FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended September 30, 1998 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
incorporation or organization) Identification No.)
5638 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 692-1862
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 and
12CFR16.3 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of common stock of the registrant: 4,098,062 outstanding as of
November 5, 1998
This Form 10-Q contains 15 pages.
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PART 1 - FINANCIAL INFORMATION
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COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 1998 December 31, 1997
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ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,257,000 $ 3,663,000
Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,815,000 8,440,000
------------------- ------------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 13,072,000 12,103,000
Time deposits in other financial institutions . . . . . . . . . . . . . . . . . . - 2,477,000
Federal reserve bank stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,000 251,000
Investment securities held to maturity, at cost,
fair value of $502,000 at September 30, 1998 and $993,000 at December 31, 1997. 502,000 999,000
Investment securities held for trading, at fair value . . . . . . . . . . . . . . 2,731,000 2,529,000
Loans
Held for investment, net of allowance for loan losses
of $1,452,000 in 1998 and $1,286,000 in 1997 . . . . . . . . . . . . . . . . . 63,239,000 56,724,000
Held for sale, at lower of cost or fair value . . . . . . . . . . . . . . . . . 82,557,000 14,440,000
Other real estate owned, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 284,000 -
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,954,000 2,725,000
Servicing assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,044,000 664,000
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,006,000 514,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164,000 1,886,000
------------------- ------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,817,000 $ 95,312,000
=================== ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand. . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,999,000 $ 15,133,000
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,411,000 13,608,000
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,549,000 12,982,000
Time certificates of $100,000 or more . . . . . . . . . . . . . . . . . . . . 46,421,000 16,833,000
Other time certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,367,000 21,696,000
------------------- ------------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,747,000 80,252,000
Accrued interest payable and other liabilities. . . . . . . . . . . . . . . . . 1,997,000 2,931,000
------------------- ------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,744,000 83,183,000
------------------- ------------------
COMMITMENTS AND CONTINGENCIES
[Note 3 and 8]
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized:
4,098,062 and 3,081,316 shares issued and outstanding at September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,714,000 8,570,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359,000 3,559,000
------------------- ------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 18,073,000 12,129,000
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . $ 171,817,000 $ 95,312,000
=================== ------------------
</TABLE>
See notes to consolidated financial statements.
2
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<TABLE>
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COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
---------- ---------- ----------- ----------
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INTEREST INCOME:
Loans, including fees . . . . . . . . . . . . $4,118,000 $1,909,000 $ 9,815,000 $5,461,000
Federal funds sold. . . . . . . . . . . . . . 69,000 89,000 296,000 253,000
Time deposits in other financial institutions 7,000 26,000 67,000 89,000
Investment securities . . . . . . . . . . . . 11,000 29,000 40,000 91,000
---------- ---------- ----------- ----------
Total interest income . . . . . . . . 4,205,000 2,053,000 10,218,000 5,894,000
INTEREST EXPENSE ON DEPOSITS. . . . . . . . . . 1,611,000 747,000 3,877,000 2,087,000
---------- ---------- ----------- ----------
NET INTEREST INCOME . . . . . . . . . . . . . . 2,594,000 1,306,000 6,341,000 3,807,000
PROVISION FOR LOAN LOSSES . . . . . . . . . . . 120,000 100,000 400,000 260,000
---------- ---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES. . . . . . . . . . . . . . . . . . . . 2,474,000 1,206,000 5,941,000 3,547,000
OTHER INCOME:
Gains from loan sales . . . . . . . . . . . . 1,605,000 1,239,000 4,088,000 2,869,000
Loan origination fees . . . . . . . . . . . . 907,000 764,000 2,725,000 2,225,000
Document processing fees. . . . . . . . . . . 426,000 127,000 1,133,000 531,000
