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 September 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: 5,670,224 outstanding as of
September 30, 2001
This Form 10-Q contains 24 pages.
PART I - FINANCIAL INFORMATION
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
(unaudited)
-------------------- -------------------
ASSETS
Cash and due from banks $ 6,939,000 $ 14,958,000
Federal funds sold 26,545,000 21,526,000
-------------------- -------------------
Cash and cash equivalents 33,484,000 36,484,000
Time deposits in other financial institutions 9,113,000 1,582,000
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 775,000 1,170,000
Investment securities held-to-maturity, at amortized cost; fair value of
$117,000 at September 30, 2001 and $1,905,000 at December 31, 2000 117,000 1,901,000
Investment securities available-for-sale, at fair value; amortized cost of
$4,855,000 at December 31, 2000 - 4,820,000
Interest only strips, at fair value 8,863,000 7,541,000
Loans:
Held for sale, at lower of cost or fair value 34,580,000 37,195,000
Securitized loans, net of allowance for loan losses of $3,830,000
for September 30, 2001 and $4,042,000 for December 31, 2000 117,847,000 152,044,000
Held for investment, net of allowance for loan losses of $3,963,000
for September 30, 2001 and $2,704,000 December 31, 2000 108,605,000 140,026,000
Servicing assets 2,809,000 2,605,000
Other real estate owned, net 109,000 227,000
Premises and equipment, net 3,056,000 4,068,000
Intangible assets, net - 3,443,000
Accrued interest receiveable and other assets 9,960,000 12,149,000
-------------------- -------------------
TOTAL ASSETS $ 329,318,000 $ 405,255,000
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand $ 26,901,000 $ 28,057,000
Interest-bearing demand 22,555,000 34,638,000
Savings 12,827,000 24,679,000
Time certificates of $100,000 or more 73,586,000 76,642,000
Other time certificates 53,223,000 64,704,000
-------------------- -------------------
TOTAL DEPOSITS 189,092,000 228,720,000
Bonds payable in connection with securitized loans, net of issuance costs 97,723,000 130,755,000
Other borrowings - 5,293,000
Accrued interest payable and other liabilities 5,308,000 4,453,000
-------------------- -------------------
TOTAL LIABILITIES 292,123,000 369,221,000
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,670,224 shares
issued and outstanding at September 30, 2001, and 6,107,216 issued and
outstanding at December 31, 2000 29,718,000 32,518,000
Retained earnings 7,477,000 3,537,000
Accumulated other comprehensive gain (loss) - (21,000)
-------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 37,195,000 36,034,000
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 329,318,000 $ 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 Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
------------ ------------ ------------ -----------
INTEREST INCOME:
Loans, including fees $10,208,000 $ 12,332,000 $30,829,000 $35,984,000
Federal funds sold 246,000 371,000 977,000 1,136,000
Investment securities 43,000 142,000 255,000 368,000
Time deposits in other financial institutions 29,000 30,000 98,000 86,000
------------ ------------ ------------ -----------
Total interest income 10,526,000 12,875,000 32,159,000 37,574,000
------------ ------------ ------------ -----------
INTEREST EXPENSE:
Deposits 2,209,000 2,607,000 7,670,000 8,766,000
Bonds payable and other borrowings 2,523,000 3,951,000 8,107,000 10,375,000
------------ ------------ ------------ -----------
Total interest expense 4,732,000 6,558,000 15,777,000 19,141,000
------------ ------------ ------------ -----------
NET INTEREST INCOME 5,794,000 6,317,000 16,382,000 18,433,000
------------ ------------ ------------ -----------
PROVISION FOR LOAN LOSSES 3,626,000 2,043,000 8,629,000 3,567,000
------------ ------------ ------------ -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,168,000 4,274,000 7,753,000 14,866,000
------------ ------------ ------------ -----------
OTHER INCOME:
Gains from loan sales 2,079,000 2,133,000 5,497,000 5,918,000
Income from sale of investment in subsidiary 96,000 - 96,000 2,080,000
Loan servicing income 552,000 40,000 2,502,000 1,762,000
Loan origination fees - sold or brokered loans 853,000 187,000 2,426,000 1,132,000
Document processing fees 474,000 176,000 1,397,000 695,000
Service charges 133,000 96,000 464,000 345,000
Other income 17,000 23,000 674,000 242,000
Gain from sale of servicing asset - 186,000 - 186,000
Proceeds from legal settlement - - 7,000,000 -
------------ ------------ ------------ -----------
Total other income 4,204,000 2,841,000 20,056,000 12,360,000
------------ ------------ ------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 4,491,000 3,702,000 13,286,000 11,360,000
Occupancy expense 967,000 990,000 2,800,000 2,717,000
Other operating expenses 657,000 817,000 1,961,000 1,897,000
Professional services 531,000 110,000 1,125,000 675,000
Loan servicing and collection 284,000 513,000 867,000 1,827,000
Advertising expense 127,000 152,000 439,000 502,000
Data processing/ ATM processing 76,000 79,000 282,000 213,000
Postage and freight 88,000 64,000 269,000 210,000
Office supply expense 91,000 81,000 275,000 299,000
Amortization of intangible assets 36,000 109,000 178,000 306,000
Professional expenses associated with legal settlement - - 2,392,000 -
------------ ------------ ------------ -----------
Total other expenses 7,348,000 6,617,000 23,874,000 20,006,000
------------ ------------ ------------ -----------
(LOSS) INCOME BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES (976,000) 498,000 3,935,000 7,220,000
------------ ------------ ------------ -----------
PROVISION FOR (BENEFIT FROM) INCOME TAXES 142,000 198,000 (5,000) 3,106,000
------------ ------------ ------------ -----------
NET (LOSS) INCOME $(1,118,000) $ 300,000 $ 3,940,000 $ 4,114,000
============ ============ ============ ===========
(LOSS) EARNINGS PER SHARE
BASIC $ (0.19) $ 0.05 $ 0.65 $ 0.67
============ ============ ============ ===========
DILUTED $ (0.19) $ 0.05 $ 0.64 $ 0.67
============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
