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 June 30, 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: 5,935,583 outstanding as of
June 30, 2001
This Form 10-Q contains 22 pages.
PART I - FINANCIAL INFORMATION
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2001 December 31, 2000
(unaudited)
--------------- -------------------
Cash and due from banks $ 7,941,000 $ 14,958,000
Federal funds sold 21,347,000 21,526,000
--------------- -------------------
Cash and cash equivalents 29,288,000 36,484,000
Time deposits in other financial institutions 3,555,000 1,582,000
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 1,084,000 1,170,000
Investment securities held-to-maturity, at amortized cost; fair value of $402,000
at June 30, 2001 and $1,905,000 at December 31, 2000 400,000 1,901,000
Investment securities available-for-sale, at fair value; amortized cost of
3,481,000 at June 30, 2001 and $4,855,000 at December 31, 2000 3,240,000 4,820,000
Interest only strips, at fair value 9,292,000 7,541,000
Loans:
Held for sale, at lower of cost or fair value 43,701,000 37,195,000
Securitized loans, net of allowance for loan losses of $3,628,000
for June 30, 2001 and $4,042,000 for December 31, 2000 132,249,000 152,044,000
Held for investment, net of allowance for loan losses of $3,368,000
for June 30, 2001 and $2,704,000 December 31, 2000 165,410,000 140,026,000
Servicing assets 2,676,000 2,605,000
Other real estate owned, net 238,000 227,000
Premises and equipment, net 3,648,000 4,068,000
Intangible assets, net 3,342,000 3,443,000
Accrued interest receiveable and other assets 9,872,000 12,149,000
--------------- -------------------
TOTAL ASSETS $ 407,995,000 $ 405,255,000
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 40,921,000 $ 28,057,000
Interest-bearing demand 35,701,000 34,638,000
Savings 16,917,000 24,679,000
Time certificates of $100,000 or more 79,184,000 76,642,000
Other time certificates 74,520,000 64,704,000
--------------- -------------------
Total deposits 247,243,000 228,720,000
Bonds payable in connection with securitized loans, net of issuance costs 111,158,000 130,755,000
Other borrowings 5,500,000 5,293,000
Accrued interest payable and other liabilities 4,041,000 4,453,000
--------------- -------------------
Total liabilities 367,942,000 369,221,000
--------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,935,583 shares
issued and outstanding at June 30, 2001, and 6,107,216 issued and outstanding
at December 31, 2000 31,444,000 32,518,000
Retained earnings 8,595,000 3,537,000
Accumulated other comprehensive gain (loss) 14,000 (21,000)
--------------- -------------------
Total stockholders' equity 40,053,000 36,034,000
--------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 407,995,000 $ 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 For the Six Months
Ended June 30 Ended June 30
2001 2000 2001 2000
----------- ----------- ------------ -----------
INTEREST INCOME:
Loans, including fees $10,312,000 $10,292,000 $20,621,000 $23,652,000
Federal funds sold 277,000 415,000 731,000 766,000
Investment securities 90,000 114,000 212,000 223,000
Time deposits in other financial institutions 44,000 34,000 69,000 58,000
----------- ----------- ------------ -----------
Total interest income 10,723,000 10,855,000 21,633,000 24,699,000
----------- ----------- ------------ -----------
INTEREST EXPENSE:
Deposits 2,643,000 2,940,000 5,461,000 6,462,000
Bonds payable and other borrowings 2,699,000 3,002,000 5,584,000 6,121,000
----------- ----------- ------------ -----------
Total interest expense 5,342,000 5,942,000 11,045,000 12,583,000
----------- ----------- ------------ -----------
NET INTEREST INCOME 5,381,000 4,913,000 10,588,000 12,116,000
----------- ----------- ------------ -----------
PROVISION FOR LOAN LOSSES 2,017,000 628,000 5,003,000 1,524,000
----------- ----------- ------------ -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,364,000 4,285,000 5,585,000 10,592,000
----------- ----------- ------------ -----------
OTHER INCOME:
Gains from loan sales 1,661,000 2,768,000 3,418,000 3,785,000
Income from sale of investment in subsidiary - - - 2,080,000
Loan servicing income 1,196,000 1,080,000 1,950,000 1,722,000
Loan origination fees - sold or brokered loans 852,000 529,000 1,573,000 945,000
Document processing fees 529,000 263,000 923,000 519,000
Service charges 144,000 138,000 331,000 249,000
