FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the Quarter Ended March 31, 2001 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)
(Registrant's telephone number, including area code) (805) 692-1862
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 and 12CFR16.3 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Number of shares of common stock of the registrant: 6,107,216 outstanding as of
March 31, 2001
This Form 10-Q contains 20 pages.
PART I - FINANCIAL INFORMATION
COMMUNITY WEST BANCSHARES
- -----------------------------------------------------------------------------------------------------------------
ASSETS March 31, 2001 December 31, 2000
(unaudited)
---------------- -------------------
Cash and due from banks $ 11,285,000 $ 14,958,000
Federal funds sold 26,933,000 21,526,000
---------------- -------------------
Cash and cash equivalents 38,218,000 36,484,000
Time deposits in other financial institutions 1,881,000 1,582,000
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 1,176,000 1,170,000
Investment securities held-to-maturity, at amortized cost; fair value of
$1,906,000 at March 31, 2001 and $1,905,000 at December 31, 2000 1,901,000 1,901,000
Investment securities available-for-sale, at fair value; amortized cost of
$3,481,000 at March 31, 2001 and $4,855,000 at December 31, 2000 3,469,000 4,820,000
Interest only strips, at fair value 8,504,000 7,541,000
Loans:
Held for sale, at lower of cost or fair value 50,697,000 37,195,000
Securitized loans, net of allowance for loan losses of $3,833,000
at March 31, 2001 and $4,042,000 at December 31, 2000 139,713,000 152,044,000
Held for investment, net of allowance for loan losses of $3,280,000
at March 31, 2001 and $2,704,000 at December 31, 2000 150,312,000 140,026,000
Servicing assets 2,624,000 2,605,000
Other real estate owned, net 184,000 227,000
Premises and equipment, net 3,868,000 4,068,000
Intangible assets, net 3,393,000 3,443,000
Accrued interest receiveable and other assets 13,688,000 12,149,000
---------------- -------------------
TOTAL ASSETS $ 419,628,000 $ 405,255,000
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 41,577,000 $ 28,057,000
Interest-bearing demand 34,002,000 34,638,000
Savings 21,522,000 24,679,000
Time certificates of $100,000 or more 87,077,000 76,642,000
Other time certificates 71,452,000 64,704,000
---------------- -------------------
Total deposits 255,630,000 228,720,000
Bonds payable in connection with securitized loans, net of issuance costs 118,393,000 130,755,000
Other borrowings 6,149,000 5,293,000
Accrued interest payable and other liabilities 2,906,000 4,453,000
---------------- -------------------
Total liabilities 383,078,000 369,221,000
---------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 6,107,216
shares issued and outstanding at March 31, 2001 and December 31,
2000 32,518,000 32,518,000
Retained earnings 4,039,000 3,537,000
Accumulated other comprehensive loss (7,000) (21,000)
---------------- -------------------
Total stockholders' equity 36,550,000 36,034,000
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 419,628,000 $ 405,255,000
================ ===================
The accompanying notes are an integral part of these consolidated
financial statements.
