UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
OrMarch 31, 2005
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to
_________---------- ----------
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
445 Pine Avenue, Goleta, California 93117
(Address of principal executive offices) (Zip Code)
(805) 692-5821
(Registrant's telephone number, including area code)
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.
[X] YES [_] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). [_] YES [X] NO [X]
Number of shares of common stock of the registrant outstanding as of November 9, 2004: 5,729,869May 10,
2005: 5,745,014
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------------- --------------------- ----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL 7
STATEMENTS
The financial statements included in this Form 10-Q should be read with
reference to Community West Bancshares' Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 1112
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 2022
ITEM 4. CONTROLS AND PROCEDURES 2022
PART II. OTHER INFORMATION
- --------------- -----------------
ITEM 1. LEGAL PROCEEDINGS 2022
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 2022
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 2022
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 2022
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 2122
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
22
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------ ---------------------------- ---------------------
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2005 2004
2003
(UNAUDITED)
--------------------------- --------------
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 9,6685,084 $ 5,7588,769
Interest-earning deposits in other financial institutions 9,138 5,031- 9,700
Federal funds sold 7,915 11,267
---------------10,190 11,736
------------ --------------
Cash and cash equivalents 26,721 22,05615,274 30,205
Time deposits in other financial institutions 392 792639 647
Investment securities available-for-sale, at fair value; amortized cost of $22,357$22,101 at
September 30, 2004March 31, 2005 and $15,455$22,380 at December 31, 2003 22,293 15,4322004 21,951 22,258
Investment securities held-to-maturity, at amortized cost; fair value of $3,041$8,159 at September 30, 2004March 31,
2005 and $5,035$6,122 at December 31, 2003 3,029 5,0362004 8,168 6,094
Federal Home Loan Bank stock, at cost 1,340 1,200
Federal Reserve Bank stock, at cost 812 812
Interest only strips, at fair value 3,004 3,5482,459 2,715
Loans:
Loans held for sale, at lower of cost or fair value 36,968 42,03842,608 45,988
Loans held for investment, net of allowance for loan losses of $2,931$2,964 at September 30, 2004March 31, 2005 and
$2,652$2,785 at December 31, 2003 216,946 166,8742004 246,440 222,153
Securitized loans, net of allowance for loan losses of $1,109$1,122 at September 30, 2004March 31, 2005 and $2,024$1,109
at December 31, 2003 24,626 35,362
---------------2004 20,284 22,365
------------ --------------
Total loans 278,540 244,274
Federal Home Loan Bank stock, at cost 1,189 -
Federal Reserve Bank stock, at cost 812 812309,332 290,506
Servicing rights 3,344 2,499assets 3,302 3,258
Other real estate owned, net 81 13 527
Premises and equipment, net 1,676 1,6321,878 1,763
Other assets 6,227 7,642
---------------5,742 5,732
------------ --------------
TOTAL ASSETS $ 347,240370,978 $ 304,250
===============365,203
============ ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 41,58831,153 $ 42,41744,384
Interest-bearing demand 62,172 38,11591,429 92,395
Savings 15,592 15,55915,259 15,370
Time certificates of $100,000 or more 38,367 19,67344,938 40,393
Other time certificates 105,241 109,091
---------------91,880 92,026
------------ --------------
Total deposits 262,960 224,855274,659 284,568
Securities sold under agreements to repurchase 17,425 14,39410,629 13,672
Federal Home Loan Bank advances 7,500 -28,500 10,500
Bonds payable in connection with securitized loans 15,969 26,10012,726 13,910
Other liabilities 6,508 4,570
---------------6,044 4,984
------------ --------------
Total liabilities 310,362 269,919
---------------332,558 327,634
------------ --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding,
5,729,8695,745,014 at September 30, 2004March 31, 2005 and 5,706,7695,729,869 at December 31, 20032004 30,139 30,020 29,874
Retained earnings 6,896 4,4728,369 7,621
Accumulated other comprehensive loss,income (loss), net (38) (15)
---------------(88) (72)
------------ --------------
Total stockholders' equity 36,878 34,331
---------------38,420 37,569
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 347,240370,978 $ 304,250
=============== ==============
365,203
============ ==============
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------MARCH 31,
-------------------------
2005 2004
2003 2004 2003
------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-------------------------
(IN THOUSANDS)
INTEREST INCOME
Loans $ 5,3605,991 $ 4,882 $ 15,216 $ 14,9174,836
Investment securities 274 95 709 316301 207
Other 77 43 192 165
-------------36 60
------------ ---------- -----------
Total interest income 5,711 5,020 16,117 15,398
-------------6,328 5,103
------------ ---------- -----------
INTEREST EXPENSE
Deposits 1,286 1,120 3,624 3,5221,509 1,154
Bonds payable and other borrowings 668 1,078 2,214 3,721
-------------551 785
------------ ---------- -----------
Total interest expense 1,954 2,198 5,838 7,243
-------------2,060 1,939
------------ ---------- -----------
NET INTEREST INCOME 3,757 2,822 10,279 8,1554,268 3,164
Provision for loan losses 186 298 251 1,006
-------------170 95
------------ ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,571 2,524 10,028 7,1494,098 3,069
NON-INTEREST INCOME
Gains from loan sales, net 861 1,274 3,212 3,520759 928
Other loan fees 730 917 2,797 2,380592 727
Loan servicing fees, net 336 332 1,239 922149 516
Document processing fees 111 341 428 810190 203
Other 120 149 353 567
-------------135 118
------------ ---------- -----------
Total non-interest income 2,157 3,013 8,029 8,199
-------------1,825 2,492
------------ ---------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,816 2,905 8,840 8,7672,937 2,797
Occupancy and equipment expenses 537 571 1,538 1,703581 505
Professional services 267 117 682 470285 187
Other operating expenses 466 603 2,102 1,782
-------------739 774
------------ ---------- -----------
Total non-interest expenses 4,086 4,196 13,162 12,722
-------------4,257 4,076
------------ ---------- -----------
Income before provision for income taxes 1,642 1,341 4,895 2,6261,666 1,485
Provision for income taxes 675 456 2,014 895
-------------688 611
------------ ---------- -----------
NET INCOME $ 967978 $ 885 $ 2,881 $ 1,731
=============874
============ ========== ===========
INCOME PER SHARE - BASIC $ .170.17 $ .16 $ .50 $ .30
=============0.15
============ ========== ===========
INCOME PER SHARE - DILUTED $ .160.16 $ .15 $ .49 $ .30
=============0.15
============ ========== ===========
===========
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS LOSSINCOME (LOSS) EQUITY
------ ------ -------- ---- -------------------- -------------- --------------- ---------------- -----------------
(IN THOUSANDS)
BALANCES AT
JANUARY 1, 2004 5,707 $29,8742005 5,730 $ 4,47230,020 $ (15)7,621 $ 34,331(72) $ 37,569
Exercise of stock options 23 146 - - 14615 79 79
Tax benefit from stock options 40 40
Comprehensive income:
Net income 2,881 - 2,881
Other comprehensive loss,978 978
Change in unrealized losses on
securities available-for-sale, net (23) (23)
---------------(16) (16)
-----------------
Comprehensive income - 2,858962
Cash dividends paid
($.080.04 per share) (457) - (457)
------ ------- ----------(230) (230)
-------------- -------------- --------------- ------------------------------- -----------------
BALANCES AT
SEPTEMBER 30, 2004 5,730 $30,020MARCH 31, 2005 5,745 $ 6,89630,139 $ (38)8,369 $ 36,878
====== ======= ==========(88) $ 38,420
============== ============== =============== ===============
================ =================
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINETHREE MONTHS ENDED
SEPTEMBER 30,
-----------------------MARCH 31,
--------------------------
2005 2004
2003
---------- ----------------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
(IN THOUSANDS)
Net income $ 2,881 $ 1,731978 874
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 251 1,006
Provision for losses on real estate owned 1 25170 95
Depreciation and amortization 971 1,451231 342
Net amortization of discounts and premiums for securities 69 131(9) (128)
Gains from:on:
Sale of other real estate owned 3 (2) (79)
Sale of loans held for sale (3,212) (3,520)(670) (891)
Changes in:
Fair value of interest only strips, net of accretion 544 785256 196
Servicing rights,assets, net of amortization and valuation adjustments (845) (379)(44) (361)
Other assets 1,415 5,268(11) 986
Other liabilities 1,990 (1,596)
---------- -----------1,124 1,007
------------ ------------
Net cash provided by operating activities 4,063 4,823
---------- -----------2,028 2,118
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (2,227) - (6,246)
Purchase of available-for-sale securities (7,940) (17,690)
Principal pay downs and maturities of held-to-maturity securities 1,985 7,005
Principal pay downs and maturities of available-for-sale securities 1,032 8,626
Loan originations and principal collections, net (31,394) 269- (5,933)
Purchase of Federal Home Loan Bank stock (1,189)(140) (805)
Principal paydowns and maturities of held-to-maturity securities 159 996
Principal paydowns and maturities of available-for-sale securities 282 190
Unrealized accumulated gains/losses on available-for-sale securities 28 -
Loan originations and principal collections, net (18,438) (13,728)
Proceeds from sale of other real estate owned 2 529 1,718
Net decrease in time deposits in other financial institutions 400 1,2878 198
Purchase of premises and equipment, net (435) (193)
---------- -----------(262) (100)
------------ ------------
Net cash used in investing activities (37,012) (5,224)
---------- -----------(20,588) (18,653)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 146 3579 27
Cash dividends paid on common stock (457)to shareholders (230) -
Net (decrease) increase in demand deposits and savings accounts 23,261 4,751(14,308) 4,178
Net increase (decrease) in time certificates of deposit 14,844 (1,119)
Proceeds from securities sold under agreements to repurchase 13,672 13,3344,399 8,325
Repayments of securities sold under agreements to repurchase (10,641) (2,618)(3,043) (139)
Proceeds from Federal Home Loan Bank advances 7,500Advances 18,000 -
Repayments of bonds payable in connection with securitized loans (10,711) (19,330)
---------- -----------(1,268) (3,428)
------------ ------------
Net cash provided by (used in) financing activities 37,614 (4,947)
---------- -----------3,629 8,963
------------ ------------
NET INCREASE (DECREASE)DECREASE IN CASH AND CASH EQUIVALENTS 4,665 (5,348)(14,931) (7,572)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,205 22,056
31,094
---------- ----------------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,72115,274 $ 25,746
========== ===========14,484
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 4,8041,476 $ 5,9371,526
Cash paid for income taxes 840 547- -
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 89 1,570
$ 112 -
See accompanying notes.