2001 2000
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,940,000 $ 4,114,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 8,629,000 3,567,000
Depreciation and amortization 1,011,000 1,020,000
Amortization of intangibles 178,000 306,000
Provision of other real estate owned 50,000 60,000
Gain on sale of other real estate owned (42,000) -
Gain on sale of subsidiary 96,000 775,000
Gain on disposal of servicing asset - (156,000)
Gain on sale of loans held for sale (5,497,000) (5,918,000)
Change in market valuation of interest only strips 1,301,000 1,266,000
Additions to interest only strips, net of amortization (2,623,000) (3,255,000)
Additions to servicing assets, net of amortization and market valuation (204,000) (99,000)
Deferred income tax benefit (1,290,000) (335,000)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (6,619,000) 336,000
Accrued interest payable and other liabilities 855,000 (242,000)
------------- --------------
Net cash provided by operating activities (215,000) 1,439,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (998,000)
Purchase of held-to-maturity securities, net (117,000) (1,902,000)
Purchase of FRB/FHLB stock - (473,000)
Paydown of principal on available-for-sale securities - 886,000
Proceeds from repayment of available-for-sale securities 4,820,000 -
Maturity of held-to-maturity security, net 1,901,000 500,000
FHLB stock dividend - (24,000)
Redemption of FHLB stock 395,000 109,000
Net increase in time deposits in other financial institutions (7,531,000) (988,000)
Net decrease in loans and loans held for sale 68,233,000 126,905,000
Proceeds from sale of other real estate owned 352,000 373,000
Purchase of premises and equipment (314,000) (1,417,000)
Proceeds from sale of servicing asset - 305,000
Net cash proceeds from sale of subsidiary 10,229,000 -
------------- --------------
Net cash provided by investing activities 77,968,000 123,276,000
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, and savings accounts (25,091,000) 8,380,000
Net decrease increase in time certificates (14,537,000) (101,060,000)
Repayment of bonds payable (33,032,000) (28,972,000)
Proceeds from issuance of other borrowings 5,500,000 -
Repayment of other borrowings (10,770,000) -
Payment of accrued director dividends (23,000) -
Exercise of stock options 35,000 13,000
Repurchase of outstanding shares (2,835,000) -
Cash dividends paid - (245,000)
------------- --------------
Net cash (used in) financing activities (80,753,000) (121,884,000)
------------- --------------
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS (3,000,000) 2,831,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,484,000 36,103,000
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,484,000 $ 38,934,000
============= ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 15,347,000 $ 19,201,000
Cash paid for income taxes $ - $ 3,059,000
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned $ 326,000 $ 285,000
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 subsidiary Goleta National Bank
("GNB"). The financial information for periods thru August 17, 2001,
include the divested subsidiary, Palomar Community Bank ("Palomar"). All
adjustments and reclassifications are of a normal and recurring nature.
Results for the period ending September 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.
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. Mortgages loans are typically
sold into the secondary market with 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.
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.
5
3. Loan Sales
HLTV Loan Sales
-----------------
The Company had $18 million and $11 million in second mortgage ("HLTV")
loans held for sale as of December 31, 2000 and September 30, 2001,
respectively. The Company sells these loans in the secondary market on a
servicing released basis.
Mortgage Loan Sales
---------------------
The Company originates and then sells wholesale mortgage loans both first
and second trust deeds. As of December 31, 2000 and September 30, 2001, the
Company had $5 and $10 million of 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 September 30, 2001, $3 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 prepayment rates ranging from 8% to
10.3%, based upon each SBA pool's historical experience.
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, 2000, the Company had approximately $11 million in SBA
loans held for sale. As of September 30, 2001, the Company had
approximately $10 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:
----------------------------- -----------------------------
September 30, 2001 December 31, 2000
----------------------------- -----------------------------
Servicing Asset I/O Strip Servicing Asset I/O Strip
---------------- ----------- ---------------- -----------
Guaranteed Portion of SBA $ 2,447,000 $ 8,863,000 $ 2,091,000 $ 7,541,000
FHA Title 1 362,000 - 514,000 -
---------------- ----------- ---------------- -----------
Total $ 2,809,000 $ 8,863,000 $ 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 nine months ended
September September
30, 2001 30, 2000
------------- -------------
Net income $ 3,940,000 $ 4,114,000
Other comprehensive income 38,000 30,000
------------- -------------
Reclassification adjustment for realized gains
previously recognized in comprehensive
income (17,000) -
============= =============
Comprehensive income $ 3,961,000 $ 4,144,000
============= =============
Other comprehensive income consists of unrealized gain on investment
securities available-for-sale, net of tax effect of $0 and $8,000, for the
nine months ended September 30, 2001 and 2000, respectively.
5. Commitments and Contingencies
Commitments
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 September 30, 2001, the Company
had entered into commitments with certain customers amounting to $21.8
million compared to $25.8 million at December 31, 2000. There were $438,000
of letters of credit outstanding at September 30, 2001; there were $913,000
of letters of credit outstanding at December 31, 2000.