2
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months
Ended March 31
2001 2000
------------ -----------
INTEREST INCOME:
Loans, including fees $10,309,000 $13,360,000
Federal funds sold 454,000 351,000
Time deposits in other financial institutions 25,000 24,000
Investment securities 122,000 109,000
------------ -----------
Total interest income 10,910,000 13,844,000
------------ -----------
INTEREST EXPENSE:
Deposits 2,818,000 3,386,000
Bonds payable and other borrowings 2,885,000 3,255,000
------------ -----------
Total interest expense 5,703,000 6,641,000
------------ -----------
NET INTEREST INCOME 5,207,000 7,203,000
PROVISION FOR LOAN LOSSES 2,986,000 896,000
------------ -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,221,000 6,307,000
OTHER INCOME:
Gains from loan sales 1,757,000 1,017,000
Income from sale of investment in subsidiary - 2,080,000
Loan servicing income 754,000 642,000
Loan origination fees - sold or brokered loans 721,000 416,000
Service charges 187,000 111,000
Document processing fees 394,000 255,000
Other income 581,000 74,000
------------ -----------
Total other income 4,394,000 4,595,000
------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 4,376,000 3,576,000
Occupancy expense 876,000 795,000
Other operating expenses 485,000 405,000
Professional services 328,000 240,000
Loan servicing and collection 299,000 726,000
Advertising expense 132,000 132,000
Office supply expense 92,000 120,000
Data processing/ ATM processing 83,000 59,000
Postage and freight 81,000 67,000
Amortization of goodwill 71,000 110,000
------------ -----------
Total other expenses 6,823,000 6,230,000
------------ -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (208,000) 4,672,000
(BENEFIT) PROVISION FOR INCOME TAXES (710,000) 1,995,000
------------ -----------
NET INCOME $ 502,000 $ 2,677,000
============ ===========
EARNINGS PER SHARE
BASIC $ 0.08 $ 0.44
============ ===========
DILUTED $ 0.08 $ 0.44
============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 502,000 $ 2,677,000
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 2,986,000 896,000
Depreciation and amortization 370,000 277,000
Amortization of intangibles 71,000 91,000
Amortization of discount on available-for-sale securities 6,000 -
Write down of other real estate owned 8,000 -
Gain on sale of loans held for sale (1,757,000) (1,017,000)
Change in market valuation of interest only strips (17,000) (53,000)
Addition to interest only strips, net of amortization (946,000) (518,000)
Addition to servicing assets, net of amortization (19,000) (68,000)
Deferred income tax (benefit) (1,133,785) -
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (953,000) (36,000)
Accrued interest payable and other liabilities (1,292,000) (2,030,000)
------------- -------------
Net cash (used in) provided by operating activities (1,041,000) 219,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (1,000,000)
Paydown of principal on available-for-sale securities 369,000 270,000
Proceeds from early retirement of bonds 1,000,000 -
FHLB stock dividend (7,000) (6,000)
Net increase in time deposits in other financial institutions (299,000) (1,677,000)
Net (increase) decrease in loans and loans held for sale (12,839,000) 90,462,000
Proceeds from sale of other real estate owned 188,000 168,000
Purchase of premises and equipment (169,000) (484,000)
------------- -------------
Net cash (used in) provided by investing activities (11,757,000) 87,733,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, and savings accounts 9,727,000 8,790,000
Net increase (decrease) in time certificates 17,167,000 (44,483,000)
Net decrease in bonds payable (12,362,000) (8,048,000)
Cash dividends paid - (222,000)
------------- -------------
Net cash provided (used in) by financing activities 14,532,000 (43,963,000)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,734,000 43,989,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,484,000 36,103,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,218,000 $ 80,092,000
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,731,000 $ 9,101,000
Cash paid for income taxes $ - $ 996,000
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned $ 153,000 $ 87,000
See notes to consolidated financial statements.
4
COMMUNITY WEST BANCSHARES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and
financial condition for the interim period. The unaudited consolidated
financial statements include the accounts of Community West Bancshares
("the Company") and its wholly owned subsidiaries Goleta National Bank
("GNB") and Palomar Community Bank ("Palomar"). All adjustments and
reclassifications are of a normal and recurring nature. Results for the
period ending March 31, 2001, are not necessarily indicative of results
which may be expected for any other interim period or for the year as a
whole. Certain reclassifications have been made in the 2000 financial
information to conform to the presentation used in 2001.
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 2000 Annual Report on
Form 10-K.
2. Summary of Significant Accounting Policies.
Investment Securities - The Company classifies as held-to-maturity those
debt securities it has the positive intent and ability to hold to maturity.
Securities held-to-maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts. Securities to be held
for indefinite periods of time, but not necessarily to be held to maturity
or on a long term basis are classified as available-for-sale and carried at
fair value with unrealized gains or losses reported as a separate component
of accumulated other comprehensive income, net of any applicable income
taxes. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined on a specific identification
basis.
Investment Securities, Held for Trading - The Company originates certain
loans for the purpose of selling either a portion or all of the loan into
the secondary market. The guaranteed portion of SBA loans are typically
sold into the secondary market servicing retained. Second mortgages
("HLTV") loans are typically sold into the secondary market servicing
released. On some of these sales, the Company retains interest only ("I/O")
strips, which represent the present value of the right to the excess cash
flows generated by the serviced loans and is based on 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, (ii) trustee
fees, (iii) FHA insurance fees (if applicable), (iv) third-party credit
enhancement fees (if applicable), and (v) stipulated servicing fees. The
Company determines the present value of this anticipated cash flow stream
at the time each loan sale transaction closes, utilizing valuation
assumptions appropriate for each particular transaction. Loan sales are
discussed in detail in Note 3.
