UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
445 Pine Avenue, Goleta, California 93117
(Address of principal executive offices) (Zip Code)
(805) 692-5821
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [_] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). [_] YES NO [X]
Number of shares of common stock of the registrant outstanding as of
November 9, 2004: 5,729,869
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL 7
STATEMENTS
The financial statements included in this Form 10-Q should be read with
reference to Community West Bancshares' Annual Report on Form 10-K for the year
ended December 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 20
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
--------------- --------------
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 9,668 $ 5,758
Interest-earning deposits in other financial institutions 9,138 5,031
Federal funds sold 7,915 11,267
--------------- --------------
Cash and cash equivalents 26,721 22,056
Time deposits in other financial institutions 392 792
Investment securities available-for-sale, at fair value; amortized cost of $22,357 at
September 30, 2004 and $15,455 at December 31, 2003 22,293 15,432
Investment securities held-to-maturity, at amortized cost; fair value of $3,041 at
September 30, 2004 and $5,035 at December 31, 2003 3,029 5,036
Interest only strips, at fair value 3,004 3,548
Loans:
Loans held for sale, at lower of cost or fair value 36,968 42,038
Loans held for investment, net of allowance for loan losses of $2,931 at
September 30, 2004 and $2,652 at December 31, 2003 216,946 166,874
Securitized loans, net of allowance for loan losses of $1,109 at
September 30, 2004 and $2,024 at December 31, 2003 24,626 35,362
--------------- --------------
Total loans 278,540 244,274
Federal Home Loan Bank stock, at cost 1,189 -
Federal Reserve Bank stock, at cost 812 812
Servicing rights 3,344 2,499
Other real estate owned, net 13 527
Premises and equipment, net 1,676 1,632
Other assets 6,227 7,642
--------------- --------------
TOTAL ASSETS $ 347,240 $ 304,250
=============== ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 41,588 $ 42,417
Interest-bearing demand 62,172 38,115
Savings 15,592 15,559
Time certificates of $100,000 or more 38,367 19,673
Other time certificates 105,241 109,091
--------------- --------------
Total deposits 262,960 224,855
Securities sold under agreements to repurchase 17,425 14,394
Federal Home Loan Bank advances 7,500 -
Bonds payable in connection with securitized loans 15,969 26,100
Other liabilities 6,508 4,570
--------------- --------------
Total liabilities 310,362 269,919
--------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding,
5,729,869 at September 30, 2004 and 5,706,769 at December 31, 2003 30,020 29,874
Retained earnings 6,896 4,472
Accumulated other comprehensive loss, net (38) (15)
--------------- --------------
Total stockholders' equity 36,878 34,331
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 347,240 $ 304,250
=============== ==============
<FN>
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------
2004 2003 2004 2003
------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans $ 5,360 $ 4,882 $ 15,216 $ 14,917
Investment securities 274 95 709 316
Other 77 43 192 165
------------- ------------ ---------- -----------
Total interest income 5,711 5,020 16,117 15,398
------------- ------------ ---------- -----------
INTEREST EXPENSE
Deposits 1,286 1,120 3,624 3,522
Bonds payable and other borrowings 668 1,078 2,214 3,721
------------- ------------ ---------- -----------
Total interest expense 1,954 2,198 5,838 7,243
------------- ------------ ---------- -----------
NET INTEREST INCOME 3,757 2,822 10,279 8,155
Provision for loan losses 186 298 251 1,006
------------- ------------ ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,571 2,524 10,028 7,149
NON-INTEREST INCOME
Gains from loan sales, net 861 1,274 3,212 3,520
Other loan fees 730 917 2,797 2,380
Loan servicing fees, net 336 332 1,239 922
Document processing fees 111 341 428 810
Other 120 149 353 567
------------- ------------ ---------- -----------
Total non-interest income 2,157 3,013 8,029 8,199
------------- ------------ ---------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,816 2,905 8,840 8,767
Occupancy and equipment expenses 537 571 1,538 1,703
Professional services 267 117 682 470
Other operating expenses 466 603 2,102 1,782
------------- ------------ ---------- -----------
Total non-interest expenses 4,086 4,196 13,162 12,722
------------- ------------ ---------- -----------
Income before provision for income taxes 1,642 1,341 4,895 2,626
Provision for income taxes 675 456 2,014 895
------------- ------------ ---------- -----------
NET INCOME $ 967 $ 885 $ 2,881 $ 1,731
============= ============ ========== ===========
INCOME PER SHARE - BASIC $ .17 $ .16 $ .50 $ .30
============= ============ ========== ===========
INCOME PER SHARE - DILUTED $ .16 $ .15 $ .49 $ .30
============= ============ ========== ===========
<FN>
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS LOSS EQUITY
------ ------ -------- ---- ------
(IN THOUSANDS)
BALANCES AT
JANUARY 1, 2004 5,707 $29,874 $ 4,472 $ (15) $ 34,331
Exercise of stock options 23 146 - - 146
Comprehensive income:
Net income 2,881 - 2,881
Other comprehensive loss, net (23) (23)
---------------
Comprehensive income - 2,858
Cash dividends
($.08 per share) (457) - (457)
------ ------- ---------- --------------- ---------------
BALANCES AT
SEPTEMBER 30, 2004 5,730 $30,020 $ 6,896 $ (38) $ 36,878
====== ======= ========== =============== ===============
<FN>
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (IN THOUSANDS)
Net income $ 2,881 $ 1,731
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 251 1,006
Provision for losses on real estate owned 1 25
Depreciation and amortization 971 1,451
Net amortization of discounts and premiums for securities 69 131
Gains from:
Sale of other real estate owned (2) (79)
Sale of loans held for sale (3,212) (3,520)
Changes in:
Fair value of interest only strips, net of accretion 544 785
Servicing rights, net of amortization and valuation adjustments (845) (379)
Other assets 1,415 5,268
Other liabilities 1,990 (1,596)
---------- -----------
Net cash provided by operating activities 4,063 4,823
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities - (6,246)
Purchase of available-for-sale securities (7,940) (17,690)
Principal pay downs and maturities of held-to-maturity securities 1,985 7,005
Principal pay downs and maturities of available-for-sale securities 1,032 8,626
Loan originations and principal collections, net (31,394) 269
Purchase of Federal Home Loan Bank stock (1,189) -
Proceeds from sale of other real estate owned 529 1,718
Net decrease in time deposits in other financial institutions 400 1,287
Purchase of premises and equipment, net (435) (193)
---------- -----------
Net cash used in investing activities (37,012) (5,224)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 146 35
Cash dividends paid on common stock (457) -
Net increase in demand deposits and savings accounts 23,261 4,751
Net increase (decrease) in time certificates of deposit 14,844 (1,119)
Proceeds from securities sold under agreements to repurchase 13,672 13,334
Repayments of securities sold under agreements to repurchase (10,641) (2,618)
Proceeds from Federal Home Loan Bank advances 7,500 -
Repayments of bonds payable in connection with securitized loans (10,711) (19,330)
---------- -----------
Net cash provided by (used in) financing activities 37,614 (4,947)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,665 (5,348)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,056 31,094
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,721 $ 25,746
========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 4,804 $ 5,937
Cash paid for income taxes 840 547
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 89 1,570
<FN>
See accompanying notes.
