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, 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 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 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 November
13, 2006: 5,800,538 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
STATEMENTS 7
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
ITEM 2. OPERATIONS 12
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ITEM 3. ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 1A RISK FACTORS 22
UNREGISTERED SALES OF EQUITY SECURITIES AND
ITEM 2. USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
SUBMISSION OF MATTERS TO A VOTE OF
ITEM 4. SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS 22
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
(UNAUDITED)
--------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 4,574 $ 4,830
Federal funds sold 15,399 8,902
--------------- --------------
Cash and cash equivalents 19,973 13,732
Time deposits in other financial institutions 630 532
Investment securities available-for-sale, at fair value; amortized cost of $23,139 at
September 30, 2006 and $22,833 at December 31, 2005 22,780 22,619
Investment securities held-to-maturity, at amortized cost; fair value of $9,382 at
September 30, 2006 and $8,619 at December 31, 2005 9,526 8,677
Federal Home Loan Bank stock, at cost 3,995 2,985
Federal Reserve Bank stock, at cost 812 812
Interest only strips, at fair value 1,471 1,888
Loans:
Loans held for sale, at lower of cost or fair value 65,629 60,506
Loans held for investment, net of allowance for loan losses of $3,898 at
September 30, 2006 and $3,954 at December 31, 2005 361,502 321,011
--------------- --------------
Total loans 427,131 381,517
Servicing rights 2,171 2,845
Other real estate owned, net - 7
Premises and equipment, net 2,276 2,146
Other assets 7,364 6,594
--------------- --------------
TOTAL ASSETS $ 498,129 $ 444,354
=============== ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 32,487 $ 34,251
Interest-bearing demand 57,429 70,453
Savings 16,089 16,459
Time certificates of $100,000 or more 155,838 109,535
Other time certificates 99,926 103,540
--------------- --------------
Total deposits 361,769 334,238
Federal Home Loan Bank advances 85,000 63,500
Other liabilities 5,762 4,381
--------------- --------------
Total liabilities 452,531 402,119
--------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; shares issued
and outstanding, 5,792,818 at September 30, 2006 and 5,751,313 at December 31, 2005 30,581 30,190
Retained earnings 15,228 12,171
Accumulated other comprehensive loss, net (211) (126)
--------------- --------------
Total stockholders' equity 45,598 42,235
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 498,129 $ 444,354
=============== ==============
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHSENDED
SEPTEMBER 30 SEPTEMBER 30,
------------------ ------------------
2006 2005 2006 2005
-------- -------- -------- --------
INTEREST INCOME (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Loans $ 9,729 $ 7,254 $ 27,144 $ 20,002
Investment securities 414 324 1,143 935
Other 133 73 415 159
-------- -------- -------- --------
Total interest income 10,276 7,651 28,702 21,096
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 3,517 2,045 9,470 5,294
Bonds payable and other borrowings 972 741 2,443 1,962
-------- -------- -------- --------
Total interest expense 4,489 2,786 11,913 7,256
-------- -------- -------- --------
NET INTEREST INCOME 5,787 4,865 16,789 13,840
Provision for loan losses 12 (39) 337 396
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,775 4,904 16,452 13,444
NON-INTEREST INCOME
Other loan fees 703 1,002 1,959 2,347
Gains from loan sales, net 318 502 1,144 2,050
Document processing fees 208 202 596 614
Service charges 89 86 269 225
Loan servicing fees, net 108 178 214 365
Other 27 26 177 80
-------- -------- -------- --------
Total non-interest income 1,453 1,996 4,359 5,681
-------- -------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,275 3,137 9,699 9,121
Occupancy and equipment expenses 573 664 1,724 1,818
Professional services 319 253 835 859
Data processing 85 104 293 211
Other operating expenses 442 641 1,340 1,452
-------- -------- -------- --------
Total non-interest expenses 4,694 4,799 13,891 13,461
-------- -------- -------- --------
Income before provision for income taxes 2,534 2,101 6,920 5,664
Provision for income taxes 1,043 (50) 2,881 1,416
-------- -------- -------- --------
NET INCOME $ 1,491 $ 2,151 $ 4,039 $ 4,248
======== ======== ======== ========
INCOME PER SHARE - BASIC $ .26 $ .37 $ .70 $ .74
INCOME PER SHARE - DILUTED $ .25 $ .36 $ .67 $ .72
Basic weighted average number of common shares outstanding 5,787 5,745 5,778 5,744
Diluted weighted average number of common shares outstanding 6,008 5,931 5,995 5,925
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 42 271 - - 271
Stock-based compensation 120 120
Comprehensive income:
Net income 4,039 - 4,039
Change in unrealized losses on
securities available-for-sale, net - (85) (85)
---------------
Comprehensive income 3,954
Cash dividends paid
($0.17 per share) (982) (982)
------ ----------- ---------- --------------- ---------------
BALANCES AT
SEPTEMBER 30, 2006 5,793 $ 30,581 $ 15,228 $ (211) $ 45,598
====== =========== =========== =============== ===============
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2006 2005
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,039 $ 4,248
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 337 396
Depreciation and amortization 368 622
Stock-based compensation 120 -
