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 March 31, 2006
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes No [X]
Number of shares of common stock of the registrant outstanding as of May 12,
2006: 5,780,653 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL 7
STATEMENTS
The financial statements included in this Form 10-Q should be read with
reference to Community West Bancshares' Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 1A RISK FACTORS 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 22
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS 23
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------- ---------------------
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2006 2005
----------------- --------------
(UNAUDITED)
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 5,536 $ 4,830
Federal funds sold 12,582 8,902
----------------- --------------
Cash and cash equivalents 18,118 13,732
Time deposits in other financial institutions 532 532
Investment securities available-for-sale, at fair value; amortized cost of $22,424 at
March 31, 2006 and $22,833 at December 31, 2005 22,124 22,619
Investment securities held-to-maturity, at amortized cost; fair value of $7,832 at March 31,
2006 and $8,619 at December 31, 2005 7,937 8,677
Federal Home Loan Bank stock, at cost 3,016 2,985
Federal Reserve Bank stock, at cost 812 812
Interest only strips, at fair value 1,656 1,888
Loans:
Loans held for sale, at lower of cost or fair value 57,398 60,506
Loans held for investment, net of allowance for loan losses of $3,908 at March 31, 2006 and
$3,954 at December 31, 2005 325,780 321,011
----------------- --------------
Total loans 383,178 381,517
Servicing assets 2,576 2,845
Other real estate owned, net 7 7
Premises and equipment, net 2,112 2,146
Other assets 6,640 6,594
----------------- --------------
TOTAL ASSETS $ 448,708 $ 444,354
================= ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 32,728 $ 34,251
Interest-bearing demand 61,683 70,453
Savings 15,128 16,459
Time certificates of $100,000 or more 121,725 109,535
Other time certificates 107,513 103,540
----------------- --------------
Total deposits 338,777 334,238
Federal Home Loan Bank advances 61,500 63,500
Other liabilities 5,026 4,381
----------------- --------------
Total liabilities 405,303 402,119
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,780,153 shares issued and
outstanding at March 31, 2006 and 5,751,313 at December 31, 2005 30,439 30,190
Retained earnings 13,142 12,171
Accumulated other comprehensive income (loss), net (176) (126)
----------------- --------------
Total stockholders' equity 43,405 42,235
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 448,708 $ 444,354
================= ==============
<FN>
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2006 2005
------------------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
INTEREST INCOME
Loans $ 8,516 $ 5,991
Investment securities 349 301
Other 184 36
--------------- -------------
Total interest income 9,049 6,328
--------------- -------------
INTEREST EXPENSE
Deposits 2,840 1,509
Other borrowings 676 551
--------------- -------------
Total interest expense 3,516 2,060
--------------- -------------
NET INTEREST INCOME 5,533 4,268
Provision for loan losses 181 170
--------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,352 4,098
NON-INTEREST INCOME
Gains from loan sales, net 324 759
Other loan fees 644 592
Other 359 474
--------------- -------------
Total non-interest income 1,327 1,825
--------------- -------------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,217 2,937
Occupancy and equipment expenses 569 581
Other operating expenses 724 739
--------------- -------------
Total non-interest expenses 4,510 4,257
--------------- -------------
Income before provision for income taxes 2,169 1,666
Provision for income taxes 910 688
--------------- -------------
NET INCOME $ 1,259 $ 978
=============== =============
INCOME PER SHARE - BASIC $ 0.22 $ 0.17
INCOME PER SHARE - DILUTED $ 0.21 $ 0.16
Basic weighted average number of common shares outstanding 5,767 5,741
Diluted weighted average number of common shares outstanding 5,976 5,955
<FN>
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
------------- -------------- --------------- --------------- ---------------
(IN THOUSANDS)
BALANCES AT
JANUARY 1, 2006 5,751 $ 30,190 $ 12,171 $ (126) $ 42,235
Exercise of stock options 29 210 - - 210
Stock-based compensation 39 39
Comprehensive income:
Net income 1,259 - 1,259
Change in unrealized losses on
securities available-for-sale,
net (50) (50)
---------------
Comprehensive income 1,209
Cash dividends paid
($0.05 per share) (288) (288)
------------- -------------- --------------- --------------- ---------------
BALANCES AT
MARCH 31, 2006 5,780 $ 30,439 $ 13,142 $ (176) $ 43,405
============= ============== =============== =============== ===============
<FN>
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,259 $ 978
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 181 170
Depreciation and amortization 121 231
Stock-based compensation 39 -
Net amortization of discounts and premiums for securities 6 (9)
Gains on:
Sale of other real estate owned 17 3
Sale of loans held for sale (244) (670)
Changes in:
Fair value of interest only strips, net of accretion 232 256
Servicing rights, net of amortization and valuation adjustments 269 (44)
Other assets (46) (11)
Other liabilities 595 1,124
----------- -----------
Net cash provided by operating activities 2,429 2,028
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities - (2,227)
Purchase of available-for-sale securities (1.999) -
Purchase of Federal Home Loan Bank stock - (140)
Federal Home Loan Bank stock dividend (31) -
Principal paydowns and maturities of held-to-maturity securities 734 159
Principal paydowns and maturities of available-for-sale securities 2,409 282
Unrealized accumulated gains/losses on available-for-sale securities 85 28
Loan originations and principal collections, net (1,714) (18,438)
Proceeds from sale of other real estate owned 99 2
Net decrease in time deposits in other financial institutions - 8