Service charges . . . . . . . . . . . . . . . 284,000 218,000 765,000 593,000
Loan servicing income . . . . . . . . . . . . 111,000 139,000 665,000 504,000
Other income. . . . . . . . . . . . . . . . . 65,000 22,000 231,000 110,000
---------- ---------- ----------- ----------
Total other income. . . . . . . . . . 3,398,000 2,509,000 9,607,000 6,832,000
---------- ---------- ----------- ----------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . 3,122,000 1,897,000 8,304,000 5,345,000
Occupancy expenses. . . . . . . . . . . . . . 637,000 373,000 1,728,000 1,087,000
Advertising . . . . . . . . . . . . . . . . . 228,000 137,000 516,000 396,000
Professional fees . . . . . . . . . . . . . . 211,000 89,000 478,000 223,000
Postage and freight . . . . . . . . . . . . . 60,000 244,000 366,000 591,000
Travel expense. . . . . . . . . . . . . . . . 79,000 30,000 192,000 106,000
Data processing expense . . . . . . . . . . . 51,000 24,000 148,000 89,000
Stationery & supply expense . . . . . . . . . 55,000 38,000 130,000 95,000
Credit report expense . . . . . . . . . . . . 29,000 23,000 106,000 67,000
Other operating expenses. . . . . . . . . . . 142,000 112,000 501,000 402,000
---------- ---------- ----------- ----------
Total other expenses. . . . . . . . . 4,614,000 2,967,000 12,469,000 8,401,000
---------- ---------- ----------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES . . . . . . . . . . . . . . . . . . . . . 1,258,000 748,000 3,079,000 1,978,000
PROVISION FOR INCOME TAXES. . . . . . . . . . . 525,000 310,000 1,278,000 827,000
---------- ---------- ----------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . $ 733,000 $ 438,000 $ 1,801,000 $1,151,000
========== ========== =========== ==========
NET INCOME PER COMMON SHARE - BASIC . . . . . . $ 0.18 $ 0.14 $ 0.51 $ 0.38
========== ========== =========== ==========
NET INCOME PER COMMON SHARE - DILUTED . . . . . $ 0.18 $ 0.12 $ 0.49 $ 0.33
========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
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COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,801,000 $ 1,151,000
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 260,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 689,000 427,000
(Gain)/loss on sale of other real estate owned . . . . . . . . . . . . . . . (25,000) 31,000
Gain on sale of loans held for sale. . . . . . . . . . . . . . . . . . . . . (4,088,000) (1,944,000)
Origination of servicing and interest only strip assets, net of amortization (582,000) (925,000)
Changes in operating assets and liabilities:
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . (1,492,000) (42,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (274,000) (193,000)
Accrued interest payable and other liabilities . . . . . . . . . . . . . . (911,000) 808,000
------------- ------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . (4,482,000) (427,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities . . . . . . . . . . . . . . . . . . . (516,000) (87,000)
Maturities of held-to-maturity securities . . . . . . . . . . . . . . . . . . 1,000,000 500,000
Net decrease in time deposits in other financial institutions . . . . . . . . 2,477,000 595,000
Net increase in loans and loans held for sale . . . . . . . . . . . . . . . . (71,315,000) (8,196,000)
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . . . 113,000 69,000
Purchase of premises and equipment. . . . . . . . . . . . . . . . . . . . . . (1,947,000) (597,000)
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Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (70,188,000) (7,716,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, and savings accounts. . . . . . . . . . . . . . 3,236,000 6,752,000
Net increase in time certificates . . . . . . . . . . . . . . . . . . . . . . . 68,259,000 7,857,000
Exercise of Stock Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,807,000 223,000
Exercise of Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 337,000 107,000
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Net cash provided by financing activities. . . . . . . . . . . . . . . . . 75,639,000 14,939,000
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 969,000 6,796,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . 12,103,000 12,792,000
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 13,072,000 $19,588,000
============= ============
See notes to consolidated financial statements.
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,385,000 $ 2,045,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614,000 $ 390,000
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned . . . . . . . . . . . . . . . . . . . . . . . $ 371,000 $ 373,000
</TABLE>
4
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COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1998 and 1997
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Community West Bancshares' (the "Company") 1997 Annual
Report on Form 10-K.