6
COMMUNITY WEST BANCSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements reflect all adjustments and
reclassifications that, in the opinion of management, are necessary for the fair
presentation of the results of operations and financial condition for the
interim periods. The unaudited consolidated financial statements include
Community West Bancshares ("Company"CWBC") and its wholly-owned subsidiary, Community
West Bank National Association (formerly knownN.A. ("CWB"). CWBC and CWB are referred to herein as Goleta National Bank)"the Company".
All adjustments and reclassifications in the periods presented are of a normal
and recurring nature. Results for the period ended September 30, 2004March 31, 2005 are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Community West
Bancshares included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.2004.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed, systematic
analysis and procedural discipline to determine the amount of the allowance for
loan losses ("ALL"). The ALL is based on estimates and is intended to be
adequate to provide for probable losses inherent in the loan portfolio. This
process involves derivingestimating probable loss estimateslosses that are based on individual loan
loss, estimation, migration analysis/historical loss rates and management's judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are recognized
at fair market value as separate assets when loans are sold with servicing
retained. Servicing rights are amortized in proportion to, and over the period
of, estimated future net servicing income. Also, at the time of the loan sale,
it is the Company's policy to recognize the related gain on the loan sale in
accordance with generally accepted accounting principalsprinciples ("GAAP"). The Company
uses industry prepayment statistics and its own prepayment experience in
estimating the expected life of the loans. Management periodically evaluates
servicing rights for impairment. Servicing rights are evaluated for impairment
based upon the fair value of the rights as compared to amortized cost on a
loan-by-loan basis. Fair value is determined using discounted future cash flows
calculated on a loan-by-loan basis and aggregated to the total asset level.
Impairment to the asset is recorded if the aggregate fair value calculation
drops below the net book value of the asset. The initial servicing rights and
resulting gain on sale are calculated based on the difference between the best
actual par and premium bids on an individual loan basis. Additionally, on
certain SBA loan sales that occurred prior to 2003, the Company retained
interest only strips ("I/O Strips"), which represent the present value of excess
net cash flows generated by the difference between (a) interest at the stated
rate paid by borrowers and (b) the sum of (i) pass-through interest paid to
third-party investors and (ii) contractual servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the
Company transferred $122 million and $81 million in loans to special purpose
trusts ("Trusts"). The transfers have been accounted for as secured borrowings
and, accordingly, the mortgage loans and related bonds issued are included in
the Company's consolidated balance sheets. Such loans are accounted for in the
same manner as loans held to maturity. Deferred debt issuance costs and bond
discount related to the bonds are amortized on a method that approximates the
level-yieldlevel yield method over the estimated life of the bonds.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the
allowance for loan losses. Subsequent to foreclosure, management periodically
performs a new valuation and the asset is carried at the lower of carrying
7
amount or fair value. Operating expenses or income, and gains or losses on
disposition of such properties, are charged to current operations.
RECENT ACCOUNTING PRONOUNCEMENTS - On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.
Pro forma disclosure will no longer be an alternative. Statement 123(R) must be
adopted no later than the first fiscal year beginning after June 15, 2005. The
Company expects to adopt Statement 123(R) as of January 1, 2006. While the
ultimate impact of adoption of this guidance is unknown at this time, the
Company does not expect the impact to be significantly different from the
proforma disclosures presented in Note 5.
2. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company sells the guaranteed portion of selected SBA loans
into the secondary market, on a servicing retained basis, in exchange for a
combination of a cash premium, servicing rights and/or I/O strips. A portion of
the proceeds is recognized as servicing fee income as it occurs and the
remainder is capitalized as excess servicing and is included in the gain on sale
calculation. The Company retains the unguaranteed portion of these loans and
services the loans as required under the SBA programs to retain specified yield
amounts. The SBA program stipulates that the Company retains a minimum of 5% of
the loan balance, which is unguaranteed. The percentage of each unguaranteed
loan in excess of 5% may be periodically sold to a third party for a cash
premium. The Company records servicing liabilities for the unguaranteed loans
sold calculated based on the present value of the estimated future servicing
costs associated with each loan. A portion of this cost is included as a
reduction to the premium collected on the loan sale, and the remainder is
accrued and recognized as a reduction of servicing expense as it occurs. The
balance of all servicing rights and obligations is subsequently amortized over
the estimated life of the loans using an estimated prepayment rate of 20-25%.
Quarterly, the servicing and I/O strip assets are analyzed for impairment.
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing released basis, in exchange
for a cash premium.
As of March 31, 2005 and December 31, 2004, the Company had approximately $39.9
and $43.6 million, respectively, in SBA loans held for sale.
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
MARCH 31, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS)
Real estate $ 94,500 $ 85,357
Manufactured housing 73,023 66,423
SBA 40,492 35,265
Commercial 34,634 30,893
Securitized 20,998 23,005
Other installment 8,630 8,645
------------- ------------
272,277 249,588
Less:
Allowance for loan losses 4,086 3,894
Deferred fees, net of costs (100) (180)
Purchased premiums on securitized loans (340) (392)
Discount on SBA loans 1,907 1,748
------------- ------------
Loans held for investment, net $ 266,724 $ 244,518
============= ============
8
An analysis of the allowance for loan losses for loans held for investment
follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
----------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 2,785 $ 2,652
Provision for loan losses 139 152
Loans charged off (52) (1)
Recoveries on loans previously charged off 92 55
----------- -----------
Balance, end of period $ 2,964 $ 2,858
=========== ===========
An analysis of the allowance for loan losses for securitized loans follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
----------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 1,109 $ 2,024
Provision for loan losses 31 (57)
Loans charged off (247) (579)
Recoveries on loans previously charged off 229 127
----------- -----------
Balance, end of period $ 1,122 $ 1,515
=========== ===========
The recorded investment in loans that is considered to be impaired:
MARCH 31, DECEMBER 31,
2005 2004
-------------- ------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 88 $ 49
Impaired loans with specific valuation allowances 3,714 3,926
Specific valuation allowances allocated to impaired loans (413) (425)
-------------- ------------
Impaired loans, net $ 3,389 $ 3,550
============== ============
Average investment in impaired loans $ 3,884 $ 5,137
============== ============
4. EARNINGS PER SHARE
Earnings per share - Basic has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
has been computed based on the weighted average number of shares outstanding
during each period plus the dilutive effect of granted options. Earnings per
share were computed as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Weighted average shares - Basic 5,741 5,707
Dilutive effect of options 214 127
----------- -----------
Weighted average shares - Diluted 5,955 5,834
=========== ===========
Net income $ 978 $ 874
Earnings per share - Basic .17 .15
Earnings per share - Diluted .16 .15
9
5. STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION - GAAP permits the Company to use either of two
methodologies to account for compensation cost in connection with employee stock
options. The first method requires issuers to record compensation expense over
the period the options are expected to be outstanding prior to exercise,
expiration or cancellation. The amount of compensation expense to be recognized
over this term is the "fair value" of the options at the time of the grant as
determined by the Black-Scholes valuation model. Black-Scholes computes fair
value of the options based on the length of their term, the volatility of the
stock price in past periods and other factors. Under this method, the issuer
recognizes compensation expense regardless of whether or not the employee
eventually exercises the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense is recognized. The Company believes that this method better reflects the
motivation for its issuance of stock options, as they are intended as incentives
for future performance rather than compensation for past performance. GAAP
requires that issuers electing the second method must present pro forma
disclosure of net income and earnings per share as if the first method had been
elected.