7
Contingencies
A number of lawsuits and state regulatory proceedings have been filed or
initiated against ACE Cash Express, Inc. ("ACE") regarding its loan-related
activities. Some of those activities consist of offering bank loans, which
are short-term loans made by the Company's subsidiary, Goleta National Bank
("GNB"), at almost all ACE locations. In some of the lawsuits GNB has also
been named as a party. A key issue in the existing lawsuits and state
regulatory proceedings is whether GNB or ACE is properly regarded as the
lender. GNB and ACE maintain that, as provided by the legal documentation
and marketing materials for these loans, GNB is the lender and that,
because GNB is a national bank located in California, the bank loans,
including the interest that may legally be charged, should be governed by
federal and California law. The plaintiffs in those lawsuits and the
regulatory authorities in one of these state regulatory proceedings,
however, maintain that ACE should be regarded as the lender, because of its
agent services, in connection with the bank loans and its purchase of
participation interests in the bank loans. The plaintiffs also state that
the bank loans, including the interest that may legally be charged, should
be governed by the laws of the respective states in which the borrowers
reside. If ACE were held to be the lender, then the interest charged for
the loans would violate most of the applicable states' usury laws, which
impose maximum rates of interest or finance charges that a nonbank lender
may charge. The consequences to the Company of such a holding in any
lawsuit or regulatory proceeding would depend on the applicable state's
usury and consumer-protection laws and on the basis for a finding of
violation of those laws. The Company intends to vigorously defend these
lawsuits and regulatory proceedings. Under the Company's agreement with
ACE, ACE would be liable for paying 90-95% of the costs and monetary
damages, if any, that might result. Management does not believe that the
risk of loss is probable.
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:
8
For the three months ended
September 30, 2001 September 30, 2000
-------------------- -------------------
Basic weighted average shares outstanding 5,917,800 6,107,216
Dilutive effect of options - 30,408
-------------------- -------------------
Diluted weighted average shares outstanding 5,917,800 6,137,624
==================== ===================
Net (loss) income $ (1,118,000) $ 300,000
(Loss) Earnings per share - Basic $ (0.19) $ 0.05
(Loss) Earnings per share - Diluted $ (0.19) $ 0.05
For the nine months ended
September 30, 2001 September 30, 2000
-------------------- -------------------
Basic weighted average shares outstanding 6,042,197 6,107,216
Dilutive effect of options 66,902 35,476
-------------------- -------------------
Diluted weighted average shares outstanding 6,109,099 6,142,692
==================== ===================
Net income $ 3,940,000 $ 4,114,000
Earnings per share - Basic $ 0.65 $ 0.67
Earnings per share - Diluted $ 0.64 $ 0.67
7. Segment Reporting
The following table denotes the financial performance of the Company's
operational segments for its periods ending September 30, 2001 and
September 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 Lending, Mortgage Lending,
Short-Term Consumer Lending, Goleta National Bank Relationship Banking, 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.
The SBA Lending, Consumer Lending, Mortgage Lending and Short-Term Consumer
Lending areas of 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 Relationship Banking, includes
9
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
Nine Months Ended Consumer Mortgage Consumer Relationship Palomar
SEPTEMBER 30, 2001 SBA Lending Lending Lending Lending Banking Community Bank Other
------------ ------------ ----------- ----------- ------------- ---------------- ------------
Interest Income $ 2,893,000 $ 15,176,000 $ 460,000 $ 3,822,000 $ 6,077,000 $ 3,730,000 $ 1,000
Interest Expense 1,924,000 9,143,000 - 209,000 2,616,000 1,418,000 467,000
------------ ------------ ----------- ----------- ------------- ---------------- ------------
Net Interest Income 969,000 6,033,000 460,000 3,613,000 3,461,000 2,312,000 (466,000)
Provision For Loan Losses 2,304,000 3,711,000 - 1,785,000 420,000 409,000 -
Noninterest Income 5,063,000 2,973,000 3,730,000 530,000 379,000 172,000 7,209,000
Noninterest Expense 3,424,000 3,994,000 2,997,000 503,000 1,737,000 2,185,000 9,034,000
------------ ------------ ----------- ----------- ------------- ---------------- ------------
Segment Profit (Loss)
before Tax $ 304,000 $ 1,301,000 $ 1,193,000 $ 1,855,000 $ 1,683,000 $ (110,000) $(2,291,000)
============ ============ =========== =========== ============= ================ ============
SEPTEMBER 30, 2001
Segment Assets $ 55,000,000 $137,310,000 $47,732,000 $ 2,649,000 $ 74,763,000 $ - $11,863,000
============ ============ =========== =========== ============= ================ ============
Nine Months Ended Consolidated
SEPTEMBER 30, 2001 Total
-------------
Interest Income $ 32,159,000
Interest Expense 15,777,000
-------------
Net Interest Income 16,382,000
Provision For Loan Losses 8,629,000
Noninterest Income 20,056,000
Noninterest Expense 23,874,000
-------------
Segment Profit (Loss)
before Tax $ 3,935,000
=============
SEPTEMBER 30, 2001
Segment Assets $ 329,317,000
=============
Short-Term
Nine Months Ended Consumer Mortgage Consumer Relationship Palomar
SEPTEMBER 30, 2000 SBA Lending Finance Division Lending Banking Community Bank Other
------------ ------------ ----------- ----------- ------------- --------------- ------------
Interest Income $ 3,068,000 $ 23,701,000 $ 205,000 $ 768,000 $ 5,473,000 $ 4,359,000 $ -
Interest Expense 1,627,000 12,571,000 - 58,000 3,012,000 1,873,000 -
------------ ------------ ----------- ----------- ------------- --------------- ------------
Net Interest Income 1,441,000 11,130,000 205,000 710,000 2,461.000 2,486,000 -
Provision For Loan Losses 324,000 2,501,000 - 52,000 600,000 90,000 -
Noninterest Income 3,845,000 3,055,000 1,863,000 - 1,161,000 397,000 2,039,000
Noninterest Expense 3,292,000 4,933,000 2,049,000 251,000 1,561,000 2,086,000 5,834,000
------------ ------------ ----------- ----------- ------------- --------------- ------------
Segment Profit (Loss)
before Tax $ 1,670,000 $ 6,751,000 $ 19,000 $ 407,000 $ 1,461,000 $ 707,000 $(3,795,000)
============ ============ =========== =========== ============= =============== ============
SEPTEMBER 30, 2000
Segment Assets $ 46,643,000 $183,990,000 $24,151,000 $ 995,000 $ 67,250,000 $ 73,954,000 $ 8,438,000
============ ============ =========== =========== ============= =============== ============
Nine Months Ended Consolidated
SEPTEMBER 30, 2000 Total
-------------
Interest Income $ 37,574,000
Interest Expense 19,141,000
-------------
Net Interest Income 18,433,000
Provision For Loan Losses 3,567,000
Noninterest Income 12,360,000
Noninterest Expense 20,006,000
-------------
Segment Profit (Loss)
before Tax $ 7,220,000
=============
SEPTEMBER 30, 2000
Segment Assets $ 405,421,000
=============
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 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
10
achieve full compliance with the Agreement. As of September 30, 2001, GNB
had total capital equal to 12.9% of risk-weighted assets. Under the terms
of the Agreement, GNB has also reduced its concentration of second mortgage
loans, excluding securitized loans, below 100% of capital, to 37.4% of
capital as of September 30, 2001. Management believes that it continues to
comply with all material provisions of the Agreement.
