable to expand the Company’s business, as anticipated, the Company may not be able to maintain profitability, and there can be no assurance that it will be able to sustain historical growth rates.

 

A component of the Company’s business strategy is to expand into high growth markets by opening new branches or organizing new banks and/or acquiring other financial institutions. Management may not be able to successfully implement this part of the Company’s business strategy, and therefore its market value and profitability may suffer.

 

Growth through acquisitions of banks represents a component of the Company’s business strategy and has significantly impacted the Company’s results over the last several years. Acquisition activity for the foreseeable future will likely be limited as a result of current credit issues encountered by many financial institutions and the recent decline in the Company’s stock price. Additionally, any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks include, among other things:

 

 

The Company cannot make assurances that it will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. The inability to improve the operating performance of acquired banks or to integrate their operations successfully could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. In addition, the Company could incur substantial expenses, including the expenses of integrating the business of the acquired bank with its existing business.

 

Management expects that competition for qualified acquisition candidates to be significant. The Company may compete with other banks or financial service companies with similar acquisition strategies, many of which may be larger or have greater financial and other resources. The purchase price of banks that might be attractive acquisition candidates may significantly exceed the fair values of their net assets. As a result, material goodwill and other intangible assets would be required to be recorded. The Company cannot assure you that it will be able to successfully identify and acquire suitable banks on acceptable terms and conditions.

Depending upon the structure of an acquisition and the consideration the Company may utilize, it may not seek your approval as a shareholder. Further, acquisitions may be structured to include cash consideration that may result in the depletion of a substantial portion of the Company’s available cash.

 

Besides the acquisition of existing financial institutions, the Company may consider the organization of new banks in high growth areas, especially in markets outside of the greater Las Vegas and Phoenix areas. The Company may also consider the opening of new branch offices. Any organization of a new bank or opening of new branches carries with it numerous risks, including the following:

 

 

The Company’s growth could be hindered unless it is able to recruit additional qualified employees.

 

Prior to the deterioration of the residential real estate sector during the second half of 2007, the greater Las Vegas and Phoenix metropolitan areas had experienced a period of rapid economic growth over the past several years. These growth periods have placed a premium on highly qualified employees in a number of industries, including the financial services industry. The Company’s business plan includes, and is dependent upon, hiring and retaining highly of qualified and motivated executives and employees at every level. Management expects to experience substantial competition in its endeavor to identify, hire and retain top-quality employees. If the Company is unable to hire and retain qualified employees in the near term, it may be unable to successfully execute it business strategies and/or be unable to successfully manage its growth.

 

Management believes its current personnel and infrastructure is adequate to support the Company’s current size. However, future success will depend on the ability of the Company’s executives and employees to continue to implement and improve operational, financial and management controls and processes, reporting systems and procedures, and to manage a growing number of client relationships. In this regard, the Company may not be able to successfully implement improvements to its management information and control systems and control procedures and processes in an efficient or timely manner. In particular, controls and procedures must be able to accommodate additional increases in loan volume and the infrastructure that comes with new branches.

 

Additionally, if the management is unable to locate additional qualified personnel to manage future expansion (consistent with the Company’s strategies) it may experience compliance and operational issues, have to slow the pace of growth or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect on the Company’s business.

 

The Company’s business would be harmed if it lost the services of any of its key executives.

 

The Company believes that its success to date and prospects for future success are substantially dependent on the executive management teams of Community Bancorp, Community Bank of Nevada and Community Bank of Arizona. The loss of the services of any of these key executives could have an adverse effect on the Company’s business and in light of the relatively small pool of persons involved in the greater Las Vegas area banking industry, replacing key members of the executive management teams or senior officers with equally competent persons who are also familiar with the Company’s market areas may prove difficult.

There is intense competition in the Company’s market areas and management cannot assure you that it will be able to successfully compete.