5
The I/O Strips are subject to significant prepayment risk, and accordingly
have an undetermined maturity date; and therefore cannot be classified as
held to maturity. The Company has chosen to classify these assets as
trading securities. Based on this classification, the Company is required
to mark these securities to fair value with the accompanying increases or
decreases in fair value being recorded as earnings or losses in the current
period. The determination of fair value is based on the same basis as when
valued at transaction close.
Loans Held for Sale - Loans that are originated and are intended for sale
in the secondary market, are carried at the lower of cost or fair value on
an aggregate basis.
3. Loan Sales
HLTV Loan Sales
---------------
As of December 31, 2000, the Company had $14 million in HLTV loans held for
sale. As of March 31, 2001, the Company had $13 million in HLTV loans held
for sale. The Company sells these loans in the secondary market on a
servicing released basis.
SBA Loan Sales
----------------
The Company sells the guaranteed portion of Small Business Administration
("SBA") loans into the secondary market in exchange for a combination of
cash premium, servicing assets, and I/O strips. The Company retains the
servicing rights. The present value of the interest only strips and
servicing assets was calculated assuming a discount rate of 1% to 2% above
the weighted average note rate and an 8% prepayment rate.
As of December 31, 2000, the Company had approximately $11 million in SBA
loans held for sale. As of March 31, 2001, the Company had approximately
$15 million in SBA loans held for sale.
Funding for SBA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans
under these programs is dependent on the continuation of such programs.
6
The balances of servicing assets and I/O strips are as follows:
March 31, 2001 December 31, 2000
---------------------- ----------------------
Servicing I/O Strip Servicing I/O Strip
Asset Asset
---------- ---------- ---------- ----------
Guaranteed Portion of SBA 2,155,000 8,504,000 2,091,000 7,541,000
FHA Title 1 469,000 - 514,000 -
---------- ---------- ---------- ----------
Total $2,624,000 $8,504,000 $2,605,000 $7,541,000
========== ========== ========== ==========
4. Comprehensive Income
Comprehensive income, which encompasses net income and the net change in
unrealized gains or losses on investment securities available-for-sale is
presented below:
For the three months ended
March 31, March 31,
2001 2000
---------- ----------
Net income 502,000 2,677,000
Other comprehensive income 14,000 7,000
---------- ----------
Comprehensive income 526,000 2,684,000
========== ==========
Other comprehensive income consists of unrealized gain (loss) on investment
securities available-for-sale, net of tax expense (benefit) of $10,000 and
($1,000) for the three months ended March 31, 2001 and 2000, respectively.
5. Commitments and Contingencies
In the ordinary course of business, the Company enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of March 31, 2001, the Company had
entered into commitments with certain customers amounting to $27.7 million
compared to $25.8 million at December 31, 2000. There were $717,000 of
letters of credit outstanding at March 31, 2001; there were $913,000 of
letters of credit outstanding at December 31, 2000.
6. 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:
For the three months ended
March 31, March 31,
2001 2000
---------- ----------
Basic weighted average shares outstanding 6,107,216 6,104,356
Dilutive effect of options 21,206 35,882
---------- ----------
Diluted weighted average shares outstanding 6,128,422 6,140,238
========== ==========
Net income $ 502,028 $2,677,000
Earnings per share - Basic $ 0.08 $ 0.44
Earnings per share - Diluted $ 0.08 $ 0.44
7
7. Segment Reporting
The following table denotes the financial performance of the Company's
operational segments for its periods ending March 31, 2001 and March 31,
2000.
The Company's management, while managing the overall company, looks at
individual areas considered significant to revenue and net income. These
significant areas, or segments, are: SBA Lending, Consumer Finance,
Mortgage Division, Goleta National Bank Branch Operations, and Palomar
Community Bank. For this discussion, the remaining divisions are considered
immaterial and are consolidated into "Other." The Other segment primarily
includes the administration areas, human resources, and data processing.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies.