6
COMMUNITY WEST BANCSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements reflect all adjustments and
reclassifications that, in the opinion of management, are necessary for the fair
presentation of the results of operations and financial condition for the
interim periods. The unaudited consolidated financial statements include
Community West Bancshares ("Company") and its wholly-owned subsidiary, Community
West Bank National Association (formerly known as Goleta National Bank). All
adjustments and reclassifications in the periods presented are of a normal and
recurring nature. Results for the period ended September 30, 2004 are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Community West
Bancshares included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed, systematic
analysis and procedural discipline to determine the amount of the allowance for
loan losses ("ALL"). The ALL is based on estimates and is intended to be
adequate to provide for probable losses inherent in the loan portfolio. This
process involves deriving probable loss estimates that are based on individual
loan loss estimation, migration analysis/historical loss rates and management's
judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are
recognized as separate assets when loans are sold with servicing retained.
Servicing rights are amortized in proportion to, and over the period of,
estimated future net servicing income. Also, at the time of the loan sale, it
is the Company's policy to recognize the related gain on the loan sale in
accordance with generally accepted accounting principals ("GAAP"). The Company
uses industry prepayment statistics and its own prepayment experience in
estimating the expected life of the loans. Management periodically evaluates
servicing rights for impairment. Servicing rights are evaluated for impairment
based upon the fair value of the rights as compared to amortized cost on a
loan-by-loan basis. Fair value is determined using discounted future cash flows
calculated on a loan-by-loan basis and aggregated to the total asset level.
Impairment to the asset is recorded if the aggregate fair value calculation
drops below the net book value of the asset. The initial servicing rights and
resulting gain on sale are calculated based on the difference between the best
actual par and premium bids on an individual loan basis. Additionally, on
certain SBA loan sales that occurred prior to 2003, the Company retained
interest only ("I/O Strips"), which represent the present value of excess net
cash flows generated by the difference between (a) interest at the stated rate
paid by borrowers and (b) the sum of (i) pass-through interest paid to
third-party investors and (ii) contractual servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period.
Quarterly, the Company verifies the reasonableness of its valuation estimates by
comparison to the results of an independent third party valuation analysis.
SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the
Company transferred $122 million and $81 million in loans to special purpose
trusts ("Trusts"). The transfers have been accounted for as secured borrowings
and, accordingly, the mortgage loans and related bonds issued are included in
the Company's consolidated balance sheets. Such loans are accounted for in the
same manner as loans held to maturity. Deferred debt issuance costs and bond
discount related to the bonds are amortized on a method that approximates the
level-yield method over the estimated life of the bonds.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the
allowance for loan losses. Subsequent to foreclosure, management periodically
performs a new valuation and the asset is carried at the lower of carrying
amount or fair value. Operating expenses or income, and gains or losses on
disposition of such properties, are charged to current operations.
STOCK-BASED COMPENSATION - GAAP permits the Company to use either of two
methodologies to account for compensation cost in connection with employee stock
options. The first method requires issuers to record compensation expense over
the period the options are expected to be outstanding prior to exercise,
expiration or
7
cancellation. The amount of compensation expense to be recognized over this
term is the "fair value" of the options at the time of the grant as determined
by the Black-Scholes valuation model. Black-Scholes computes fair value of the
options based on the length of their term, the volatility of the stock price in
past periods and other factors. Under this method, the issuer recognizes
compensation expense regardless of whether or not the employee eventually
exercises the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense is recognized. GAAP requires that issuers electing the second method
must present pro forma disclosure of net income and earnings per share as if the
first method had been elected.
The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2004 2003 2004 2003
--------- ----------- --------- ----------
Annual dividend yield 1.8% 0.0% 1.8% 0.0%
Expected volatility 22.0% 27.9% 32.9% 31.0%
Risk-free interest rate 4.2% 3.9% 4.2% 3.8%
Expected life (in years) 6.8 7.3 6.8 7.3
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosure of net income and earnings per share using the fair value method. If
the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, the Company's net income, basic net income per
share and diluted net income per share would have been reduced to the pro forma
amounts following:
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2004 2003 2004 2003
---------- ---------- --------- ----------
Income:
As reported $ 967 $ 885 $ 2,881 $ 1,731
Pro forma 923 795 2,759 1,572
Income per common share - basic
As reported $ .17 $ .16 $ .50 $ .30
Pro forma .16 .14 .48 .28
Income per common share - diluted
As reported $ .16 $ .15 $ .49 $ .30
Pro forma .16 .14 .47 .27
COMPREHENSIVE INCOME
The following schedule reflects comprehensive income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 967 $ 885 $ 2,881 $ 1,731
Other comprehensive income, net of tax:
Unrealized gains on investment securities, net of tax 11 6 (23) 9
---------- ---------- ---------- ----------
Comprehensive income $ 978 $ 891 $ 2,858 $ 1,740
========== ========== ========== ==========
2. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company sells the guaranteed portion of selected SBA loans
into the secondary market, on a servicing retained basis, in exchange for a
combination of a cash premium, servicing rights and/or I/O strips. A portion of
the yield is recognized as servicing fee income as it occurs and the remainder
is capitalized as excess servicing and is included in the gain on sale
calculation. The Company retains the unguaranteed portion of these loans and
services the loans as required under the SBA programs to retain specified yield
amounts. The SBA program stipulates that the Company retains a minimum of 5% of
the loan balance, which is unguaranteed. The percentage of each unguaranteed
loan in excess of 5% may be periodically sold to a third party for a cash
premium. The balances of all servicing rights are subsequently amortized over
the estimated life of the loans using an estimated prepayment rate of 20-22%.