Purchase of premises and equipment, net (87) (262)
----------- -----------
Net cash used in investing activities (504) (20,588)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 210 79
Cash dividends paid to shareholders (288) (230)
Net (decrease) in demand deposits and savings accounts (11,624) (14,308)
Net increase in time certificates of deposit 16,163 4,399
Repayments of securities sold under agreements to repurchase - (3,043)
Proceeds from Federal Home Loan Bank Advances - 18,000
Repayments of Federal Home Loan Bank Advances (2,000) -
Repayments of bonds payable in connection with securitized loans - (1,268)
----------- -----------
Net cash provided by financing activities 2,461 3,629
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,386 (14,931)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,732 30,205
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,118 $ 15,274
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 2,680 $ 1,526
Cash paid for income taxes 151 -
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned $ 116 $ 112
<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 ("CWBC") and its wholly-owned subsidiary, Community
West Bank N.A. ("CWB"). CWBC and CWB are referred to herein as "the Company".
All adjustments and reclassifications in the periods presented are of a normal
and recurring nature. Results for the period ended March 31, 2006 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, 2005.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROVISION AND 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.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The review of the adequacy of the allowance takes into consideration such
factors as concentrations of credit, changes in the growth, size and composition
of the loan portfolio, overall and individual portfolio quality, review of
specific problem loans, collateral, guarantees and economic conditions that may
affect the borrowers' ability to pay and/or the value of the underlying
collateral. Additional factors considered include: geographic location of
borrowers, changes in the Company's product-specific credit policy and lending
staff experience. These estimates depend on the outcome of future events and,
therefore, contain inherent uncertainties.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans. A provision for
loan losses is charged to expense. The allowance is charged for losses when
management believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a "loss"; portions of loans which are
deemed to be uncollectible; overdrafts which have been outstanding for more than
30 days; and, all other unsecured loans past due 120 or more days. Subsequent
recoveries, if any, are credited to the ALL.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are
recognized at fair market value as separate assets when loans are sold with
servicing retained. Servicing rights are amortized in proportion to, and over
the period of, estimated future net servicing income. 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. The initial
servicing rights and resulting gain on sale are calculated based on the
difference between the best actual par and premium bids on an individual loan
basis. Additionally, on certain SBA loan sales that occurred prior to 2003, the
Company retained interest only strips ("I/O Strips"), which represent the
present value of excess net cash flows generated by the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors and (ii) contractual
servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
7
SECURITIZED LOANS AND BOND DEFERRED COSTS - Purchased loan premiums, deferred
debt issuance costs and bond discount related to the loan and bonds are
amortized on a method that approximates the level yield method over the
estimated life of the loans and bonds, respectively.
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 - On January 1, 2006, the Company changed its
accounting policy related to stock-based compensation in connection with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 123,
"Share-Based Payment (Revised 2004)." See Note 4 - Stock-Based Compensation for
additional information.
RECENT ACCOUNTING PRONOUNCEMENTS - In March of 2006, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 156, "Accounting for Servicing
of Financial Assets, amendment of FASB Statement No. 140" (SFAS No. 156). SFAS
No. 156 amends SFAS No. 140 with respect to the accounting for separately
recognized servicing assets and liabilities. SFAS No. 156 primarily requires
companies to initially record separately recognized servicing rights at fair
value, allows companies to choose between two measurement methods and provides
additional disclosure requirements. SFAS No. 156 will be effective for the
Registrants as of January 1, 2007 and the Company is currently assessing the
impact that SFAS No. 156 may have on its financial statements.
2. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company periodically 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 and servicing rights. A portion of
the proceeds is recognized as servicing fee income as it occurs and the
remainder is capitalized as excess servicing and is included in the gain on sale
calculation. The Company retains the unguaranteed portion of these loans and
services the loans as required under the SBA programs to retain specified yield
amounts. The SBA program stipulates that the Company retains a minimum of 5% of
the loan balance, which is unguaranteed. The percentage of each unguaranteed
loan in excess of 5% may be periodically sold to a third party for a cash
premium. The Company records servicing liabilities for the unguaranteed loans
sold calculated based on the present value of the estimated future servicing
costs associated with each loan. A portion of this cost is included as a
reduction to the premium collected on the loan sale, and the remainder is
accrued and recognized as a reduction of servicing expense as it occurs. The
balance of all servicing rights and obligations is subsequently amortized over
the estimated life of the loans using an estimated prepayment rate of 25-30%.