 

Commercial banking in the greater Las Vegas and Phoenix metropolitan areas is a highly competitive business. Increased competition in the Company’s markets may result in a reduction in volume of loans and deposits. The Company competes for loans, deposits and customers primarily with the local offices of major banks and with other community banks in its market as well as credit unions, small loan companies, insurance companies, mortgage companies, finance companies, brokerage houses, other financial institutions, and out-of-state financial intermediaries, some of which are not subject to the same degree of regulation and restriction and some of which have greater financial resources. Technological advances continue to contribute to greater competition in domestic and international products and services. Ultimately, the Company may not be able to compete successfully against current and future competitors.

 

The Company’s allowance for loan losses may not be adequate to cover actual losses, particularly given the relatively large individual loan size.

 

A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors and related parties may fail to perform in accordance with their loan terms. This risk increases during periods of economic deterioration such as was experienced during the second half of 2007 and continuing into 2008. The underwriting and credit monitoring policies that management has adopted to address this risk may not prevent unexpected losses that could have a material adverse affect on the Company. The Company’s average loan size at December 31, 2007 was approximately $952,000 (excluding credit card, overdraft and purchased participation loans). This relatively large average loan size, while an advantage from a cost generation standpoint, can adversely impact the Company if the larger loans become delinquent, unstable, impaired, uncollectible or inadequately collateralized.

 

Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. However, the allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect the Company’s business. The allowance for loan losses is based on the Company’s prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and other economic factors. The determination of the appropriate level of loan loss allowance is an inherently complex process and is based on numerous assumptions. The amount of actual losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond the Company’s control and these losses may exceed current estimates. Management cannot assure you that it will not increase the allowance for loan losses further or that regulators will not require the Company to increase this allowance. Either of these occurrences could adversely affect the Company’s business and prospects.

 

The Company’s future earnings could be negatively impacted if an impairment of goodwill is recognized.

 

The Company recorded $113.6 million of goodwill from its merger-related activities during 2005 and 2006. Goodwill represents the difference between the fair value of the net assets (tangible and intangible) acquired and the acquisition price. In accordance with SFAS No. 141, goodwill is not amortized but tested for impairment annually. Impairment testing consists of comparing the fair value of reporting units (e.g., segments) with its carrying amount, including goodwill. An impairment loss would be recorded to the extent the carrying value of the goodwill exceeds the fair value of goodwill. If the Company is unable to sustain its growth and expand its profitability, an impairment of goodwill could be recognized which would adversely affect future earnings.

 

Provisions in the Company’s articles of incorporation and bylaws may limit the ability of another party to acquire the Company.

 

Various provisions of the Company’s articles of incorporation and by-laws could delay or prevent a third-party from acquiring the Company, even if doing so might be beneficial to our shareholders. These provisions provide for, among other requirements, advance notice for nomination of directors and limitations on the ability of shareholders

to call a special meeting of shareholders, which can make minority shareholder representation on the board of directors more difficult to establish.

 

The Company is subject to interest rate risk.

 

The Company’s earnings and cash flows are largely dependent upon the Company’s net interest income. Net interest income is the difference between interest income earned on interest earning assets such as loans and securities and interest expense paid on interest bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including, but not limited to, general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the amount of interest the Company receives on loans and securities and the amount of interest paid on deposits and borrowings, but such changes could also affect the Company’s ability to originate loans and obtain deposits as well as the fair value of its financial assets and liabilities. If the interest paid on deposits and other borrowings increases at a faster rate than the interest received on loans and other investments, net interest income, and therefore earnings, could be adversely affected. Conversely, earnings could also be adversely affected if the interest received on loans and other investments fall more quickly than the interest paid on deposits and other borrowings.

 

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the results of operations, the Company’s net interest margin has been compressing over the past six quarters. Any substantial, unexpected and/or prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. If short-term interest rates continue to decrease in 2008 as they did in January 2008, the Company may experience further compression of its net interest margin.

 

The Company cost of funds could increase if wholesale core deposits are unavailable.