Quarterly, the servicing and I/O strip assets are analyzed for impairment.
8
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing released basis, in exchange
for a cash premium.
As of September 30, 2004 and December 31, 2003, the Company had approximately
$34.9 million and $36.9 million, respectively, in SBA loans held for sale.
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Commercial $ 28,240 $ 24,592
Real estate 93,135 71,010
SBA 31,103 30,698
Manufactured housing 61,080 39,073
Other installment 8,205 5,770
Securitized 25,194 36,563
--------------- --------------
246,957 207,706
Less:
Allowance for loan losses 4,040 4,676
Deferred fees, net of costs (181) (65)
Purchased premiums on securitized loans (451) (689)
Discount on SBA loans 1,977 1,548
--------------- --------------
Loans held for investment, net $ 241,572 $ 202,236
=============== ==============
An analysis of the allowance for loan losses for loans held for investment
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
----------- ----------- ---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 2,779 $ 2,698 $ 2,652 $ 3,379
Provision for loan losses 192 (56) 380 21
Loans charged off (43) (44) (173) (1,548)
Recoveries on loans previously charged off 3 54 72 800
----------- ----------- ---------- -----------
Balance, end of period $ 2,931 $ 2,652 $ 2,931 $ 2,652
=========== =========== ========== ===========
An analysis of the allowance for loan losses for securitized loans follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
----------- ----------- ---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 1,369 $ 2,119 $ 2,024 $ 2,571
Provision for loan losses (6) 354 (129) 985
Loans charged off (324) (586) (1,168) (1,941)
Recoveries on loans previously charged off 70 224 382 496
----------- ----------- ---------- -----------
Balance, end of period $ 1,109 $ 2,111 $ 1,109 $ 2,111
=========== =========== ========== ===========
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 51 $ 235
Impaired loans with specific valuation allowances 4,221 6,843
Specific valuation allowances allocated to impaired loans (596) (640)
--------------- --------------
Impaired loans, net $ 3,676 $ 6,436
=============== ==============
Average investment in impaired loans $ 5,450 $ 6,584
=============== ==============
9
4. EARNINGS PER SHARE
Earnings per share - Basic has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
has been computed based on the weighted average number of shares outstanding
during each period plus the dilutive effect of granted options. Earnings per
share were computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------------
2004 2003 2004 2003
------------ ----------- -------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,720 5,693 5,714 5,691
Dilutive effect of options 149 80 130 47
------------ ----------- -------------- -------------
Weighted average shares - Diluted 5,869 5,773 5,844 5,738
============ =========== ============== =============
Net income $ 967 $ 885 $ 2,881 $ 1,731
Earnings per share - Basic .17 .16 .50 .30
Earnings per share - Diluted .16 .15 .49 .30
5. REPURCHASE AGREEMENTS AND OTHER BORROWINGS
The Company has entered into a financing arrangement with a third party by which
its government-guaranteed securities can be pledged as collateral for short-term
borrowings. As of September 30, 2004 and December 31, 2003, securities with a
carrying value of $18.2 million and $14.7 million respectively, were pledged as
collateral for short-term borrowings. As of September 30, 2004 and December
31, 2003, the Company had $17.4 million and $14.4 million, respectively, of
outstanding repurchase agreements, with interest rates of 1.40% to 2.35%, all of
which mature within one year.
As of September 30, 2004, the Company had advances of $7.5 million from the
Federal Home Loan Bank ("FHLB") with interest rates of 1.34% to 2.59%, $5.5
million of which matures in less than one year.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is designed to provide insight into management's assessment of
significant trends related to the Company's consolidated financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto and the other financial
information appearing elsewhere in this report. See discussion under "Factors
That May Affect Future Results of Operations" for further information on risks
and uncertainties as well as information on the strategies adopted by the
Company to address these risks.
FORWARD LOOKING STATEMENTS
This 2004 Report on Form 10-Q contains statements that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those forward-looking statements include statements regarding the
intent, belief or current expectations of the Company and its management. Any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those projected in the forward-looking statements. The Company does not
undertake any obligation to revise or update publicly any forward-looking
statements for any reason.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
EXECUTIVE OVERVIEW
The Company experienced overall loan growth of $33.6 million, or 11.9%, for the
first nine months of 2004 compared to a $512,000 decrease in loans for the first
nine months of 2003. Total loans increased to $282.6 million at September 30,
2004 from $251.3 million at September 30, 2003. The securitized loans continue
to pay off at a rapid rate decreasing by 41.9% to $25.7 million at September 30,
2004 from $44.3 million at September 30, 2003. The Company continues to benefit
from the pay down of the high-interest bonds related to the securitized loans,
as well as a reduction in charge-offs due to the general portfolio credit
quality stabilization.
To better reflect the markets in which the Company serves, the name of its
subsidiary Bank was changed to Community West Bank National Association ("CWB")
effective September 1, 2004. In addition, CWB commenced plans to open a
full-service branch office in Santa Maria, California during the first quarter
of 2005.
RESULTS OF OPERATIONS - THIRD QUARTER COMPARISON
The Company recorded net income of $967,000 for the three months ended September
30, 2004, or $.16 per share diluted, compared to net income of $885,000, or $.15
per share diluted, during the three months ended September 30, 2003.