Net amortization of discounts and premiums for investment securities 1 29
Gains on:
Sale of other real estate owned 19 35
Sale of loans held for sale (1,144) (1,521)
Loans originated for sale and principal collections, net 1,404 1,300
Changes in:
Fair value of interest only strips, net of accretion 417 682
Servicing rights, net of amortization and valuation adjustments 674 238
Other assets (626) (591)
Other liabilities 1,296 274
--------- ---------
Net cash provided by operating activities 6,905 5,712
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (2,479) (2,237)
Purchase of available-for-sale securities (3,976) (2,112)
Purchase of Federal Home Loan Bank stock (900) (1,317)
Federal Home Loan Bank stock dividend (110) (45)
Principal pay downs and maturities of held-to-maturity securities 1,626 1,321
Principal pay downs and maturities of available-for-sale securities 3,674 1,207
Loan originations and principal collections, net (46,327) (64,062)
Proceeds from sale of other real estate owned 104 96
Net (increase) decrease in time deposits in other financial institutions (98) 114
Purchase of premises and equipment, net (498) (652)
--------- ---------
Net cash used in investing activities (48,984 (67,687)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 271 83
Cash dividends paid on common stock (982) (804)
Net (decrease) increase in demand deposits and savings accounts (15,158) (14,414)
Net increase in time certificates of deposit 42,689 33,615
Repayments of securities sold under agreements to repurchase - (13,672)
Proceeds from Federal Home Loan Bank advances 29,500 46,000
Repayment of Federal Home Loan Bank advances (8,000) (2,000)
Repayments of bonds payable in connection with securitized loans - (4,409)
--------- ---------
Net cash provided by financing activities 48,320 44,399
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,241 (17,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,732 30,205
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,973 $ 12,629
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 10,740 $ 6,440
Cash paid for income taxes 3,082 2,157
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 116 155
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".
The accompanying unaudited condensed Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") and with the instructions to Form 10-Q and
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair statement have been reflected in the financial
statements. However, the results of operations for the three and nine-month
periods ended September 30, 2006 are not necessarily indicative of the results
to be expected for the full year
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
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.
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 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.
7
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) ("SFAS No. 123(R)"). See Note 4 -
Stock-Based Compensation for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS - In March 2006, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 156, "Accounting for Servicing
of Financial Assets, an 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 as of
January 1, 2007 and the Company is currently assessing the impact that SFAS No.
156 may have on its financial statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 provides enhanced guidance for using fair value
to measure assets and liabilities. SFAS No. 157 will be effective for fiscal
years ending after November 15, 2007. The Company has not started to assess the
impact of SFAS No. 157.
In October 2006, FASB issued FASB Statement No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 amends
SFAS Nos. 87, 88 and 123(R) with respect to the accounting for defined benefit
pension and other postretirement plans. FASB No. 158 primarily requires
companies to (a) recognize in its statement of financial position an asset for
the defined benefit postretirement plan's overfunded status or a liability for a
plan's underfunded status, (b) measure a defined benefit postretirement plan's
assets and obligations that determine its funded status as of the end of the
employer's fiscal year, and, (c) recognize changes in the funded status of a
defined benefit postretirement plan in comprehensive income in the year in which
the changes occur. The disclosure requirements of SFAS No. 158 will be
effective for fiscal years ending after December 15, 2006. The requirement to
measure plan assets and benefit obligations will be effective for fiscal years
ending after December 15, 2008. The adoption of SFAS No. 158 is not anticipated
to have an impact on the Company's financial position or results of operations.
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. 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,
typically 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. 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 certain SBA loans into the secondary market,
on a servicing released basis, typically for a cash premium.
As of September 30, 2006 and December 31, 2005, the Company had approximately
$64.5 million and $58.1 million, respectively, in SBA loans held for sale.
8
MORTGAGE LOAN SALES - From time to time, the Company enters into mortgage loan
rate lock commitments (normally for 30 days) with potential borrowers. In
conjunction therewith, the Company enters into a forward sale commitment to sell
the locked loan to a third party investor. This forward sale agreement requires
delivery of the loan on a "best efforts" basis but does not obligate the Company
to deliver if the mortgage loan does not fund.