 

The Company has funded a part of its loan growth through the use of wholesale core deposits. These deposits can be called with 30 to 60 days notice and have a floating interest rate indexed to the federal funds rate. If these products are unavailable in the future, management might have to secure alternative funding liabilities under terms and conditions (e.g., rates and duration) that could adversely affect the Company’s earnings.

 

The Company is subject to extensive government regulation. These regulations could adversely affect the Company’s business, financial condition, results of operations or cash flows.

 

The Company is subject to extensive regulation by federal and state governmental authorities and subject to various laws, judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. Because the Company’s business is highly regulated, the laws, rules and regulations applicable to it are subject to regular modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact its operations. Management cannot assure you that these proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could adversely affect the Company’s business, financial condition, results of operations or cash flows.

 

The Company’s Stock Trades Less Frequently Than Others.

 

Although the Company’s common stock is listed for trading on the NASDAQ Global Market, the trading volume of our common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. The Company’s stock price could fall due to lower trading volume of our common stock, significant sales of our common stock or the expectation of these sales.

The Company’s Stock Price is Affected by a Variety of Factors.

 

Stock price volatility may impact resale of your common stock when desired or at attractive prices. The Company’s stock price can fluctuate significantly in response to a variety of factors discussed in this section including, among other reasons:

 

 

• General economic conditions nationally or within the Company’s primary markets.

 

The Company’s Common Stock Is Not An Insured Deposit.

 

The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment.

 

 

Not applicable.

 

 

The Company’s headquarters are located at 400 South 4^th Street, Suite 215, Las Vegas, Nevada 89101, which it occupies under a ten-year lease agreement, expiring in August 2012. As of December 31, 2007, the Company operated 16 branch facilities, one loan production office and various administrative offices in Nevada and Arizona, of which 7 are owned and 14 are leased, with expiration dates ranging from November 2008 to March 2018. During 2007, the Company purchased two lots in the Phoenix metropolitan area and anticipates completing construction of new branches in 2008. In January 2008, the Company executed a new ten year lease agreement in the Las Vegas, Nevada area for a new branch anticipated to be opened during 2008.

 

Management believes the properties are adequately covered by insurance and that the existing facilities are adequate for present and anticipated future use.

 

 

There are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject. There are no material proceedings known to Management to be contemplated by any governmental authority. The Company is involved in a variety of litigation matters in the ordinary course of its business and anticipates that it will become involved in new litigation matters from time-to-time in the future.

 

 

Not applicable.

 

 

Market Information

 

The Company’s common stock is listed on the NASDAQ Global Market and traded under the symbol CBON. The following table sets forth the high and low closing prices of the Company’s common stock for the year and during each quarter in 2007 and 2006, as reported by the NASDAQ Global Market.

 

 

Holders

 

As of February 29, 2008, there were approximately 4,000 stockholders of record. At such date, the Company’s directors and executive officers owned approximately 7.0% of the outstanding shares. There are no other classes of common equity outstanding.

 

Dividends

 

The Company’s has not declared a cash dividend since 2002, as it has used its current and retained earnings to support continued growth. Management does not foresee any circumstances in the immediate future in which it would consider paying cash dividends on the Company’s common stock.

 

Under Nevada law, a corporation may not pay a dividend if, after giving effect to the dividend, (i) the corporation would not be able to pay its debts as they become due; or (ii) the corporation’s assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporations were to be dissolved at the time of distribution, to satisfy the dissolution rights of any preferred shareholders.

 

Under Arizona law, a corporation may pay dividends on the same basis as any other Arizona corporation. A corporation may not make a distribution to shareholders if to do so would render the corporation insolvent or unable to pay its debts as they become due. However, an Arizona bank may not declare a non-stock dividend out of capital surplus without the approval of the Superintendent.

 

Additionally, the Company’s junior subordinated debt agreements contain provisions which prohibit the paying of dividends if it defers payment of interest on outstanding trust preferred securities (See “Item I. Business — Supervision and Regulation — Capital Adequacy”) and certain other borrowings contain dividend restrictions.