Quarterly, the servicing and I/O strip assets are analyzed for impairment.
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing released basis, in exchange
for a cash premium.
As of March 31, 2006 and December 31, 2005, the Company had approximately $54.9
and $58.1 million, respectively, in SBA loans held for sale.
MORTGAGE LOAN SALES - In the normal course of business, the Company enters into
mortgage loan rate lock commitments with potential borrowers. Simultaneously,
the Company enters into a "best efforts" forward sale commitment to sell the
locked loans to a third party investor. Since the two commitments directly
offset and create a perfect hedge, there is no interest rate risk to the
Company; therefore, there is no material net income statement effect. At March
31, 2006, the Company had $2.9 million in outstanding mortgage loan commitments.
8
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
MARCH 31, DECEMBER 31,
2006 2005
----------- --------------
(IN THOUSANDS)
Commercial $ 44,817 $ 44,957
Real Estate 115,567 116,938
SBA 35,129 37,088
Manufactured housing 110,828 101,336
Securitized 13,537 14,590
Other installment 11,030 11,355
----------- --------------
330,908 326,264
Less:
Allowance for loan losses 3,908 3,954
Deferred fees, net of costs 42 137
Purchased premiums on securitized loans (195) (224)
Discount on SBA loans 1,373 1,386
----------- --------------
Loans held for investment, net $ 325,780 $ 321,011
=========== ==============
An analysis of the allowance for loan losses for loans held for investment and
securitized loans follows:
Three Months Ended
March 31, 2006
-----------------------------------------
Held for
Investment Securitized Total
------------ ------------- ------------
(in thousands)
Balance, beginning of period $ 3,326 $ 628 $ 3,954
Provision for loan losses 109 72 181
Loans charged off (111) (120) (231)
Recoveries on loans previously charged off 1 3 4
------------ ------------- ------------
Balance, end of period $ 3,325 $ 583 $ 3,908
============ ============= ============
Three Months Ended
March 31, 2005
-----------------------------------------
Held for
Investment Securitized Total
------------ ------------- ------------
(in thousands)
Balance, beginning of period $ 2,785 $ 1,109 $ 3,894
Provision for loan losses 139 31 170
Loans charged off (52) (247) (299)
Recoveries on loans previously charged off 92 229 321
------------ ------------- ------------
Balance, end of period $ 2,964 $ 1,122 $ 4,086
============ ============= ============
The recorded investment in loans that is considered to be impaired:
MARCH 31, DECEMBER 31,
2006 2005
-------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 74 $ 77
Impaired loans with specific valuation allowances 3,181 3,406
Specific valuation allowances allocated to impaired loans (480) (473)
-------------- --------------
Impaired loans, net $ 2,775 $ 3,010
============== ==============
Average investment in impaired loans $ 3,349 $ 3,716
============== ==============
9
4. STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION - Prior to January 1, 2006, employee compensation
expense under stock option plans was reported only if options were granted below
market price at grant date in accordance with the intrinsic value method of
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Because the exercise price of the
Company's employee stock options always equaled the market price of the
underlying stock on the date of grant, no compensation expense was recognized on
options granted. As stated in Note 1 - Significant Accounting Policies, the
Company adopted the provisions of SFAS 123R on January 1, 2006. SFAS 123R
eliminates the ability to account for stock-based compensation using APB 25 and
requires that such transactions be recognized as compensation cost in the income
statement based on their fair values on the measurement date, which is generally
the date of the grant. The Company transitioned to the fair-value based
accounting for stock-based compensation using a modified version of prospective
application ("modified prospective application"). Under modified prospective
application, as it is applicable to the Company, SFAS 123R applies to new awards
modified, repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered (generally referring to non-vested awards) that were
outstanding as of January 1, 2006 will be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption
of SFAS 123R. The attribution of compensation cost for those earlier awards is
based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
previously adopt the fair value accounting method for stock-based employee
compensation.
The fair value of the Company's employee stock options granted is estimated at
the date of grant using the Black-Scholes option-pricing model. This model
requires the input of highly subjective assumptions, changes to which can
materially affect the fair value estimate. Additionally, there may be other
factors that would otherwise have a significant effect on the value of employee
stock options granted but are not considered by the model. Accordingly, while
management believes that the Black-Scholes option-pricing model provides a
reasonable estimate of fair value, the model does not necessarily provide the
best single measure of fair value for the Company's employee stock options.
As a result of applying the provisions of SFAS 123R during the three months
ended March 31, 2006, the Company recognized additional stock-based compensation
expense related to stock options of $39,000. The increase in stock-based
compensation expense related to stock options during the three months ended
March 31, 2006 had no material impact on basic or diluted earnings per share,
income from continuing operations, income before taxes, net income, cash flow
from operation and cash flow from financing activities..