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------- INCREASE
2004 2003 DECREASE
------------------ --------------- ------------------
(DOLLARS IN THOUSANDS, EXCEP PER SHARE AMOUNTS)
Interest income $ 5,711 $ 5,020 $ 691
Interest expense 1,954 2,198 (244)
------------------ --------------- ------------------
Net interest income 3,757 2,822 935
------------------ --------------- ------------------
Provision for loan losses 186 298 (112)
------------------ --------------- ------------------
Net interest income after provision for loan losses 3,571 2,524 1,047
Non-interest income 2,157 3,013 (856)
Non-interest expenses 4,086 4,196 (110)
------------------ --------------- ------------------
Income before provision for income taxes 1,642 1,341 301
Provision for income taxes 675 456 219
------------------ --------------- ------------------
Net income $ 967 $ 885 $ 82
================== =============== ==================
Earnings per share - Basic $ .17 $ .16 $ .01
================== =============== ==================
Earnings per share - Diluted $ .16 $ .15 $ .01
================== =============== ==================
Comprehensive income $ 978 $ 891 $ 87
================== =============== ==================
11
Interest Income
Total interest income increased by $691,000, or 13.8%, for the third quarter of
2004 compared to 2003. The increase was due to a $213,000 increase in
investment interest income for the third quarter 2004 compared to 2003 and a
$478,000, or 9.8%, increase in loan interest income for the comparable quarters.
The increase in investment interest income was a result of the increase in the
average securities portfolio from $13.9 million for the third quarter of 2003 to
$27.5 million for the third quarter of 2004. The increase in loan interest
income is also primarily due to overall loan growth. Average total loans for
the third quarter 2004 increased to $282.3 million from $253.5 million for the
third quarter of 2003. Total loans grew $5 million, or 1.8%, for the quarter
ended September 30, 2004. The Company also benefited from a 75 basis point rise
in the prime rate during the third quarter of 2004. Manufactured housing,
commercial real estate, commercial and construction loan interest income
increased by $515,000, $211,000, $148,000 and $174,000, respectively, for the
third quarter 2004 compared to 2003. These increases were partially offset by
declines in interest income for the securitized and mortgage loan portfolios of
$573,000 and $224,000, respectively for the third quarter of 2004 compared to
2003. SBA and other loan products had small increases in loan interest income
for the third quarter of 2004 compared to 2003.
Interest Expense
The decline in interest expense for the third quarter of 2004 compared to the
third quarter of 2003 was primarily due to the pay down in the securitized loan
portfolio and the correlated pay downs in the high-interest securitized bonds.
The bond interest expense for the three months ended September 30, 2004 declined
by $499,000, or 47.5%, to $550,000 from $1 million for the three months ended
September 30, 2003. This decline was partially offset by increases in interest
on deposits and other borrowings. Interest on deposits increased by $166,000,
or 14.8%, for the third quarter 2004 compared to 2003. Interest expense on
other borrowings increased slightly for the third quarter 2004 compared to 2003.
Average interest-bearing deposits increased for the third quarter of 2004 over
2003 by $29.5 million, or 16%. Average other borrowed funds increased by $17.9
million to $27.2 million for the quarter ended 2004 compared to 2003. Total
average cost of funds declined from 3.17% for the third quarter of 2003 to 3.01%
for the third quarter of 2004.
Provision for Loan Losses
The provision for loan losses for the third quarter of 2004 declined by
$112,000, or 37.6%, from the third quarter of 2003. This decrease was primarily
due to a $360,000 reduction in the provision for loan losses for the securitized
loans resulting primarily from the $4.1 million of pay downs in the portfolio
during the period. As a result of loan growth within the other product lines,
this decrease was partially offset by volume-related provision increases in
certain other loan products.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains from sale of loans, servicing fees and other revenues not
derived from interest on earning assets. The $856,000, or 28.4%, decline in
non-interest income for the three months ended September 30, 2004 as compared to
the same period in 2003 is primarily due to the slowdown in demand for mortgage
loans. The change in mortgage loan demand impacted loan document fee income,
net gain on mortgage loan sales and other loan fees by ($230,000), ($236,000)
and ($188,000), respectively, for the third quarter of 2004 compared to 2003.
SBA net gain on 7(a) loan sales remained relatively unchanged for the third
quarter of 2004 compared to 2003, at $695,000 and $700,000, respectively.
Service charges on deposit accounts, loan servicing and other revenue not
derived from interest on earning assets were also approximately the same for the
comparable periods of third quarter 2004 compared to 2003, at $455,000 and
$481,000, respectively. The remaining $171,000 decrease in non-interest income
for the third quarter of 2004 compared to 2003 is due to premium and other
income related to the sale of $2.1 million in unguranteed SBA 7(a) loans which
closed in the third quarter of 2003 compared to no such sale in 2004. These
unguaranteed loans are generally sold one or two times per year.
Non-Interest Expenses
Total non-interest expenses decreased $110,000 for the third quarter of 2004
compared to the third quarter of 2003. During the third quarter of 2004, the
Company experienced increases in expenses related to the change in name of the
subsidiary bank including marketing and consulting, which were offset by
decreased expenses in salaries and employee benefits, insurance, occupancy and
loan collection.
RESULTS OF OPERATIONS - NINE MONTH COMPARISON
The Company recorded net income of $2.9 million for the nine months ended
September 30, 2004, or $.49 per share diluted, compared to net income of $1.7
million, or $.30 per share diluted, for the nine months ended September 30,
2003. The Company experienced net loan growth of $32 million from $246.5
million at September 30, 2003 to $278.5 million at September 30, 2004. The
securitized loans paid down to a net balance of $24.6 million at
12
September 30, 2004 from a net balance of $42.2 million at September 30, 2003.
The changes in loan portfolio mix have contributed to the net interest income
after provision for loan losses increase of $2.9 million, or 40.3%, for the
first nine months of 2004 compared to 2003.