The mortgage rate lock agreement and the forward sale agreement qualify as
derivatives under SFAS No. 133, as amended. The value of these derivatives is
generally equal to the fee, if any, charged to the borrower at inception but may
fluctuate in the event of changes in interest rates. These derivative financial
instruments are recorded at fair value if material. Although the Company does
not attempt to qualify these transactions for the special hedge accounting
afforded by SFAS No. 133, management believes that changes in the fair value of
the two commitments generally offset and create an economic hedge. At September
30, 2006 and December 31, 2005, the Company had $2.6 million and $8.1 million,
respectively, in outstanding mortgage loan rate lock and forward sale
commitments, the impact of which was not material to the Company's financial
position or results of operations.
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,
2006 2005
--------------- --------------
(IN THOUSANDS)
Commercial $ 52,790 $ 44,957
Real Estate 131,022 116,938
SBA 30,615 37,088
Manufactured housing 133,373 101,336
Securitized 10,953 14,590
Other installment 7,670 11,355
--------------- --------------
366,423 326,264
Less:
Allowance for loan losses 3,898 3,954
Deferred fees, net of costs 78 137
Purchased premiums on securitized loans (147) (224)
Discount on SBA loans 1,092 1,386
--------------- --------------
Loans held for investment, net $ 361,502 $ 321,011
=============== ==============
An analysis of the allowance for loan losses for loans held for investment and
securitized loans follows:
THREE MONTHS ENDED
SEPTEMBER 30, 2006
------------------------------------
HELD FOR
INVESTMENT SECURITIZED TOTAL
------------ ------------- -------
(IN THOUSANDS)
Balance, beginning of period $ 3,393 $ 604 $3,997
Provision for loan losses 177 (165) 12
Loans charged off (104) (167) (271)
Recoveries on loans previously charged off 72 88 160
------------ ------------- -------
Balance, end of period $ 3,538 $ 360 $3,898
============ ============= =======
THREE MONTHS ENDED
SEPTEMBER 30, 2005
------------------------------------
HELD FOR
INVESTMENT SECURITIZED TOTAL
------------ ------------- -------
(IN THOUSANDS)
Balance, beginning of period $ 3,102 $ 898 $4,000
Provision for loan losses 171 (210) (39)
Loans charged off (54) (137) (191)
Recoveries on loans previously charged off 3 172 175
------------ ------------- -------
Balance, end of period $ 3,222 $ 723 $3,945
============ ============= =======
9
NINE MONTHS ENDED
SEPTEMBER 30, 2006
------------------------------------
HELD FOR
INVESTMENT SECURITIZED TOTAL
------------ ------------- -------
(IN THOUSANDS)
Balance, beginning of period $ 3,326 $ 628 $3,954
Provision for loan losses 397 (60) 337
Loans charged off (275) (332) (607)
Recoveries on loans previously charged off 90 124 214
------------ ------------- -------
Balance, end of period $ 3,538 $ 360 $3,898
============ ============= =======
NINE MONTHS ENDED
SEPTEMBER 30, 2005
------------------------------------
HELD FOR
INVESTMENT SECURITIZED TOTAL
------------ ------------- -------
(IN THOUSANDS)
Balance, beginning of period $ 2,785 $ 1,109 $3,894
Provision for loan losses 515 (119) 396
Loans charged off (173) (699) (872)
Recoveries on loans previously charged off 95 432 527
------------ ------------- -------
Balance, end of period $ 3,222 $ 723 $3,945
============ ============= =======
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30, DECEMBER 31,
2006 2005
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 66 $ 77
Impaired loans with specific valuation allowances 4,182 3,406
Specific valuation allowances allocated to impaired loans (599) (473)
--------------- --------------
Impaired loans, net $ 3,649 $ 3,010
=============== ==============
Average investment in impaired loans $ 3,859 $ 3,716
=============== ==============
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. 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 No.
123R ("123R") on January 1, 2006. 123R eliminates the ability to account for
stock-based compensation using the intrinsic value method 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, 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 is recognized as the remaining requisite service is rendered
during the period of and/or the periods after the adoption of 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,
management believes that the Black-Scholes option-pricing model provides a
reasonable estimate of fair value.
10
As a result of applying the provisions of 123R during the three and nine-month
periods ended September 30, 2006, the Company recognized stock-based
compensation expense related to stock options of $41,000 and $120,000,
respectively.