The SBA Lending, Consumer Finance, and Mortgage Divisions from Goleta
National Bank are considered individual segments because of the different
loan products involved and the significance of the associated revenue. The
Goleta National Bank Branch operations, includes deposits and commercial
lending. Management analyzes Palomar separately from Goleta National Bank,
as they are two different subsidiaries under Community West Bancshares.
All of the Company's assets and operations are located within the United
States. The assets shown for each segment are estimates.
The following table sets forth various revenue and expense items that
management relies on in decision making.
Goleta
National
Three Months Ended Consumer Mortgage Bank Branch Palomar Consolidated
MARCH 31, 2001 SBA Lending Finance Division Operations Community Bank Other Total
----------- ------------ ----------- ----------- -------------- ------------ -------------
Interest Income $ 963,000 $ 5,535,000 $ 123,000 $ 2,771,000 $ 1,518,000 $ - $ 10,910,000
Interest Expense 487,000 2,801,000 62,000 1,403,000 627,000 323,000 5,703,000
----------- ------------ ----------- ----------- -------------- ------------ -------------
Net Interest Income 476,000 2,734,000 61,000 1,368,000 891,000 (323,000) 5,207,000
Provision For Loan Losses 302,000 1,733,000 39,000 867,000 45,000 - 2,986,000
Noninterest Income 1,773,000 799,000 1,041,000 141,000 65,000 575,000 4,394,000
Noninterest Expense 1,144,000 1,374,000 850,000 526,000 771,000 2,158,000 6,823,000
----------- ------------ ----------- ----------- -------------- ------------ -------------
Segment Profit before Tax $ 803,000 $ 426,000 $ 213,000 $ 116,000 $ 140,000 $(1,906,000) $ (208,000)
=========== ============ =========== =========== ============== ============ =============
MARCH 31, 2001
Segment Assets $55,923,000 $159,634,000 $48,822,000 $61,301,000 $ 81,297,000 $12,651,000 $419,628,000
=========== ============ =========== =========== ============== ============ =============
8
Goleta
Three Months Ended National
MARCH 31, 2000 Consumer Mortgage Bank Branch Palomar Consolidated
SBA Lending Finance Division Operations Community Bank Other Total
---------------- ------------ ------------- ------------ --------------- ---------- ------------
Interest Income $ 718,000 $ 5,697,000 $ 94,000 $ 5,942,000 $ 1,393,000 $ - $ 13,844,000
Interest Expense 348,000 2,761,000 46,000 2,880,000 607,000 - 6,641,000
---------------- ------------ ------------- ------------ --------------- ---------- ------------
Net Interest Income 370,000 2,936,000 48,000 3,062,000 786,000 - 7,203,000
Provision For Loan Losses 50,000 396,000 7,000 413,000 30,000 - 896,000
Noninterest Income 1,215,000 481,000 605,000 107,000 52,000 2,135,000 4,595,000
Noninterest Expense 910,000 1,860,000 675,000 1,523,000 634,000 628,000 6,230,000
---------------- ------------ ------------- ------------ --------------- ---------- ------------
Segment Profit before Tax $ 625,000 $ 1,161,000 $ (29,000) $ 1,233,000 $ 174,000 $1,507,000 $ 4,672,000
================ ============ ============= ============ =============== ========== ============
MARCH 31, 2000
Segment Assets $ 36,334,000 $246,288,000 $ 16,499,000 $100,981,000 $ 76,986,000 $4,956,000 $482,044,000
================ ============ ============= ============ =============== ========== ============
8. Debt Refinancing
Subsequent to December 31, 2000, the Company obtained a loan of $5,500,000
from Union Bank of California and used the proceeds to repay a loan from a
shareholder and a loan from Zion's First National Bank. The loan is for a
term of one year. Interest only payments are due monthly at a rate of Libor
plus 1.5%.
9. Capital
GNB is operating under formal written agreement with the OCC (the
"Agreement"). Under the terms of the Agreement, among other things, GNB is
required to maintain total capital at least equal to 12% of risk-weighted
assets, and Tier I capital at least equal to 7% of adjusted total assets.