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
2004 2003 (DECREASE)
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 16,117 $ 15,398 $ 719
Interest expense 5,838 7,243 (1,405)
------------------ ------------------ ------------------
Net interest income 10,279 8,155 2,124
------------------ ------------------ ------------------
Provision for loan losses 251 1,006 (755)
------------------ ------------------ ------------------
Net interest income after provision for loan losses 10,028 7,149 2,879
Non-interest income 8,029 8,199 (170)
Non-interest expenses 13,162 12,722 440
------------------ ------------------ ------------------
Income before provision for income taxes 4,895 2,626 2,269
Provision for income taxes 2,014 895 1,119
------------------ ------------------ ------------------
Net income $ 2,881 $ 1,731 $ 1,150
================== ================== ==================
Earnings per share - Basic $ .50 $ .30 $ .20
================== ================== ==================
Earnings per share - Diluted $ .49 $ .30 $ .19
================== ================== ==================
Comprehensive income $ 2,858 $ 1,740 $ 1,118
================== ================== ==================
Interest Income
Total interest income increased by $719,000, or 4.7%, for the first nine months
of 2004 compared to 2003. Investment interest income increased by $420,000, or
87.3%, and loan interest income increased by $299,000, or 2%, for the first nine
months of 2004 compared to 2003. The increase in investment income is the
result of an increase in the average securities portfolio balance from $12.7
million as of September 30, 2003 to $25.9 million as of September 30, 2004. The
increase in loan interest income was due to overall net loan growth primarily in
the manufactured housing, commercial real estate, land, construction, and
commercial loan portfolios that grew by 73.1%, 43.1%, 61.6%, 33.9% and 39.1%,
respectively, from September 30, 2003 to September 30, 2004. Manufactured
housing, commercial real estate, land and construction, SBA and commercial loans
had increases in interest income of $1.2 million, $453,000, $507,000, $352,000
and $461,000, respectively, for the first nine months of 2004 compared to 2003.
The pay down of securitized loans resulted in a decline of interest income of
$2.1 million from $4.9 million to $2.8 million for the first nine months of 2003
to 2004. Mortgage loan interest income also declined for the first nine months
of 2004 by 80%, or $469,000, compared to 2003, as the volume and time held in
warehouse both declined.
Interest Expense
The decline in interest expense for the nine months ended September 30, 2004
compared to 2003 was primarily due to the pay down in the securitized loan
portfolio and the correlated pay downs in the high-interest securitized bonds.
The bond interest expense for the nine months ended September 30, 2004 declined
by $1.7 million to $2 million from $3.7 million for 2003. This decline was
partially offset by a small increase in interest expense on deposits of $100,000
for the nine months ended September 30, 2004 compared to 2003 as well as an
increase in interest expense on other borrowings of $215,000. Total average
cost of funds for the first nine months of 2004 was 3.17% compared to 4.25% for
the first nine months of 2003.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 2004
decreased by $755,000 compared to the first nine months of 2003. The primary
decrease was in the securitized loan portfolio of $1.1 million due to the
continued pay downs in the portfolio.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains from sale of loans, servicing fees and other revenues not
derived from interest on earning assets. The $170,000, or 2%, decrease in
non-interest revenue for the nine months ended September 30, 2004 as compared to
the same period in 2003 is primarily due to the decline in mortgage loan volume
of originations and loan sales. Total non-interest income related to mortgage
lending declined $1.5 million from 2003 to 2004. Other income also declined by
$214,000 primarily due to gains on sales of other real estate owned in 2003 of
$157,000. SBA origination and loan sale
13
income increased by $1.2 million for the 2004 compared to 2003. Loan servicing
income for the nine months ended September 30, 2004 also increased by $317,000
for 2004 compared to 2003. Service charges on deposit accounts and other
revenues not derived from interest income decreased slightly.
Non-Interest Expenses
Total non-interest expenses increased 3.5%, or $440,000, for the nine months
ended September 30, 2004 compared to 2003. Professional services increased by
$212,000, or 45%, primarily due to increases in consulting and auditing fees.
The Company outsources certain administrative tasks. Other operating expenses
increased by $320,000, or 18%, for 2004 compared to 2003. This increase is
primarily due to an increase of $134,000 in advertising expenses and $268,000 in
other loan and collection fees. These increases were partially offset by a
decrease in the securitized loan servicing fees of $184,000 for the year to date
2004 compared to 2003. Salaries and employee benefits increased slightly by
$73,000 for the first nine months of 2004 compared to 2003. The increase in
employee benefit costs was primarily due to increases in various insurance plans
of $115,000, or 20.1%. Total occupancy and equipment expenses decreased by
$165,000 from 2003 to 2004. This decrease was due to decreases in premises and
equipment maintenance and depreciation costs.
INTEREST RATES AND DIFFERENTIALS
The following table illustrates average yields on our interest-earning assets
and average rates on our interest-bearing liabilities for the periods indicated.
These average yields and rates are derived by dividing interest income by the
average balances of interest-earning assets and by dividing interest expense by
the average balances of interest-bearing liabilities for the periods indicated.
