Bank’s Shareholders Take Stock While Acquisition Nears

Shareholders of Rancho Bernardo Community Bank, a single-office institution with about $124 million in assets, are cheering on the rise of shares by the bank’s proposed owner, Community Bancorp.

As the stock of Escondido-based Community Bancorp rises, so does the amount Rancho Bernardo Community shareholders receive for stock in their bank, which was founded in 1997.

When the deal was announced in April, the total price for Rancho Bernardo Community was about $33 million was based on Community Bancorp’s stock price of about $31, the midpoint of a “collar,” or range for the deal to occur. If Community Bancorp’s stock drops below or rises above the collar, it triggers a renegotiation of the transaction.

Since the agreement was struck, Community Bancorp’s stock, which is traded on the Nasdaq exchange under the ticker CMBC, has risen from about $29 to about $32, providing Rancho Bernardo Community’s stockholders with an aggregate price of about $1 million above the originally announced deal.

“As their stock has improved, so has the benefits to our shareholders,” said Rancho Bernardo Community Chief Executive Officer Alan Douglas.

The acquisition is scheduled to close shortly after Aug. 17, when Rancho Bernardo Community shareholders meet to vote on the deal.

Because it is a state chartered bank that’s being acquired by a nationally chartered Community National Bank, the transaction requires approval of two-thirds of Rancho Bernardo Community’s shareholders, not just a simple majority.

Despite that, Douglas isn’t worried. Voting, which began several months ago, so far has been overwhelmingly in favor of the bank’s sale. In fact, only 0.12 percent of the votes were tallied against the deal, meaning more than 99.8 percent are for it.

“I’ve talked to all the large shareholders, and I know what their positions are, and the percentage in favor seems to be holding,” Douglas said.

Formal Approvals

The transaction has already been approved by both the federal Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. and does not require approval of Community Bancorp’s shareholders.

The stock and cash transaction calls for Community Bancorp to issue 600,000 shares of its Nasdaq-traded stock, plus $10 million. The deal entails the transfer of 65 percent stock and 35 percent cash, with Rancho Bernardo Community shareholders having the option to receive either cash or stock, or a combination of both.

This is Community Bancorp’s second deal in less than a year. In October, it acquired Cuyamaca Bank, a Santee-based lender with about $115 million in assets.

As of June 30, Rancho Bernardo Community reported net income of $673,000 for its first six months, compared with net income of $748,000 for the same period of 2004. Total assets grew 15 percent to $124.5 million, while loans increased 8.8 percent to $90.8 million.

Douglas said Community Bancorp will retain Rancho Bernardo Community’s sole office and its 26 employees, although Douglas and several others will not be making the move. Douglas said he will get a director’s seat on the board.

Stock On A Roll

Meanwhile, Community Bancorp’s stock has been rising for good reason. The bank’s performance in recent quarters has been exceptional, with net profits rising 40 percent during the six months ended June 30 to $5.4 million, compared with $3.8 million in the same period last year.

That propelled its return on average assets to 1.52 percent, and its return on average equity to 22.04 percent for the first half.

For its return on average equity performance for three years ending in 2004, the bank was ranked 10th among publicly traded community Banks with less than $1 billion in assets by U.S. Banker magazine.

Helped by the loan growth occurring from offices formerly belonging to Cuyamaca Bank, Community showed overall assets increased to $770 million, up 20 percent from the previous year’s second quarter. That included total loans of $504.6 million, up 42 percent. Total deposits grew by the same rate to $633.5 million.

On the downside, nonperforming loans, those past due more than 90 days, also grew. As of June 30, Community Bancorp listed $7.9 million in nonperforming loans, nearly double the $4 million listed at the end of 2004, and $1.7 million in nonperforming loans at June 30, 2004.

Community Bancorp Chief financial Officer Bruce Mills said nearly all of the problem loans were caused by three credits, two of which were to the same now-deceased borrower. The bank has begun the process of taking back the real estate put up as collateral on the loans that cover the remainder of what’s owed, Mills said.

Community’s nonperforming loans as a percentage of gross loans on June 30 was 1.22 percent, a ratio several bankers said wasn’t significant.

Frank Mercardante, the chief executive at Encinitas-based Southwest Community Bank, said given the size and growth rates of the bank, having a certain percentage of problem loans is practically a given. When eliminating the Small Business Administration guaranteed portion of the portfolio, Community Bancorp’s problem loans made up 0.78 percent of the portfolio, which is statistically insignificant, Mercardante said.

With the acquisition of Rancho Bernardo Community, Community Bancorp will cause its total assets to increase to nearly $900 million. Given the pace it’s growing, that means Community should pass $1 billion in assets this year, though Mills declined to say when that may happen.