The Agreement also places limitations on growth and payments of dividends
until GNB is in compliance with its approved capital plan. GNB is also
required to submit monthly progress reports to the OCC detailing actions
taken results of the actions, and a description of actions needed to
achieve full compliance with the Agreement. As of March 31, 2001 GNB had
total capital equal to 12.12% of risk-weighted assets. Under the terms of
the Agreement, GNB has also reduced its concentration of second mortgage
loans below 100% to 38% of capital as of March 31, 2001. Management
believes that it continues to comply with all material provisions of the
Agreement.
8. Subsequent Events
On April 17, 2001, the Company announced the settlement of a lawsuit
against their former auditors and financial consultants. The lawsuit was
initially filed October 10, 2000. Under the terms of the agreement, the
Company received a $7 million cash settlement. The net proceeds, which were
received in the second quarter of 2001, are expected to increase the
Company's book value by $.48 to $.50 per share.
On December 1, 2000, the Company signed a definitive agreement to sell
Palomar Community Bank to Centennial First Financial Services for $10.5
million. Under the terms of the agreement, Centennial will acquire all the
outstanding stock of Palomar in exchange for $10.5 million in cash. The
sale is expected to be completed in the third quarter of 2001.
9
COMMUNITY WEST BANCSHARES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight into
the consolidated results of operations and the financial condition of Community
West Bancshares, and subsidiaries (the "Company").
Statements concerning expectations for growth and market forecasts, and any
other guidance on future periods, constitute forward-looking statements which
are subject to a number of risks and uncertainties which might cause actual
results to differ materially from stated expectations. These factors include,
but are not limited to, the approval of regulatory agencies and shareholders,
the effect of interest rate changes, the expansion of the Company and its
subsidiaries, changes in SBA policy or funding, competition in the financial
services market for both deposits and loans, and general economic conditions.
RESULTS OF OPERATIONS
For the First Quarter Ended March 31,
- -------------------------------------------
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:
For the Three Months Ended
---------------------------- Amount of Percent of
March 31, March 31, Increase Increase
2001 2000 (Decrease) (Decrease)
-------------- ------------- ------------ ----------
Interest Income $ 10,910,000 $ 13,844,000 $(2,934,000) (21.2%)
Interest Expense 5,703,000 6,641,000 (938,000) (14.1%)
-------------- ------------- ------------
Net Interest Income 5,207,000 7,203,000 (1,996,000) (27.7%)
Provision for Loan Losses 2,986,000 896,000 2,090,000 233.3%
-------------- ------------- ------------
Net Interest Income after
Provision for Loan Losses 2,221,000 6,307,000 (4,086,000) (64.8%)
Other Income 4,394,000 4,595,000 (201,000) (4.4%)
Other Expense 6,823,000 6,230,000 593,000 9.5%
-------------- ------------- ------------
Income before Provision
for Income Taxes (208,000) 4,672,000 (4,880,000) (104.5%)
Provision for Income Taxes (710,000) 1,995,000 (2,705,000) (135.6%)
-------------- ------------- ------------
Net Income $ 502,000 $ 2,677,000 $(2,175,000) (81.2%)
============== ============= ============
Earnings Per Share - Basic $ 0.08 $ 0.44 $ (0.36) (81.8%)
============== ============= ============
Earnings Per Share -
Diluted $ 0.08 $ 0.44 $ (0.36) (81.8%)
============== ============= ============
Earnings Per Share -- Basic is calculated using weighted average number of
shares outstanding for the period. Earnings Per Share -- Diluted is calculated
using the weighted average number of shares outstanding for the period, plus the
net dilutive effect of outstanding stock options using the treasury stock
method.
10
The annualized return on average equity was 5.6% for the three months ended
March 31, 2001 compared to 30.6% for the same period in 2000. The decrease is
due to the one-time sale of interest in the subsidiary ePacific.com, which
occurred in 2000 and additional provision for loan losses in 2001.
The book value per share increased from $5.90 at December 31, 2000 to $5.98 at
March 31, 2001.