 

The holding company is a legal entity separate and distinct from Community Bank of Nevada and Community Bank of Arizona. Since the holding company has no significant assets other than Community

Bank of Nevada and Community Bank of Arizona, it will be dependent upon dividends from Community Bank of Nevada and Community Bank of Arizona for cash with which to pay dividends when, and if, the Company’s dividend policy changes.

 

Further, federal and state banking regulations place certain restrictions on dividends paid by Community Bank of Nevada or Community Bank of Arizona to Community Bancorp.

 

In addition, dividends paid by Community Bank of Nevada or Community Bank of Arizona, as the case may be, to Community Bancorp would be prohibited if the effect thereof would cause either subsidiaries’ capital to be reduced below applicable minimum capital requirements. For a discussion of the regulatory limitations on the ability of the banks to pay dividends, see “Item 1. Federal and State Regulation of Community Bank of Nevada and Community Bank of Arizona — Dividends.”

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information as of December 31, 2007 with respect to options outstanding and available under the Company’s 2005 Equity Based Compensation Plan, which is its only equity compensation plan:

 

 

Note — securities remaining available for future issuance reset annually at March 24 to 15% of the Company’s outstanding common stock reduced for any restricted shares issued.

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The Board of Directors at its regular meeting of July 25, 2007, authorized the purchase of up to 5% of the Company’s outstanding shares as of June 30, 2007, or 520,996 shares, over the next twelve months. All shares were, and will be, purchased at current market prices on the date of transaction. During the quarters ended September 30, 2007 and December 31, 2007, the total number of shares repurchased was 42,800 and 273,400, respectively, at a weighted average price of $23.03 and $19.80, respectively. As of December 31, 2007, the Company could repurchase up to an additional 204,796 shares under the July 2007 authorization.

During the third and fourth quarters of 2007, shares repurchase activity was as follows:

 

Performance Graph

 

The following graph compares the percentage change in the cumulative shareholder return on the Company’s common stock during the period of December 10, 2004 through December 31, 2007, rather than five previous years, as the Company became a registered company as of December 10, 2004.

 

 

 

Selected Consolidated Financial Data

 

The selected financial information in the table below as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 is derived from the Company’s audited consolidated financial statements. Results for past years are not necessarily indicative of results that may be expected for any future period.

 

SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER DATA

 

 

 

 

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes to the consolidated financial statements included in Item 8 of this Report as well as “Item 1A. Risk Factors.”

 

As of December 31, 2007, the Company operated in two reportable segments: Community Bank of Nevada and Community Bank of Arizona. Community Bancorp is included in the “other” category because it represents an overhead function rather than an operating segment.

 

Overview

 

Since Community Bank of Nevada commenced operations in 1995, it has experienced consistent growth in total assets and profitability. Through its 2006 acquisition, the Company expanded operations to the Phoenix metropolitan market area. Growth has been fueled by the significant population and economic growth of the greater Las Vegas, and now by the Phoenix, markets (e.g., areas in which the Company operates). The growth in the greater Las Vegas area has accompanied significant investments in the gaming and tourism industry. The significant population increases in the Las Vegas and Phoenix market areas has resulted in an increase in the acquisition of undeveloped/developed land for residential and commercial development, the construction of residential communities, shopping centers and office buildings, and the development and expansion of the businesses and professions that provide essential goods and services to this expanded population. The Company’s results have been influenced by the following strategies, which were implemented in order to benefit from these market factors:

 

 

KEY FACTORS IN EVALUATING FINANCIAL CONDITION AND OPERATING PERFORMANCE

 

Return to shareholders.  For 2007, the Company’s return on average shareholders’ equity (“ROAE”) was 8.9% compared to 11.6% for 2006. The decrease in ROAE was due in part to the issuance of approximately 3.0 million shares of Community Bancorp common stock, resulting in an increase of $94.7 million in the Company’s equity, as part of the October 2006 acquisition of Valley Bancorp.