The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
----------- -----------
Annual dividend yield 1.6% 0.0%
Expected volatility 35.0% 30.6%
Risk-free interest rate 4.3% 3.8%
Expected life (in years) 6.8 6.8
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosure of net income and earnings per share using the fair value method. If
the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, the Company's net income, basic net income per
share and diluted net income per share would have been reduced to the pro forma
amounts following:
THREE MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31,
------------------------
2005 2004
----------- -----------
Income:
As reported $ 978 $ 874
Pro forma 950 838
Income per common share - basic
As reported .17 .15
Pro forma .17 .15
Income per common share - diluted
As reported .16 .15
Pro forma .16 .14
6. BORROWINGS
REPURCHASE AGREEMENTS - The Company has a financing arrangement with a third
party by which its government-guaranteed securities can be pledged as collateral
for short-term borrowings. As of March 31, 2005 and December 31, 2004, the
Company had $10.6 million and $13.7 million, respectively, of outstanding
repurchase agreements, with interest rates of 1.75% to 2.35%, all of which
mature by July 2005. Securities with a carrying value of $11.8 million and $14.0
million were pledged as collateral for short-term borrowings as of March 31,
2005 and December 31, 2004, respectively.
FEDERAL HOME LOAN BANK ADVANCES - The Company has a blanket lien credit line
with the Federal Home Loan Bank ("FHLB") As of March 31, 2005, and December 31,
2004, the Company had $28.5 million and $10.5 million of outstanding advances
with interest rates of 1.77% to 3.28% and terms of up to three years. This total
includes $18.0 million borrowed at variable rates which adjust to current LIBOR
rate either monthly or quarterly. As of March 31, 2005 and December 31, 2004,
the Company had $33.3 million and $33.8 million of loans and $18.2 million and
$14.1 million of securities, respectively, held by the FHLB and available to be
pledged as collateral for current and future FHLB advances.
10
BONDS PAYABLE - The following is a summary of bonds payable:
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(IN THOUSANDS)
Series 1998-1 $ - $ 179
Series 1999-1 13,243 14,332
------------- -------------
13,243 14,511
Less: Bond issuance costs 197 228
Bond discount 320 373
------------- -------------
Total bonds payable, net $ 12,726 $ 13,910
============= =============
The Series 1999-1 bonds have interest rates ranging form 7.85% - 8.75% with
stated maturity of May 25, 2025. The Series 1999-1 bonds are collateralized by
securitized loans with an outstanding balance of $15.3 million and $16.4 million
at March 31, 2005 and December 31, 2004, respectively.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion is designed to provide insight into management's assessment of
significant trends related to the Company's consolidated financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto and the other financial
information appearing elsewhere in this report. See discussion under "Factors
That May Affect Future Results of Operations" for further information on risks
and uncertainties as well as information on the strategies adopted by the
Company to address these risks.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains statements that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those forward-looking statements include statements regarding the intent, belief
or current expectations of the Company and its management. Any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and actual results may differ materially from those
projected in the forward-looking statements. The Company does not undertake any
obligation to revise or update publicly any forward-looking statements for any
reason.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
OVERVIEW OF EARNINGS PERFORMANCE
The Company earned net income of $978,000 or $0.17 per basic share and $0.16 per
diluted share for the first quarter of 2005. This represents an 11.9% increase
in net income over the comparable period of 2004. The significant factors
impacting net income for the first quarter of 2005 were:
- Net loan portfolio growth in the first quarter of 2005 of $18.8
million, or 6.5%, primarily in commercial real estate and manufactured
housing loans.
- Continued prepayments of the securitized loans and the related
bonds which declined $2.1 million and $1.2 million, respectively, in
the first quarter of 2005.
- A net increase in total assets of $5.8 million, or 1.6%, and a
net decrease in total deposits of $9.9 million, or 3.5%, for the first
quarter of 2005.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
significantly from those estimates. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's financial
condition and results of operations and require management's most difficult,
subjective and complex judgments.
ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed, systematic
analysis and procedural discipline to determine the amount of the allowance for
loan losses ("ALL"). The ALL is based on estimates and is intended to be
adequate to provide for probable losses inherent in the loan portfolio. This
process involves estimating probable losses that are based on individual loan
loss, migration analysis/historical loss rates and management's judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are recognized
at fair market value as separate assets when loans are sold with servicing
retained. Servicing rights are amortized in proportion to, and over the period
of, estimated future net servicing income. Also, at the time of the loan sale,
it is the Company's policy to recognize the related gain on the loan sale in
accordance with GAAP. The Company uses industry prepayment statistics and its
own prepayment
12
experience in estimating the expected life of the loans. Management periodically
evaluates servicing rights for impairment. Servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to amortized cost
on a loan-by-loan basis. Fair value is determined using discounted future cash
flows calculated on a loan-by-loan basis and aggregated to the total asset
level. Impairment to the asset is recorded if the aggregate fair value
calculation drops below the net book value of the asset. The initial servicing
rights and resulting gain on sale are calculated based on the difference between
the best actual par and premium bids on an individual loan basis. Additionally,
on certain SBA loan sales that occurred prior to 2003, the Company retained
interest only strips ("I/O Strips"), which represent the present value of excess
net cash flows generated by the difference between (a) interest at the stated
rate paid by borrowers and (b) the sum of (i) pass-through interest paid to
third-party investors and (ii) contractual servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the
Company transferred $122 million and $81 million in loans to special purpose
trusts ("Trusts"). The transfers have been accounted for as secured borrowings
and, accordingly, the mortgage loans and related bonds issued are included in
the Company's consolidated balance sheets. Such loans are accounted for in the
same manner as loans held to maturity. Deferred debt issuance costs and bond
discount related to the bonds are amortized on a method that approximates the
level yield method over the estimated life of the bonds.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the
allowance for loan losses. Subsequent to foreclosure, management periodically
performs a new valuation and the asset is carried at the lower of carrying
amount or fair value. Operating expenses or income, and gains or losses on
disposition of such properties, are charged to current operations.
STOCK-BASED COMPENSATION - GAAP permits the Company to use either of two
methodologies to account for compensation cost in connection with employee stock
options. The first method requires issuers to record compensation expense over
the period the options are expected to be outstanding prior to exercise,
expiration or 7
cancellation. The amount of compensation expense to be recognized
over this term is the "fair value" of the options at the time of the grant as
determined by the Black-Scholes valuation model. Black-Scholes computes fair
value of the options based on the length of their term, the volatility of the
stock price in past periods and other factors. Under this method, the issuer
recognizes compensation expense regardless of whether or not the employee
eventually exercises the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense is recognized. The Company believes that this method better reflects the
motivation for its issuance of stock options, as they are intended as incentives
for future performance rather than compensation for past performance. GAAP
requires that issuers electing the second method must present pro forma
disclosure of net income and earnings per share as if the first method had been
elected.
The fair value of each stock option grant is estimated onRECENT ACCOUNTING PRONOUNCEMENTS - On December 16, 2004, the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2004 2003 2004 2003
--------- ----------- --------- ----------
Annual dividend yield 1.8% 0.0% 1.8% 0.0%
Expected volatility 22.0% 27.9% 32.9% 31.0%
Risk-free interest rate 4.2% 3.9% 4.2% 3.8%
Expected life (in years) 6.8 7.3 6.8 7.3
Statement of Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires
proall share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.
Pro forma disclosure of net income and earnings per share usingwill no longer be an alternative. Statement 123(R) must be
adopted no later than the fair value method. If
the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, the Company's net income, basic net income per
share and diluted net income per share would have been reduced to the pro forma
amounts following:
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2004 2003 2004 2003
---------- ---------- --------- ----------
Income:
As reported $ 967 $ 885 $ 2,881 $ 1,731
Pro forma 923 795 2,759 1,572
Income per common share - basic
As reported $ .17 $ .16 $ .50 $ .30
Pro forma .16 .14 .48 .28
Income per common share - diluted
As reported $ .16 $ .15 $ .49 $ .30
Pro forma .16 .14 .47 .27
COMPREHENSIVE INCOME
The following schedule reflects comprehensive income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 967 $ 885 $ 2,881 $ 1,731
Other comprehensive income, net of tax:
Unrealized gains on investment securities, net of tax 11 6 (23) 9
---------- ---------- ---------- ----------
Comprehensive income $ 978 $ 891 $ 2,858 $ 1,740
========== ========== ========== ==========
2. LOAN SALES AND SERVICING
SBA LOAN SALES -first fiscal year beginning after June 15, 2005. The
Company sellsexpects to adopt Statement 123(R) as of January 1, 2006. While the
guaranteed portionultimate impact of selected SBA loans
intoadoption of this guidance is unknown at this time, the secondary market, on a servicing retained basis, in exchange for a
combination of a cash premium, servicing rights and/or I/O strips. A portion of
the yield is recognized as servicing fee income as it occurs and the remainder
is capitalized as excess servicing and is included in the gain on sale
calculation. The Company retains the unguaranteed portion of these loans and
services the loans as required under the SBA programs to retain specified yield
amounts. The SBA program stipulates that the Company retains a minimum of 5% of
the loan balance, which is unguaranteed. The percentage of each unguaranteed
loan in excess of 5% may be periodically sold to a third party for a cash
premium. The balances of all servicing rights are subsequently amortized over
the estimated life of the loans using an estimated prepayment rate of 20-22%.
Quarterly, the servicing and I/O strip assets are analyzed for impairment.
8
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing released basis, in exchange
for a cash premium.
As of September 30, 2004 and December 31, 2003, the Company had approximately
$34.9 million and $36.9 million, respectively, in SBA loans held for sale.