Average assets for the three months ended March 31, 2001, were $404,170,000
compared to $502,001,000 for the same period in 2000; average equity increased
to $36,049,000 for the three months ended March 31, 2001, from $34,972,000 for
the same period in 2000.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The annualized net interest margin was 5.8% for the three months ended March 31,
2001 compared to an annualized net interest margin of 6.3% for the three months
ended March 31, 2000. Earning assets averaged $363,151,000 for the three months
ended March 31, 2001. This represented a decrease of $79,988,000, or 18.1% from
the average earning assets of $443,139,000 for the three months ended March 31,
2000. This decrease is related to the reduction in loans held for sale and the
declining securitized loan balance from March 31, 2000 until March 31, 2001.
The net interest income figures above include income from the Company's
securities. The following table shows the interest and fees and corresponding
yields for loans only.
For the Three Months Ended
---------------------------------
March 31, 2001 March 31, 2000
---------------- --------------
Interest and Fees $ 10,309,000 $ 13,360,000
Average Loans 321,156,000 406,476,000
Annualized Yield 12.8% 13.1%
The decrease of 22.8% in interest and fees is due the planned asset and loan
reductions. Furthermore, the change in the annualized yield is due to the
repricing of the Company's variable rate product as a result of the generally
lower market interest rates.
CREDIT LOSS EXPERIENCE
As a natural corollary to the Company's lending activities, some loan losses are
experienced. The risk of loss varies with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. The degree of
perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Company attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.
11
The Company maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans, which the Company's
management determines require further monitoring and supervision, are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Company's Loan Committee.
The Company charges off that portion of any loan which management considers to
represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond any collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrower's industry. The principal amount of any loan
which is declared a loss is charged against the Company's allowance for loan
losses.
The Company's allowance for loan losses is designed to provide for loan losses
inherent within the loan portfolio, which have not been specifically identified.
The allowance for loan losses is established through charges to operating
expenses in the form of provisions for loan losses. Actual loan losses or
recoveries are charged or credited, directly to the allowance for loan losses.
The amount of the allowance is determined by management of the Company. Among
the factors considered in determining the allowance for loan losses are the
current financial condition of the Company's borrowers and the value of the
security, if any, for their loans. Current economic conditions and their impact
on various industries and individual borrowers are also taken into
consideration, as are the Company's historical loan loss experience and reports
of banking regulatory authorities. Because these estimates, factors and
evaluations are primarily judgmental, no assurance can be given as to whether or
not the Company will sustain loan losses substantially higher in relation to the
size of the allowance for loan losses or that subsequent evaluation of the loan
portfolio may not require substantial changes in such allowance.
The following table summarizes the Company's allowance for loan loss for the
dates indicated:
Amount of Percent of
March 31, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ -------------- ------------- ----------
BALANCES:
Gross loans $347,835,000 $ 336,011,000 $ 11,824,000 3.5%
Allowance for loan losses 7,113,000 6,746,000 367,000 5.4%
Nonaccrual loans 4,227,000 2,095,000 2,132,000 101.8%
RATIOS:
Allowance for loan losses to gross loans 2.0% 2.0%
Net loans charged off to allowance for loan losses 37.4% 82.7%
12
The provision for loan losses was $2,986,000 for the three months ended March
31, 2001. This is a increase of $2,090,000 or 233.3%, over the $896,000 for the
three months ended March 31, 2000, due in part to increased delinquencies in the
Company's SBA portfolio as well as to continue to provide for reserves for loans
securitized in 1998 and 1999. Gross loans outstanding increased 3.5% from
December 2000 to March 2001 due to new loan originations, in excess of principal
reductions, brought on by increased loan demand. For the three months ended
March 31, 2001, losses charged to the allowance for loan losses totaled
$2,856,000. This was offset by $195,000 recoveries; with the net effect being
$2,661,000 of loans were charged to the allowance.
Management of the Company reviews with the Board of Directors the adequacy of
the allowance for loan losses on a quarterly basis. The loan loss provision is
adjusted when specific items reflect a need for such an adjustment. Management
believes that there were no material loan losses during the last fiscal year
that has not been charged off. Management also believes that the Company has
adequately provided for all individual items in its portfolio, which may result
in a material loss to the Company.