10. 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, and 266,259 shares in the third quarter
of 2001, at a weighted average price of $6.50, bringing the total
repurchased shares to 588,529.
11. Sale of Palomar Community Bank
On August 17, 2001 the Company, completed the sale of its subsidiary,
Palomar Community Bank to Centennial First Financial Services for $10.5
million in cash. The Company acquired Palomar's Common Stock on December
14, 1998 by issuing 1,367,542 common shares. On the date of acquisition
those shares had a market value of $12 million. The acquisition was
accounted for using the purchase method of accounting, and resulted in
Palomar recording $6 million in goodwill and other intangible assets. In
December of 2000, the Company signed a definitive agreement to sell 100% of
Palomar to Centennial for $10.5 million in cash and wrote down $2 million
of Palomar's goodwill which it determined to be impaired based on the
purchase price. Upon completion of the transaction the Company recorded a
small gain on the sale for book purposes. However, due to accounting for
the acquisition of Palomar as a purchase, the tax basis of the Company's
investment in Palomar was substantially less than its book basis. As a
result, the Company recorded a $1 million provision for the estimated tax
liability.
Concurrently, a portion of the proceeds from the sale was used to repay a
loan from Union Bank of California in the amount of $5.5 million.
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 subsidiary (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 September 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
September 30, September 30, Increase Increase
2001 2000 (Decrease) (Decrease)
--------------- -------------- ------------ -----------
Interest Income $ 10,526,000 $ 12,875,000 $(2,349,000) (18.2%)
Interest Expense 4,732,000 6,558,000 (1,826,000) (27.8%)
--------------- -------------- ------------
Net Interest Income 5,794,000 6,317,000 (523,000) (8.3%)
Provision for Loan Losses 3,626,000 2,043,000 1,583,000 77.5%
--------------- -------------- ------------
Net Interest Income After
Provision for Loan Losses 2,168,000 4,274,000 (2,106,000) (49.3%)
Other Income 4,204,000 2,841,000 1,363,000 48.0%
Other Expense 7,348,000 6,617,000 731,000 11.0%
--------------- -------------- ------------
(Loss) Income Before
Provision for Income Taxes (976,000) 498,000 (1,474,000) (296.0%)
Provision for Income Taxes 142,000 198,000 (56,000) (28.3%)
--------------- -------------- ------------
Net (Loss) Income $ (1,118,000) $ 300,000 $(1,418,000) (472.7%)
=============== ============== ============
Earnings Per Share - Basic $ (0.19) $ 0.05 $ (0.24) (480.0%)
=============== ============== ============
Earnings Per Share - Diluted $ (0.19) $ 0.05 $ (0.24) (480.0%)
=============== ============== ============
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.
The annualized loss on average equity was 11.1% for the three months ended
September 30, 2001, compared to return on average equity of 3.7% for the same
period in 2000. The
12
decrease is primarily due to the tax provision in connection with the sale of
Palomar and increased provisions for loan losses in the third quarter of 2001.
Average assets for the three months ended September 30, 2001, were $413,231,000
compared to $431,725,000 for the same period in 2000; average equity increased
to $40,344,000 for the three months ended September 30, 2001, from $32,782,000
for the same period in 2000.
For the Nine - Months Ending September 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 Nine Months Ended
------------------------------ Amount of Percent of
September September 30, Increase Increase
30, 2001 2000 (Decrease) (Decrease)
-------------- -------------- ------------ -----------
Interest Income $ 32,159,000 $ 37,574,000 $(5,415,000) (14.4%)
Interest Expense 15,777,000 19,141,000 (3,364,000) (17.6%)
-------------- -------------- ------------
Net Interest Income 16,382,000 18,433,000 (2,051,000) (11.1%)
Provision for Loan Losses 8,629,000 3,567,000 5,062,000 141.9%
-------------- -------------- ------------
Net Interest Income After
Provision for Loan Losses 7,753,000 14,866,000 (7,113,000) (47.8%)
Other Income 20,056,000 12,360,000 7,696,000 62.3%
Other Expense 23,874,000 20,006,000 3,868,000 19.3%
-------------- -------------- ------------
Income Before Provision for
Income Taxes 3,935,000 7,220,000 (3,285,000) (45.5%)
Provision for Income Taxes (5,000) 3,106,000 (3,111,000) (100.2%)
-------------- -------------- ------------
Net Income $ 3,940,000 $ 4,114,000 $ (174,000) (4.2%)
============== ============== ============
Earnings Per Share - Basic $ 0.65 $ 0.67 $ (0.02) (3.0%)
============== ============== ============
Earnings Per Share - Diluted $ 0.64 $ 0.67 $ (0.03) (4.5%)
============== ============== ============
The annualized return on average equity was 13.9% for the nine months ended
September 30, 2001 compared to 17.4 % for the same period in 2000.