Other income 76,000 145,000 657,000 219,000
Proceeds from legal settlement 7,000,000 - 7,000,000 -
----------- ----------- ------------ -----------
Total other income 11,458,000 4,923,000 15,852,000 9,519,000
----------- ----------- ------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 4,419,000 4,082,000 8,795,000 7,658,000
Occupancy expense 957,000 932,000 1,833,000 1,727,000
Other operating expenses 819,000 675,000 1,304,000 1,080,000
Professional services 266,000 325,000 594,000 565,000
Loan servicing and collection 284,000 588,000 583,000 1,314,000
Advertising expense 180,000 218,000 312,000 350,000
Data processing/ ATM processing 123,000 75,000 206,000 134,000
Postage and freight 100,000 79,000 181,000 146,000
Office supply expense 92,000 98,000 184,000 218,000
Amortization of intangible assets 71,000 87,000 142,000 197,000
Professional expenses associated with legal settlement 2,392,000 - 2,392,000 -
----------- ----------- ------------ -----------
Total other expenses 9,703,000 7,159,000 16,526,000 13,389,000
----------- ----------- ------------ -----------
INCOME BEFORE PROVISION (BENEFIT FROM)
FOR INCOME TAXES 5,119,000 2,049,000 4,911,000 6,722,000
----------- ----------- ------------ -----------
PROVISION (BENEFIT FROM) FOR INCOME TAXES 563,000 912,000 (147,000) 2,908,000
----------- ----------- ------------ -----------
NET INCOME $ 4,556,000 $ 1,137,000 $ 5,058,000 $ 3,814,000
=========== =========== ============ ===========
EARNINGS PER SHARE
BASIC $ 0.75 $ 0.18 $ 0.83 $ 0.62
=========== =========== ============ ===========
DILUTED $ 0.75 $ 0.18 $ 0.83 $ 0.62
=========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,058,000 $ 3,814,000
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 5,003,000 1,524,000
Depreciation and amortization 696,000 657,000
Amortization of intangibles 142,000 197,000
Provision of other real estate owned 8,000 63,000
Gain on sale of loans held for sale (3,418,000) (3,785,000)
Change in market valuation of interest only strips 92,000 -
Additions to interest only strips, net of amortization (1,843,000) (1,888,000)
Additions to servicing assets, net of amortization and market valuation (71,000) (68,000)
Deferred income tax (benefit) (1,346,000) -
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 3,598,000 236,000
Accrued interest payable and other liabilities (420,000) (722,000)
------------- --------------
Net cash provided by operating activities 7,499,000 28,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (992,000)
Paydown of principal on available-for-sale securities 630,000 527,000
Proceeds from early retirement of investment securities available-for-sale 1,000,000 -
Maturity of held-to-maturity security 1,500,000 -
FHLB stock dividend (13,000) (17,000)
Redemption of FHLB stock 99,000 110,000
Net increase in time deposits in other financial institutions (1,973,000) (2,471,000)
Net (increase) decrease in loans and loans held for sale (14,006,000) 106,543,000
Proceeds from sale of other real estate owned 307,000 345,000
Purchase of premises and equipment (275,000) (1,225,000)
------------- --------------
Net cash (used in) provided by investing activities (12,731,000) 102,820,000
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, and savings accounts 6,165,000 3,959,000
Net increase (decrease) in time certificates 12,358,000 (95,608,000)
Repayment of bonds payable (19,597,000) (15,525,000)
Proceeds from issuance of other borrowings 5,500,000 -
Repayment of other borrowings (5,293,000) -
Payment of accrued director dividends (23,000) -
Exercise of stock options 30,000 13,000
Repurchase of outstanding shares (1,104,000) -
Cash dividends paid - (222,000)
------------- --------------
Net cash (used in) by financing activities (1,964,000) (107,383,000)
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,196,000) (4,535,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,484,000 36,103,000
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,288,000 $ 31,568,000
============= ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 10,908,000 $ 12,565,000
Cash paid for income taxes $ - $ 263,800
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned $ 326,000 $ 87,000
The accompanying notes are an integral part of these 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 June 30, 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 amortized cost. Debt
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.