Statements concerning future performance, developments or events, concerning
expectations for growth and market forecasts, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties which might cause actual results to differ materially
from stated expectations. These factors include, but are not limited to, the
approval of regulatory agencies and shareholders, the effect of interest rate
changes, the expansion of the Company, changes in SBA policy or funding,
competition in the financial services market for both deposits and loans, and
general economic conditions.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA and FHA
Title I home improvement loans and 125 loan-to-value loans, which are originated
and are intended for sale in the secondary market, are carried at the lower of
cost or fair value. Funding for SBA and FHA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans under
these programs is dependent on the continuation of such programs.
The Company sells SBA and FHA Title I loans with servicing retained. The Company
retains an interest only ("I/O") strip, which represents the present value of
the right to the excess cash flows generated by the serviced loans which
represents 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, (ii) trustee fees, (iii) FHA insurance fees (if applicable), (iv)
third-party credit enhancement fees (if applicable), and (v) stipulated
servicing fees. The Company determines the present value of this anticipated
cash flow stream at the time each loan sale transaction closes, utilizing
valuation assumptions appropriate for each particular transaction.
The significant valuation assumptions are related to the anticipated average
lives of the loans sold, including the anticipated prepayment speeds and the
anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flows, which is
calculated utilizing the constant prepayment rate of the serviced loans, which
was 8% and 15% for SBA and Title I loans, respectively, for the nine months
ended September 30, 1998.
5
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The I/O Strips are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Investments in Certain Debt and
Equity Marketable Securities." As an I/O Strip is subject to significant
prepayment risk, and therefore has an undetermined maturity date, it cannot be
classified as held to maturity. The Company has chosen to classify its I/O
Strips as trading securities. Based on this classification, the Company is
required to mark these securities to fair value with the accompanying increases
or decreases in fair value being recorded as earnings in the current period. The
determination of fair value is based on the previously mentioned methodology.
As the gain recognized in the year of sale is equal to the net estimated future
cash flows from the I/O Strips, discounted at a market interest rate, the amount
of cash actually received over the lives of the loans is expected to exceed the
gain previously recognized at the time the loans are sold. The I/O Strips are
amortized based on an accelerated method against the cash flows resulting in
income recognition that is not materially different from the interest method.
The Company generally retains the right to service loans it originates or
purchases and subsequently sells.
2. Certain reclassifications have been made in the 1997 financial
information to conform to the presentation used in 1998.
3. In the ordinary course of business, the Company enters into commitments
to extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of September 30, 1998, the Company had
entered into commitments with certain customers amounting to $19.7 million
compared to $20.4 million at December 31, 1997. There was $35,000 of letters of
credit outstanding at September 30, 1998, compared to $30,000 at December 31,
1997.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of a
normal and recurring nature. Results for the period ending September 30, 1998,
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share -- basic has been computed based on the weighted
average number of shares outstanding during each period, which was 4,014,624 and
3,039,584 for the three months and 3,544,106 and 3,001,654 for the nine months
ended September 30, 1998, and 1997, respectively. Net income per share --
diluted has been computed based on the weighted average number of shares
outstanding during each period plus the dilutive effect of outstanding warrants
and granted options. The number of shares used for the net income per share -
diluted calculation was 4,014,624 and 3,039,584 for the three months and
3,544,106 and 3,001,654 for the nine months ended September 30, 1998, and 1997,
respectively. The outstanding warrants expired on September 30, 1998. The net
income per share amounts for 1997 have been retroactively stated to reflect the
two-for-one stock split in February 1998.
6
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6. Supplemental cash flow information: During the nine-month period ended
September 30, 1998, loans amounting to $371,000 were transferred to Other Real
Estate Owned ("OREO") as a result of foreclosure on the real properties held as
collateral. During the nine-month period ending September 30, 1998, the Company
sold OREO with a book value of $87,000.
7. In an effort to provide more specific guidance to businesses on
accounting for internal software development, the Accounting Standards Executive
Committee has issued Statement of Position (SOP) 98-1. SOP 98-1 requires
companies to capitalize and amortize many of the costs associated with
developing or obtaining software for internal use. The Company adopted SOP 98-1
as of the quarter-ended June 30, 1998; and has capitalized approximately
$386,000 in development costs for the six months since adoption.