No options were granted during the three months ended September 30, 2006 and
2005. The fair value of options granted for the nine-month periods ended
September 30, 2006 and 2005 was $60,000 and $21,000, respectively. 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 $405,000 at September 30,
2006. At such date, the weighted-average period over which this unrecognized
expense is expected to be recognized is 1.62 years.
The following pro forma information presents the net income and earnings per
share for the three and nine months ended September 30, 2005 as if the fair
value method of 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.
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------- -------------------
(dollars in thousands, except per share amounts)
Income:
As reported $ 2,151 $ 4,248
Proforma 2,125 4,168
Income per share - basic
As reported .37 .74
Pro forma .37 .73
Income per share - diluted
As reported .36 .72
Pro forma .36 .70
During the three months ended September 30, 2006 and 2005, proceeds from stock
option exercises totaled $53,000 and $4,000, respectively. For the nine months
ended September 30, 2006 and 2005, proceeds from the exercise of stock options
were $271,000 and $83,000 respectively, and the shares issued in connection with
stock exercises were 42,000 and 16,000, respectively.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,787 5,745 5,778 5,744
Dilutive effect of options 221 186 217 181
---------- ---------- ---------- ----------
Weighted average shares - Diluted 6,008 5,931 5,995 5,925
========== ========== ========== ==========
Net income $ 1,491 $ 2,151 $ 4,039 $ 4,248
Earnings per share - Basic .26 .37 .70 .74
Earnings per share - Diluted .25 .36 .67 .72
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 loans and securities of the U.S Government and its
agencies. The outstanding advances at September 30, 2006 and December 31, 2005
include $44.5 million and $38.5 million, respectively, borrowed at variable
rates which adjust to the current LIBOR rate either monthly or quarterly. At
September 30, 2006 and December 31, 2005, CWB had securities pledged to FHLB of
$32.1 million and $31.1 million, respectively, at carrying value and loans
pledged of $134 million and $62.8 million, respectively. At September 30, 2006,
CWB had $29.5 million available capacity for additional FHLB 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
The Company earned net income of $1.5 million, or $0.25 per diluted share, for
the third quarter 2006. Income before provision for income taxes for the third
quarter 2006 was $2.5 million compared to $2.1 million for the third quarter
2005, an increase of 20.6%. For the nine months ended September 30, 2006, the
company earned $4 million, or $0.67 per diluted share. Income before provision
for income taxes for the nine months ended September 30, 2006 increased by $1.3
million, or 22.2%, over the comparable period of 2005. The net income for both
the three- and nine-month periods in 2005 included an income tax credit of
$914,000, or $0.15 per diluted share, from resolution of a potential tax issue.
The significant factors impacting net income for the third quarter 2006 and for
the nine months ended September 30, 2006 were:
- average loan balances for the third quarter of 2006 were $422
million compared to $347 million for the same quarter of 2005, an
increase of 21.6%
- continued rising interest rate and flat yield curve environment
over the first nine months of 2006 resulted in slightly reduced
margins despite an increase in yields on interest-earning assets to
8.53% from 7.68%. This decrease in net interest margin is due to
continued competition for core deposits resulting in the Company using
more expensive wholesale funding sources and an increase in cost of
funds for the quarter and year to date 2006. Management expects
continued margin deterioration in the future
- fewer loan sales as management's focus continues on portfolio
growth which resulted in decreased gains on loan sales
The Company continues to focus on growing its loan portfolio despite increased
industry-wide competition and a challenging interest rate environment. To
expand its Community West branding and enhance convenience for existing
customers, the Company opened two new branch locations during fiscal year 2005
and opened a third new branch location in Westlake Village, California on
October 2, 2006.
CRITICAL ACCOUNTING POLICIES
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.
A number of critical accounting policies are used in the preparation of the
Company's consolidated financial statements. These policies relate to areas of
the financial statements that involve estimates and judgments made by
management. These include: 1) provision and allowance for loan losses, 2)
interest only strips and servicing rights, and 3) securitized loan premiums and
deferred costs. These critical accounting policies are discussed in the
Company's 2005 10-K with a description of how the estimates are determined and
an indication of the consequences of an over or under estimate.