Loan Sales and Servicing - The Company originates certain loans for the
purpose of selling either a portion or all of the loan into the secondary
market. Such loans are carried at the lower of cost or fair market value on
an aggregate basis. 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 also 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, and (ii) contractual
servicing fees. The Company determines the present value of this estimated
cash flow stream at the time each loan sale transaction closes, utilizing
valuation assumptions, as to discount rate and prepayment rate, appropriate
for each particular transaction. Loan sales are discussed in detail in Note
3.
5
The I/O Strips are accounted for as investments in debt securities
classified as trading securities. Accordingly, the Company marks these
securities to fair market value with the resulting increases or decreases
in fair market value being recorded in operations in the current period.
3. Loan Sales
HLTV Loan Sales
-----------------
The Company had $18 million and $16 million in HLTV loans held for sale as
of December 31, 2000 and June 30, 2001, respectively. The Company sells
these loans in the secondary market on a servicing released basis.
Mortgage and Consumer Loan Sales
------------------------------------
The Company originates and then sells wholesale mortgage loans both first
an second TD's. As of December 31, 2000 and June 30, 2001, the Company had
$5 and $10 million wholesale mortgage loans held for sale, respectively.
The Company also originates sub-prime mortgage loans for sale into the
secondary market. As of December 31, 2000, the Company had $2 million held
for sale. As of June 30, 2001, $5 million in sub-prime mortgage loans were
held for sale. Both products are sold 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.
The SBA program stipulates that the Company retain 5% of the un-guaranteed
portion of the loan balance. The remaining percentage can be sold to a
third party from time to time for a cash premium.
As of December 31, 2001, the Company had approximately $11 million in SBA
loans held for sale. As of June 30, 2001, the Company had approximately $12
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:
---------------------- ----------------------
June 30, 2001 December 31, 2000
---------------------- ----------------------
Servicing I/O Strip Servicing I/O Strip
Asset Asset
----------- --------- ---------- ----------
Guaranteed Portion of SBA $2,269,000 $9,292,000 $2,091,000 $7,541,000
FHA Title 1 407,000 - 514,000 -
----------- --------- ---------- ----------
Total $2,676,000 $9,292,000 $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 six months ended
June 30, June 30,
2001 2000
---------- ----------
Net income $5,058,000 $3,814,000
Other comprehensive income 35,000 10,000
---------- ----------
Comprehensive income $5,093,000 $3,824,000
========== ==========
Other comprehensive income consists of unrealized gain (loss) on investment
securities available-for-sale, net of tax effect of $26,000 and $4,000, for
the six months ended June 30, 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 June 30, 2001, the Company had
entered into commitments with certain customers amounting to $27.9 million
compared to $25.8 million at December 31, 2001. There were $818,000 of
letters of credit outstanding at June 30, 2001; there were $913,000 of
letters of credit outstanding at December 31, 2001.
7
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
June 30, June 30,
2001 2000
---------- ----------
Basic weighted average shares outstanding 6,094,710 6,104,356
Dilutive effect of options 64,231 41,645
---------- ----------
Diluted weighted average shares outstanding 6,158,941 6,146,001
========== ==========
Net income $4,556,000 $1,137,000
Earnings per share - Basic $ 0.75 $ 0.18
Earnings per share - Diluted $ 0.75 $ 0.18
For the six months ended
June 30, June 30,
2001 2000
---------- ----------
Basic weighted average shares outstanding 6,100,913 6,104,356
Dilutive effect of options 12,784 41,645
---------- ----------
Diluted weighted average shares outstanding 6,113,697 6,146,001
========== ==========
Net income $5,058,000 $3,814,000
Earnings per share - Basic $ 0.83 $ 0.62
Earnings per share - Diluted $ 0.83 $ 0.62
7. Segment Reporting
The following table denotes the financial performance of the Company's
operational segments for its periods ending June 30, 2001 and June 30,
2000.
Company management, while managing the overall company, reviews individual
areas considered "significant" to revenue and net income. These significant
areas, or segments, are: SBA Lending, Consumer Financing, the Mortgage
Division, Short-Term Consumer Lending, Goleta National Bank Branch
Operations, and Palomar Community Bank. For this discussion, the remaining
divisions are considered immaterial and are consolidated into "Other."
Other segment includes the holding company administration areas, human
resources, and technologies support. The accounting policies of the
individual segments are the same as those described in the summary of
significant accounting policies.
8
The SBA Lending, Consumer Finance, Mortgage Divisions and Short-Term
Consumer Lending 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 following table sets forth various revenue and expense items that
management relies on to make decisions.