 

Diluted earnings per share were $1.95 for 2007, compared to $1.92 for 2006. The moderate growth in the Company’s diluted earnings per share, compared to the increases in net income during the same years, reflects the issuance of approximately 3.0 million shares in the fourth quarter 2006 as part of the acquisition of Valley Bancorp.

 

Return on average assets.  Return on average assets (“ROAA”) was 1.2% for 2007 compared to 1.4% in 2006. The relatively stable ROAA from year to year reflects the Company’s increase in average earning assets and elimination of excess liquidity which off-set the impact of the increase in non-interest bearing assets (goodwill and core deposit intangibles), resulting from the Company’s 2006 acquisitions.

Asset quality.  Non-performing loans as of December 31, 2007 were $12.1 million compared to $647,000 at December 31, 2006. As a percentage of total gross loans, non-performing loans increased to 0.85% at December 31, 2007 as compared to 0.05% at December 31, 2006. The increase in non-performing loans from December 31, 2006 is composed of non-accrual commercial and industrial, commercial real estate and construction and land development loans that are well secured with sufficient loan to values. At December 31, 2007 three credit relationships accounted for approximately $9.2 million of the non accrual loans with the balance of the non-accrual loans related to 18 borrowers with loan balances that range from $5,000 to $550,000.

 

Asset growth.  Total assets increased by 7.8% to $1.7 billion as of December 31, 2007, from $1.6 billion as of December 31, 2006. The increase in total assets was driven primarily by a $162.0 million increase in net loans off set in part by reductions in cash and cash equivalents and securities of $46.9 million from December 31, 2006 to December 31, 2007. Asset growth during 2007 was funded primarily through increases in interest bearing deposits of $88.6 million, borrowings of $53.5 million, and current year income of $20.4 million, offset in part by a reduction in non-interest bearing deposits of $34.3 million.

 

Operating efficiency.  The Company’s efficiency ratio increased to 53.3% in 2007 compared to 49.9% in 2006. The increase in the efficiency ratio was driven primarily by the 0.31% compression in net interest margin and increases (due to a full year of amortization) of core deposit intangible amortization and costs (e.g., payroll, rent, supplies, etc) associated with opening three new branches and one administrative office.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s accounting policies are integral to understanding its financial results. The most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from year to year. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of the Company’s current accounting policies involving significant management valuation judgments.

 

Allowance for Loan Losses.  The allowance for loan losses represents Managements’ best estimate of the probable losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loan charge-offs, net of recoveries.

 

Management evaluates the Company’s allowance for loan losses on a quarterly basis. Management believes the allowance for loan losses, or ALLL, is a “critical accounting estimate” because it is based upon the assessment of various quantitative and qualitative factors affecting the collectibility of loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans. For a discussion of the allowance and the Company’s methodology, see “Financial Condition — Loans — Allowance for Loan Losses in this section.”

 

The Company’s ALLL is based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, asset classifications, loan grades, changes in the volume and mix of loans, collateral value, historical loss experiences, peer group loss experiences, size and complexity of individual credits, and economic conditions. Provisions for loan losses are provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected or anticipated loss is measurable. General valuation allowances are based on a portfolio segmentation based on risk grading, with a further evaluation of various quantitative and qualitative factors noted above.

 

The Company incorporates statistics provided by the FDIC regarding loss percentages experienced by banks in the western United States, as well as an internal five-year loss history, to establish potential risk based on the type of collateral securing each loan. As an additional comparison, data from local banks within the Company’s peer group is reviewed to determine the nature and scope of their losses to date. These reviews provide an understanding of the geographic and size trends in the local banking community. Finally, each credit graded “Special Mention” and below with a loan balance of $200,000 or higher (e.g., an impaired loan) is individually assessed to determine the appropriate loan loss reserve for a particular credit.

Management periodically reviews the qualitative and quantitative loss factors utilized in its analysis of the specific and general allowance for loan losses in an effort to incorporate the current status of the factors described above.