Total fair value of options granted was $18,000 and $14,000 during the three
months ended March 31, 2006 and 2005. Stock-based compensation net of
forfeitures, is recognized ratably over the requisite service period for all
awards. Estimated future stock-based compensation expense related to unvested
stock options totaled $454,000 at March 31, 2006. At such date, the
weighted-average period over which this unrecognized expense is expected to be
recognized was 1.76 years.
The following pro forma information presents the net income and earnings per
share for the three months ended March 31, 2005 as if the fair value method of
SFAS 123R had been used to measure compensation cost for stock-based
compensation plans. For purposes of these pro forma disclosures, the estimated
fair value of stock options and non-vested stock awards is amortized to expense
over the related vesting periods.
Income:
As reported $ 978
Less: Stock-based compensation expense determined under
fair value methods for all awards, net of related tax effects (28)
------
Pro forma income $ 950
======
Income per common share - basic
As reported $0.17
Pro forma 0.17
Income per common share - diluted
As reported 0.16
Pro forma 0.16
During the three months ended March 31, 2006 and 2005, proceeds from stock
option exercises totaled $210,000 and $79,000, respectively. During the three
months ended March 31, 2006 and 2005, 28,840 and 15,145 shares, respectively,
were issued in connection with stock option exercises.
10
5. EARNINGS PER SHARE
Earnings per share - Basic has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
has been computed based on the weighted average number of shares outstanding
during each period plus the dilutive effect of granted options. Earnings per
share were computed as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Weighted average shares - Basic 5,767 5,741
Dilutive effect of options 209 214
---------- ------------
Weighted average shares - Diluted 5,976 5,955
========== ============
6. BORROWINGS
FEDERAL HOME LOAN BANK ADVANCES - The Company has a blanket lien credit line
with the Federal Home Loan Bank ("FHLB"). Advances are collateralized in the
aggregate by CWB's eligible mortgage loans and securities of the U.S Government
and its agencies. The outstanding advances at March 31, 2006 and December 31,
2005 totaled $61.5 million and $63.5 million, and included $36.5 million and
$38.5 million, respectively, of funds borrowed at variable rates which adjust to
the current LIBOR rate either monthly or quarterly. At March 31, 2006 and
December 31, 2005, CWB had securities pledged to FHLB of $30.1 million at
carrying value and loans of $62.7 million, and $31.1 million at carrying value
and loans of $62.8 million, respectively. At March 31, 2006, CWB had $32.5
million available for additional borrowing.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is designed to provide insight into management's assessment of
significant trends related to the Company's consolidated financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto and the other financial
information appearing elsewhere in this report.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains statements that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those forward-looking statements include statements regarding the intent, belief
or current expectations of the Company and its management. Any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and actual results may differ materially from those
projected in the forward-looking statements. The Company does not undertake any
obligation to revise or update publicly any forward-looking statements for any
reason.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
OVERVIEW OF EARNINGS PERFORMANCE FIRST QUARTER 2006
The Company earned net income of $1.3 million, or $0.22 per basic share, and
$0.21 per diluted share for the first quarter 2006. This represents a 28.7%
increase in net income over the comparable period of 2005. The significant
factors impacting net income for the first quarter 2006 were:
- the Company was able to maintain an average net interest margin
of 5.14% on average loans of $385 million for the first quarter 2006
compared to an average net interest margin of 5.02% on $308 million on
average loans for the first quarter 2005
- continued negative effect on non-interest income primarily gains
from loan sales and loan servicing as a result of management's
strategic decision to sell fewer loans and grow the loan portfolio
- stable overall portfolio credit quality
- a modest 5.9% growth in non-interest expense in the first quarter
2006 compared to 2005 resulting from ongoing efforts to control costs
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
significantly from those estimates. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's financial
condition and results of operations and require management's most difficult,
subjective and complex judgments.
PROVISION AND 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.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The review of the adequacy of the allowance takes into consideration such
factors as concentrations of credit, changes in the growth, size and composition
of the loan portfolio, overall and individual portfolio quality, review of
specific problem loans, collateral, guarantees and economic conditions that may
affect
12
the borrowers' ability to pay and/or the value of the underlying collateral.
Additional factors considered include: geographic location of borrowers, changes
in the Company's product-specific credit policy and lending staff experience.