Average assets for the nine months ended September 30, 2001, were $415,842,000
compared to $443,708,000 for the same period in 2000, this decrease represents
the Company's planned decrease in asset size through loan sales.
Average equity increased to $37,685,000 for the nine months ended September 30,
2001, from $31,555,000 for the same period in 2000. The increase corresponds
with the retention of net income.
The book value per share increased from $5.90 at December 31, 2000, to $6.56 at
September 30, 2001.
13
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 6.8% for the three months ended September
30, 2001, compared to an annualized net interest margin of 6.8% for the three
months ended September 30, 2000.
The annualized net interest margin was 5.8% for the nine months ended September
30, 2001, compared to an annualized net interest margin of 5.9% for the nine
months ended September 30, 2000.
Changes in the Company's net interest margin are related to the following
combination of factors. The margin decreased, in part, due to the decline in
interest rates as the Company's variable rate loans repriced faster than the
corresponding deposits. The margin also decreased as securitized loan
prepayments were used, as contractually required, to retire lower yielding
tranches of the bonds used to fund these loans.
The net interest margin for the three month period ending September 30, 2001 was
significantly higher than the net interest margin for the nine month period
ending September 30, 2001 due to an increase, during the third quarter, in loan
balances from the Company's higher-yielding Short-Term Consumer Lending product.
Earning assets averaged $377,558,000 for the nine months ended September 30,
2001. This represented a decrease of $38,088,000 or 9.2% from the average
earning assets of $415,646,000 for the nine months ended September 30, 2000.
This decrease is due to the decrease in asset size.
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 Nine months Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
-------------------- -------------------- -------------------- --------------------
Interest and Fees $ 10,208,000 $ 12,332,000 $ 30,829,000 $ 35,984,000
Average Loans 330,294,000 332,154,000 336,555,000 381,796,000
Annualized Yield 12.4% 14.8% 12.2% 12.6%
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.
14
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 is the Company's historical loan loss experience. 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
September 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
--------------- -------------- ------------- -----------
BALANCES:
Gross loans $ 268,825,000 $ 336,011,000 $(67,186,000) (20.0%)
Allowance for loan losses 7,793,000 6,746,000 1,047,000 15.5%
Nonaccrual loans 9,040,000 2,095,000 6,945,000 331.5%
RATIOS:
Allowance for loan losses to gross loans 2.9% 2.0% 0.9%
Net loans charged off to allowance for loan
losses 87.5% 82.7% 4.9%
The provision for loan losses was $8,629,000 for the nine months ended September
30, 2001. This is an increase of $5,062,000 or 141.9%, over the $3,567,000 for
the nine months ended September 30, 2000, due in part to increased delinquencies
in the Company's SBA and Securitized loans, as well as significant growth in the
Short-Term Consumer Lending portfolios. Gross loans outstanding decreased 20%
15
from December 2000 to September 2001 due to the sale of Palomar, however to
offset this reduction in loans, the Company increased its loan origination
activity. For the nine months ended September 30, 2001, losses charged to the
allowance for loan losses totaled $7,347,000. This was offset by $526,000
recoveries; with the net effect being $6,821,000 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 nine months ended September 30, 2001, increased
62.3% over the nine months ended September 30, 2000. The increase is primarily
due to the proceeds from a legal settlement received in the second quarter of
2001, and the increase of gain on the sale of SBA loans.
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Other expenses for the nine months ended
September 30, 2001, increased 19.3% over the nine months ended September 30,
2000. The increase for the most part was legal and professional expenses
associated with both the legal settlement, taking place in the second quarter of
2001, and the sale of Palomar taking place in the third quarter of 2001.
TAXES
Taxes includes: a benefit for the resolution of tax contingencies related to the
sale of ePacific.com; a provision for the estimated tax liability associated
with the sale of Palomar; as well as normal tax accruals based upon the
Company's operating income.
16
BALANCE SHEET ANALYSIS
Amount of Percent of
September 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
-------------- ------------- ------------- -----------
Cash and Cash Equivalents $ 33,484,000 $ 36,484,000 $ (3,000,000) (8.2%)
Investment Securities and
Time Deposits 10,005,000 9,473,000 532,000 5.6%
Loans, held for sale 34,580,000 37,195,000 (2,615,000) (7.0%)
Securitized Loans 117,847,000 152,044,000 (34,197,000) (22.5%)
Loans, held for investment 108,605,000 140,026,000 (31,421,000) (22.4%)
Total Assets 329,318,000 405,255,000 (75,937,000) (18.7%)
Total Deposits 189,092,000 228,720,000 (39,628,000) (17.3%)
Total Stockholders' Equity $ 37,195,000 $ 36,034,000 $ 1,161,000 3.2%
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 increase of 5.6% is primarily from the investment in time deposits.
LOANS
The 7.0% decrease in loans held for sale is due to a decrease in the number of
unsold Small Business Administration loans at the end of the period. The
decrease in the securitized loan portfolio of 22.5% is due to an increase in
prepayment volume associated with declining interest rates. Lastly, the
decrease in loans held for investment is related to the exclusion of Palomar
Community Bank's loans, due to the sale transaction taking place in the third
quarter 2001.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
Amount of Percent of
September 30, December 31, Increase Increase
2001 2000 (Decrease) (Decrease)
-------------- ------------- ------------- -----------
Noninterest-Bearing Deposits $ 26,901,000 $ 28,057,000 $ (1,156,000) (4.1%)
Interest-Bearing Deposits 22,555,000 34,638,000 (12,083,000) (34.9%)
Savings 12,827,000 24,679,000 (11,852,000) (48.0%)
Time Certificates over $100,000 73,586,000 76,642,000 (3,056,000) (4.0%)
Other Time Certificates 53,223,000 64,704,000 (11,481,000) (17.7%)
Total Deposits $ 189,092,000 $ 228,720,000 $(39,628,000) (17.3%)
17
The decrease in deposits reflects the elimination of Palomar's deposits, due to
the sale in the third quarter of 2001. However, Goleta National Bank's deposits
increased $26,872,000 or 14.2% between December 31, 2000 and September 30, 2001.