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Commercial $ 28,240 $ 24,592
Real estate 93,135 71,010
SBA 31,103 30,698
Manufactured housing 61,080 39,073
Other installment 8,205 5,770
Securitized 25,194 36,563
--------------- --------------
246,957 207,706
Less:
Allowance for loan losses 4,040 4,676
Deferred fees, net of costs (181) (65)
Purchased premiums on securitized loans (451) (689)
Discount on SBA loans 1,977 1,548
--------------- --------------
Loans held for investment, net $ 241,572 $ 202,236
=============== ==============
An analysis of the allowance for loan losses for loans held for investment
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
----------- ----------- ---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 2,779 $ 2,698 $ 2,652 $ 3,379
Provision for loan losses 192 (56) 380 21
Loans charged off (43) (44) (173) (1,548)
Recoveries on loans previously charged off 3 54 72 800
----------- ----------- ---------- -----------
Balance, end of period $ 2,931 $ 2,652 $ 2,931 $ 2,652
=========== =========== ========== ===========
An analysis of the allowance for loan losses for securitized loans follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
----------- ----------- ---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 1,369 $ 2,119 $ 2,024 $ 2,571
Provision for loan losses (6) 354 (129) 985
Loans charged off (324) (586) (1,168) (1,941)
Recoveries on loans previously charged off 70 224 382 496
----------- ----------- ---------- -----------
Balance, end of period $ 1,109 $ 2,111 $ 1,109 $ 2,111
=========== =========== ========== ===========
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 51 $ 235
Impaired loans with specific valuation allowances 4,221 6,843
Specific valuation allowances allocated to impaired loans (596) (640)
--------------- --------------
Impaired loans, net $ 3,676 $ 6,436
=============== ==============
Average investment in impaired loans $ 5,450 $ 6,584
=============== ==============
9
4. EARNINGS PER SHARE
Earnings per share - Basic has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
has been computed based on the weighted average number of shares outstanding
during each period plus the dilutive effect of granted options. Earnings per
share were computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------------
2004 2003 2004 2003
------------ ----------- -------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,720 5,693 5,714 5,691
Dilutive effect of options 149 80 130 47
------------ ----------- -------------- -------------
Weighted average shares - Diluted 5,869 5,773 5,844 5,738
============ =========== ============== =============
Net income $ 967 $ 885 $ 2,881 $ 1,731
Earnings per share - Basic .17 .16 .50 .30
Earnings per share - Diluted .16 .15 .49 .30
5. REPURCHASE AGREEMENTS AND OTHER BORROWINGS
The Company has entered into a financing arrangement with a third party by which
its government-guaranteed securities can be pledged as collateral for short-term
borrowings. As of September 30, 2004 and December 31, 2003, securities with a
carrying value of $18.2 million and $14.7 million respectively, were pledged as
collateral for short-term borrowings. As of September 30, 2004 and December
31, 2003, the Company had $17.4 million and $14.4 million, respectively, of
outstanding repurchase agreements, with interest rates of 1.40% to 2.35%, all of
which mature within one year.
As of September 30, 2004, the Company had advances of $7.5 million from the
Federal Home Loan Bank ("FHLB") with interest rates of 1.34% to 2.59%, $5.5
million of which matures in less than one year.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is designed to provide insight into management's assessment of
significant trends related to the Company's consolidated financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto and the other financial
information appearing elsewhere in this report. See discussion under "Factors
That May Affect Future Results of Operations" for further information on risks
and uncertainties as well as information on the strategies adopted by the
Company to address these risks.
FORWARD LOOKING STATEMENTS
This 2004 Report on Form 10-Q contains statements that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those forward-looking statements include statements regarding the
intent, belief or current expectations of the Company and its management. Any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those projected in the forward-looking statements. The
Company does not undertake any obligationexpect the impact to revise or update publicly any forward-looking
statements for any reason.
The following discussion should be readsignificantly different from the
proforma disclosures presented in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION ANDNote 5.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
EXECUTIVE OVERVIEW
The Company experienced overall loan growth of $33.6 million, or 11.9%, for the
first nine months of 2004 compared to a $512,000 decrease in loans for the first
nine months of 2003. Total loans increased to $282.6 million at September 30,
2004 from $251.3 million at September 30, 2003. The securitized loans continue
to pay off at a rapid rate decreasing by 41.9% to $25.7 million at September 30,
2004 from $44.3 million at September 30, 2003. The Company continues to benefit
from the pay down of the high-interest bonds related to the securitized loans,
as well as a reduction in charge-offs due to the general portfolio credit
quality stabilization.
To better reflect the markets in which the Company serves, the name of its
subsidiary Bank was changed to Community West Bank National Association ("CWB")
effective September 1, 2004. In addition, CWB commenced plans to open a
full-service branch office in Santa Maria, California during the first quarter
of 2005.
RESULTS OF OPERATIONS - THIRDOPERATIONS-FIRST QUARTER COMPARISON
The Company recorded net income of $967,000$978,000 for the three months ended September
30, 2004,March 31,
2005, or $.16$.17 per share diluted,basic, compared to net income of $885,000,$874,000, or $.15 per
share diluted,basic, during the three months ended September 30, 2003.March 31, 2004.
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
13
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------MARCH 31,
------------------------------- INCREASE
2005 2004 2003 DECREASE
------------------(DECREASE)
--------------- --------------------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPEXCEPT PER SHARE AMOUNTS)
Interest income $ 5,7116,328 $ 5,0205,103 $ 6911,225
Interest expense 1,954 2,198 (244)
------------------2,060 1,939 121
--------------- --------------------------------- ----------------
Net interest income 3,757 2,822 935
------------------4,268 3,164 1,104
--------------- --------------------------------- ----------------
Provision for loan losses 186 298 (112)
------------------170 95 75
--------------- --------------------------------- ----------------
Net interest income after provision for loan losses 3,571 2,524 1,0474,098 3,069 1,029
Non-interest income 2,157 3,013 (856)1,825 2,492 (667)
Non-interest expenses 4,086 4,196 (110)
------------------4,257 4,076 181
--------------- --------------------------------- ----------------
Income before provision for income taxes 1,642 1,341 3011,666 1,485 181
Provision for income taxes 675 456 219
------------------688 611 77
--------------- --------------------------------- ----------------
Net income $ 967978 $ 885874 $ 82
==================104
=============== ================================= ================
Earnings per share - Basic $ .17 $ .16.15 $ .01
==================.02
=============== ================================= ================
Earnings per share - Diluted $ .16 $ .15 $ .01
================== =============== ================================= ================
Comprehensive income $ 978962 $ 891959 $ 87
==================3
=============== ================================= ================
11
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 VERSUS 2004
-----------------------------
CHANGE DUE TO
TOTAL ------------------
CHANGE RATE VOLUME
--------- ------------------
(IN THOUSANDS)
Interest-earning deposits in other financial
institutions (including time deposits) $ (16) $ 6 $ (22)
Federal funds sold (8) 20 (28)
Investment securities 94 11 83
Loans, net 1,565 328 1,237
Securitized loans (410) (30) (380)
--------- -------- --------
Total interest-earning assets 1,225 335 890
--------- -------- --------
Interest-bearing demand 424 141 283
Savings 12 26 (14)
Time certificates of deposit (81) (33) (48)
Bonds payable (367) (59) (308)
Other borrowings 133 57 76
--------- -------- --------
Total interest-bearing liabilities 121 132 (11)
--------- -------- --------
Net interest income $ 1,104 $ 203 $ 901
========= ======== ========
Interest Income
Total interest income increased by $691,000,$1.2 million, or 13.8%24.0%, for the thirdfirst quarter of
20042005 compared to 2003. The increase was due to a $213,000 increase in
investment interest income for the third quarter 2004 compared to 2003 and a
$478,000, or 9.8%, increase in loan interest income for the comparable quarters.
The increase in investment interest income was a result of the increase in the
average securities portfolio from $13.9 million for the third quarter of 2003 to
$27.5 million for the thirdfirst quarter of 2004. The increase was primarily due to
increases in interest income from loans. Loan interest income increased by $1.2
million, or 23.9%, for the first quarter of 2005 compared to 2004. Loan interest
income increased a net of $857,000, which includes a decrease in securitized
loan interest income is also primarilyof $380,000, was due to overall loan growth. Average total loans for
the third quarter 2004 increased to $282.3 million from $253.5 million for the
third quarter of 2003. Total loans grew $5 million, or 1.8%, for the quarter
ended September 30, 2004. The Company also benefited from a 75 basis point rise
in the prime rate during the third quarter of 2004. Manufactured housing,
commercial real estate, commercial and construction loanGenerally, rising
interest income
increased by $515,000, $211,000, $148,000 and $174,000, respectively, for the
third quarter 2004 compared to 2003. These increases were partially offset by
declinesrates contributed an additional $335,000 in interest income for the securitized and mortgage loan portfolios of
$573,000 and $224,000, respectivelyall
interest-earning assets.
Interest Expense
Total interest expense increased $121,000, or 6.2%, for the thirdfirst quarter of
20042005 compared to 2003. SBA and other loan products had small increases in loan interest income
for the third quarter of 2004 compared to 2003.