Amounts outstanding are averages of daily balances during the applicable
periods.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ------------ ------------ -----------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning deposits in other financial institutions:
Average balance $ 8,194 $ 1,677 $ 6,821 $ 1,872
Interest income 49 8 118 30
Average yield 2.38% 1.95% 2.31% 2.15%
Federal funds sold:
Average balance $ 7,699 $ 14,409 $ 8,667 $ 16,096
Interest income 28 35 74 135
Average yield 1.45% .97 % 1.14% 1.12%
Investment securities:
Average balance $ 27,455 $ 13,852 $ 25,890 $ 12,718
Interest income 274 63 709 316
Average yield 3.97% 1.81% 3.66% 3.33%
Gross loans, excluding securitized:
Average balance $ 254,404 $ 204,950 $ 236,685 $ 193,186
Interest income 4,520 3,500 12,365 9,969
Average yield 7.07% 6.78% 6.98% 6.90%
Securitized loans:
Average balance $ 27,937 $ 48,597 $ 31,923 $ 56,216
Interest income 840 1,414 2,851 4,948
Average yield 11.96% 11.54% 11.93% 11.77%
TOTAL INTEREST-EARNING ASSETS:
Average balance $ 325,689 $ 283,485 $ 309,986 $ 280,088
Interest income 5,711 5,020 16,117 15,398
Average yield 6.98% 7.03% 6.95% 7.35%
14
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ------------- ----------- ------------
INTEREST-BEARING LIABILITIES: (DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average balance $ 49,472 $ 36,252 $ 41,828 $ 34,562
Interest expense 200 89 426 272
Average cost of funds 1.61% .98% 1.36% 1.05%
Savings deposits:
Average balance $ 16,615 $ 16,257 $ 18,490 $ 15,447
Interest expense 61 55 180 161
Average cost of funds 1.46% 1.34% 1.30% 1.40%
Time certificates of deposit:
Average balance $ 147,121 $ 131,209 $ 142,609 $ 131,291
Interest expense 1,025 976 3,019 3,089
Average cost of funds 2.77% 2.95% 2.83% 3.15%
Bonds payable:
Average balance $ 17,768 $ 36,460 $ 21,235 $ 42,312
Interest expense 550 1,049 1,958 3,681
Average cost of funds 12.31% 11.41% 12.32% 11.63%
Other borrowings:
Average balance $ 27,197 $ 9,285 $ 21,606 $ 4,201
Interest expense 118 29 255 40
Average cost of funds 1.73% 1.23% 1.58% 1.27%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance $ 258,173 $ 229,463 $ 245,768 $ 227,813
Interest expense 1,954 2,198 5,838 7,243
Average cost of funds 3.01% 3.80% 3.17% 4.25%
NET INTEREST INCOME $ 3,757 $ 2,822 $ 10,279 $ 8,155
NET INTEREST SPREAD 3.96% 3.22% 3.77% 3.10%
AVERAGE NET MARGIN 4.59% 3.95% 4.43% 3.89%
Nonaccrual loans are included in the average balance of loans outstanding.
Net interest income is the difference between the interest and fees earned on
loans and investments and the interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest expense
depends on the volume or balance of earning assets compared to the volume or
balance of interest-bearing deposits and liabilities and the interest rate
earned on those interest-earning assets compared to the interest rate paid on
those interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate
of interest earned on assets and the average rate of interest that must be paid
on liabilities used to fund those assets. To maintain its net interest margin,
the Company must manage the relationship between interest earned and paid.
FINANCIAL CONDITION
Average assets for the nine months ended September 30, 2004 were $325.7 million
compared to $298.9 million for the nine months ended September 30, 2003.
Average equity increased to $35.8 million for the nine months ended September
30, 2004 from $33.7 million for the same period in 2003. Average loans
increased to $268.6 million for the nine months ended September 30, 2004 from
$249.4 million for the nine months ended September 30, 2003. Average deposits
also increased for the nine months ended September 30, 2004 to $241.3 million
from $215.3 million for the nine months ended September 30, 2003.
The book value per share increased to $6.44 at September 30, 2004 from $6.02 at
December 31, 2003.
15
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2004 2003 (DECREASE) (DECREASE)
------------- ------------- ----------- -----------
Cash and cash equivalents $ 26,721 $ 22,056 $ 4,665 21.2%
Time deposits in other financial institutions 392 792 (400) (50.5%)
Investment securities available-for-sale 22,293 15,432 6,861 44.5%
Investment securities held-to-maturity 3,029 5,036 (2,007) (39.9%)
I/O strips 3,004 3,548 (544) (15.3%)
Loans-Held for sale 36,968 42,038 (5,070) (12.1%)
Loans-Held for investment, net 216,946 166,874 50,072 30.0%
Securitized loans, net 24,626 35,362 (10,736) (30.4%)
Federal Home Loan Bank stock, at cost 1,189 - 1,189 -
Federal Reserve Bank stock, at cost 812 812 - -
Total Assets 347,240 304,250 42,990 14.1%
Total Deposits 262,960 224,855 38,105 16.9%
Securities sold under agreements to repurchase 17,425 14,394 3,031 21.1%
Federal Home Loan Bank advances 7,500 - 7,500 -
Bonds payable in connection with securitized loans 15,969 26,100 (10,131) (38.8%)
Total Stockholders' Equity 36,878 34,331 2,547 7.4%
The securitized loans are paying off at a current annualized rate of 41.5%. The
Company has effectively focused on replacing these loans with growth in the
manufactured housing, SBA, commercial and commercial real estate loan
portfolios.
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 41,588 $ 42,417 $ (829) (2.0%)
Interest-bearing deposits 62,172 38,115 24,057 63.1%
Savings 15,592 15,559 33 -
Time certificates of $100,000 or more 38,367 19,673 18,694 95.0%
Other time certificates 105,241 109,091 (3,850) (3.5%)
-------------- ------------- ----------- -----------
Total deposits $ 262,960 $ 224,855 $ 38,105 16.9%
============== ============= =========== ===========
The increase in the Company's deposits is primarily due to an increase in money
market deposit accounts of $22.9 million, or 43.9%, which is the result of a new
preferred money market product. Certificates of deposit also increased by $14.8
million, or 11.5%.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
A loan is considered impaired when, based on current information, it is probable
that the Company will be unable to collect the scheduled payments of principal
or interest under the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments. Loans that experience insignificant payment delays or
payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays or payment shortfalls on a
case-by-case basis. When determining the possibility of impairment, management
considers the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record and the amount of the shortfall in relation to the principal and interest
owed. For collateral-dependent loans, the Company uses the fair value of
collateral method to measure impairment. All other loans, except for
securitized loans, are measured for impairment based on the present value of
future cash flows. Impairment is measured on a loan-by-loan basis for all loans
in the portfolio except for the securitized loans, which are evaluated for
impairment on a collective basis.