12
RESULTS OF OPERATIONS - THIRD QUARTER COMPARISON
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------ INCREASE
2006 2005 (DECREASE)
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 10,276 $ 7,651 $ 2,625
Interest expense 4,489 2,786 1,703
-------------- --------------- ---------------
Net interest income 5,787 4,865 922
-------------- --------------- ---------------
Provision for loan losses 12 (39) 51
-------------- --------------- ---------------
Net interest income after provision for loan losses 5,775 4,904 871
Non-interest income 1,453 1,996 (543)
Non-interest expenses 4,694 4,799 (105)
-------------- --------------- ---------------
Income before provision for income taxes 2,534 2,101 433
Provision for income taxes 1,043 (50) 1,093
-------------- --------------- ---------------
Net income $ 1,491 $ 2,151 $ (660)
============== =============== ===============
Earnings per share - Basic $ .26 $ .37 $ (.11)
============== =============== ===============
Earnings per share - Diluted $ .25 $ .36 $ (.11)
============== =============== ===============
Comprehensive income $ 1,525 $ 2,109 $ (584)
============== =============== ===============
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2006 VERSUS 2005
---------------------------
CHANGE DUE TO
TOTAL -----------------
CHANGE RATE VOLUME
-------- -----------------
(IN THOUSANDS)
Interest-earning deposits, federal funds sold,
investment securities $ 150 $ 96 $ 54
Loans, net 2,475 812 1,663
-------- ------- --------
Total interest-earning assets 2,625 908 1,717
-------- ------- --------
Deposits 1,472 634 838
Bonds payable (277) - (277)
Other borrowings 508 189 319
-------- ------- --------
Total interest-bearing liabilities 1,703 823 880
-------- ------- --------
Net interest income $ 922 $ 85 $ 837
======== ======== ========
Interest Income
Total interest income increased by $2.6 million, or 34.3%, for the third quarter
2006 compared to the third quarter 2005. Loan interest income increased by $2.5
million, or 34.1%, for the third quarter 2006 compared to 2005. $1.7 million of
this increase was due to loan growth and $812,000 can be attributed to increases
in interest rates. Interest income from commercial real-estate and construction,
manufactured housing, commercial and SBA loans increased by $932,000, $866,000,
$446,000 and $437,000, respectively, for the third quarter 2006 compared to
2005. Average loan balances for manufactured housing, commercial real-estate and
construction and commercial loans increased by 45.5%, 30.1% and 31.2%,
respectively, compared to the third quarter 2005. The securitized loan portfolio
continues to run off resulting in a decline in interest income of $239,000, or
39.8%, for the third quarter 2006 compared to 2005. Total interest income from
investments increased $150,000 for the third quarter 2006 compared to 2005,
primarily due to increases in interest rates.
Interest Expense
Total interest expense increased $1.7 million, or 61.1%, for the third quarter
2006 compared to 2005. Interest on deposits increased $1.5 million, or 72.0%.
Of this increase, $838,000 was attributed to deposit growth and $634,000 to
increased rates on deposits. Interest expense related to other borrowings
increased by $231,000, or 31.2% and was due to FHLB advances. Interest expense
on FHLB advances increased to $972,000 for the third quarter 2006
13
compared to $460,000 for the same period of 2005. Interest expense for the third
quarter 2005 included $278,000 related to the securitized bonds which were paid
off in the fourth quarter 2005.
Provision for Loan Losses
The provision for loan losses increased slightly for the third quarter of 2006
compared to the third quarter 2005 due to loan growth.
Non-Interest Income
Non-interest income includes other loan fees, gains from sale of loans, loan
document fees, service charges on deposit accounts, loan servicing fees and
other revenues not derived from interest on earning assets. Total non-interest
income declined by $543,000, or 27.2%, for the third quarter 2006 as compared to
the same period in 2005. The decrease was primarily due to declines in other
loan fees and gains from sale of loans. Other loan fees decreased by $299,000,
or 29.8%, and net gains from loan sales decreased by $184,000, or 36.7%. Net
loan servicing declined slightly by $70,000, or 39.3%. The decline in other
loan fees of $299,000 was primarily due to fewer premiums received from
referrals of SBA 504 loans. The decline in gains from sale of loans was due to
declines in both SBA and mortgage loan sale gains which declined by $111,000 and
$73,000, respectively. The decrease in SBA gains from loan sales was primarily
due to declines in the market rates. The decline in mortgage gains from sale of
loans was due to a $16.7 million decline in loan origination volume for the
comparable periods. Both document processing fees and service charges on
deposit accounts were up slightly for the third quarter of 2006 compared to
2005.
Non-Interest Expenses
Total non-interest expenses declined slightly by $105,000, or 2.2%, for the
third quarter 2006 compared to 2005. The decline was primarily due to decreases
in other expenses of $279,000 and occupancy expenses of $91,000 for the third
quarter 2006 compared to 2005. These declines were partially offset by
increases in salaries and employee benefits of $138,000 and professional
services of $66,000 for the third quarter 2006 compared to 2005. The decrease
in other expenses was due to lower loan related expenses, insurance and a loss
on disposal of assets taken in 2005.