Interest Expense
The decline in interest expense for the third quarter of 2004 compared to the
third quarter of 2003 was primarily due to the pay down in the securitized loan
portfolio and the correlated pay downs in the high-interest securitized bonds.
The bond interest expense for the three months ended September 30, 2004 declined
by $499,000, or 47.5%, to $550,000 from $1 million for the three months ended
September 30, 2003. This decline was partially offset by increases in interest
on deposits and other borrowings.2004. Interest on deposits increased by $166,000,$355,000, or 14.8%30.8%, for
the thirdfirst quarter 2004of 2005 compared to 2003.2004. Of this increase, $221,000 was
attributed to deposit growth and $134,000 to increased interest rates on
deposits. Interest expense on bonds payable and other borrowings declined by
$234,000, or 29.8%, due to a decrease in bonds payable expense of $367,000
primarily caused by paydowns, that were partially offset by an increase in
interest expense on other borrowings increased slightlyof $133,000 for the third quarter 2004 compared to 2003.
Average interest-bearing deposits increased for the third quarter of 2004 over
2003 by $29.5 million, or 16%. Average other borrowed funds increased by $17.9
million to $27.2 million for the quarter ended 2004 compared to 2003. Total
average cost of funds declined from 3.17% for the third quarter of 2003 to 3.01%
for the third quarter of 2004.comparable quarters.
Provision for Loan Losses
14
The provision for loan losses increased slightly for the thirdfirst quarter of 2004 declined by
$112,000, or 37.6%, from2005
compared to the thirdfirst quarter of 2003. This decrease2004. The increase was primarily a result of
volume related provision increases due to portfolio growth adjusted for
improvements in credit quality factors and a $360,000 reductionslight decline in the provision for
loan losses for the securitized loans resulting primarily from the $4.1 million of pay downs in the portfolio
during the period. As a result of loan growth within the other product lines,
this decrease was partially offset by volume-related provision increases in
certain other loan products.portfolio.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains fromon sale of loans, servicing fees and other revenues not derived
from interest on earning assets. The $856,000,Total non-interest income declined by $667,000
or 28.4%26.8%, decline in
non-interest income for the three months ended September 30, 2004March 31, 2005 as compared to the same
period in 2003 is2004 primarily due to a $367,000 decrease in net loan servicing. The
decline in net servicing income was the slowdown in demand for mortgage
loans. The change in mortgageresult of increased prepayments within
the SBA 7(a) loan demand impacted loan document fee income,portfolio. In addition, net gaingains on mortgage loan sales and other loan feesdeclined by
($230,000), ($236,000)
and ($188,000), respectively,$169,000 for the third quarter of 2004 comparedcomparable periods due to 2003.
SBAa decrease in net gainpremiums received
on 7(a) loan sales remained relatively unchangedand a slight decline in mortgage loan refinance activity.
Total mortgage loan related non-interest income, which includes origination fees
and gains on loan sales, declined $398,000 for the thirdfirst quarter of 20042005
compared to 2003, at $695,000 and $700,000, respectively.
Service charges on deposit accounts, loan servicing and other revenue not
derived from interest on earning assets were also approximately the same for the
comparable periods of third quarter 2004 compared to 2003, at $455,000 and
$481,000, respectively. The remaining $171,000 decrease in non-interest income
for the third quarter of 2004 compared to 2003 is due to premium and other
income related to the sale of $2.1 million in unguranteed SBA 7(a) loans which
closed in the third quarter of 2003 compared to no such sale in 2004. These
unguaranteed loans are generally sold one or two times per year.
Non-Interest Expenses
Total non-interest expenses decreased $110,000 for the third quarter of 2004
compared to the third quarter of 2003. During the third quarter of 2004, the
Company experienced increases in expenses related to the change in name of the
subsidiary bank including marketing and consulting, which were offsetexpense increased by decreased expenses in salaries and employee benefits, insurance, occupancy and
loan collection.
RESULTS OF OPERATIONS - NINE MONTH COMPARISON
The Company recorded net income of $2.9 million for the nine months ended
September 30, 2004,$181,000, or $.49 per share diluted, compared to net income of $1.7
million, or $.30 per share diluted, for the nine months ended September 30,
2003. The Company experienced net loan growth of $32 million from $246.5
million at September 30, 2003 to $278.5 million at September 30, 2004. The
securitized loans paid down to a net balance of $24.6 million at
12
September 30, 2004 from a net balance of $42.2 million at September 30, 2003.
The changes in loan portfolio mix have contributed to the net interest income
after provision for loan losses increase of $2.9 million, or 40.3%4.4%, for the first nine monthsquarter
of 2004 compared to 2003.
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
2004 2003 (DECREASE)
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 16,117 $ 15,398 $ 719
Interest expense 5,838 7,243 (1,405)
------------------ ------------------ ------------------
Net interest income 10,279 8,155 2,124
------------------ ------------------ ------------------
Provision for loan losses 251 1,006 (755)
------------------ ------------------ ------------------
Net interest income after provision for loan losses 10,028 7,149 2,879
Non-interest income 8,029 8,199 (170)
Non-interest expenses 13,162 12,722 440
------------------ ------------------ ------------------
Income before provision for income taxes 4,895 2,626 2,269
Provision for income taxes 2,014 895 1,119
------------------ ------------------ ------------------
Net income $ 2,881 $ 1,731 $ 1,150
================== ================== ==================
Earnings per share - Basic $ .50 $ .30 $ .20
================== ================== ==================
Earnings per share - Diluted $ .49 $ .30 $ .19
================== ================== ==================
Comprehensive income $ 2,858 $ 1,740 $ 1,118
================== ================== ==================
Interest Income
Total interest income increased by $719,000, or 4.7%, for the first nine months
of 2004 compared to 2003. Investment interest income increased by $420,000, or
87.3%, and loan interest income increased by $299,000, or 2%, for the first nine
months of 2004 compared to 2003. The increase in investment income is the
result of an increase in the average securities portfolio balance from $12.7
million as of September 30, 2003 to $25.9 million as of September 30, 2004. The
increase in loan interest income was due to overall net loan growth primarily in
the manufactured housing, commercial real estate, land, construction, and
commercial loan portfolios that grew by 73.1%, 43.1%, 61.6%, 33.9% and 39.1%,
respectively, from September 30, 2003 to September 30, 2004. Manufactured
housing, commercial real estate, land and construction, SBA and commercial loans
had increases in interest income of $1.2 million, $453,000, $507,000, $352,000
and $461,000, respectively, for the first nine months of 2004 compared to 2003.
The pay down of securitized loans resulted in a decline of interest income of
$2.1 million from $4.9 million to $2.8 million for the first nine months of 2003
to 2004. Mortgage loan interest income also declined for the first nine months
of 2004 by 80%, or $469,000, compared to 2003, as the volume and time held in
warehouse both declined.
Interest Expense
The decline in interest expense for the nine months ended September 30, 2004
compared to 2003 was primarily due to the pay down in the securitized loan
portfolio and the correlated pay downs in the high-interest securitized bonds.
The bond interest expense for the nine months ended September 30, 2004 declined
by $1.7 million to $2 million from $3.7 million for 2003. This decline was
partially offset by a small increase in interest expense on deposits of $100,000
for the nine months ended September 30, 2004 compared to 2003 as well as an
increase in interest expense on other borrowings of $215,000. Total average
cost of funds for the first nine months of 2004 was 3.17% compared to 4.25% for
the first nine months of 2003.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 2004
decreased by $755,000 compared to the first nine months of 2003. The primary
decrease was in the securitized loan portfolio of $1.1 million due to the
continued pay downs in the portfolio.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains from sale of loans, servicing fees and other revenues not
derived from interest on earning assets. The $170,000, or 2%, decrease in
non-interest revenue for the nine months ended September 30, 2004 as2005 compared to the same period in 2003 is primarily due to the decline in mortgage loan volume
of originations and loan sales. Total non-interest income related to mortgage
lending declined $1.5 million from 2003 to 2004. Other income also declined by
$214,000 primarily due to gains on sales of other real estate owned in 2003 of
$157,000. SBA origination and loan sale
13
income increased by $1.2 million for the 2004 compared to 2003. Loan servicing
income for the nine months ended September 30, 2004 also increased by $317,000
for 2004 compared to 2003. Service charges on deposit accounts and other
revenues not derived from interest income decreased slightly.
Non-Interest Expenses
Total non-interest expenses increased 3.5%, or $440,000, for the nine months
ended September 30, 2004 compared to 2003. Professional services increased by
$212,000, or 45%, primarily due to increases in consulting and auditing fees.
The Company outsources certain administrative tasks. Other operating expenses
increased by $320,000, or 18%, for 2004 compared to 2003. This increase is primarily due to
ana net increase of $134,000 in advertising expenses and $268,000 in
other loan and collection fees. These increases were partially offset by a
decrease in the securitized loan servicing fees of $184,000 for the year to date
2004 compared to 2003. Salariessalaries and employee benefits increased slightly by
$73,000 for the first nine months of 2004 compared to 2003. The increase in
employee benefit costs was primarily due to increases in various insurance plans
of $115,000,$140,000, or 20.1%5%. Total occupancy and equipment expenses decreased by
$165,000 from 2003 to 2004. This decrease was due to decreases in premises and
equipment maintenance and depreciation costs.