16
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 51 $ 235
Impaired loans with specific valuation allowances 4,221 6,843
Specific valuation allowances allocated to impaired loans (596) (640)
--------------- --------------
Impaired loans, net $ 3,676 $ 6,436
=============== ==============
Average investment in impaired loans $ 5,450 $ 6,584
=============== ==============
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 7,655 $ 7,174
SBA guaranteed portion of loans included above (4,743) (4,106)
--------------- --------------
Nonaccrual loans, net $ 2,912 $ 3,068
=============== ==============
Troubled debt restructured loans, gross $ 126 $ 193
Loans 30 through 89 days past due with interest accruing 1,796 3,907
Allowance for loan losses to gross loans 1.43% 1.84%
As specified under governing documents, CWB generally repurchases the guaranteed
portion of SBA loans from investors, on behalf of the SBA, when those loans
become past due 120 days. After the foreclosure and collection process is
complete, the SBA reimburses CWB for this principal balance. Therefore,
although these balances do not earn interest during this period, they generally
do not result in a loss of principal to CWB.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The Company's liquidity
management is viewed from both a long-term and short-term perspective as well as
from an asset and liability perspective. Management monitors liquidity through
regular reviews of maturity profiles, funding sources and loan and deposit
forecasts to minimize funding risk. The Company has Asset/Liability Committees
("ALCO") at the Board and CWB management levels to review asset/liability
management and liquidity issues. The Company maintains strategic liquidity and
contingency plans. The liquidity ratio of the Company was 24.8% at September
30, 2004 and 26% at December 31, 2003. The liquidity ratio consists of cash and
due from banks, deposits in other financial institutions, available for sale
investments, federal funds sold and loans held for sale, divided by total
assets. The Company has obtained a financing arrangement allowing it to pledge
securities as collateral for short-term borrowings. At September 30, 2004 and
December 31, 2003, the Company had outstanding repurchase borrowings of $17.4
million and $14.4 million, respectively. The interest rates range from 1.40%
to 2.35%, all of which mature within one year. This arrangement allows for
additional borrowing capacity and provides improved flexibility in managing the
Company's liquidity.
The Company, through CWB, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window a portion of what is pledged at
the Federal Reserve Bank. The facility is available on a short-term basis,
typically overnight. CWB qualifies for primary credit as it has been deemed to
be in sound financial condition. The rate on primary credit is currently at 100
basis points above the Federal Open Market Committee's (FOMC) target federal
funds rate (currently at 1.75%).
During the first quarter of 2004, CWB became a member of the Federal Home Loan
Bank ("FHLB"). This membership allows for additional borrowing capacity and
provides an additional source to utilize in managing the Company's liquidity.
Outstanding borrowings from the FHLB were $7.5 million at September 30, 2004.
The
17
interest rates range from 1.34% to 2.59%, $5.5 million of which matures in less
than one year. Currently, the unused borrowing capacity is $9.1 million.
CWB also maintains two unsecured federal funds purchased credit lines of $6
million each from other financial institutions, which it may periodically use
for short-term liquidity needs.
CAPITAL RESOURCES
The Company's equity capital was $36.9 million at September 30, 2004. Under the
Prompt Corrective Action provisions of the Federal Deposit Insurance Act
("FDICIA"), national banks are assigned regulatory capital classifications based
on the specified capital ratios of the institutions. The capital
classifications are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized".
To be considered "well capitalized", an institution must have a core capital
ratio of at least 5% and a total risk-based capital ratio of at least 10%.
Additionally, FDICIA imposed in 1994 a Tier 1 risk-based capital ratio of at
least 6% to be considered "well capitalized". Tier I risk-based capital is,
defined as common stock and retained earnings net of goodwill and other
intangible assets.
To be categorized as "well capitalized" or "adequately capitalized", CWB must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
and values as set forth in the tables below:
Total
(dollars in thousands) Risk - Risk - Adjusted Total Tier 1 Tier 1
Based Tier 1 Weighted Average Capital Capital Leverage
Capital Capital Assets Assets Ratio Ratio Ratio
-------- -------- --------- --------- -------- -------- ---------
September 30, 2004
CWBC (Consolidated) $ 40,120 $ 36,581 $ 282,553 $ 344,746 14.20% 12.95% 10.61%
CWB 37,589 34,051 282,044 341,018 13.33 12.07 9.99
December 31, 2003
CWBC (Consolidated) 37,150 34,096 242,730 305,666 15.31 14.05 11.15
CWB 34,695 31,648 242,170 301,024 14.33 13.07 10.51
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
Banking is a complex, highly regulated industry. The banking regulatory scheme
serves not to protect investors, but is designed to maintain a safe and sound
banking system, to protect depositors and the FDIC insurance fund, and to
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress and the states have created several largely autonomous regulatory
agencies and enacted numerous laws that govern banks, bank holding companies and
the banking industry. Consequently, the Company's growth and earnings
performance, as well as that of CWB, may be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Board of Governors of
the Federal Reserve Bank ("FRB"), the FDIC, the Office of the Comptroller of the
Currency ("OCC") and the California Department of Financial Institutions
("DFI"). For a detailed discussion of the regulatory scheme governing the
Company and CWB, please see the discussion in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Supervision and Regulation."
- --------------------------------------------------------------------------------
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's short and long-term success is subject to many factors that are
beyond its control. Shareholders and prospective investors in the Company
should carefully consider the following risk factors, in addition to other
information contained in this report. This Report on Form 10-Q contains
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of numerous risks
and uncertainties, including those described below.
INTEREST RATE RISK
The Company is exposed to different types of interest rate risks. These risks
include: lag, repricing, basis and prepayment risk.
18
- Lag Risk- lag risk results from the inherent timing difference between
the repricing of the Company's adjustable rate assets and liabilities.
For instance, certain loans tied to the prime rate index may only
reprice on a quarterly basis. However, at a community bank such as
CWB, when rates are rising, funding sources tend to reprice more
slowly than the loans. Therefore, for CWB, the effect of this timing
difference is generally favorable during a period of rising interest
rates and unfavorable during a period of declining interest rates.