These estimates depend on the outcome of future events and, therefore, contain
inherent uncertainties.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans. A provision for
loan losses is charged to expense. The allowance is charged for losses when
management believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a "loss"; portions of loans which are
deemed to be uncollectible; overdrafts which have been outstanding for more than
30 days; and, all other unsecured loans past due 120 or more days. Subsequent
recoveries, if any, are credited to the ALL.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are
recognized at fair market value as separate assets when loans are sold with
servicing retained. Servicing rights are amortized in proportion to, and over
the period of, estimated future net servicing income. 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. The initial
servicing rights and resulting gain on sale are calculated based on the
difference between the best actual par and premium bids on an individual loan
basis. Additionally, on certain SBA loan sales that occurred prior to 2003, the
Company retained interest only strips ("I/O Strips"), which represent the
present value of excess net cash flows generated by the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors and (ii) contractual
servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
SECURITIZED LOANS AND BOND DEFERRED COSTS - Purchased loan premiums, deferred
debt issuance costs and bond discount related to the loan and bonds are
amortized on a method that approximates the level yield method over the
estimated life of the loans and bonds, respectively.
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 - On January 1, 2006, the Company changed its
accounting policy related to stock-based compensation in connection with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 123,
"Share-Based Payment (Revised 2004)." See Note 4 - Stock-Based Compensation for
additional information.
RECENT ACCOUNTING PRONOUNCEMENTS - In March of 2006, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 156, "Accounting for Servicing
of Financial Assets, amendment of FASB Statement No. 140" (SFAS No. 156). SFAS
No. 156 amends SFAS No. 140 with respect to the accounting for separately
recognized servicing assets and liabilities. SFAS No. 156 primarily requires
companies to initially record separately recognized servicing rights at fair
value, allows companies to choose between two measurement methods and provides
additional disclosure requirements. SFAS No. 156 will be effective for the
Registrants as of January 1, 2007 and the Company is currently assessing the
impact that SFAS No. 156 may have on its financial statements.
13
Results of Operations-First Quarter Comparison
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
MARCH 31,
-------------------------------------- INCREASE
2006 2005 (DECREASE)
------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 9,049 $ 6,328 $ 2,721
Interest expense 3,516 2,060 1,456
------------------ ------------------ -------------------
Net interest income 5,533 4,268 1,265
------------------ ------------------ -------------------
Provision for loan losses 181 170 11
------------------ ------------------ -------------------
Net interest income after provision for loan losses 5,352 4,098 1,254
Non-interest income 1,327 1,825 (498)
Non-interest expenses 4,510 4,257 253
------------------ ------------------ -------------------
Income before provision for income taxes 2,169 1,666 503
Provision for income taxes 910 688 222
------------------ ------------------ -------------------
Net income $ 1,259 $ 978 $ 281
================== ================== ===================
Earnings per share - Basic $ .22 $ .17 $ .05
================== ================== ===================
Earnings per share - Diluted $ .21 $ .16 $ .05
================== ================== ===================
Dividends per common share $ .05 $ .04 $ .01
================== ================== ===================
Comprehensive income $ 1,209 $ 962 $ 247
================== ================== ===================
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2006 VERSUS 2005
---------------------------------------
CHANGE DUE TO
TOTAL -------------------------
CHANGE RATE VOLUME
------------ -------------------------
(IN THOUSANDS)
Interest-earning deposits in other financial
institutions (including time deposits) $ (10) $ 7 $ (17)
Federal funds sold 158 16 142
Investment securities 48 24 24
Loans, net 2,525 908 1,617
------------ ----------- ------------
Total interest-earning assets 2,721 955 1,766
------------ ----------- ------------
Interest-bearing demand (94) 97 (191)
Savings 31 31 -
Time certificates of deposit 1,394 422 972
Bonds payable (370) - (370)
Other borrowings 495 139 356
------------ ----------- ------------
Total interest-bearing liabilities 1,456 689 767
------------ ----------- ------------
Net interest income $ 1,265 $ 266 $ 999
============ =========== ============
Interest Income
Total interest income increased $2.7 million, or 43.0%, for the first quarter
2006 compared to the first quarter 2005. The increase was primarily due to
increases in interest income from loans. Loan interest income increased by $2.5
million, or 42.1%, for the first quarter 2006 compared to 2005. $1.6 million of
the increase in interest income on loans was due to volume growth while $908,000
can be attributed to higher interest rates.
Interest Expense
Total interest expense increased $1.5 million, or 70.7%, for the first quarter
2006 compared to 2005. Interest on deposits increased by $1.3 million, or
88.2%, for the first quarter 2006 compared to 2005. Of this increase, $781,000
was attributed to deposit growth and $550,000 to increased interest rates on
deposits. Interest expense on other borrowings increased $125,000, or 22.7%,
to $676,000 from $551,000 for the first quarter 2006 compared to
14
2005. Interest expense on FHLB advances increased to $676,000 for the first
quarter 2006 compared to $127,000 for the first quarter 2005. This increase was
partly offset by the payoff of the securitized bonds in November 2005,
contributing to a decline of $370,000 in related interest expense for the
comparable three-month periods.