 

Although Management believes the level of the allowance as of December 31, 2007 was adequate to absorb probable losses in the loan portfolio, a decline in local, economic or other factors could result in increasing losses that cannot be reasonably predicted at this time.

 

Available- for-Sale Securities.  Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that available-for-sale securities be carried at fair value. The Company believes this to be a “critical accounting estimate” in that the fair value of a security is based on quoted market prices or, if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Management utilizes the services of a reputable third party vendor to assist with the determination of estimated fair values.

 

Adjustments to the fair value resulting from unrealized gains or losses on available-for-sale securities impact the consolidated financial statements by increasing or decreasing assets and stockholders’ equity. If a decline in fair value of any available-for-sale security is deemed other than temporarily impaired, the security is written down to fair market value with a corresponding charge to operating income.

 

Goodwill and Other Intangibles.  Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. The historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on a straight-line basis over the period benefited. Goodwill is not amortized for book purposes, although it is reviewed for potential impairment on an annual basis on October 1, or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

 

Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is considered “not recoverable” if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

 

Share-Based Compensation.  Effective January 1, 2006 (the “adoption date”), the Company adopted the provisions of the FASB issued Statement No. 123 (revised 2004), or SFAS No. 123R, Share-Based Payment, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, requiring the measurement and recognition of all share-based compensation under the fair value method. The Company adopted SFAS No. 123R using the modified prospective method for options granted. Under this transition method, SFAS No. 123R applies to new awards and to awards that were outstanding on the adoption date that are subsequently modified, repurchased or cancelled. In addition, the expense recognition provision of SFAS No. 123R applies to options granted prior to the adoption date that were unvested at the adoption date. In determining the fair value of stock options, the Company uses the Black-Scholes option-pricing model that employs the following assumptions:

 

 

 

Segment Reporting.  With the acquisition of Community Bank of Arizona on September 30, 2006, the Company increased its business presence in the greater Phoenix market area. As of December 31, 2007, certain changes were implemented in the management and reporting of certain business units and currently, the Company has two reportable operating segments: Community Bank of Nevada and Community Bank of Arizona.

 

Trends and Developments Impacting the Company’s Recent and Future Results

 

Certain trends and developments have occurred that are important in understanding the Company’s recent and future results.

 

 

Recently, economic trends in Las Vegas and Phoenix have been influenced by the weakening United States economy. The residential real estate market deteriorated significantly during 2007, which has led to a decrease in the Company’s ability to originate loans in the construction and commercial real estate sectors. Continuing economic weakness in the local economies and on the national level will adversely affect the Company’s profitability and its ability to sustain it historic growth rates.

 

 

Management uses various modeling strategies to manage the re-pricing characteristics of the Company’s assets and liabilities. These models contain a number of assumptions and cannot take into account all the various factors that influence the sensitivities of the Company’s assets and liabilities. At December 31, 2007, the Company’s balance sheet was liability sensitive, demonstrating that a larger amount of its interest sensitive liabilities will re-price within certain time horizons than will its interest sensitive assets. Being liability sensitive means generally that in times of rising interest rates, a company’s net interest margin will decrease. It also means that generally in times of falling interest rates a company’s net interest margin will be favorably impacted.

 

While the Company’s balance sheet was liability sensitive based on an interest rate shock analysis, various factors could further compress the Company’s net interest margin in a falling interest rate environment. These factors include, but are not limited to, reversal of interest income on non-accrual loan, changes in deposit mix and waiving of interest rate floors on variable rate loans. Additionally, the Company’s net interest margin is coming under pressure from: (i) competitor pricing strategies for both loans and deposits that the Company may need to respond to in order to retain key customers and (ii) changes in deposit mix as customers move funds from low or non-interest bearing transaction and savings accounts to higher yielding time deposits. If short-term market rates continue to drop in 2008 as they did in January, the Company might experience further compression of its net interest margin. See “Sensitivity of Net Interest Income” for potential impact of 2008 rate reductions by the Federal Open Market Committee and “Item 7A. Quantitative and Qualitative Disclosure about Market Risk.”