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 September 30, 2001, was 23.5% 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 a federal funds line of credit
with a correspondent bank totaling $5,000,000.
CAPITAL RESOURCES
The Company's equity capital was $37,195,000 at September 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, and 266,259 shares in the third quarter of 2001,
bringing the total repurchased shares to 588,529.
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."
18
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 September 30, 2001, based on the most recent regulatory
notification, the Company was determined to be adequately capitalized.
19
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 SEPTEMBER Under Prompt
30, 2001: For Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
--------------- ------ ------------ --------- ----------- ------------
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED $ 44,707,231 16.19% $ 22,088,039 8.00% N/A N/A
Goleta National Bank $ 35,695,861 12.97% $ 22,012,802 8.00% $27,516,003 10.00%
Tier I Capital (to Risk Weighted Assets)
CONSOLIDATED $ 36,913,925 13.37% $ 11,044,020 4.00% N/A N/A
Goleta National Bank $ 32,206,065 11.70% $ 11,006,401 4.00% $16,509,602 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $ 36,913,925 10.02% $ 14,733,805 4.00% N/A N/A
Goleta National Bank $ 32,206,065 9.77% $ 13,185,530 4.00% $16,481,912 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 WE ighted 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 Weighted Assets)
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%
20
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.
21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company's subsidiary, Goleta National Bank ("GNB"), makes short-term loans
("Bank Loans") using certain marketing and servicing assistance of ACE Cash
Express Inc. ("ACE") at almost all of ACE's retail locations pursuant to the
terms of that certain Master Loan Agency Agreement ("the GNB Agreement"). A
number of lawsuits and state regulatory proceedings have been filed or initiated
against GNB and/or ACE regarding the Bank Loans.
A key issue in the existing lawsuits and state regulatory proceedings that
concern the Bank Loans is, whether GNB or ACE is properly regarded as the
lender. The Company and ACE maintain that, as provided by the legal
documentation and marketing materials for the Bank Loans, GNB is the lender and
that, because GNB is a national bank located in California, the Bank Loans,
including the interest that may legally be charged, should be governed by
federal and California law. The plaintiffs in those lawsuits and the regulatory
authorities in one of these state regulatory proceedings, however, maintain that
ACE should be regarded as the lender, because of the services it renders to GNB
under the GNB Agreement in connection with the Bank Loans and ACE's purchase of
participation interests in the Bank Loans, and that the Bank Loans, including
interest that may legally be charged, should be governed by the laws of the
respective states in which the borrowers reside. If ACE were held to be the
lender, then the interest charged for the Bank Loans would violate most of the
applicable states' usury laws, which impose maximum rates of interest or finance
charges that a nonbank lender may charge. The consequences to the Company of
such a holding in any lawsuit or regulatory proceeding would depend on the
applicable state's usury and consumer-protection laws and on the basis for a
finding of violation of those laws. Those consequences could include the
Company's obligation to refund interest collected on the illegal Bank Loans, to
refund the principal amount of the illegal Bank Loans, to pay treble or other
multiple damages, to pay monetary penalties specified by statute, and to cease
offering the Bank Loans (at least as theretofore offered). Regarding each
lawsuit, that amount would depend upon proof of the allegations, on the number
of persons who constitute the class of plaintiffs (if permitted by the court) or
the number or the amount of the loan-related transactions during an applicable
time period, and (for certain of the claims) on proof of actual damages
sustained by the plaintiffs. The Company intends to vigorously defend these
lawsuits and regulatory proceedings through trial and, if necessary, appeal. The
GNB Agreement generally provides that ACE will be liable for 90 to 95% of the
costs and monetary damages, if any, that would be paid to claimants in these
actions and GNB will generally be liable for 5 to 10% of such costs and/or
monetary damages.
Any adverse determination in these actions could result in adverse actions by
the regulatory agencies with authority over GNB and the Company, including the
Office of the Comptroller of the Currency and the Board of Governors of the
Federal Reserve System.
Jennafer Long v. Ace Cash Express, Inc.: This lawsuit was filed in a Florida
- ------------------------------------------
Circuit Court in Clay County, Florida, and was served on ACE on November 8,
2000. The plaintiff, for herself and others similarly situated, alleges that the
Bank Loans offered at the ACE locations in Florida are being made by ACE rather
than by GNB and, therefore, that those Bank Loans violate Florida usury laws and
the offering of those Bank Loans involves misrepresentations and deceptive
practices in violation of Florida law. The plaintiff seeks an unspecified amount
of damages, including an amount equal to all interest charged on the Bank Loans
made in Florida, the plaintiff's attorneys' fees, and court costs.
GNB and ACE are defending this lawsuit primarily on the basis that the Bank
Loans are made by GNB, as a national bank located in California, and are
therefore governed by federal and California law, and are not subject to Florida
usury laws. ACE's attempts to remove this case to federal court have been
unsuccessful. On August 30, 2001, GNB filed a motion to intervene as a defendant
in this lawsuit. On October 18, 2001, the court approved GNB's intervention. GNB
and ACE have filed a motion to dismiss this lawsuit, which is pending before the
Court.
Order to Show Cause from Maryland Commissioner of Financial Regulation: On July
- -----------------------------------------------------------------------
5, 2001, the Maryland Commissioner of Financial Regulation issued an Order to
Show Cause to ACE. Unlike the long case described above, and the proceedings
described below, with the exception of the Colorado litigation, this dispute
does not center around the question whether GNB or ACE is the true lender.