8. On November 2, 1998, the Company announced its shareholders have approved
the acquisition of Palomar Savings and Loan of Escondido, California. The
shareholders of Palomar Savings had approved the merger at an earlier meeting in
October 1998. The merger, which will be accounted for as a pooling of interests
whereby Palomar Savings becomes a wholly owned subsidiary of the Company, is
expected to be completed before year end 1998. Palomar Savings will retain its
name. All regulatory approval has been received.
The value of the transaction will be approximately $13.5 million. The combined
company will have total assets, loans, and deposits of approximately $250
million, $210 million and $225 million, respectively. Combined shareholders'
equity will be approximately $24 million.
9. In September, the Company's subsidiary, Goleta National Bank opened a
second branch office located in Ventura, California. This office houses a full
service branch, as well as, SBA, mortgage, and accounts receivable financing
departments. As of the end of the quarter, the Ventura branch has $12.0 million
in new deposits.
7
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COMMUNITY WEST BANCSHARES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Community West
Bancshares, (the "Company").
RESULTS OF OPERATIONS
The Company reported net earnings of $733,000 for the three months ended
September 30, 1998, an increase of $295,000, or 67.4%, compared to $438,000 for
the three months ended September 30, 1997. Basic earnings per share were $.18
for the three months ended September 30, 1998, compared to $.14 per share for
the three ended September 30, 1997. Basic earnings per share is calculated
using weighted average number of shares outstanding for the period. Diluted
earnings per share were $.18 per share for the three months ended September 30,
1998, compared to $.12 per share for the three months ended September 30, 1997.
Diluted earnings per share is calculated using the weighted average number of
shares outstanding for the period, plus the net effect of outstanding warrants
and granted stock options using the treasury stock method. The annualized return
on average equity was 16.6% for the three months ended September 30, 1998, and
15.5% for the three months ended September 30, 1997.
The Company reported net earnings of $1,801,000 for the nine months ended
September 30, 1998, an increase of $650,000, or 56.5%, compared to $1,151,000,
for the nine months ended September 30, 1997. Basic earnings per share were $.51
for the nine months ended September 30, 1998, compared to $.38 per share for the
nine months ended September 30, 1997. Diluted earnings per share were $.49 per
share for the nine months ended September 30, 1998, compared to $.33 per share
for the nine months ended September 30, 1997. The annualized return on average
equity was 15.8% for the nine months ended September 30, 1998, and 14.3%, for
the nine months ended September 30, 1997
The book value per share increased from $3.93 at December 31, 1997, to $4.41 at
September 30, 1998. Average assets for the nine months ended September 30, 1998,
were $138,656,000 compared to $87,685,000 for the nine months ended September
30, 1997; average equity increased to $15,207,000 for the nine months ended
September 30, 1998, from $10,765,000 for the nine months ended September 30,
1997.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
8
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The annualized net interest margin was 6.8% for the three months ended September
30, 1998, compared to an annualized net interest margin of 6.0% for the three
months ended September 30, 1997. Net interest income totaled $2,594,000 for the
three months ended September 30, 1998. This represented an increase of
$1,288,000, or 98.6%, from net interest income of $1,306,000 for the three
months ended September 30, 1997. Earning assets averaged $152,455,000 for the
three months ended September 30, 1998. This represented an increase of
$65,474,000, or 75.3%, over average earning assets of $86,981,000 for the three
months ended September 30, 1997. The increase was primarily a result of a 472%
increase in loans held for sale at September 30, 1998 from September 30, 1997.
The Company increased its balance of HLTV second mortgage loans through retail,
brokers, and bulk purchases in the second and third quarter. The Company funded
these purchases by increasing the rates on short-term time deposits. It is
anticipated these loans will be used for a loan securitization the Company has
planned.
For the three months ended September 30, 1998, the Company earned interest and
fees of $4,118,000 on average loans of $136,838,000 representing an annualized
yield of 12.0%. For the three months ended September 30, 1997, the Company
earned interest and fees of $1,909,000 on average loans of $64,597,000, for an
annualized yield of 11.8%.