OTHER INCOME
Other income includes service charges on deposit accounts, gains on sale of
loans, servicing fees, and other revenues not derived from interest on earning
assets. Other income for the three months ended March 31, 2001, decreased 4.4%
over the three months ended March 31, 2000. The decrease was due to the one-time
sale of investment in subsidiary. Another component of other income for 2001 is
a one-time fee paid to the Company, from a major vendor, resulting from the
short-term consumer product.
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Other expenses for the three months ended March
31, 2001, increased 9.5% over the three months ended March 31, 2000. The
increase in other expenses for the periods compared were primarily because of
commission and administrative expenses associated with the increase in the
volume of loans sold.
TAXES
Taxes includes a benefit for the resolution of tax contingencies related to the
sale of subsidiary.
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BALANCE SHEET ANALYSIS
Amount of Percent of
March 31, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ ------------- ------------- ----------
Cash and Cash Equivalents $ 38,218,000 $ 36,484,000 $ 1,734,000 4.8%
Investment Securities and
Time Deposits 8,427,000 9,473,000 (1,046,000) (11.0%)
Loans, held for sale 50,697,000 37,195,000 13,502,000 36.3%
Securitized Loans 139,713,000 152,044,000 (12,331,000) (8.1%)
----------- ----------- ------------
Loans, held for investment 150,312,000 140,026,000 10,286,000 7.3%
Total Assets 419,628,000 405,255,000 14,373,000 3.5%
Total Deposits 255,630,000 228,720,000 26,910,000 11.8%
Total Stockholders' Equity 36,550,000 36,034,000 516,000 1.4%
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash and federal funds sold.
INVESTMENT SECURITIES
The investment securities are made up of time deposits held in other financial
institutions, Federal Reserve Bank and Federal Home Loan Bank stock, U.S.
Treasury Notes and Bills, mortgage-backed securities and interest only strips.
The decrease of 11.0% is primarily from a reduction in time deposits and the
early retirement of bonds.
LOANS
The 36.3% increase in loans held for sale is due to the increase in the Small
Business Administration and Mortgage Lending portfolio.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
Amount of Percent of
March 31, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ ------------- ------------ ----------
Noninterest-Bearing Deposits $ 41,577,000 $ 28,057,000 $13,520,000 48.2%
Interest-Bearing Deposits 34,002,000 34,638,000 (636,000) (1.8%)
Savings 21,522,000 24,679,000 (3,157,000) (12.8%)
Time Certificates over $100,000 87,077,000 76,642,000 10,435,000 13.6%
Other Time Certificates 71,452,000 64,704,000 6,748,000 10.4%
------------ ------------- ------------
Total Deposits $255,630,000 $ 228,720,000 $26,910,000 11.8%
============ ============= ============
14
The changes in deposits is a result of the Company's active plan of replacing
short-term time deposits, used to fund loans available for sale, with
traditional deposit accounts.
LIQUIDITY
The Company has an asset and liability management program that aids management
in maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Company
at March 31, 2001 was 22.9% and at December 31, 2000, was 20.2%, based on liquid
assets (consisting of cash and due from banks, federal funds sold, deposits in
other financial institutions, investments, and loans held for sale) divided by
total assets. Management believes it maintains adequate liquidity levels.
At times when the Company has more funds than it needs for its reserve
requirements or short-term liquidity needs, the Company increases its securities
investments and sells federal funds. It is management's policy to maintain a
substantial portion of its portfolio of assets and liabilities on a short-term
or highly liquid basis in order to maintain rate flexibility and to meet loan
funding and liquidity needs. The Company has two federal funds lines of credit
with its correspondent banks totaling $8,000,000. In addition, the Company has a
line of credit with the Federal Home Loan Bank. This line had approximately
$20,000,000 available at March 31, 2001.
CAPITAL RESOURCES
The Company's equity capital was $36,550,000 at March 31, 2001. The primary
source of capital for the Company has been the retention of net income.
On December 28, 1998, the Board of Directors of the Company authorized a stock
buy-back plan. Under this, plan management is authorized to repurchase up to
$2,000,000 worth of the outstanding shares of its common stock. As of December
31, 2000 and March 31, 2001 management had repurchased 137,437 shares of common
stock at a cost of $1,236,000. No additional shares have been purchased in 2001.