Rather, the Order alleges that ACE's activities as agent for GNB regarding the
Bank Loans offered in Maryland violate the Maryland Credit Services Businesses
Act because ACE is not licensed as a "credit services business" in Maryland. The
Order directs ACE to show cause why a final order should not be entered
requiring ACE to cease its loan-related activities in Maryland without obtaining
a license as a credit services business and to pay a civil penalty of up to
$1,000 for the first violation and up to $5,000 for each subsequent violation.
The Order also states that the Commissioner continues to investigate whether
Maryland Bank Loans after June 1, 2001 violate a new provision of the Maryland
Credit Services Businesses Act prohibiting credit services businesses from
facilitating unsecured closed-end loans to consumers at interest rates in excess
of the rates permitted by Maryland law.
22
ACE disagrees with the material allegations in the Order and believes that it is
not required to be licensed as a "credit services business" in Maryland. On
July 30, 2001, ACE requested a hearing before the Commissioner in accordance
with the Order. That hearing has been scheduled for December 5-6, 2001. On
November 6, 2001, ACE filed a motion for summary judgment with respect to the
Order. The Commissioner's response is due November 21, 2001.
State of Colorado, ex rel. Ken Salazar, Attorney General for the State of
- --------------------------------------------------------------------------------
Colorado, and Laura E. Udis, Administrator, Uniform Consumer Credit Code v. Ace
- --------------------------------------------------------------------------------
Cash Express, Inc.: This lawsuit was filed on behalf of the State of Colorado
- ---------------------
against ACE in a Colorado state District Court in the City and County of Denver,
Colorado, on July 13, 2001. The complaint alleges that the Bank Loans offered
and made by GNB at ACE locations in Colorado are "deferred deposit" loans
subject to the Colorado Deferred Deposit Loan Act (the "DDLA"), which is part of
the Colorado Uniform Consumer Credit Code (the "Colorado UCCC"); that the second
and third renewals of the Bank Loans violate the DDLA (which purports to permit
only one renewal of deferred deposit loans at the interest rates permitted by
the DDLA); and that ACE is required to maintain a license as a "supervised
lender" in Colorado because of its activities in connection with the Bank Loans.
In its complaint, the State of Colorado seeks various remedies under the
Colorado UCCC and other Colorado law, including the refund to borrowers of all
finance charges or interest received on all Bank Loans made in Colorado while
ACE was unlicensed; the refund to borrowers of all finance charges or interest
received on all second and third renewals of the Bank Loans since July 1, 2000,
the effective date of the DDLA; and a penalty (to be determined by the court)
equal to the greater of either all of the finance charges or interest received
or up to ten times the amount of all excess finance charges or interest
received.
On July 31, 2001, the State of Colorado filed a motion for a preliminary
injunction to require ACE to cease all activities regarding the Bank Loans in
Colorado immediately. On August 10, 2001, ACE removed this lawsuit to the
United States District Court for the District of Colorado on the grounds that
the alleged limits on interest charges on second and third renewals imposed by
the DDLA are completely preempted by federal law and the State's claims
accordingly involve questions of federal law. On September 4, 2001, the State
of Colorado filed a motion to remand this lawsuit back to the Colorado state
court. A hearing in the federal court regarding that motion is scheduled for
November 19, 2001.
Whether the case remains in federal court or returns to state court, ACE
believes that it has various substantive arguments under both federal and
Colorado law in defense of the legality of the Colorado Bank Loans. Those
arguments include that the Bank Loans are not deferred deposit loans under the
DDLA; that ACE cannot be required to obtain a supervised lender license in light
of federal laws applicable to GNB and its agents; that the State is not entitled
to the remedies it is seeking for the alleged licensing violations; and that the
limits regarding loan renewals imposed by the DDLA are preempted by federal law.
In addition, without admitting that it is required to obtain supervised lender
licenses under the Colorado UCCC, ACE has applied for such licenses. The
Administrator of the Colorado UCCC has indicated that any licensure will be
subject to specified conditions. There can be no assurance that ACE and the
State will be able to reach any agreement that will permit ACE to obtain such
licenses nor can there by any assurance that such licenses, if obtained, will
result in a partial resolution of the litigation between ACE and the State,
insofar as such litigation concerns AC's licensing status.
Rufus Patricia Brown v. Ace Cash Express, Inc. et al.: This lawsuit against ACE
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and unnamed franchises of ACE was filed on August 20, 2001, in the Circuit Court
for Baltimore City, Maryland. On September 7, 2001, ACE removed this lawsuit to
the United States District Court for the District of Maryland on the grounds
that federal jurisdiction exists because of the parties' diversity of
citizenship and the presence of federal questions in this case. On September 12,
2001, the plaintiff filed an amended complaint. In the complaint, the plaintiff
purports to represent a class of all consumers who received a Bank Loan at any
ACE location in Maryland since April 1, 2000. The plaintiff alleges that the
defendants' loan-related activities violate the Maryland usury laws, the
Maryland Consumer Loan Law, the Maryland Unsecured Closed End Credit Regulation
Act, and the Maryland Consumer Protection Act and are unconscionable under
Maryland law. The plaintiff seeks relief of various kinds, including a permanent
injunction against any further alleged illegal activities, an order that all
obligations of the class of plaintiffs to the defendants are void, the return
(as restitution) to the class of plaintiffs of all amounts paid to the
defendants, the plaintiffs attorneys' fees and expenses, and court costs.
On October 22, 2001, ACE filed an answer denying all of the plaintiff's material
allegations in the amended complaint, which are largely, but not exclusively,
based on the core contention that the Bank Loans should be regarded as made by
ACE rather than GNB. Plaintiff has moved to remand this case to federal court.
On October 29, 2001, AC filed an opposition to the plaintiff's motion to remove
this case to federal court.