Short-Term Goleta National
Six Months Ended Consumer Mortgage Consumer Bank Branch Palomar
JUNE 30, 2001 SBA Lending Finance Division Lending Operations Community Bank
------------ ----------------- ------------------- ----------- ---------------- ---------------
Interest Income $ 1,996,000 $ 10,696,000 $ 323,000 $ 1,695,000 $ 3,919,000 $ 2,992,000
Interest Expense 500,000 7,843,000 81,000 47,000 982,000 1,171,000
------------ ----------------- ------------------- ----------- ---------------- ---------------
Net Interest Income 1,496,000 2,853,000 242,000 1,648,000 2,937,000 1,821,000
Provision For Loan Losses 1,252,000 1,604,000 - 784,000 1,248,000 115,000
Noninterest Income 3,628,000 1,839,000 2,358,000 530,000 280,000 139,000
Noninterest Expense 2,258,000 2,737,000 1,934,000 257,000 1,101,000 1,526,000
------------ ----------------- ------------------- ----------- ---------------- ---------------
Segment Profit before Tax $ 1,614,000 $ 351,000 $ 666,000 $ 1,137,000 $ 868,000 $ 319,000
============ ================= =================== =========== ================ ===============
JUNE 30, 2001
Segment Assets $ 57,992,000 $ 154,636,000 $ 47,872,000 $ 280,000 $ 57,774,000 $ 79,359,000
============ ================= =================== =========== ================ ===============
Short-Term Goleta National
Six Months Ended Consumer Mortgage Consumer Bank Branch Palomar
JUNE 30, 2001 SBA Lending Finance Division Lending Operations Community Bank
------------ ----------------- ------------------- ----------- ---------------- ---------------
Interest Income $ 1,968,000 $ 16,853,000 $ 111,000 $ - $ 2,968,000 $ 2,799,000
Interest Expense 981,000 8,399,000 55,000 - 1,603,000 1,242,000
Net Interest Income 987,000 8,454,000 56,000 - 1,365,000 1,557,000
------------ ----------------- ------------------- ----------- ---------------- ---------------
Provision For Loan Losses 181,000 1,096,000 - - 187,000 60,000
Noninterest Income 3,396,000 1,947,000 1,217,000 - 444,000 216,000
Noninterest Expense 2,181,000 3,524,000 1,364,000 - 1,359,000 1,356,000
Segment Profit before Tax $ 2,021,000 $ 5,781,000 $ (91,000) $ - $ 263,000 $ 357,000
============ ================= =================== =========== ================ ===============
JUNE 30, 2000
Segment Assets $ 56,305,000 $ 206,602,000 $ 17,723,000 $ - $ 58,039,000 $ 75,104,000
============ ================= =================== =========== ================ ===============
Six Months Ended Consolidated
JUNE 30, 2001 Other Total
------------ -------------
Interest Income $ 12,000 $ 21,633,000
Interest Expense 421,000 11,045,000
------------ -------------
Net Interest Income (409,000) 10,588,000
Provision For Loan Losses - 5,003,000
Noninterest Income 7,078,000 13,460,000
Noninterest Expense 6,713,000 14,134,000
------------ -------------
Segment Profit before Tax $ (44,000) $ 4,911,000
============ =============
JUNE 30, 2001
Segment Assets $10,082,000 $ 407,995,000
============ =============
Six Months Ended Consolidated
-------------
JUNE 30, 2000 Other Total
------------ -------------
Interest Income $ - $ 24,699,000
Interest Expense 303,000 12,583,000
------------ -------------
Net Interest Income (303,000) 12,116,000
Provision For Loan Losses - 1,524,000
Noninterest Income 2,299,000 9,519,000
Noninterest Expense 3,605,000 13,389,000
------------ -------------
Segment Profit before Tax $(1,609,000) $ 6,722,000
============ =============
JUNE 30, 2000
Segment Assets $ 5,387,000 $ 419,160,000
============ =============
9
9. Debt Refinancing
The Company obtained a loan of $5,500,000 from Union Bank of California on
March 21, 2001, 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%.
10. 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 1 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 those actions, and a description of actions needed to
achieve full compliance with the Agreement. As of June 30, 2001 GNB had
total capital equal to 12.6% of risk-weighted assets. Under the terms of
the Agreement, GNB has also reduced its concentration of second mortgage
loans below 100% of capital, to 39.9% of capital as of June 30, 2001.