RESULTS OF OPERATIONS - NINE MONTH COMPARISON
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------ INCREASE
2006 2005 (DECREASE)
-------------- -------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 28,702 $ 21,096 $ 7,606
Interest expense 11,913 7,256 4,657
-------------- -------------- ---------------
Net interest income 16,789 13,840 2,949
-------------- -------------- ---------------
Provision for loan losses 337 396 (59)
-------------- -------------- ---------------
Net interest income after provision for loan losses 16,452 13,444 3,008
Non-interest income 4,359 5,681 (1,322)
Non-interest expenses 13,891 13,461 430
-------------- -------------- ---------------
Income before provision for income taxes 6,920 5,664 1,256
Provision for income taxes 2,881 1,416 1,465
-------------- -------------- ---------------
Net income $ 4,039 $ 4,248 $ (209)
============== ============== ===============
Earnings per share - Basic $ .70 $ .74 $ (.04)
============== ============== ===============
Earnings per share - Diluted $ .67 $ .72 $ (.05)
============== ============== ===============
Comprehensive income $ 3,954 $ 4,238 $ (284)
============== ============== ===============
14
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2006 VERSUS 2005
------------------------------------
CHANGE DUE TO
TOTAL -----------------------
CHANGE RATE VOLUME
----------- ---------- -----------
(IN THOUSANDS)
Interest-earning deposits, federal funds sold,
investment securities $ 464 $ 215 $ 249
Loans, net 7,142 2,265 4,877
----------- ---------- -----------
Total interest-earning assets 7,606 2,480 5,126
----------- ---------- -----------
Deposits 4,176 1,748 2,428
Bonds payable (968) - (968)
Other borrowings 1,449 513 936
----------- ---------- -----------
Total interest-bearing liabilities 4,657 2,261 2,396
----------- ---------- -----------
Net interest income $ 2,949 $ 219 $ 2,730
=========== ========== ===========
Interest Income
Total interest income increased by $7.6 million, or 36.1%, for the first nine
months 2006 compared to 2005. Loan interest income increased by $7.1 million, or
35.7%, for the nine months ended September 30, 2006 compared to the same period
for 2005. Of this increase, $4.9 million was due to loan growth and $2.2
million can be attributed to higher rates. Interest income from manufactured
housing, commercial real-estate and construction, SBA and commercial loans
increased by $2.5 million, $2.4 million, $1.4 million, and $1.4 million,
respectively, for the nine months ended September 30 2006 compared to 2005.
Average loan balances for these loan categories increased by 49.4%, 27.7%, 7.0%
and 33.0%, respectively, compared to the first nine months of 2005. These
increases were partially offset by the decline in interest income from the
securitized loans of $748,000, or 38.2%. Total interest income from investments
increased $464,000 for the first nine months of 2006 compared to 2005. $249,000
of this increase was due to volume and $215,000 was due to increased interest
rates. The increase primarily related to an increase in federal funds sold
interest income of $262,000.
Interest Expense
Total interest expense increased $4.7 million, or 64.2%, for the nine months
ended September 30, 2006 compared to the first nine months 2005. Interest on
deposits increased $4.2 million, or 78.9%. Of this increase, $2.4 million was
attributed to deposit growth and $1.8 million to increased rates on deposits.
Interest expense on FHLB advances increased to $2.4 million for the first nine
months of 2006 compared to $903,000 for the same period of 2005. This increase
was partly offset by the payoff of the bonds related to the securitized loans in
November 2005, contributing to a decline of $968,000 in related interest expense
for the comparable nine-month periods.
Provision for Loan Losses
The provision for loan losses for the first nine months of 2006 decreased
$59,000, or 14.9%, to $337,000 from $396,000 for 2005. The decrease is
primarily due to changes in the portfolio mix and the Company continues to
benefit from the low amounts of classified loans and net charge-offs.
Non-Interest Income
Non-interest income includes other loan fees, gains from sale of loans, loan
document fees, service charges on deposit accounts, servicing fees and other
revenues not derived from interest on earning assets. Total non-interest income
declined by $1.3 million, or 23.3%, for the nine months ended September 30, 2006
compared to 2005. $906,000 of this decline was due to lower net gains from loan
sales. Gains from SBA loan sales declined by $765,000 or 42.6%, and gains from
mortgage loan sales declined by $141,000 or 55.1%. The decline in gain from SBA
loan sales is due to management's strategic decision to sell fewer loans in 2006
and a recent decline in market rates. The Company sold $8.7 million fewer SBA
7(a) loans in the first nine months of 2006 compared to 2005. The decline in
gains from mortgage loan sales is a result of a decrease in origination volume
of $46 million for 2006 compared to 2005. Also contributing to the decline in
non-interest income is the decrease in other loan fees of $388,000 or 16.5%, due
to fewer premiums received from referrals of SBA 504 loans in 2006 compared to
2005.