Provision for Loan Losses
The provision for loan losses increased slightly to $181,000, or 6.5%, for the
first quarter 2006 compared to $170,000 for the first quarter 2005. The
increase was primarily due to growth in the loan portfolio. Total impaired
loans decreased by $500,000 to $3.3 million at March 31, 2006 from $3.8 million
at March 31, 2005.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains on sale of loans, servicing fees and other revenues not derived
from interest on earning assets. Total non-interest income declined by $498,000
or 27.3%, for the three months of 2006 as compared to the same period in 2005
primarily due to a $446,000 decrease in gains on SBA loans sold.
In the first quarter 2006, the Company sold $2.5 million in SBA loans compared
to $8.0 million in the first quarter of 2005 resulting in gains of $241,000 and
$687,000, respectively, a decline of 64.9%. The decline in other non-interest
income of $114,000 was primarily due to reduced loan servicing fees of SBA loans
and the related amortization of the servicing asset.
Non-Interest Expenses
Total non-interest expenses increased by $253,000, or 5.9%, for the first
quarter 2006 compared to the same period of 2005. This increase is primarily
due to a net increase in salaries and employee benefits of $280,000, or 9.5%.
15
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
ENDED MARCH 31,
--------------------------
2006 2005
------------- -----------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning deposits in other financial institutions:
Average balance $ 562 $ 2,364
Interest income 5 16
Average yield 3.84% 2.68%
Federal funds sold:
Average balance $ 16,415 $ 3,346
Interest income 179 20
Average yield 4.42% 2.40%
Investment securities:
Average balance $ 34,030 $ 31,730
Interest income 349 301
Average yield 4.16% 3.85%
Gross loans, excluding securitized:
Average balance $ 371,249 $ 285,010
Interest income 8,058 5,328
Average yield 8.80% 7.58%
Securitized loans:
Average balance $ 14,249 $ 22,649
Interest income 458 663
Average yield 13.02% 11.87%
TOTAL INTEREST-EARNING ASSETS:
Average balance $ 436,505 $ 345,099
Interest income 9,049 6,328
Average yield 8.41% 7.44%
16
THREE MONTHS
ENDED MARCH 31,
--------------------------
2006 2005
------------- -----------
INTEREST-BEARING LIABILITIES: (DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average balance $ 65,038 $ 93,495
Interest expense 436 529
Average cost of funds 2.72% 2.29%
Savings deposits:
Average balance $ 15,550 $ 15,560
Interest expense 101 70
Average cost of funds 2.64% 1.82%
Time certificates of deposit:
Average balance $ 224,864 $ 129,954
Interest expense 2,303 910
Average cost of funds 4.15% 2.84%
Bonds payable:
Average balance $ - $ 13,393
Interest expense - 370
Average cost of funds - 11.21%
Other borrowings:
Average balance $ 63,078 $ 29,818
Interest expense 676 181
Average cost of funds 4.35% 2.46%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance $ 368,530 $ 282,220
Interest expense 3,516 2,060
Average cost of funds 3.87% 2.96%
NET INTEREST INCOME $ 5,533 $ 4,268
NET INTEREST SPREAD 4.54% 4.48%
AVERAGE NET MARGIN 5.14% 5.02%
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 three months ended March 31, 2006 were $451.6 million
compared to $359.9 million for the three months ended March 31, 2005. Average
equity increased to $43.3 million for the three months ended March 31, 2006,
from $38.2 million for the same period in 2005.
The book value per share increased to $7.51 at March 31, 2006 from $7.34 at
December 31, 2005.
17
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS MARCH 31, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2006 2005 (DECREASE) (DECREASE)
---------- ------------- ----------- -----------
Cash and cash equivalents $ 18,118 $ 13,732 $ 4,386 31.9%
Time deposits in other financial institutions 532 532 - -
Investment securities available-for-sale 22,124 22,619 (495) (2.2%)
Investment securities held-to-maturity 7,937 8,677 (740) (8.5%)
Federal Home Loan Bank stock, at cost 3,016 2,985 31 1.0%
Federal Reserve Bank stock, at cost 812 812 - -
I/O strips 1,656 1,888 (232) (12.3%)
Loans-Held for sale 57,398 60,506 (3,108) (5.1%)
Loans-Held for investment, net 325,780 321,011 4,769 1.5%
Total Assets 448,708 444,354 4,354 1.0%
Total Deposits 338,777 334,238 4,539 1.4%
Federal Home Loan Bank advances 61,500 63,500 (2,000) (3.1%)
Total Stockholders' Equity 43,405 42,235 1,170 2.8%
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
MARCH 31, DECEMBER 31, INCREASE INCREASE
2006 2005 (DECREASE) (DECREASE)
---------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 32,728 $ 34,251 $ (1,523) (4.4%)
Interest-bearing deposits 61,683 70,453 (8,770) (12.4%)
Savings 15,128 16,459 (1,331) (8.1%)
Time certificates of $100,000 or more 121,725 109,535 12,190 11.1%
Other time certificates 107,513 103,540 3,973 3.8%
---------- ------------- ----------- -----------
Total deposits $ 338,777 $ 334,238 $ 4,539 1.4%
========== ============= =========== ===========
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A loan is considered impaired when, based on current information, it is probable
that the Company will be unable to collect the scheduled payments of principal
or interest under the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments. Loans that experience insignificant payment delays or
payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays or payment shortfalls on a
case-by-case basis. When determining the possibility of impairment, management
considers the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record and the amount of the shortfall in relation to the principal and interest
owed. For collateral-dependent loans, the Company uses the fair value of
collateral method to measure impairment. All other loans, except for
securitized loans, are measured for impairment based on the present value of
future cash flows. Impairment is measured on a loan-by-loan basis for all loans
in the portfolio except for the securitized loans, which are evaluated for
impairment on a collective basis.