INTEREST RATES AND DIFFERENTIALS
The following table illustrates average yields on our interest-earning assets
and average rates on our interest-bearing liabilities for the periods indicated.
These average yields and rates are derived by dividing interest income by the
average balances of interest-earning assets and by dividing interest expense by
the average balances of interest-bearing liabilities for the periods indicated.
Amounts outstanding are averages of daily balances during the applicable
periods.
THREE MONTHS
NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------MARCH 31,
------------------------------
2005 2004
2003 2004 2003
----------- ------------ ------------ -----------
INTEREST-EARNING ASSETS:-------------- --------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits in other financial institutions:
Average balance $ 8,1942,364 $ 1,677 $ 6,821 $ 1,8725,793
Interest income 49 8 118 3016 32
Average yield 2.38% 1.95% 2.31% 2.15%2.68% 2.21%
Federal funds sold:
Average balance $ 7,6993,346 $ 14,409 $ 8,667 $ 16,09610,935
Interest income 20 28 35 74 135
Average yield 1.45% .97 % 1.14% 1.12%2.40% 1.02%
Investment securities:
Average balance $ 27,45531,730 $ 13,852 $ 25,890 $ 12,71822,974
Interest income 274 63 709 316301 207
Average yield 3.97% 1.81% 3.66% 3.33%3.85% 3.60%
Gross loans, excluding securitized:
Average balance $ 254,404285,010 $ 204,950 $ 236,685 $ 193,186218,284
Interest income 4,520 3,500 12,365 9,9695,328 3,763
Average yield 7.07% 6.78% 6.98% 6.90%7.58% 6.89%
Securitized loans:
Average balance $ 27,93722,649 $ 48,597 $ 31,923 $ 56,21635,686
Interest income 840 1,414 2,851 4,948663 1,073
Average yield 11.96% 11.54% 11.93% 11.77%11.87% 12.03%
TOTAL INTEREST-EARNING ASSETS:
Average balance $ 325,689345,099 $ 283,485 $ 309,986 $ 280,088293,672
Interest income 5,711 5,020 16,117 15,3986,328 5,103
Average yield 6.98%7.44% 7.03% 6.95% 7.35%
1415
THREE MONTHS
NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------MARCH 31,
------------------------------
2005 2004
2003 2004 2003
----------- ------------- ----------- ------------
INTEREST-BEARING LIABILITIES:-------------- --------------
(DOLLARS IN THOUSANDS)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits:
Average balance $ 49,47293,495 $ 36,252 $ 41,828 $ 34,56234,446
Interest expense 200 89 426 272529 105
Average cost of funds 1.61% .98% 1.36% 1.05%2.29% 1.22%
Savings deposits:
Average balance $ 16,61515,560 $ 16,257 $ 18,490 $ 15,44719,769
Interest expense 61 55 180 16170 58
Average cost of funds 1.46% 1.34% 1.30% 1.40%1.82% 1.17%
Time certificates of deposit:
Average balance $ 147,121129,954 $ 131,209 $ 142,609 $ 131,291136,941
Interest expense 1,025 976 3,019 3,089910 991
Average cost of funds 2.77% 2.95% 2.83% 3.15%2.84% 2.89%
Bonds payable:
Average balance $ 17,76813,393 $ 36,460 $ 21,235 $ 42,31224,657
Interest expense 550 1,049 1,958 3,681370 737
Average cost of funds 12.31% 11.41% 12.32% 11.63%11.21% 11.96%
Other borrowings:
Average balance $ 27,19729,818 $ 9,285 $ 21,606 $ 4,20114,340
Interest expense 118 29 255 40181 48
Average cost of funds 1.73% 1.23% 1.58% 1.27%2.46% 1.34%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance $ 258,173282,220 $ 229,463 $ 245,768 $ 227,813230,153
Interest expense 1,954 2,198 5,838 7,2432,060 1,939
Average cost of funds 3.01% 3.80% 3.17% 4.25%2.96% 3.37%
NET INTEREST INCOME $ 3,7574,268 $ 2,822 $ 10,279 $ 8,1553,164
NET INTEREST SPREAD 3.96% 3.22% 3.77% 3.10%4.48% 3.58%
AVERAGE NET MARGIN 4.59% 3.95% 4.43% 3.89%5.02% 4.31%
Nonaccrual loans are included in the average balance of loans outstanding.
Net interest income is the difference between the interest and fees earned on
loans and investments and the interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest expense
depends on the volume or balance of earning assets compared to the volume or
balance of interest-bearing deposits and liabilities and the interest rate
earned on those interest-earning assets compared to the interest rate paid on
those interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate of
interest earned on assets and the average rate of interest that must be paid on
liabilities used to fund those assets. To maintain its net interest margin, the
Company must manage the relationship between interest earned and paid.
FINANCIAL CONDITION
Average assets for the ninethree months ended September 30, 2004March 31, 2005 were $325.7$359.9 million
compared to $298.9$310.2 million for the ninethree months ended September 30, 2003.March 31, 2004. Average
equity increased to $35.8$38.2 million for the ninethree months ended September
30, 2004March 31, 2005,
from $33.7$35.1 million for the same period in 2003. Average loans
increased to $268.6 million for the nine months ended September 30, 2004 from
$249.4 million for the nine months ended September 30, 2003. Average deposits
also increased for the nine months ended September 30, 2004 to $241.3 million
from $215.3 million for the nine months ended September 30, 2003.2004.
The book value per share increased to $6.44$6.69 at September 30, 2004March 31, 2005 from $6.02$6.56 at
December 31, 2003.
152004.
16
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS SEPTEMBER 30,MARCH 31, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2005 2004 2003 (DECREASE) (DECREASE)
----------------------- ------------- ----------- -----------
Cash and cash equivalents $ 26,72115,274 $ 22,05630,205 $ 4,665 21.2%(14,931) (49.4%)
Time deposits in other financial institutions 392 792 (400) (50.5%639 647 (8) (1.2%)
Investment securities available-for-sale 22,293 15,432 6,861 44.5%21,951 22,258 (307) (1.4%)
Investment securities held-to-maturity 3,029 5,036 (2,007) (39.9%)8,168 6,094 2,074 34.0%
I/O strips 3,004 3,548 (544) (15.3%2,459 2,715 (256) (9.4%)
Loans-Held for sale 36,968 42,038 (5,070) (12.1%42,608 45,988 (3,380) (7.3%)
Loans-Held for investment, net 216,946 166,874 50,072 30.0%246,440 222,153 24,287 10.9%
Securitized loans, net 24,626 35,362 (10,736) (30.4%20,284 22,365 (2,081) (9.3%)
Federal Home Loan Bank stock, at cost 1,189 - 1,189 -1,340 1,200 140 11.7%
Federal Reserve Bank stock, at cost 812 812 - -
Total Assets 347,240 304,250 42,990 14.1%370,978 365,203 5,775 1.6%
Total Deposits 262,960 224,855 38,105 16.9%274,659 284,568 (9,909) (3.5%)
Securities sold under agreements to repurchase 17,425 14,394 3,031 21.1%10,629 13,672 (3,043) (22.3%)
Federal Home Loan Bank advances 7,500 - 7,500 -28,500 10,500 18,000 171.4%
Bonds payable in connection with securitized loans 15,969 26,100 (10,131) (38.8%12,726 13,910 (1,184) (8.5%)
Total Stockholders' Equity 36,878 34,331 2,547 7.4%$ 38,420 $ 37,569 $ 851 2.3%
The securitized loans are paying offpaid down in the first quarter of 2005 at a current
annualized rate of 41.5%37.2%. The Company has effectively focused on replacing these
loans with growth in the manufactured housing, SBA, commercial and commercial real
estate loan portfolios.
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
SEPTEMBER 30,MARCH 31, DECEMBER 31, INCREASE INCREASE
2005 2004 2003 (DECREASE) (DECREASE)
------------------------ ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 41,58831,153 $ 42,41744,384 $ (829) (2.0%(13,231) (29.8%)
Interest-bearing deposits 62,172 38,115 24,057 63.1%91,429 92,395 (966) (1.0%)
Savings 15,592 15,559 33 -15,259 15,370 (111) (0.7%)
Time certificates of $100,000 or more 38,367 19,673 18,694 95.0%44,938 40,393 4,545 11.3%
Other time certificates 105,241 109,091 (3,850) (3.5%91,880 92,026 (146) (0.2%)
------------------------ ------------- ----------- -----------
Total deposits $ 262,960274,659 $ 224,855284,568 $ 38,105 16.9%
==============(9,909) (3.5%)
========== ============= =========== ===========
The increase in the Company's deposits is primarily due to an increase in money
market deposit accounts of $22.9 million, or 43.9%, which is the result of a new
preferred money market product. Certificates of deposit also increased by $14.8
million, or 11.5%.
ASSET QUALITYNONACCRUAL, PAST DUE AND ALLOWANCE FOR LOAN LOSSESRESTRUCTURED LOANS
A loan is considered impaired when, based on current information, it is probable
that the Company will be unable to collect the scheduled payments of principal
or interest under the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments. Loans that experience insignificant payment delays or payment
shortfalls generally are not classified as impaired. Management determines the
significance of payment delays or payment shortfalls on a case-by-case basis.