The annualized net interest margin was 6.5% for the nine months ended September
30, 1998, compared to an annualized net interest margin of 6.1% for the nine
months ended September 30, 1997. Net interest income totaled $6,341,000 for the
nine months ended September 30, 1998. This represented an increase of
$2,534,000, or 66.6%, from net interest income of $3,807,000 for the nine months
ended September 30, 1997. Earning assets averaged $130,983,000 for the nine
months ended September 30, 1998. This represented an increase of $48,260,000, or
58.3%, over average earning assets of $82,723,000 for the nine months ended
September 30, 1997.
For the nine months ended September 30, 1998, the Company earned interest and
fees of $9,815,000 on average loans of $112,576,000 representing an annualized
yield of 11.6%. For the nine months ended September 30, 1997, the Company earned
interest and fees of $5,461,000 on average loans of $62,652,000, for an
annualized yield of 11.6%.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charged against operating results and
from recoveries on loans previously charged off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was
$1,452,000 at September 30, 1998, versus $1,286,000 at December 31, 1997. At
September 30, 1998, the allowance for credit losses was equal to 1.0% of gross
loans compared to 1.8% of gross loans at December 31, 1997. This percentage
decrease was because the Company increased its balance of HLTV second mortgage
loans through retail, brokers, and bulk purchases in the second and third
quarter, which are being held for a future loan securitization.
9
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During the third quarter of 1998, the provision for credit losses was $120,000,
representing an increase of $20,000, or 20.0%, over a provision for credit
losses of $100,000 for the three months ended September 30, 1997. The provision
was $400,000 for the nine months ended September 30, 1998, an increase of
$140,000, or 53.8%, over a provision for credit losses of $260,000 for the nine
months ended September 30, 1997.
For the three months ended September 30, 1998, the Company has a net recovery of
$18,000. This represents an increase of $99,000, or 122.2%, over a net
charge-off of $81,000 for the three months ended September 30, 1997. Losses
charged to the allowance for credit losses, net of recoveries, totaled $235,000
for the nine months ended September 30, 1998. This represents a decrease of
$113,000, or 32.5%, from the September 1997 net charge-off of $348,000.
Nonaccrual loans decreased to $720,000 at September 30, 1998, compared to
$1,259,000 at December 31, 1997. This represented a decrease of $539,000, or
42.8%.
While management believes that the allowance was adequate at September 30, 1998,
to absorb losses from any known or inherent risks in the portfolio; no assurance
can be given that economic conditions which adversely affect the Company's
service areas or other circumstances will not be reflected in increased
provisions or credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of loans, servicing fees, and other revenues not derived from interest on
earning assets. Other operating income for the three and nine months ended
September 30, 1998, was $3,398,000 and $9,607,000. This represented an increase
of $889,000, or 35.4%, and $2,755,000, or 40.6%, over other operating income of
$2,509,000 and $6,832,000 for the three and nine months ended September 30,
1997. The increase was attributable to continued emphasis by the Company on
generating noninterest income.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Company required
additional staff and overhead expense to support the continued high level of
customer service, which increased the cost of occupying the Company's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Company's personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other operating expenses
totaled $4,614,000 and $12,469,000 for the three and nine months ended September
30, 1998. This represented an increase of $1,647,000, or 55.5%, and $4,068,000,
or 48.4%, over other operating expenses of $2,967,000 and $8,401,000 for the
three and nine months ended September 30, 1997. The increase in other expenses
for the periods compared was primarily because of compensation related to loan
originations and sales, the continued upgrading of data processing hardware and
software, and an increase in occupancy costs. The increase in other operating
expense of 48.4% was partially offset by the 40.6% increase in other operating
income. The Company's ratio of noninterest income to noninterest expense for the
first nine months of 1998 was 77.0%, versus 81.3% for the same period of 1997.
This ratio has decreased because of additional expenses incurred from several
projects the Company is working on for the second half of the year. These
include a loan securitization, expanding the SBA lending in the southeast,
opening a new branch office in Ventura, California, and acquiring Palomar
Savings of Escondido, California.