Beverly Purdie v. Ace Cash Express, Inc. et al.: This lawsuit was filed on
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September 6, 2001 in the United States District Court for the Northern District
of Texas. As amended, the complaint names as defendants GNB, ACE, and several
ACE executives. In the complaint, the plaintiff purports to represent a class of
all consumers in the United States to whom a Bank Loan has been made by GNB at
any ACE location since September 6, 1997, as well as sub-classes of persons who
have engaged in those kinds of transactions and are alleged to be victims of
usury or of unfair or deceptive lending practices under the laws of various
states in the United States during the time periods within the various
applicable statutes of limitations. The plaintiffs allege that the defendants'
loan-related activities violate the federal Racketeer Influenced and Corrupt
Organizations ("RICO") Act, the federal Truth in Lending Act ("TILA"), the
federal Electronic Funds Transfer Act, the federal Fair Debt Collection
Practices Act, and the laws and regulations of various states regarding usury,
deceptive trade practices (including the Texas Deceptive Trade Practices Act),
and other consumer protections. These claims are largely, but not exclusively
premised upon the core contention that Bank Loans should be regarded as made by
ACE rather than GNB. The plaintiff seeks relief of various kinds, including a
permanent injunction against any further alleged illegal activities; the return
(as restitution) to the class and sub-classes of plaintiffs of all amounts paid
to the defendants; an order that all obligations of the class and sub-class of
23
plaintiffs to the defendants are void; statutory damages of $500,000 each for
violation of the federal TILA, the federal Electronic Funds Transfer Act, and
the federal Fair Debt Collection Practices Act; damages equal to three times the
amount of all fees and interest paid by the class and sub-classes of plaintiffs
since September 6, 1997, punitive damages of at least $250 million; the
plaintiff's attorneys' fees; and court costs.
On November 9, 2001, ACE and GNB filed a motion to transfer this case to the
United States District Court for the District of Maryland and also moved to
dismiss the federal law claims in this case.
Vonnie T. Hudson v. Ace Cash Express, Inc. et al.: This lawsuit regarding the
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Bank Loans was filed on September 11, 2001 in the United States District Court
for the Southern District of Indiana. This lawsuit was filed against GNB, ACE
and several ACE executives on behalf of a purported class of individuals who
reside in Indiana and obtained Bank Loans. The plaintiff alleges that: all of
the defendants' loan-related activities violate the Indiana Uniform Consumer
Credit Code (the "Indiana UCCC") and the Indiana "loansharking" statute, because
the interest charged for the Bank Loans exceeds the finance charges permitted by
those statutes; that ACE's and GNB's loan-related activities violate the federal
TILA, Regulation Z, and the Indiana UCCC, because the disclosures to borrowers
of Bank Loans do not comply with the disclosure requirements of those laws; and
that the loan-related activities of all of the defendants other than ACE violate
the federal RICO Act. The plaintiff seeks relief of various kinds, including (a)
for the members of the class of plaintiffs who were allegedly charged excessive
interest, an order declaring the Bank Loans to them "void" the refund of all
finance charges or interest paid by them in excess of the maximum finance
charges permitted under the Indiana UCCC, and a penalty (to be determined by the
court) in a maximum amount equal to the greater of either all of the finance
charges or interest received from them or up to ten times the amount of all
excess finance charges or interest received from them; (b) for the members of
the class of plaintiffs who allegedly did not receive proper disclosures under
the federal TILA, Regulation Z, and the Indiana UCCC, statutory damages of
$500,000 each for violations of those statutes; (c) for the members of the class
of plaintiffs allegedly damaged because of violations of the RICO Act, an amount
equal to three times those damages; and (d) the plaintiff's attorneys' fees and
of violations of the RICO Act, an amount equal to three times those damages; and
(d) the plaintiff's attorneys' fees and court costs.
GNB and the other defendants intend to vigorously contest this action, including
the core allegation that ACE rather than GNB is the "true" lender.
Goleta National Bank v. Ohio Superintendent of Financial Institutions. On July
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16, 2001, the Ohio Superintendent of Financial Institutions (the
"Superintendent") delivered a Note of Intent to Issue Cease and Desist Order and
Notice of Opportunity for Hearing to ACE. This Notice states that ACE, not GNB,
is the lender of the maker of Ohio Bank Loans; that the Bank Loans accordingly
violate the Ohio Small Loan Act and are void; that all finance charges and
interest received from the Bank Loans, as well as the outstanding principal of
all existing Bank Loans, should be forfeited; and that ACE should be ordered to
cease violating the Ohio Small Loan Act. A hearing on this Notice was United
States District Court for the Southern District of Ohio and on October 12, 2001,
it moved for a preliminary injunction prohibiting the Superintendent from
proceeding with his administrative action against ACE. Through this motion, GNB
contends that the administrative proceeding, if allowed to go forward, would
prevent GNB from charging the interest authorized by federal law and effectively
prevent GNB from making Bank Loans to Ohio residents, in contravention of its
rights under the National Bank Act. The Superintendent has agreed to suspend the
administrative proceeding until the federal court rules on GNB's motion. The
Superintendent's brief is due November 23, 2001, and a hearing will be scheduled
after that date.
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
(a) Reports on Form 8-K
On October 4, 2001, Community West Bancshares (the
"Registrant") filed a current report on Form 8K
announcing the signing of a privately negotiated
stock purchase agreement with outside
shareholders.
24
On September 7, 2001, Community West Bancshares
(the "Registrant") filed a current report on Form
8K providing pro forma financial statements
related to the sale of its subsidiary, Palomar
Community Bank.
On August 24, 2001, Community West Bancshares (the
"Registrant") filed a current report on Form 8K
reporting the sale of its subsidiary, Palomar
Community Bank, on August 17, 2001. Palomar was
sold to Centennial First Financial Services for
$10.5 million in cash.
(b) Exhibit
10. Agreement between the Company's subsidiary Goleta
National Bank and Ace Cash Express Inc.
25
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: November 16, 2001 Lynda Pullon Radke
Senior Vice President
Chief Financial Officer
26