Non-Interest Expenses
Total non-interest expenses increased by $430,000, or 3.2%, for the nine months
ended September 30, 2006 compared to the same period of 2005. The increase is
primarily due to increased salaries and employee benefits of $578,000, or 6.3%,
which was partly offset by slight decreases in various other non-interest
expenses.
15
INTEREST RATES AND DIFFERENTIALS
The following table illustrates average yields on interest-earning assets and
average rates on 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,
-------------------- --------------------
2006 2005 2006 2005
--------- --------- --------- ---------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning deposits in other financial institutions:
Average balance $ 640 $ 734 $ 571 $ 1,165
Interest income 7 6 18 24
Average yield 4.60% 3.29% 4.24% 2.81%
Federal funds sold:
Average balance $ 9,665 $ 7,920 $ 11,221 $ 5,967
Interest income 126 67 397 135
Average yield 5.15% 3.39% 4.73% 3.02%
Investment securities:
Average balance $ 36,555 $ 34,058 $ 35,215 $ 32,717
Interest income 414 324 1,143 935
Average yield 4.49% 3.77% 4.34% 3.82%
Gross loans, excluding securitized:
Average balance $409,797 $329,537 $390,022 $307,015
Interest income 9,368 6,654 25,934 18,044
Average yield 9.07% 8.01% 8.89% 7.86%
Securitized loans:
Average balance $ 11,716 $ 17,861 $ 12,993 $ 20,309
Interest income 361 600 1,210 1,958
Average yield 12.23% 13.33% 12.45% 12.89%
TOTAL INTEREST-EARNING ASSETS:
Average balance $468,373 $390,110 $450,022 $367,173
Interest income 10,276 7,651 28,702 21,096
Average yield 8.70% 7.78% 8.53% 7.68%
16
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2006 2005 2006 2005
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES: (DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average balance $ 55,379 $ 87,783 $ 59,259 $ 91,066
Interest expense 457 590 1,340 1,720
Average cost of funds 3.27% 2.67% 3.02% 2.52%
Savings deposits:
Average balance $ 15,274 $ 16,793 $ 15,310 $ 16,231
Interest expense 120 91 330 244
Average cost of funds 3.13% 2.16% 2.89% 2.01%
Time certificates of deposit:
Average balance $248,989 $155,103 $236,273 $140,316
Interest expense 2,940 1,364 7,800 3,330
Average cost of funds 4.69% 3.49% 4.41% 3.17%
Bonds payable:
Average balance - $ 10,585 - $ 12,034
Interest expense - 278 - 968
Average cost of funds - 10.41% - 10.76%
FHLB Advances:
Average balance $ 77,294 $ 52,363 $ 69,443 $ 42,837
Interest expense 972 463 2,443 994
Average cost of funds 4.99% 3.51% 4.70% 3.10%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance $396,936 $322,627 $380,285 $302,484
Interest expense 4,489 2,786 11,913 7,256
Average cost of funds 4.49% 3.43% 4.19% 3.21%
NET INTEREST INCOME $ 5,787 $ 4,865 $ 16,789 $ 13,840
NET INTEREST SPREAD 4.21% 4.35% 4.34% 4.47%
NET INTEREST MARGIN 4.90% 4.95% 4.99% 5.04%
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 total assets increased by $82.4 million, or 21.6%, to $464.5 million for
the nine months ended September 30, 2006 compared to $382.1 million for the nine
months ended September 30, 2005. Average total equity increased by $5.2
million, or 13.3%, to $44.3 million for the nine months ended September 30, 2006
from $39.1 million for the comparable period 2005. Average total gross loans
increased by $75.7 million, or 23.1%, to $403 million for the nine months ended
September 30, 2006 from $327.3 million for the nine months ended September 30,
2005. Average deposits also increased by 22.5% from $282.1 million for the nine
months ended September 30, 2005 to $345.7 million for the nine months ended
September 30, 2006.
The book value per share increased to $7.87 at September 30, 2006 from $7.34 at
December 31, 2005 primarily due to earnings from operations.