This lag can produce some short-term volatility, particularly in times
of numerous prime rate changes. The last prime rate change was
effected on September 22, 2004.
- Repricing Risk - repricing risk is caused by the mismatch in the
maturities / repricing periods between interest-earning assets and
interest-bearing liabilities. If CWB was perfectly matched, the net
interest margin would generally expand during rising rate periods and
generally contract during falling rate periods. This is so since loans
tend to reprice more quickly than do funding sources. Typically, since
CWB is somewhat asset sensitive, this would also tend to expand the
net interest margin during times of interest rate increases. However,
to some extent, banks are also subject to the steepness of the yield
curve that is, the spread between rates at different maturity points.
- Basis Risk - item pricing tied to different indices may tend to react
differently, however, all CWB's variable products are priced off the
prime rate.
- Prepayment Risk - prepayment risk results from borrowers paying down /
off their loans prior to maturity. Prepayments on fixed-rate products
increase in falling interest rate environments and decrease in rising
interest rate environments. Since a majority of CWB's loan
originations are adjustable rate and set based on prime, and there is
little lag time on the reset, CWB does not experience significant
prepayments. However, CWB does have more prepayment risk on its
securitized and manufactured housing loans and its mortgage-backed
investment securities. Offsetting the prepayment risk on the
securitized loans are the related bonds payable, which were issued at
a fixed rate. When the bonds payable prepay, given the current
interest rate environment, this reduces CWB's interest expense as a
higher, fixed rate is, in effect, traded for a lower, variable rate
funding source.
MANAGEMENT OF INTEREST RATE RISK
To mitigate the impact of changes in market interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are
generally retained as they have similar repricing characteristics as our funding
sources. CWB sells mortgage products and a portion of its SBA loan
originations. While the Company has some interest rate exposure in excess of
five years, it has internal policy limits designed to minimize risk should
interest rates rise. Currently, the Company does not use derivative instruments
to help manage risk, but will consider such instruments in the future if the
perceived need should arise.
Loan sales- The Company's ability to originate, purchase and sell loans is also
significantly impacted by changes in interest rates. Increases in interest
rates may also reduce the amount of loan and commitment fees received by CWB. A
significant decline in interest rates could also decrease the size of the CWB's
servicing portfolio and the related servicing income by increasing the level of
prepayments.
DEPENDENCE ON REAL ESTATE
Approximately 47% of the loan portfolio of the Company is secured by various
forms of real estate, including residential and commercial real estate. A
decline in current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
loans. The real estate securing the Company's loan portfolio is concentrated in
California. If real estate values decline significantly, especially in
California, the change could harm the financial condition of the Company's
borrowers, the collateral for its loans will provide less security, and the
Company would be more likely to suffer losses on defaulted loans.
ECONOMIC CONDITIONS
Economic activity continued to moderately expand during the third quarter of
2004. California banks reported generally solid loan demand and good credit
quality. Demand for business lending continued to improve in most areas.
Demand for mortgages to finance home purchases weakened. Across the country,
loan demand generally improved with an increase in commercial loan demand
offsetting some softening in consumer loan demand.
INCREASED COMPETITION
The financial services industry is extremely competitive. As new competitors
and new products enter the market, the increase in competition may reduce market
share or cause the prices the Company can charge for products and services to
fall.
19
CURTAILMENT OF GOVERNMENT GUARANTEED LOAN PROGRAMS
A major segment of the Company's business consists of originating and selling
loans guaranteed by the SBA. From time to time, the government agencies that
guarantee these loans reach their internal limits and cease to guarantee loans.
In addition, these agencies may change their rules for loans or Congress may
adopt legislation that would have the effect of discontinuing or changing the
programs. Non-governmental programs could replace government programs for some
borrowers, but the terms might not be equally acceptable. Therefore, if these
changes occur, the volume of loans to small businesses that now qualify for
government guaranteed loans could decline. Also, the profitability of these
loans could decline. In early October of 2004, the SBA announced major program
changes which include: a decrease in the guarantee limit to $1 million, borrower
fees will revert to 2001 levels, and approval of an increase in the ongoing
lender fee paid to the SBA from .36% to .50%. The effects from changes to SBA
lending from the new changes on the Company's future performance and results of
operations are not practical to quantify at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the end of
the last fiscal year. For information about the Company's market risk, see the
information contained in the Company's Annual Report on Form 10-K under the
caption "Item 7A. Quantitative and Qualitative Disclosure about Market Risk,"
which is incorporated herein by this reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, with the
participation of the Company's management, carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer believe that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective in making known to them material information relating to the
Company (including its consolidated subsidiaries) required to be included in
this report.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objections is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There was no change in the Company's internal control over financial reporting,
known to the Chief Executive Officer or the Chief Financial Officer, that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------ ------------------
The Company is involved in various litigation of a routine nature that is being
handled and defended in the ordinary course of the Company's business. In the
opinion of management, based in part on consultation with legal counsel, the
resolution of these litigation matters will not have a material impact on the
Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURTIES AND USE OF PROCEEDS
- ------ ----------------------------------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------ ----------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
- ------ --------------------------------------------------
Not applicable
20
ITEM 5. OTHER INFORMATION
- ------ ------------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ -------------------------------------
(a) Exhibits.
31.1 Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
July 26, 2004: The Company furnished a Current Report on Form 8-K to
report that, on July 23, 2004, the Company issued a press release
announcing its financial results for the quarter ended June 30, 2004.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY WEST BANCSHARES
-------------------------
(Registrant)
Date: November 9, 2004 /s/ Charles G. Baltuskonis
----------------------------------------
Charles G. Baltuskonis
Executive Vice President and
Chief Financial Officer
On Behalf of Registrant and as
Principal Financial and Accounting Officer
22
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
======= ===================================================================================================
31.1 Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32* Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to
Rule 13a-13(b) and Rule 15d-14(b), promulgated under the Securities Exchange Act of
1934, as amended, and 18 U.S.C.1350.
==============================
* This certification is furnished to, but not filed, with the Commission.
This certification shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that the Registrant specifically incorporates
it by reference.
23