The recorded investment in loans that is considered to be impaired:
MARCH 31, DECEMBER 31,
2006 2005
------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 74 $ 77
Impaired loans with specific valuation allowances 3,181 3,406
Specific valuation allowances allocated to impaired loans (480) (473)
------------- --------------
Impaired loans, net $ 2,775 $ 3,010
============= ==============
Average investment in impaired loans $ 3,349 $ 3,716
============= ==============
18
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
MARCH 31, DECEMBER 31,
2006 2005
------------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 5,703 $ 6,797
SBA guaranteed portion of loans included above (3,641) (4,332)
------------- --------------
Nonaccrual loans, net $ 2,062 $ 2,465
============= ==============
Troubled debt restructured loans, gross $ 74 $ 75
Loans 30 through 89 days past due with interest accruing 1,276 1,792
Allowance for loan losses to gross loans 1.01% 1.03%
CWB generally repurchases the guaranteed portion of SBA loans from investors
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, INTEREST RATE RISK AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The most important factor in the
preservation of liquidity is maintaining public confidence that facilitates the
retention and growth of core deposits. Ultimately, public confidence is gained
through profitable operations, sound credit quality and a strong capital
position. The Company's liquidity management is viewed from both a long-term
and short-term perspective as well as from an asset and liability perspective.
Management monitors liquidity through regular reviews of maturity profiles,
funding sources and loan and deposit forecasts to minimize funding risk. The
Company has asset/liability committees ("ALCO") at the Board and CWB management
level to review asset/liability management and liquidity issues. The Company
maintains strategic liquidity and contingency plans. Periodically, the Company
has used short-term time certificates from other financial institutions to meet
projected liquidity needs.
The liquidity ratio of the Company was 22% as of March 31, 2006 and 22% as of
December 31, 2005. 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.
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Company
established a credit line under which the borrowing capacity is determined using
a percentage of its total assets, subject to collateralization from the pledging
option under requirements of FHLB's "Blanket Lien". Approval in March 2005, for
FHLB's "Blanket Lien" option represents an enhancement of the Bank's borrowing
capacity with FHLB, which was previously based on "delivery status". Advances
are collateralized in the aggregate by CWB's FHLB stock, deposits maintained
with FHLB, certain mortgages or deeds of trust and securities of the U.S.
Government and its agencies. The maximum amount of credit available to CWB will
change in accordance with FHLB policies. The outstanding advances at March 31,
2006 include $36.5 million of funds borrowed at variable rates which adjust to
the current LIBOR rate either monthly or quarterly. At March 31, 2006, CWB had
securities pledged to FHLB, of $30.1 million at carrying value and loans of
$62.7 million, and had $32.5 million available for additional borrowing. The
outstanding advances at December 31, 2005 included $38.5 million borrowed at
variable rates with securities pledged of $31.1 million at carrying value and
loans of $62.8 million.
The Company, through the Bank, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window up to 50% of what is pledged at
the Federal Reserve Bank. The facility is available on a short-term basis,
typically overnight. CWB qualifies for primary credit as it has been deemed to
be in sound financial condition. The rate on primary credit will be 50 basis
points less than the secondary credit rate and will generally be granted on a
"no questions asked basis" at a rate that initially will be at 100 basis points
above the Federal Open Market Committee's (FOMC) target federal funds rate. As
the rate is currently not attractive, it is unlikely it will be used as a
regular source of funding, but is noted as available as an alternative funding
source.
The Company also maintains three unsecured federal funds purchased credit lines
for a total borrowing capacity of $18.5 million.
19
CWBC's routine funding requirements primarily consist of certain operating
expenses. Normally, CWBC obtains funding to meet its obligations from dividends
collected from its subsidiary and has the capability to issue debt securities.
Federal banking laws regulate the amount of dividends that may be paid by
banking subsidiaries without prior approval.
INTEREST RATE RISK
The Company is exposed to different types of interest rate risks. These risks
include: lag, repricing, basis and prepayment risk.