When determining the possibility of impairment, management considers the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed. For
collateral-dependent loans, the Company uses the fair value of collateral method
to measure impairment. All other loans, except for securitized loans, are
measured for impairment based on the present value of future cash flows.
Impairment is measured on a loan-by-loan basis for all loans in the portfolio
except for the securitized loans, which are evaluated for impairment on a
collective basis.
1617
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2005 2004
2003
--------------- -------------------------- ------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 5188 $ 23549
Impaired loans with specific valuation allowances 4,221 6,8433,714 3,926
Specific valuation allowances allocated to impaired loans (596) (640)
--------------- --------------(413) (425)
------------ ------------
Impaired loans, net $ 3,6763,389 $ 6,436
=============== ==============3,550
============ ============
Average investment in impaired loans $ 5,4503,884 $ 6,584
=============== ==============5,137
============ ============
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2005 2004
2003
--------------- -----------------------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 7,6558,461 $ 7,1748,350
SBA guaranteed portion of loans included above (4,743) (4,106)(5,867) (5,287)
--------------- -----------------------------
Nonaccrual loans, net $ 2,9122,594 $ 3,0683,063
=============== =============================
Troubled debt restructured loans, gross $ 126123 $ 193124
Loans 30 through 89 days past due with interest accruing 1,796 3,9071,379 1,804
Allowance for loan losses to gross loans 1.43% 1.84%1.30% 1.32%
As specified under governing documents,
CWB generally repurchases the guaranteed portion of SBA loans from investors on behalf of the SBA,
when those loans become past due 120 days. After the foreclosure and collection
process is complete, the SBA reimburses CWB for this principal balance.
Therefore, although these balances do not earn interest during this period, they
generally do not result in a loss of principal to CWB.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The most important factor in the
preservation of liquidity is maintaining public confidence that facilitates the
retention and growth of core deposits. Ultimately, public confidence is gained
through profitable operations, sound credit quality and a strong capital
position. The Company's liquidity management is viewed from both a long-term and
short-term perspective as well as from an asset and liability perspective.
Management monitors liquidity through regular reviews of maturity profiles,
funding sources and loan and deposit forecasts to minimize funding risk. The
Company has Asset/Liability Committeesasset/liability committees ("ALCO") at the Board and CWB management
levelslevel to review asset/liability management and liquidity issues. The Company
maintains strategic liquidity and contingency plans. The liquidity ratio of the
Company was 24.8% at September
30, 200422% and 26% at27% as of March 31, 2005 and December 31, 2003.2004,
respectively. The liquidity ratio consists of cash and due from banks, deposits
in other financial institutions, available for sale investments, federal funds
sold and loans held for sale, divided by total assets.
The Company has invested resources in the purchase of government-guaranteed
investment securities and obtained a financing arrangement, allowingrepurchase
agreements ("Repos") that allow it to pledge these securities as collateral for
short-term borrowings.borrowings in case of increased liquidity needs. At September 30, 2004March 31, 2005
and December 31, 2003,2004, the Company had outstanding repurchase borrowings of $17.4$10.6 million and $14.4$13.7 million,
respectively. Therespectively, of outstanding Repos, with interest rates range from 1.40%of 1.75% to 2.35%, all
of which mature within one year. This arrangement allows for
additionalby July 2005.
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Company
established a credit line under which the borrowing capacity is determined using
a percentage of its total assets, subject to collateralization from the pledging
option under requirements of FHLB's "Blanket Lien". Approval in March 2005, for
FHLB's "Blanket Lien" option represents an enhancement of the Bank's borrowing
capacity with FHLB, which was previously based on "delivery status". Advances
are collateralized in the aggregate by CWB's FHLB stock, deposits maintained
with FHLB, certain mortgages or deeds of trust and provides improved flexibilitysecurities of the U.S.
Government and its
18
agencies. The maximum amount of credit available to CWB will change in
managingaccordance with FHLB policies. As of March 31, 2005 and December 31, 2004, the
Company's liquidity.Company had $28.5 million and $10.5 million, respectively, of FHLB advances with
interest rates of 1.77% to 3.28% and terms of up to three years. As of March 31,
2005, $18.0 million of these advances have variable interest rates that adjust
to current LIBOR rate either monthly or quarterly. As of March 31, 2005, CWB had
approximately $42.0 million available for future borrowing.
The Company, through CWB,the bank, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window a portionup to 50% of what is pledged at
the Federal Reserve Bank. The facility is available on a short-term basis,
typically overnight. CWB qualifies for primary credit as it has been deemed to
be in sound financial condition. The rate on primary credit is currentlywill be 50 basis
points less than the secondary credit rate and will generally be granted on a
"no questions asked basis" at a rate that initially will be at 100 basis points
above the Federal Open Market Committee's (FOMC) target federal funds rate. As
the rate (currently at 1.75%).
During the first quarteris currently not attractive, it is unlikely it will be used as a
regular source of 2004, CWB became a member of the Federal Home Loan
Bank ("FHLB"). This membership allows for additional borrowing capacity and
providesfunding, but is noted as available as an additional source to utilize in managing the Company's liquidity.
Outstanding borrowings from the FHLB were $7.5 million at September 30, 2004.
The
17
interest rates range from 1.34% to 2.59%, $5.5 million of which matures in less
than one year. Currently, the unused borrowing capacity is $9.1 million.alternative funding
source.
CWB also maintains two unsecured federal funds purchased credit lines for a
total of $6$13.5 million each from other financial institutions, which it may
periodically use for short-term liquidity needs.
CWBC's routine funding requirements primarily consist of certain operating
expenses. Normally, CWBC obtains funding to meet its obligations from dividends
collected from its subsidiary and has the capability to issue debt securities.
Federal banking laws regulate the amount of dividends that may be paid by
banking subsidiaries without prior approval.
CAPITAL RESOURCES
The Company's equity capital was $36.9$38.4 million at September 30, 2004.March 31, 2005. Under the
Prompt Corrective Action provisions of the Federal Deposit Insurance Act
("FDICIA"), national banks are assigned regulatory capital classifications based
on the specified capital ratios of the institutions. The capital classifications
are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized".
To be considered "well capitalized", an institution must have a core capital
ratio of at least 5% and a total risk-based capital ratio of at least 10%.
Additionally, FDICIA imposed in 1994 a new Tier 1 risk-based capital ratio of at
least 6% to be considered "well capitalized". Tier I risk-based capital is,
defined as common stock and retained earnings net of goodwill and other
intangible assets.
To be categorized as "well capitalized" or "adequately capitalized", CWB must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
and values as set forth in the tables below:
Total
(dollars in thousands) Risk - Risk -Risk- Adjusted Total Tier 1 Tier 1
BasedTotal Tier 1 Weighted Average Capital Capital Leverage
(dollars in thousands) Capital Capital Assets Assets Ratio Ratio Ratio
-------- -------- --------- --------- -------- -------- ---------
September 30,March 31, 2005
CWBC (Consolidated) $ 42,089 $ 38,177 $ 312,724 $ 362,900 13.46% 12.21% 10.52%
CWB 39,489 35,580 312,498 359,410 12.64 11.39 9.90
December 31, 2004
CWBC (Consolidated) $ 40,120 $ 36,581 $ 282,553 $ 344,746 14.20% 12.95% 10.61%41,047 37,315 298,359 358,623 13.76% 12.51% 10.41%
CWB 37,589 34,051 282,044 341,018 13.33 12.07 9.99
December 31, 2003
CWBC (Consolidated) 37,150 34,096 242,730 305,666 15.31 14.05 11.15
CWB 34,695 31,648 242,170 301,024 14.33 13.07 10.5138,550 34,819 298,309 354,889 12.92 11.67 9.81
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
Banking is a complex, highly regulated industry. The banking regulatory scheme
serves not to protect investors, but is designed to maintain a safe and sound
banking system, to protect depositors and the FDIC insurance fund, and to
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress and the states have created several largely autonomous regulatory
agencies and enacted numerous laws that govern banks, bank holding companies and
the banking industry. Consequently, the Company's growth and earnings
performance, as well as that of CWB, may be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Board of Governors of
the Federal Reserve Bank ("FRB"), the FDIC, the Office of the Comptroller of the
Currency ("OCC") and the California Department of Financial Institutions
("DFI"). For a detailed discussion of the regulatory scheme governing the
Company and CWB, please see the discussion in the
19
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20032004
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Supervision and Regulation."
- --------------------------------------------------------------------------------
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's short and long-term success is subject to many factors that are
beyond its control. Shareholders and prospective investors in the Company should
carefully consider the following risk factors, in addition to other information
contained in this report. This Report on Form 10-Q contains forward-looking
statements. ActualThose forward-looking statements include statements regarding the
intent, belief or current expectations of the Company and its management. Any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results couldmay differ materially from
those anticipatedprojected in thesethe forward-looking statements as a result of numerousstatements. Such risks and uncertainties
including those described below.include:
INTEREST RATE RISK
The Company is exposed to different types of interest rate risks. These risks
include: lag, repricing, basis and prepayment risk.