 

 

RESULTS OF OPERATIONS

 

The Company’s results of operations depend primarily on net interest income (interest and dividend income less interest expense). Interest and dividend income are the earnings received on interest earning assets, such as loans and investments. Interest expense is the expense incurred on interest bearing liabilities, such as interest bearing deposits and other borrowings. Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest income and non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes service charges and other deposit related fees,

and non-interest expense consists primarily of employee compensation and benefits, occupancy, equipment and depreciation expense, and other operating expenses.

 

Net Interest Income.  Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities used to fund those assets, including interest bearing deposits and other borrowings. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities.

 

The following table sets forth, for the years indicated, the dollar amount of changes in interest earned and interest paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to (i) changes in average daily balances (volume) and (ii) changes in interest rates (rate):

 

 

 

 

The following table presents condensed consolidated average balance sheet information, together with interest income and yields earned on average interest earning assets, as well as interest expense and rates paid on average interest bearing liabilities. Average balances are derived from daily balances, and nonaccrual loans are included as interest earning assets for purposes of this table.

 

 

 

 

2007 versus 2006

 

As a result of 2007 growth and the impact of the 2006 acquisitions, interest income, interest expense and net interest income for the year ended December 31, 2007 increased substantially from the year ended December 31, 2006. The 2006 acquisition of Community Bank of Arizona (September 2006) and Valley Bancorp (October 2006) resulted in the addition of $367.6 million of gross loans (at acquisition) and a corresponding increase in deposits of $376.0 million (at acquisition).

 

For the year ended December 31, 2007, interest and dividend income increased to $128.0 million compared to $86.5 million in 2006. The primary driver of the increase was the increase in average loans outstanding due to both organic and merger-related loan growth. Also impacting interest income were loan yields for 2007 which increased to 9.17% compared to 9.09% in 2006. The increase in the loan yields in 2007 as compared to 2006 was due primarily to the slightly higher average prime rate of 8.05% in 2007 compared to 7.96% in 2006. The Company’s loan portfolio is comprised of approximately 70.0% rate sensitive loans tied to recognized indexes (e.g., Prime and LIBOR). Loan yields also improved slightly during 2007 due to higher loan fees charged on construction and land development loans which are amortized over the life of the loan.

 

Interest expense in 2007 increased to $57.1 million compared to $33.8 million in 2006. The increase was primarily due to the growth in average interest-bearing liabilities due to both organic and merger-related growth. Impacting the increase in average interest bearing liabilities (in addition to the mergers noted above) was the issuance of $51.5 million in trust preferred debt in the third quarter of 2006. For 2007 the average cost of interest bearing liabilities increased to 4.75% compared to 4.28% during 2006 reflecting continued competitive pricing pressures on deposits, changes in market rates and usage of other instruments (e.g., trust preferred debt, wholesale deposits and other borrowings) to fund the Company’s growth.

 

The Company’s net interest margin during 2007 decreased to 4.88% compared to 5.19% in 2006. The decrease in net interest margin was primarily attributable to continued upward pressure and availability of deposits and other funding liabilities during 2007 in a fairly stable prime rate environment.

 

Net interest income before provision for loan losses increased 34.4% compared to 2006, as interest earned on higher loan volumes and increased yields outweighed the effect of increased funding liabilities and higher cost of funds. Impacting net interest income for 2007 was the addition of gross loans and deposits from the 2006 acquisitions as well as the issuance of trust preferred debt in 2006.

 

2006 versus 2005

 

For the year ended December 31, 2006, interest and dividend income increased to $86.5 million compared to $46.3 million in 2005. The primary cause of the increase was the increase in average loans due to both organic and merger related loan growth. Also impacting interest and dividend income was loan yields in 2006 increased to 9.09% from 8.03% in 2005. The 106 basis point increase in loan yields during 2006 was primarily due to an increase in the average prime rate to 7.96% in 2006 as compared to 6.19% in 2005. As noted above, the Company’s loan portfolio is comprised of approximately 70% of rate sensitive loans tied to recognized indexes.