Management believes that it continues to comply with all material
provisions of the Agreement.
11. Stock Buyback Plan
On May 24, 2001, the Board of Directors announced a resumption of the
Company's stock buyback plan. Subsequent to that announcement, the Company
repurchased 184,833 shares in the second quarter of 2001, at a weighted
average price of $6.00 per share, bringing the total repurchased shares to
322,270.
12. Sale of Palomar Community Bank
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. At the
time of closing, the Company expects to record a $1 million charge for tax
liability related to the sale. The sale is expected to close in the third
quarter of 2001.
10
13. Settlement of Lawsuit
In October 2000, the Company filed a lawsuit against its former accountants
alleging deficient consulting and audit services that lead to the
restatement of the Company's 1998 financial statements and ultimately to an
impairment of capital. In April of 2001, the Company settled the lawsuit
and received $7 million in cash. The proceeds are reflected as other income
for financial reporting purposes. The Company also incurred $2,392,000 in
legal and professional fees in connection with the settlement which are
included as other expenses.
14. New Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has finalized new
accounting standards covering business combinations, goodwill and
intangible assets. These new rules published in July 2001, consist of
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". In
conjunction with these new accounting standards, the FASB has issued
"Transition Provision for New Business Combination Accounting Rules"
("Provision") that require the Company to cease amortization of goodwill
and adopt the new impairment approach as of January 1, 2001. Management
does not expect SFAS No.'s 141 and 142 to have a material effect on the
Company's financial position or results of operations.
11
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 Three - Months Ending June 30,2001
- -------------------------------------------------
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
June 30, June 30, Increase Increase
2001 2000 (Decrease) (Decrease)
----------- ----------- ------------ ------------
Interest Income $10,723,000 10,855,000 $ (132,000) (1.2%)
Interest Expense 5,342,000 5,942,000 (600,000) (10.1%)
----------- ----------- ------------
Net Interest Income 5,381,000 4,913,000 468,000 9.5%
Provision for Loan Losses 2,017,000 628,000 1,389,000 221.2%
----------- ----------- ------------
Net Interest Income after
Provision for Loan Losses 3,364,000 4,285,000 (921,000) (21.5%)
Other Income 11,458,000 4,923,000 6,535,000 132.7%
Other Expense 9,703,000 7,159,000 2,544,000 35.5%
----------- ----------- ------------
Income before Provision
for (Benefit from) Income Taxes 5,119,000 2,049,000 3,070,000 149.8%
Provision for (Benefit from) Income Taxes 563,000 912,000 (349,000) (38.3%)
----------- ----------- ------------
Net Income $ 4,556,000 $ 1,137,000 $ 3,419,000 300.7%
=========== =========== ============
Earnings Per Share - Basic $ 0.75 $ 0.18 $ 0.57 316.7%
=========== =========== ============
Earnings Per Share - Diluted $ 0.75 $ 0.18 $ 0.57 316.7%
=========== =========== ============
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.
12
The annualized return on average equity was 49.7% for the three months ended
June 30, 2001 compared to 12.7% for the same period in 2000. The increase is
primarily due to the net proceeds received from the settlement of a lawsuit in
the second quarter of 2001.
Average assets for the three months ended June 30, 2001, were $416,283,000
compared to $432,303,000 for the same period in 2000; average equity increased
to $36,667,000 for the three months ended June 30, 2001, from $35,978,000 for
the same period in 2000.
For the Six - Months Ending June 30,2001
- -----------------------------------------------
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 Six Months Ended
------------------------- Amount of Percent of
June 30, June 30, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ ----------- ------------ -----------
Interest Income $21,633,000 $24,699,000 $(3,066,000) (12.4%)
Interest Expense 11,045,000 12,583,000 (1,538,000) (12.2%)
------------ ----------- ------------
Net Interest Income 10,588,000 12,116,000 (1,528,000) (12.6%)
Provision for Loan Losses 5,003,000 1,524,000 3,479,000 228.3%
------------ ----------- ------------
Net Interest Income after
Provision for Loan Losses 5,585,000 10,592,000 (5,007,000) (47.3%)
Other Income 15,852,000 9,519,000 6,333,000 66.5%
Other Expense 16,526,000 13,389,000 3,137,000 23.4%
------------ ----------- ------------
Income before (Benefit from)
Provision for Income Taxes 4,911,000 6,722,000 (1,811,000) (26.9%)
(Benefit from) Provision for
Income Taxes (147,000) 2,908,000 (3,055,000) (105.1%)
Net Income $ 5,058,000 $ 3,814,000 $ 1,244,000 32.6%
============ =========== ============
Earnings Per Share - Basic $ 0.83 $ 0.62 $ 0.21 33.9%
============ =========== ============
Earnings Per Share - Diluted $ 0.83 $ 0.62 $ 0.21 33.9%
============ =========== ============
The annualized return on average equity was 27.8% for the six months ended June
30, 2001 compared to 21.3% for the same period in 2000. The increase is
primarily due to the proceeds received from the settlement of a lawsuit during
the second quarter 2001.