10
<PAGE>
BALANCE SHEET ANALYSIS
At September 30, 1998, total assets were $171,817,000 representing an increase
of $76,505,000, or 80.3%, from total assets of $95,312,000 at December 31, 1997.
Total deposits of $151,747,000 at September 30, 1998, increased $71,495,000, or
89.1%, from $80,252,000 at December 31, 1997. Net loans increased $74,632,000,
or 104.9%, from $71,164,000 at December 31, 1997, to $145,796,000 at September
30, 1998. The Company planned these increases in deposits and loans. The loan
portfolio was increased through retail, brokers, and bulk purchases. The rates
on short-term time deposits were raised to help fund the loan increase.
INVESTMENT SECURITIES
At September 30, 1998, investment securities totaled $3,496,000. This
represented a decrease of $2,760,000, or 44.1%, over total investments of
$6,256,000 at December 31, 1997. This decrease was caused, in part, by time
deposits in other institutions decreasing to zero at September 30, 1998, from
$2,477,000 at December 31, 1997. The Company intentionally did not renew any
time deposits at maturity.
DEPOSITS AND OTHER BORROWINGS
At September 30, 1998, deposits totaled $151,747,000. This represented an
increase of $71,495,000, or 89.1%, over total deposits of $80,252,000 at
December 31, 1997. The increase in deposits is a result of the Company using
short-term time deposits to fund the planned increase in loans.
Noninterest bearing demand deposits totaled $17,999,000 at September 30, 1998.
This represented an increase of $2,866,000, or 18.9%, over noninterest bearing
demand deposits of $15,133,000 at December 31, 1997. Interest bearing deposits
totaled $133,748,000 at September 30, 1998. This represented an increase of
$68,629,000, or 105.4%, over interest bearing deposits of $65,119,000 at
December 31, 1997.
LIQUIDITY
The Company has an asset and liability management program that aids management
in maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Company
at September 30, 1998, was 57.8% and at December 31, 1997, was 37.4%, based on
liquid assets (consisting of cash and due from banks, deposits in other
financial institutions, investments, federal funds sold and loans available for
sale) divided by total assets. Management believes it maintains adequate
liquidity levels.
11
<PAGE>
CAPITAL RESOURCES
The Company's equity capital was $18,073,000 at September 30, 1998. The primary
source of capital for the Company has been the retention of net income. During a
stock offering in 1996, 472,653 warrants were issued; these warrants were
exercisable at $8.75 for two shares of common stock and expired June 30, 1998.
On June 30, 1998, 468,302 warrants had been exercised, which left 4,351 expired.
The exercised warrants brought in $4,098,000 in additional capital. This
additional capital will be used for possible merger or acquisition activity, as
well as to allow continued internal growth.
On November 2, 1998, the Company announced its shareholders have approved the
acquisition of Palomar Savings and Loan of Escondido, California. The
shareholders of Palomar Savings had approved the merger at an earlier meeting in
October 1998. The merger, which will be accounted for as a pooling of interests
whereby Palomar Savings becomes a wholly owned subsidiary of the Company, is
expected to be completed before year end 1998. Palomar Savings will retain its
name. All regulatory approval has been received.
The value of the transaction will be approximately $13.5 million. The combined
company will have total assets, loans, and deposits of approximately $250
million, $210 million and $225 million, respectively. Combined shareholders'
equity will be approximately $24 million.
The Company's subsidiary, Goleta National Bank, is required to meet risk-based
capital standards set by the respective regulatory authorities. The risk-based
capital standards require the achievement of a minimum ratio of total capital to
risk-weighted assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In
addition, the regulatory authorities require the highest rated institutions to
maintain a minimum leverage ratio of 4.0%. At September 30, 1998, Goleta
National Bank exceeded the minimum risk-based capital ratio and leverage ratio
required to be considered "Well Capitalized."