18
- Lag Risk- lag risk results from the inherent timing difference
between the repricing of the Company's adjustable rate assets and
liabilities. For instance, certain loans tied to the prime rate index
may only reprice on a quarterly basis. However, at a community bank
such as CWB, when rates are rising, funding sources tend to reprice
more slowly than the loans. Therefore, for CWB, the effect of this
timing difference is generally favorable during a period of rising
interest rates and unfavorable during a period of declining interest
rates. This lag can produce some short-term volatility, particularly
in times of numerous prime rate changes.
The last prime rate change was
effected on September 22, 2004.
- Repricing Risk - repricing risk is caused by the mismatch in the
maturities / repricing periods between interest-earning assets and
interest-bearing liabilities. If CWB was perfectly matched, the net
interest margin would generally expand during rising rate periods and
generally contract
during falling rate periods. This is so since loans tend to reprice
more quickly than do funding sources. Typically, since CWB is somewhat
asset sensitive, this would also tend to expand the net interest
margin during times of interest rate increases. However,
to some extent, banks are also subject to the steepness of the yield
curve that is, the spread between rates at different maturity points.
- Basis Risk - item pricing tied to different indices may tend to
react differently, however, all CWB's variable products are priced off
the prime rate.
- Prepayment Risk - prepayment risk results from borrowers paying
down / off their loans prior to maturity. Prepayments on fixed-rate
products increase in falling interest rate environments and decrease
in rising interest rate environments. Since a majority of CWB's loan
originations are adjustable rate and set based on prime, and there is
little lag time on the reset, CWB does not experience significant
prepayments. However, CWB does have more prepayment risk on its
securitized and manufactured housing loans and its mortgage-backed
investment securities. Offsetting the prepayment risk on the
securitized loans are the related bonds payable, which were issued at
a fixed rate. When the bonds payable prepay, given the current
interest rate environment, this reduces CWB's interest expense as a
higher, fixed rate is, in effect, traded for a lower, variable rate
funding source.
MANAGEMENT OF INTEREST RATE RISK
To mitigate the impact of changes in market interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are
generally retained as they have similar repricing characteristics as our funding
sources. CWB sells mortgage products and a portion of its SBA loan originations.
While the Company has some interest rate exposure in excess of five years, it
has internal policy limits designed to minimize risk should interest rates rise.
Currently, the Company does not use derivative instruments to help manage risk,
but will consider such instruments in the future if the perceived need should
arise.
Loan sales-sales - The Company's ability to originate, purchase and sell loans is also
significantly impacted by changes in interest rates. Increases in interest rates
may also reduce the amount of loan and commitment fees received by CWB. A
significant decline in interest rates could also decrease the size of the CWB's
servicing portfolio and the related servicing income by increasing the level of
prepayments.
20
OPERATIONAL RISK
Operational risk represents the risk of loss resulting from the Company's
operations, including but not limited to, the risk of fraud by employees or
persons outside the Company, the execution of unauthorized transactions by
employees, transaction processing errors and breaches of internal control system
and compliance requirements. This risk of loss also includes the potential legal
actions that could arise as a result of an operational deficiency or as a result
of noncompliance with applicable regulatory standards, adverse business
decisions or their implementation and customer attrition due to potential
negative publicity.
Operational risk is inherent in all business activities and the management of
this risk is important to the achievement of the Company's objectives. In the
event of a breakdown in the internal control system, improper operation of
systems or improper employee actions, the Company could suffer financial loss,
face regulatory action and suffer damage to its reputation. The Company manages
operational risk through a risk management framework and its internal control
processes. The framework involves business units, corporate risk management
personnel and executive management. Under this framework, the business units
have direct and primary responsibility and accountability for identifying,
controlling and monitoring operational risk. Business unit managers maintain a
system of controls with the objective of providing proper transaction
authorization and execution, proper system operations, safeguarding of assets
from misuse or theft and ensuring the reliability of financial and other data.
Business unit managers ensure that the controls are appropriate and are
implemented as designed. Business continuation and disaster recovery planning is
also critical to effectively manage operational risks. The Company's internal
audit function (currently outsourced to a third party) validates the system of
internal controls through risk-based regular and ongoing audit procedures and
reports on the effectiveness of internal controls to executive management and
the Audit Committee of the Board.
While the Company believes that it has designed effective methods to minimize
operational risks, there is no absolute assurance that business disruption or
operational losses would not occur in the event of disaster.
DEPENDENCE ON REAL ESTATE
Approximately 47%45% of the loan portfolio of the Company is secured by various
forms of real estate, including residential and commercial real estate. A
decline in current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
loans. The real estate securing the Company's loan portfolio is concentrated in
California. If real estate values decline significantly, especially in
California, the change could harm the financial condition of the Company's
borrowers, the collateral for its loans will provide less security and the
Company would be more likely to suffer losses on defaulted loans.
ECONOMIC CONDITIONS
Economic activity continued to moderately expand during the third quarter of
2004. California banks reported generally solid loan demand and good credit
quality. Demand for business lending continued to improve in most areas.
Demand for mortgages to finance home purchases weakened. Across the country,
loan demand generally improved with an increase in commercial loan demand
offsetting some softening in consumer loan demand.
INCREASED COMPETITION
The financial services industry is extremely competitive. As new competitors
and new products enter the market, the increase in competition may reduce market
share or cause the prices the Company can charge for products and services to
fall.
19
CURTAILMENT OF GOVERNMENT GUARANTEED LOAN PROGRAMS COULD AFFECT A SEGMENT OF THE
COMPANY'S BUSINESS
A major segment of the Company's business consists of originating and selling
government guaranteed loans, in particular those guaranteed by the SBA. From
time to time, the government agencies that guarantee these loans reach their
internal limits and cease to guarantee loans. In addition, these agencies may
change their rules for loans or Congress may adopt legislation that would have
the effect of discontinuing or changing the programs. Non-governmental programs
could replace government programs for some borrowers, but the terms might not be
equally acceptable. Therefore, if these changes occur, the volume of loans to
small businessesbusiness, industrial and agricultural borrowers of the types that now
qualify for government guaranteed loans could decline. Also, the profitability
of these loans could decline. In early OctoberAs the funding and sale of 2004, the SBA announced major program
changes which include:guaranteed portion
of 7(a) loans is a decrease insignificant portion of the guarantee limit to $1 million, borrower
fees will revert to 2001 levels, and approval of an increase inCompany's business, the ongoing
lender fee paidlong-term
resolution to the SBA from .36% to .50%. The effects from changes to SBA
lending fromfunding for the new changes7(a) loan program may have an unfavorable
impact on the Company's future performance and results of operations areoperations.
ECONOMIC CONDITIONS
The economy continued to expand at a moderate pace in the first quarter of 2005.
The retail, housing and manufacturing sectors of the economy all showed strength
as did travel and tourism. Banks have reported stronger lending activity,
particularly in business lending, while the Federal Reserve has continued to
raise the Federal discount rate, now at 2.75%. These increases to the discount
rate tend to enhance net interest margin for asset-sensitive financial
institutions but may be tempered by a lending environment that remains very
competitive.
COMPETITION
The banking industry is highly competitive. The Company faces competition not
practicalonly from other financial institutions within the markets it serves, but
deregulation has resulted in competition from companies not typically associated
with financial services as well as companies accessed through the internet. As a
community bank, the Company attempts to quantify atcombat this time.increased competition by
developing and offering new products and increased quality of services.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the end of
the last fiscal year. For information about the Company's market risk, see the
information contained in the Company's Annual Report on Form 10-K under the
caption "Item 7A. Quantitative and Qualitative Disclosure about Market Risk,"
which is incorporated herein by this reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, with the
participation of the Company's management, carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer believe that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective in making known to them material information relating to the
Company (including its consolidated subsidiaries) required to be included in
this report.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objections is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There was no change in the Company's internal control over financial reporting,
known to the Chief Executive Officer or the Chief Financial Officer, that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------ -----------------------------------
The Company is involved in various litigation of a routine nature that is being
handled and defended in the ordinary course of the Company's business. In the
opinion of management, based in part on consultation with legal counsel, the
resolution of these litigation matters will not have a material impact on the
Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURTIES AND USE OF PROCEEDS
- ------ ----------------------------------------------------- ----------------------------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------ ----------------------------------------- -------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ --------------------------------------------------------- ---------------------------------------------------
Not applicable
20
ITEM 5. OTHER INFORMATION
- ------ ------------------------- -----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ -------------------------------------------- --------------------------------
(a) Exhibits.
31.1 Certification by the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
3222
32.1 Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
July 26, 2004:January 28, 2005: The Company furnished a Current Report on Form
8-K to report that, on July 23, 2004,January 27, 2005, the Company issued a press
release announcing its financial results for the quarter and year
ended June 30, 2004.
21December 31, 2004 and declared a dividend.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY WEST BANCSHARES
-------------------------
(Registrant)
Date: November 9, 2004May 10, 2005 /s/Charles G. Baltuskonis
-----------------------------------------------------------------
Charles G. Baltuskonis
Executive Vice President and
Chief Financial Officer
On Behalf of Registrant and as
Principal Financial and Accounting Officer
2224
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
======= ===================================================================================================
31.1 Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32*32.1* Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to
Rule 13a-13(b) and Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C.1350.
==================================================
* This certification is furnished to, but not filed, with the Commission.
This certification shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that the Registrant specifically incorporates
it by reference.
23
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