Average assets for the six months ended June 30, 2001, were $ 418,408,000
compared to $459,175,000 for the same period in 2000; average equity increased
to $36,359,000 for the six months ended June 30, 2001, from $35,782,000 for the
same period in 2000.
The book value per share increased from $5.90 at December 31, 2000 to $6.75 at
June 30, 2001.
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.
13
The annualized net interest margin was 5.9% for the three months ended June 30,
2001 compared to an annualized net interest margin of 4.7% for the three months
ended June 30, 2000. The annualized net interest margin was 5.6% for the six
months ended June 30, 2001 compared to an annualized net interest margin of 5.2%
for the six months ended June 30, 2000. Earning assets averaged $378,951,000
for the six months ended June 30, 2001. This represented a increase of
$46,224,000 or 13.9% from the average earning assets of $332,727,000 for the six
months ended June 30, 2000. This increase is related to the increase in SBA
loans, mortgage and consumer loans.
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 For the Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------- --------------- --------------- ---------------
Interest and Fees $ 10,312,000 $ 10,292,000 $ 20,621,000 $ 23,652,000
Average Loans 344,000,000 395,422,000 340,662,000 396,773,000
Annualized Yield 12.0% 10.4% 12.1% 11.8%
The change in the annualized yield is due to the repricing of the Company's
variable rate product as a result of 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.
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.
14
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
June 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------- -------------- ------------ -----------
BALANCES:
Gross loans $348,356,000 $ 336,011,000 $12,345,000 3.7%
Allowance for loan losses 6,996,000 6,746,000 250,000 3.7%
Nonaccrual loans 2,652,000 2,095,000 557,000 26.6%
RATIOS:
Allowance for loan losses to gross loans 2.0% 2.0% 0.00%
Net loans charged off to allowance for loan
losses 68.0% 82.7% (14.7%)
The provision for loan losses was $5,003,000 for the six months ended June 30,
2001. This is a increase of $3,479,000 or 228.3%, over the $1,524,000 for the
six months ended June 30, 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 3.7% from
December 2000 to June 2001 due to new loan originations, in excess of principal
reductions, brought on by increased loan demand. For the six months ended June
30, 2001, losses charged to the allowance for loan losses totaled $5,168,000.
This was offset by $414,000 recoveries; with the net effect being $4,754,000 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.
15
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 six months ended June 30, 2001,
increased 66.5% over the six months ended June 30, 2000. The increase is
primarily due to the proceeds from a legal settlement.
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and
equipment, and other operating expenses. Other expenses for the six months
ended June 30, 2001, increased 23.4% over the six months ended June 30,
2000. The increase for the most part are legal and professional expenses
associated with the legal settlement.
TAXES
Taxes includes a benefit for the resolution of tax contingencies related to the
sale of subsidiary.
BALANCE SHEET ANALYSIS
Amount of Percent of
June 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ ------------- ------------- -----------
Cash and Cash Equivalents $ 29,288,000 $ 36,484,000 $ (7,196,000) (19.7%)
Investment Securities and
Time Deposits 8,279,000 9,473,000 (1,194,000) (12.6%)
Loans, held for sale 43,701,000 37,195,000 6,506,000 17.5%
Securitized Loans 132,249,000 152,044,000 (19,795,000) (13.0%)
Loans, held for investment 165,410,000 140,026,000 25,384,000 18.1%
Total Assets 407,995,000 405,255,000 2,740,000 0.7%
------------ ------------- -------------
Total Deposits 247,243,000 228,720,000 18,523,000 8.1%
Total Stockholders' Equity $ 40,053,000 $ 36,034,000 $ 4,019,000 11.2%
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 12.6% is primarily from an early retirement of bonds, the
maturity of other investment securities.