Table 1 below presents Goleta National Bank's risk-based leverage capital ratios
as of September 30, 1998, and December 31, 1997:
TABLE 1 - REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM
------------
MINIMUM WELL
CAPITAL RATIOS REQUIREMENT CAPITALIZED SEPTEMBER 30, 1998 DECEMBER 31, 1997
- -------------------------- ------------ ------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Risk-based Capital Ratios:
Tier I. . . . . . . . . 4.00% 6.00% 9.34% 15.95%
Total . . . . . . . . . 8.00% 10.00% 10.31% 17.20%
Leverage Ratio . . . . . . 4.00% 5.00% 8.98% 12.02%
</TABLE>
12
<PAGE>
YEAR 2000
The Company has conducted a review of its computer systems to determine and
address any potential implications of "Year 2000 compliance." "Year 2000
compliance" refers to the inability of certain computer systems to recognize
dates commencing on January 1, 2000. The Company has implemented a plan to meet
Year 2000 readiness; this plan is fully supported by management and the Board of
Directors. This plan consists of five phases; awareness, assessment,
renovation, validation, and implementation. In the awareness phase, a team was
formed consisting of members from all departments within the Company. This team
defined the Year 2000 issue, how and where it would impact the Company. The
assessment phase determined the size of the issue and which systems were
determined as critical to the operations of the Company. During the renovation
phase systems, hardware, and software are tested for compliance and any
non-compliance systems are replaced. Nothing determined as critical needed
replacement. During the validation phase, further testing is done on any new
equipment or systems installed. The implementation phase will happen at the end
of 1998. The Company is going to re-test all systems in a mock exercise as if
it is January 2000. Also in this phase, customer awareness of the Year 2000
issue and what the Company has done to address the issue will intensify. This
will, but is not limited to, mailings to our customers, public announcements,
and training for Company employees to address customer concerns.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
On November 2, 1998, the Company announced its
Shareholders have approved the acquisition of
Palomar Savings and Loan of Escondido, California.
The shareholders of Palomar Savings had approved the
merger at an earlier meeting in October 1998. The
merger, which will be accounted for as a pooling of
interests whereby Palomar Savings becomes a wholly
owned subsidiary of the Company, is expected to be
completed before year end 1998. Palomar Savings will
retain its name. All regulatory approval has been
received.
The value of the transaction will be approximately
$13.5 million. The combined company will have total
assets, loans, and deposits of approximately $250
million, $210 million and $225 million,
respectively. Combined shareholders' equity will be
approximately $24 million.
Shareholders of Palomar will receive shares of
Community West equal to 2.2 times the book value of
Palomar, determined as of the month end immediately
preceding the closing date of the transaction. The
number of shares of Community West stock received by
Palomar shareholders will be determined by the
average price of Community West stock for the 30
day period immediately preceding the closing date.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMMUNITY WEST BANCSHARES
-------------------------
(Registrant)
/S/ C. Randy Shaffer
---------------------------
Date: November 5, 1998 C. Randy Shaffer
Executive Vice President
15
<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3257000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9815000
<TRADING-ASSETS> 2731000
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<LOANS> 147248000
<ALLOWANCE> 1452000
<TOTAL-ASSETS> 171817000
<DEPOSITS> 151747000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1997000
<LONG-TERM> 0
0
0
<COMMON> 12714000
<OTHER-SE> 5359000
<TOTAL-LIABILITIES-AND-EQUITY> 171817000
<INTEREST-LOAN> 9815000
<INTEREST-INVEST> 40000
<INTEREST-OTHER> 363000
<INTEREST-TOTAL> 10218000
<INTEREST-DEPOSIT> 3837000
<INTEREST-EXPENSE> 3877000
<INTEREST-INCOME-NET> 6341000
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<EXPENSE-OTHER> 12469000
<INCOME-PRETAX> 3079000
<INCOME-PRE-EXTRAORDINARY> 3079000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1801000
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
<YIELD-ACTUAL> 0
<LOANS-NON> 720000
<LOANS-PAST> 271000
<LOANS-TROUBLED> 960000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1286000
<CHARGE-OFFS> 311000
<RECOVERIES> 76000
<ALLOWANCE-CLOSE> 1451000
<ALLOWANCE-DOMESTIC> 0
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