Under the Prompt Corrective Action provisions of the Federal Deposit Insurance
Act, national banks are assigned regulatory capital classifications based on
specified capital ratios of the institutions. The capital classifications are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
The relevant capital ratios of the institution in this determination are (i) the
ratio of Tier I capital (primarily common stock and retained earnings less
goodwill and other intangible assets) to adjusted average total assets (the
"Tier I capital to average assets ratio"), (ii) the ratio of Tier I capital to
risk-weighted assets (the "Tier I risk-based capital ratio"), and (iii) the
ratio of qualifying total capital to risk-weighted assets (the "total risk-based
capital ratio"). To be considered "well capitalized," an institution must have
a Tier I capital to average assets ratio of at least 5%, a Tier I risk-based
15
capital ratio of at least 6%, and a total risk-based capital ratio of at least
10%. Generally, for an institution to be considered "adequately capitalized"
these three ratios must be at least 4%, 4% and 8%, respectively. An institution
will generally be considered (1) "undercapitalized" if any one of these three
ratios is less than 4%, 4% and 8%, respectively, and (2) "significantly
undercapitalized" if any one of these three ratios is less than 3%, 3% and 6%,
respectively. As of March 31, 2001, based on the most recent regulatory
notification, the Company was determined to be adequately capitalized.
16
The Company's actual capital amounts and ratios for the periods indicated are as
follows:
CAPITAL AMOUNTS AND To Be Well Capitalized
RATIOS AS OF DECEMBER 31, Under Prompt
2001: For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ------------ --------
Total Capital (to Risk Weighted assets)
CONSOLIDATED $39,587,267 11.24% $28,179,483 8.00% N/A N/A
Goleta National Bank $36,036,370 12.04% $23,952,799 8.00% $29,940,999 10.00%
Palomar Community Bank $ 7,460,737 14.14% $ 4,214,464 8.00% $ 5,268,081 10.00%
Tier I Capital (to Risk Weighted assets)
CONSOLIDATED $32,514,938 9.23% $14,089,741 4.00% N/A N/A
Goleta National Bank $32,261,663 10.78% $11,976,400 4.00% $17,964,599 6.00%
Palomar Community Bank $ 6,801,332 12.89% $ 2,107,232 4.00% $ 3,160,848 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $32,514,938 7.29% $16,166,797 4.00% N/A N/A
Goleta National Bank $32,261,663 9.65% $13,374,166 4.00% $16,717,708 5.00%
Palomar Community Bank $ 6,801,332 8.86% $ 3,069,640 4.00% $ 3,837,050 5.00%
CAPITAL AMOUNTS AND To Be Well Capitalized
RATIOS AS OF DECEMBER 31, Under Prompt
2000: For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ---------
Total Capital (to Risk Weighted Assets)
CONSOLIDATED $38,645,337 11.04% $28,013,787 8.00% N/A N/A
Goleta National Bank $35,573,765 12.12% $23,473,626 8.00% $29,342,032 10.00%
Palomar Community Bank $ 7,329,473 13.89% $ 4,223,104 8.00% $ 5,278,879 10.00%
Tier I Capital (to Risk WeightedAssets)
CONSOLIDATED $31,898,901 9.11% $14,006,894 4.00% N/A N/A
Goleta National Bank $31,876,965 10.86% $11,736,813 4.00% $17,605,219 6.00%
Palomar Community Bank $ 6,669,613 12.64% $ 2,111,552 4.00% $ 3,167,328 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $31,898,901 7.25% $17,597,784 4.00% N/A N/A
Goleta National Bank $31,876,965 8.87% $14,375,225 4.00% $17,969,031 5.00%
Palomar Community Bank $ 6,669,613 8.75% $ 3,048,776 4.00% $ 3,810,970 5.00%
17
COMMUNITY WEST BANCSHARES
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 end of December 31, 2000. For details, reference the
Company's annual filing on Form 10K.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities 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
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On May 1, 2001 Community West Bancshares (the
"Registrant"), filed an current report on
Form 8K announcing the settlement of a
lawsuit against their former certifying
accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMMUNITY WEST BANCSHARES
-------------------------
(Registrant)
-----------------------------
Date: May 15, 2001 Lynda Pullon Radke
Senior Vice President
Chief Financial Officer
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