17
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2006 2005 (DECREASE) (DECREASE)
-------------- ------------- ----------- -----------
Cash and cash equivalents $ 19,973 $ 13,732 $ 6,241 45.4%
Time deposits in other financial institutions 630 532 98 18.4%
Investment securities available-for-sale 22,780 22,619 161 0.7%
Investment securities held-to-maturity 9,526 8,677 849 9.8%
Federal Home Loan Bank stock, at cost 3,995 2,985 1,010 33.8%
Federal Reserve Bank stock, at cost 812 812 - -
I/O strips 1,471 1,888 (417) (22.1%)
Loans held for sale 65,629 60,506 5,123 8.5%
Loans held for investment, net 361,502 321,011 40,491 12.6%
Total Assets 498,129 444,354 53,775 12.1%
Total Deposits 361,769 334,238 27,531 8.2%
Federal Home Loan Bank advances 85,000 63,500 21,500 33.9%
Total Stockholders' Equity 45,598 42,235 3,363 8.0%
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
2006 2005 (DECREASE) (DECREASE)
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 32,487 $ 34,251 $ (1,764) (5.2%)
Interest-bearing deposits 57,429 70,453 (13,024) (18.5%)
Savings 16,089 16,459 (370) (2.2%)
Time certificates of $100,000 or more 155,838 109,535 46,303 42.3%
Other time certificates 99,926 103,540 (3,614) (3.5%)
-------------- ------------- ----------- -----------
Total deposits $ 361,769 $ 334,238 $ 27,531 8.2%
============== ============= =========== ===========
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:
SEPTEMBER 30, DECEMBER 31,
2006 2005
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 66 $ 77
Impaired loans with specific valuation allowances 4,182 3,406
Specific valuation allowances allocated to impaired loans (599) (473)
--------------- --------------
Impaired loans, net $ 3,649 $ 3,010
=============== ==============
Average investment in impaired loans $ 3,859 $ 3,716
=============== ==============
18
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
SEPTEMBER 30, DECEMBER 31,
2006 2005
--------------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 5,683 $ 6,797
SBA guaranteed portion of loans included above 3,365 (4,332)
--------------- --------------
Nonaccrual loans, net $ 2,318 $ 2,465
=============== ==============
Troubled debt restructured loans, gross $ 70 $ 75
Loans 30 through 89 days past due with interest accruing 1,207 1,792
Allowance for loan losses to gross loans 0.90% 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 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 September 30, 2006 and 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". 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 September 30, 2006
included $44.5 million of funds borrowed at variable rates which adjust to the
current LIBOR rate either monthly or quarterly. At September 30, 2006, CWB had
$32.1 million of securities at carrying value and loans of $134 million pledged
to FHLB, and had $29.5 million available for additional borrowing. The
outstanding advances at December 31, 2005 included $38.5 million borrowed at
variable rates with $31.1 million of securities at carrying value and loans of
$62.8 million pledged to FHLB.
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. Historically, 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. However, since the yield curve has flattened over the
last two years, short-term funding sources have generally repriced
quicker. 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 usually 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. Borrowers prepay for different reasons, but
such prepayments are typically expected to decrease in a rising
interest rate market.
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 Company (on a consolidated basis) and CWB are subject to various regulatory
capital requirements administered by the Federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and CWB's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and CWB must meet specific capital guidelines that involve
quantitative measures of the Company's and CWB's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company's and CWB's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
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
20
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 imposes
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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). The Company's and CWB's actual capital
amounts and ratios as of September 30, 2006 and December 31, 2005 are presented
in the table below:
Risk- Adjusted Total Tier 1 Tier 1
(DOLLARS IN Total Tier 1 Weighted Average Capital Capital Leverage
THOUSANDS) Capital Capital Assets Assets Ratio Ratio Ratio
September 30, 2006
CWBC (Consolidated) $ 49,413 $ 45,515 $ 423,774 486,243 11.66% 10.74% 9.36%
CWB 45,790 41,892 423,805 482,403 10.80 9.88 8.68
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
- --------------------------------------------------------------------------------
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.
21
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
- ------ -----------------
In April 2006, Villa Constance South Homeowners' Association ("Homeowners'
Association" or "Plaintiff"), named the Bank in a First Amended Complaint
against Bartlein & Company, Inc., Robert Bartlein and James Nguyen
(collectively, the "Management Company"). The action sought an accounting
against the Management Company which managed the Homeowners' Association
accounts. The action sought compensatory and punitive damages and declaratory
injunctive relief purporting to allege 10 different causes of action, four of
which were against the Bank. The action is pending in the State of California,
Santa Barbara Superior Court.
After a series of successful attacks on the pleadings by the Bank, the Plaintiff
agreed to dismiss the Bank, with prejudice, in return for a waiver of costs. A
dismissal with prejudice as to the Bank was filed with the court on September
22, 2006 and the dismissal entered on September 22, 2006.
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
- ------- ---------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- ------- -----------------
None
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.
22
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 13, 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
23
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 Rule13a-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.
24