16
LOANS
The 17.5% increase in loans held for sale is due to an increase in the Small
Business Administration and Mortgage Lending portfolios.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
Amount of Percent of
June 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
------------ ------------- ------------ -----------
Noninterest-Bearing Deposits $ 40,921,000 $ 28,057,000 $12,864,000 45.8%
Interest-Bearing Deposits 35,701,000 34,638,000 1,063,000 3.1%
Savings 16,917,000 24,679,000 (7,762,000) (31.5%)
Time Certificates over $100,000 79,184,000 76,642,000 2,542,000 3.3%
Other Time Certificates 74,520,000 64,704,000 9,816,000 15.2%
------------ ------------- ------------
Total Deposits $247,243,000 $ 228,720,000 $18,523,000 8.1%
============ ============= ============
The changes in deposits is a result of the Company's strategy to offer
competitive rates in an effort to attract additional deposits as loan demand
increases.
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 June 30, 2001 was 19.7% and at December 31, 2000, was 22.9%, 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 $6,500,000. In addition, the Company has a
line of credit with the Federal Home Loan Bank. This line had approximately
$20,000,000 available at June 30, 2001.
17
CAPITAL RESOURCES
The Company's equity capital was $40,050,000 at June 30, 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. On May 24, 2001,
the Board of Directors announced a resumption of the Company's stock buyback
plan. Subsequent to that announcement, the Company repurchased 184,833 shares
in the second quarter of 2001, bringing the total repurchased shares to
322,270.
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
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 June 30, 2001, based on the most recent regulatory
notification, the Company was determined to be adequately capitalized.
18
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 JUNE 30, Under Prompt
2001: For Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
Total Capital (to Risk Weighted Assets)
CONSOLIDATED $42,892,207 12.59% $27,246,776 8.00% N/A N/A
Goleta National Bank $36,143,749 12.60% $22,945,388 8.00% $28,681,735 10.00%
Palomar Community Bank $ 7,639,300 14.23% $ 4,297,781 8.00% $ 5,372,226 10.00%
Tier I Capital (to Risk WeightedAssets)
CONSOLIDATED $36,055,583 10.59% $13,623,388 4.00% N/A N/A
Goleta National Bank $32,526,317 11.34% $11,472,694 4.00% $17,209,041 6.00%
Palomar Community Bank $ 6,968,136 12.98% $ 2,148,891 4.00% $ 3,223,336 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $36,055,583 8.92% $16,166,797 4.00% N/A N/A
Goleta National Bank $32,526,317 9.98% $13,037,760 4.00% $16,297,200 5.00%
Palomar Community Bank $ 6,968,136 8.58% $ 3,247,520 4.00% $ 4,059,400 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%
19
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.
20
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
(a) The date of the meeting and whether it was an
annual or special meeting.
May 25, 2001 Annual Meeting
(b) The name of each director elected at the meeting.
Michael A. Alexander
Dr. Mounir A. Ashamalla
Robert Bartlein
Jean W. Blois
John D. Illgen
Lynda Nahra
Michel Nellis
William R. Peeples
Richard M. Sanborn
James R. Sims
Llewellyn W. Stone
(c) Description of each matter voted upon and the
number of votes cast for, against or withheld -
Election of Directors.
For Withheld
Michael A. Alexander 5,278,369 29,241
Dr. Mounir R. Ashamalla 5,258,159 49,451
Robert H. Bartlein 5,277,759 29,851
Jean W. Blois 5,258,259 49,351
John D. Illgen 5,274,663 32,947
Lynda Nahra 5,278,159 29,451
Michel Nellis 5,279,159 28,451
William R. Peeples 5,279,159 28,451
Richard M. Sanborn 5,233,219 74,391
James R. Sims 5,254,227 53,383
Llewellyn W. Stone 5,267,903 39,707
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On May 1, 2001 Community West Bancshares (the
"Registrant"), filed a current report on Form
8K announcing the settlement of a lawsuit
against their former certifying accountants.
On May 24, 2001 Community West Bancshares
(the "Registrant"), filed a current report on
Form 8K presenting the year 2000 in review.
Also on May 24, 2001 Community West
Bancshares (the "Registrant") filed a current
report on Form 8K announcing the resumption
of a previously enacted stock buyback plan.
21
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: August 14, 2001 Lynda Pullon Radke
Senior Vice President
Chief Financial Officer
22