- 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.
- 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 expand during rising rate periods and 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.
- 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.
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.
CAPITAL RESOURCES
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
rules as to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions and new regulations concerning
internal controls, accounting and operations.
The prompt corrective action regulations of FDICIA define specific capital
categories based on the institutions' capital ratios. The capital categories, in
declining order, are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". To be considered "well capitalized", an institution must have
a core capital ratio of at least 5% and a total risk-based capital ratio of at
least 10%. Additionally, FDICIA imposed in 1994 a new Tier I risk-based capital
ratio of at least 6% to be considered "well capitalized". Tier I risk-based
capital is, primarily, common stock and retained earnings, net of goodwill and
other intangible assets.
20
To be categorized as "adequately capitalized" or "well 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:
Risk- Adjusted Total Tier 1 Tier 1
(dollars in thousands) Total Tier 1 Weighted Average Capital Capital Leverage
Capital Capital Assets Assets Ratio Ratio Ratio
-------- -------- --------- --------- -------- -------- ---------
March 31, 2006
CWBC (Consolidated) $ 47,231 $ 43,323 $ 380,346 $ 455,090 12.42% 11.39% 9.52%
CWB 43,524 39,644 380,321 451,298 11.44 10.42 8.78
December 31, 2005
CWBC (Consolidated) 46,031 42,077 375,487 429,378 12.26% 11.21% 9.80%
CWB 42,501 38,577 375,474 425,768 11.32 10.27 9.06
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
The Company does not anticipate any material changes in its capital resources.
CWBC has common equity only and does not have any off-balance sheet financing
arrangements. The Company has not reissued any treasury stock nor does it have
any immediate plans or programs to do so.
- --------------------------------------------------------------------------------
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, and the Office of the Comptroller of
the Currency ("OCC"). 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 fiscal year ended December 31, 2005 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operation - Supervision and Regulation."
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.
21
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
- ------- ------------------
On April 3, 2006, Villa Constance South Homeowners' Association ("Homeowners'
Association" or "Plaintiff"), filed a First Amended Complaint against Bartlein &
Company, Inc., Robert Bartlein and James Nguyen (collectively, the "Management
Company") and the Company and the Bank for accounting, compensatory and punitive
damages, and for declaratory injunctive relief purporting to allege 10 different
causes of action. The action is pending in the State of California, Santa
Barbara Superior Court.
Plaintiff alleges that the Management Company was the managing agent for the
Homeowners' Association from 1992 until sometime in 2005 and that during that
time the Management Company commingled funds in the Homeowners' Association
account at the Bank with funds of the other associations which the Management
Company managed all in violation of Section 1363.2(d) of the California Civil
Code. Robert Bartlein is the owner and President of Management Company and is
also a shareholder and a member of the Board of Directors of the Company and
Chairman of the Board of the Bank.
Plaintiff alleges that the Bank aided and abetted the improper conduct of the
Management Company and that the Bank was unjustly enriched because Plaintiff's
money was placed, in part, in an interest free account thus allowing the Bank to
have use of the interest funds for other loans and/or other benefits to the
Bank. The Plaintiff also contends that the Bank violated California Business &
Profession Code Section 17200 in that the Bank falsely deceived the public by
failing to disclose that the Plaintiff's funds were in an interest free account.
In connection with the Amended Complaint, Plaintiff seeks compensatory damages
as to all defendants (including the Bank) of $10.5 million in addition to
unspecified punitive damages and other relief.
The Bank has filed a demurrer to the Complaint (which is akin to the motion to
dismiss for failure to state a cause of action. ) The demurrer asserts that even
if every allegation against the Bank is true, there has been a failure to state
a claim for any relief against the Bank. The demurrer is scheduled to be heard
on June 14, 2006. While no discovery has been done to this date by the Bank
with respect to the Plaintiff's claims, based on the information currently
available, the Bank believes that it acted properly in setting up the
Plaintiff's accounts and the Management Company's account in connection with the
management of the Homeowners' Association. The Bank intends to vigorously defend
the action if its demurrer is overruled and the Bank is required to file an
Answer to the Amended Complaint.
ITEM 1A. RISK FACTORS
- --------- -------------
There have been no material changes in the risk factors previously disclosed
under Item 1A.of the Company's 2005 Annual Report on Form 10-K .
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -------- -------------------------------------------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -------- ----------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- -----------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
- -------- ------------------
None
22
ITEM 6. EXHIBITS
- -------- --------
Exhibits.
31.1 Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or 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) or Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
*32.1 Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to
Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities and Exchange Act of 1934, as
amended, and 18 U.S.C. 1350.
*This certification is furnished to, but shall not be deemed 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
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: May 12, 2006 /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
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
======= ==================================================================================================
31.1 Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or 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) or Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1* Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to
Rule 13a-14(b) or 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 shall not be deemed 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.
25