 

Interest expense for the year ended December 31, 2006 increased to $33.8 million compared to $12.5 million in 2005. The primary cause for the increase was the increase in average interest-bearing liabilities, which included (in addition to the interest-bearing liabilities acquired in the mergers noted above), the addition of $51.5 million in trust preferred debt during the third quarter of 2006. For 2006 the average cost of interest-bearing liabilities increased to 4.28% compared to 2.73% during 2005 reflecting changes in markets rates and usage of higher cost liabilities (trust preferred debt, wholesale deposits and other borrowings) to fund, in part, the Company’s growth.

 

For the year ended December 31, 2006, the Company’s net interest margin decreased to 5.19%, compared to 5.21% for the year ended December 31, 2005. The Company’s net interest income before provision for loan losses increased to $52.7 million compared to $33.8 million in 2005. The increase in the net interest income before provision for loan losses was the result of the increased earning capacity of the Company as average earning assets increased $366.3 million during 2006.

Provision for Loan Losses.  The Company has established an allowance for loan losses through charges to earnings that are reflected in the Consolidated Statements of Income as “provision for loan losses.” Specifically, the provision for loan losses represents the amount charged against current year earnings to achieve an allowance for loan losses that, in management’s judgment, is adequate to address the risks in the Company’s loan portfolio and inherent losses.

 

2007 versus 2006

 

The Company recorded a provision for loan losses of $3.4 million in 2007 compared to $3.5 million for 2006. The allowance for loan losses was $17.1 million, or 1.20% of total gross loans, as of December 31, 2007 compared to $15.0 million, or 1.19% of total gross loans, at December 31, 2006. The relatively stable provision for loan losses, year over year, resulted from a lower provision for originated loans as historic loan growth decreased in 2007, combined with a $761,000 increase in net charge offs in 2007 as compared to 2006 (net charge offs were $1.2 million, 9 basis points of average loans, and $469,000, 5 basis points of average loans, for the years ended December 31, 2007 and 2006, respectively).

 

2006 versus 2005

 

The provision for loan losses for the year ended December 31, 2006 was $3.5 million compared to $1.1 million in the year ended December 31, 2005. The allowance for loan losses was $15.0 million, or 1.19% of gross loans, as of December 31, 2006 compared to $8.1 million, or 1.22% of total gross loans, as of December 31, 2005. The increase in the provision for loan losses in 2006 (compared to 2005) was due primarily to organic loan growth during 2006.

 

Non-Interest Income.  The following table presents, for the years indicated, the major categories of non-interest income:

 

 

2007 versus 2006

 

Non-interest income increased 38.0%, or $997,000, to $3.6 million for 2007 compared to $2.6 million for 2006. While the Company continued to experience growth throughout 2007, the increase in non-interest income was due primarily to the acquisition of Community Bank of Arizona (September 2006) and Valley Bancorp (October 2006) (e.g., acquisition of additional customer accounts from which customer service fees are earned) and the increase in gain on sale of loans that included a gain of approximately $285,000 related to the sale of substantially all of the Company’s credit card portfolio during the second quarter of 2007.

 

2006 versus 2005

 

Non-interest income for the year ended December 31, 2006 increased to $2.6 million compared to $2.3 million for the year ended December 31, 2005, primarily due to increases in the Company’s branch network accomplished with the 2006 acquisitions, resulting in higher service charges and rental income, an increase in net swaps

settlements (resulting from two interest rate swaps entered into in 2006), off set in part by a decrease in the income from bank owned life insurance.

 

Non-Interest Expense.  Non-interest expenses are costs, other than interest expense and the provision for loan losses, associated with providing banking and financial services to customers and conducting the Company’s operations. The following table presents, for the years indicated, the major categories of non-interest expense: