SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT:February 26, 1999
--------------------------------------
Community West Bancshares
--------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California
--------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-23575 77-0446957
--------------------------------------------------------------------
(Commission File Number) (IRS Employer I.D. Number)
5638 Hollister Avenue, Goleta, California 93117
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(805) 692-1862
---------------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL STATEMENTS AND EXHIBITS.
<PAGE>
(a) FINANCIAL STATEMENT OF BUSINESS ACQUIRED.
The financial statements for Palomar Savings and Loan Association required
by this Item 7 are incorporated herein in their entirety by this reference to
Exhibit 99.2 hereto.
(b) PRO FORMA FINANCIAL INFORMATION.
COMMUNITY WEST BANCSHARES AND PALOMAR SAVINGS AND LOAN ASSOCIATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data
combines the historical consolidated condensed financial statements of Community
West Bancshares and Palomar Savings and Loan Association after giving effect to
the Merger which was consummated on December 14, 1998 as if it had been
effective on September 30, 1998 and December 31, 1997, with respect to the Pro
Forma Combined Condensed Balance Sheets, and as of the beginning of the periods
indicated, with respect to the Pro Forma Combined Condensed Statements of
Income. This information is presented under pooling-of-interests accounting.
The information for the nine months ended September 30, 1998 is derived from the
unaudited financial statements of Community West Bancshares and Palomar Savings
and Loan Association which includes, in the opinion of the respective
managements of Community West Bancshares and Palomar Savings and Loan
Association, all adjustments (consisting only of normal accruals) necessary to
present fairly the data for such periods. This information should be read in
conjunction with the historical consolidated financial statements of Community
West Bancshares and Palomar Savings and Loan Association including their
respective notes thereto, which are included and incorporated by reference into
this amendment to Current Report on Form 8-K dated December 29, 1998. The effect
of estimated Merger and reorganization costs expected to be incurred in
connection with the Merger have been reflected in the Unaudited Pro Forma
Combined Condensed Balance Sheets; however, since the estimated costs are
nonrecurring, they have not been reflected in the Unaudited Pro Forma Combined
Condensed Statements of Income. See Note 2 to the Unaudited Pro Forma Combined
Condensed Financial Information. The unaudited pro forma combined condensed
financial data does not give effect to any anticipated operating efficiencies
which may occur in conjunction with the Merger. The Unaudited Pro Forma Combined
Condensed Balance Sheets are not necessarily indicative of the actual financial
position that would have existed had the Merger been consummated on September
30, 1998 or December 31, 1997, or that may exist in the future. The Unaudited
Pro Forma Combined Condensed Statements of Income are not necessarily indicative
of the results that would have occurred had the Merger been consummated on the
dates indicated or that may be achieved in the future. The actual financial
position and results of operations will differ, perhaps significantly, from the
pro forma amounts reflected herein because of a variety of factors, including
changes in value and changes in operating results between the dates of the
unaudited pro forma financial data and the dates on which the Merger took place.
<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998
(UNAUDITED)
Community West Palomar Savings
Bancshares & Loan (1) Adjustments(2) Pro Forma
--------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 3,257,000 $ 1,764,000 $ 5,021,000
Federal funds sold 9,815,000 - 9,815,000
--------------- ---------------- ------------
Total cash and cash equivalents 13,072,000 1,764,000 14,836,000
Federal reserve bank stock 264,000 538,000 802,000
Investment securities available for sale, at fair value - 9,603,000 9,603,000
Investment securities held to maturity, at cost, 502,000 3,411,000 3,913,000
Investment securities held for trading, at fair value 2,731,000 - 2,731,000
Loans
Held for investment, net of allowance for loan losses 63,239,000 59,134,000 122,373,000
Held for sale, at lower of cost or fair value 82,557,000 4,898,000 87,455,000
Other real estate owned, net 284,000 - 284,000
Premises and equipment, net 3,954,000 264,000 4,218,000
Servicing assets 1,044,000 - 1,044,000
Accrued interest receivable 2,006,000 461,000 2,467,000
Other assets 2,164,000 989,000 3,153,000
--------------- ---------------- ------------
TOTAL ASSETS 171,817,000 81,062,000 $252,879,000
=============== ================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand 17,999,000 779,000 $ 18,778,000
Interest-bearing demand 13,411,000 5,372,000 18,783,000
Savings 13,549,000 10,909,000 24,458,000
Time certificates of $100,000 or more 46,421,000 42,781,000 89,202,000
Other time certificates 60,367,000 12,861,000 73,228,000
--------------- ---------------- ------------
Total deposits 151,747,000 72,702,000 224,449,000
Notes payable - 1,500,000 1,500,000
Accrued interest payable and other liabilities 1,997,000 861,000 2,858,000
--------------- ---------------- ------------
Total liabilities 153,744,000 75,063,000 228,807,000
--------------- ---------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized:
5,465,735 shares issued and outstanding at September 30, 1998 12,714,000 4,539,000 17,253,000
Retained earnings 5,359,000 1,460,000 6,819,000
--------------- ---------------- ------------
Total stockholders' equity 18,073,000 5,999,000 24,072,000
--------------- ---------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 171,817,000 81,062,000 $252,879,000
=============== ================ ============
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS AT
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CWB and
CWB Palomar Pro Forma Palomar
(Historical) (Historical)(1) Adjustments(2) Pro Forma
---------- ---------- ------------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 3,663 $ 2,634 $ 6,297
Federal funds sold 8,440 4,100 12,540
---------- ---------- ------------- -----------
TOTAL CASH AND CASH EQUIVALENTS 12,103 6,734 18,837
Time deposits at other financial
institutions 2,477 - 2,477
Federal Reserve Bank and Federal
Home Loan Bank stock, at cost 251 512 763
Securities held to maturity, at cost 999 4,156 5,155
Securities available for sale, at fair value - 8,912 8,912
Securities held for trading, at fair value 2,529 - 2,529
---------- ---------- ------------- -----------
TOTAL SECURITIES 3,528 13,068 16,596
Loans net for deferred fees and costs 58,010 57,985 115,995
Loans, held for sale at lower of cash
or fair market value 14,440 - 14,440
Allowances for loan losses 1,286 765 2,051
Premises and equipment 2,725 127 2,852
Investments in real estate ventures - 77 77
Other assets 3,064 873 3,937
---------- ---------- ------------- -----------
TOTAL ASSETS $ 95,312 $ 78,611 $ 173,923
========== ========== ============= ===========
LIABILITY AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits $ 15,132 $ 657 $ 15,789
Interest bearing deposits 65,120 71,782 136,902
---------- ---------- ------------- -----------
Total deposits 80,252 72,439 152,691
Accrued interest payable and other
liabilities 2,931 613 3,544
---------- ---------- ------------- -----------
TOTAL LIABILITIES 83,183 73,052 156,235
SHAREHOLDERS' EQUITY:
Common stock and surplus 8,570 4,263 12,833
Retained earnings 3,559 1,265 4,824
Unrealized net gains (losses) on
investments available for sale, net - 31 31
---------- ---------- ------------- -----------
TOTAL SHAREHOLDERS' EQUITY 12,129 5,559 17,688
---------- ---------- ------------- -----------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 95,312 $ 78,611 $ 173,923
========== ========== ============= ===========
Number of common shares
outstanding 3,081,316 648,186 4,082,116
Common shareholders' equity per share $ 3.94 $ 8.58 $ 4.33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Community West Palomar Savings
Bancshares & Loan (1) Adjustments(2) Pro Forma
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 9,815,000 $ 3,291,000 $13,112,000
Federal funds sold 296,000 - 296,000
Time deposits in other financial institutions 67,000 - 67,000
Investment securities 40,000 916,000 950,000
--------------- ----------------- -----------
Total interest income 10,218,000 4,207,000 14,425,000
INTEREST EXPENSE ON DEPOSITS 3,877,000 2,576,000 6,453,000
--------------- ----------------- -----------
NET INTEREST INCOME 6,341,000 1,631,000 7,972,000
PROVISION FOR LOAN LOSSES 400,000 (61,000) 339,000
--------------- ----------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 5,941,000 1,692,000 7,633,000
OTHER INCOME:
Gains from loan sales 4,088,000 454,000 4,542,000
Loan origination fees 2,725,000 - 2,725,000
Document processing fees 1,133,000 - 1,133,000
Service charges 765,000 - 765,000
Loan servicing income 665,000 135,000 800,000
Other income 231,000 80,000 311,000
--------------- ----------------- -----------
Total other income 9,607,000 669,000 10,276,000
--------------- ----------------- -----------
OTHER EXPENSES:
Salaries and employee benefits 8,304,000 848,000 9,152,000
Occupancy expenses 1,728,000 266,000 1,994,000
Advertising 516,000 95,000 611,000
Professional fees 478,000 145,000 623,000
Postage and freight 366,000 28,000 394,000
Travel expense 192,000 33,000 225,000
Data processing expense 148,000 122,000 270,000
Stationery & supply expense 130,000 73,000 203,000
Credit report expense 106,000 - 106,000
Other operating expenses 501,000 112,000 613,000
--------------- ----------------- -----------
Total other expenses 12,469,000 1,722,000 14,191,000
--------------- ----------------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 3,079,000 639,000 3,718,000
PROVISION FOR INCOME TAXES 1,278,000 118,000 1,396,000
--------------- ----------------- -----------
NET INCOME 1,801,000 521,000 $ 2,322,000
=============== ================= ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.51 $ 0.38 $ 0.47
=============== ================= ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.49 $ 0.38 $ 0.45
=============== ================= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
CWB and
CWB Palomar Pro Forma Palomar
(Historical) (Historical)(1) Adjustments(2) Pro Forma
-------------- ------------------ ------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,350 $ 4,410 $ $ 11,760
Interest on interest bearing deposits
in other banks 121 109 230
Interest on investment securities 115 828 943
Interest on federal funds sold 423 193 - 616
-------------- ------------------ ------------- ---------------
TOTAL INTEREST INCOME 8,009 5,540 13,549
INTEREST EXPENSE:
Interest expense on deposits 2,910 3,421 6,331
Interest expense on borrowings - 29 - 29
-------------- ------------------ ------------- ---------------
TOTAL INTEREST EXPENSE 2,910 3,450 6,360
NET INTEREST INCOME: 5,099 2,090 7,189
Less: provisions (credit) for loan losses 260 (70) 190
-------------- ------------------ ------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,839 2,160 - 6,999
NON-INTEREST INCOME:
Gains from loan sales 4,101 289 4,390
Loan origination fees 2,961 - 2,961
Document processing fees 819 - 819
Loan servicing income 632 82 714
Service charges, commissions and fees 896 88 984
Securities gains (losses) - (10) (10)
Other income 23 27 - 50
-------------- ------------------ ---------------
TOTAL NON-INTEREST INCOME 9,432 476 9,908
NON-INTEREST EXPENSE:
Salaries and benefits 7,315 935 8,250
Occupancy, expenses 1,508 260 1,768
Advertising expense 587 53 640
Professional services 426 86 512
Telephone, stationery and supplies 468 61 529
Goodwill amortization 155 - 155
Other 1,065 522 - 1,587
-------------- ------------------ ------------- ---------------
TOTAL NON-INTEREST EXPENSE 11,524 1,917 13,441
Income before income taxes 2,747 719 3,466
Income taxes 1,158 99 1,257
-------------- ------------------ ------------- ---------------
NET INCOME $ 1,589 $ 620 $ - $ 2,209
============== ================== ============= ===============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic 3,016,208 648,186 4,017,008
Diluted 3,588,477 648,186 4,589,277
Income per share
Basic $ 0.53 $ 0.96 $ 0.55
Diluted $ 0.44 $ 0.96 $ 0.48
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 1: BASIS OF PRESENTATION. Certain historical data of Palomar have been
reclassified on a pro forma basis to conform to CWB's classifications. The
financial data for the two years ended December 31, 1997 are derived from the
unaudited financial statements of Palomar since Palomar changed its fiscal year
end in 1996 from December 31 to September 30. Transactions between the
Companies are not material in relation to the unaudited pro forma combined
financial statements, and have not been eliminated from the pro forma combined
amounts. The unaudited pro forma number of common shares outstanding, common
shareholders' equity per share, number of shares (basic and diluted) and income
per share (basic and diluted) are based on the share amounts for CWB plus the
historical share amounts for Palomar multiplied by an assumed Conversion Ratio
of 1.544. The historical shares from Palomar have been restated to reflect the
5% stock dividend issued on February 18, 1998.
<PAGE>
NOTE 2: MERGER COSTS. The unaudited pro forma combined condensed financial
data reflects CWB management's current estimate, for purposes of pro forma
presentation, of the aggregate estimated merger costs of $321,000 ($186,000
net of taxes, computed using the combined federal and state tax rate of 42%)
expected to be incurred in connection with the Merger. While a portion of these
costs may be required to be recognized over time, the current estimate of these
costs has been recorded in the Unaudited Pro Forma Combined Condensed Balance
Sheets in order to disclose-the aggregate effect of these activities on CWB's
pro forma combined financial position. The estimated aggregate costs include
the following:
Investment banking fees $ 191,000
Legal and other professional costs $ 110,000
Printing costs $ 10,000
Other costs $ 10,000
TOTAL ESTIMATED AGGREGATE COSTS $ 321,000
=============
CWB Management's cost estimates are forward-looking. While the costs
represent CWB Management's current estimate of merger costs that will be
incurred, the ultimate level and timing of recognition of such costs will be
based on the final merger and integration plan to be completed prior to
consummation of the Merger, which will be developed by various of the Companies'
task forces and integration committees. Readers are cautioned that the
completion of the merger and integration plan and the resulting management plans
detailing actions to be undertaken to effect the Merger and resultant
integration of operations will impact these estimates; the type and amount of
actual costs incurred could vary materially from these estimates if future
developments differ from the underlying assumptions used by management in
determining the current estimate of these costs.
<PAGE>
(c) EXHIBITS.
The following exhibits are filed with this amendment to Current Report
on Form 8-K dated December 29, 1998.
Exhibit
Number Description
- --------- --------------
23.1 Consent of KPMG LLP (Palomar Savings and Loan Association)
99.2 Audited Statements of Financial Condition of Palomar Savings and Loan
Association and subsidiary as of December 31, 1997 and 1996 and the
related Statements of Operations, Changes in Stockholders' Equity
and Cash Flows for each of the years in the period ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to Current Report on Form 8-K
dated December 29, 1998 to be signed on its behalf by the undersigned
hereunder duly authorized.
Dated: February 26, 1999
COMMUNITY WEST BANCSHARES
By: /s/ C. Randy Shaffer
------------------------------------
C. Randy Shaffer
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- --------- -----------
23.1 Consent of KPMG LLP (Palomar Savings and Loan Association)
99.2 Audited Statements of Financial Condition of Palomar Savings and Loan
Association and subsidiary as of December 31, 1997 and 1996 and the
related Statements of Operations, Changes in Stockholders' Equity
and Cash Flows for each of the years in the period ended
December 31, 1997.
<PAGE>
Consent of Indepent Auditors
The Board of Directors
Palomar Savings and Loan Association:
We consent to the inclusion of our report dated December 14, 1998, with respect
to the consolidated statements of financial condition of Palomar Savings and
Loan Association and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the two years ended December 31, 1997, which report appears in the
Form 8-K of Community West Bancshares dated February 25, 1999.
KPMG LLP
San Diego, California
February 25, 1999
<PAGE>
Independent Auditors' Report
The Board of Directors
Palomar Savings and Loan Association:
We have audited the accompanying consolidated statements of financial condition
of Palomar Savings and Loan Association and subsidiary (the Association) as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
Consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Palomar Savings and
Loan Association and subsidiary as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
San Diego, California
December 14, 1998
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents (note 1) $ 6,734,021 9,100,168
Investments:
Securities available-for-sale, at fair value (note 3) 8,911,878 6,919,851
Securities held-to-maturity, at amortized cost (fair values approximate
$3,970,677 and $4,915,274 at December 31, 1997 and 1996, respectively)
(note 2) 4,156,028 5,147,691
Loans receivable held-for investment, net (notes 4, 10 and 13) 55,921,150 55,449,537
Loans receivable held-for-sale (note 5) 1,298,888 957,861
Accrued interest and dividends receivable 405,670 411,090
Real estate owned, net (note 7) ------ 426,648
Investments in real estate ventures, net (note 6) 76,883 75,341
Premises and equipment, net (note 8) 127,159 150,058
Investment in Federal Home Loan Bank stock, at cost (note 10) 512,000 481,600
Prepaid expenses and other assets (note 11) 390,520 543,425
Taxes receivable (note 11) 72,968 390,586
$78,607,165 80,053,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9) $72,438,633 72,500,010
Borrowings from Federal Home Loan Bank (notes 4 and 10) --- 2,000,000
Accounts payable and other liabilities 642,822 626,417
----------- -----------
Total liabilities $73,081,455 75,126,427
----------- -----------
Stockholders' equity (notes 15 and 16):
Guarantee stock, $4 par value, 1,250,000 shares authorized
648,186 issued and outstanding at December 31, 1997 and 1996 $ 2,469,908 2,469,908
Capital in excess of par value 1,793,097 1,793,097
Unrealized gains (losses) on securities available-for-sale, net 31,169 (6,400)
Retained earnings, substantially restricted (Note 11) 1,231,536 670,824
----------- -----------
Total stockholders' equity $ 5,525,710 4,927,429
----------- -----------
Commitments and contingencies (notes 4, 11 and 12)
$78,607,165 80,053,856
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Earnings
Years Ended December 31, 1997 and 1996
1997 1996
----------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $4,412,563 4,289,611
Interest on mortgage-backed securities 672,969 831,581
Interest on federal funds sold 192,531 145,658
Interest and dividends on investments 265,012 381,006
----------- ----------
Total interest income 5,543,075 5,647,856
----------- ----------
Interest expense:
Interest on deposits (note 9) 3,421,581 3,447,978
Interest on borrowings 28,854 117,544
----------- ----------
Total interest expense 3,450,435 3,565,522
----------- ----------
Net interest income before provision (credit) for loan losses 2,092,640 2,082,334
Provision (credit) for loan losses (note 4) (69,452) 215,488
----------- ----------
Net interest income after provision (credit) for loan losses 2,162,092 1,866,846
----------- ----------
Non-interest income (expense):
Gain on real estate ventures (note 6) 10,740 17,499
Net gain on sale of loans 288,714 31,011
(Losses) gains on sale of securities available-for-sale (note 3) (12,019) 13,543
Gain on sale of real estate investment 3,809 94,995
Gain on early retirement of securities held-to-maturity (note 2)
Loan servicing fee income 81,617 93,363
Other fees and charges 93,862 105,735
----------- ----------
Total non-interest income 466,723 356,146
----------- ----------
General and administrative:
Salaries and related personnel costs 805,089 734,812
Premises and occupancy costs 227,295 212,464
SAIF insurance 93,093 715,459
REO expenses 70,700 11,049
Professional services 81,017 105,161
Data Processing 89,643 88,386
Advertising 56,178 36,452
Other 487,088 333,058
----------- ----------
Total general and administrative $1,910,103 2,236,841
----------- ----------
Earnings (loss) before income taxes 718,712 (13,849)
Income tax expense (benefit) (note 11) 158,000 (112,000)
----------- ----------
Net earnings $ 560,712 98,151
=========== ==========
Basic and diluted earnings per share 0.87 0.15
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996
Unrealized
gains
(losses) on
securities Retained
Capital in available- earnings Total
Guarantee Stock excess of for-sale, substantially stockholders'
--------------------
Shares Amount par value net restricted equity
-------- ---------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 648,186 $2,469,908 1,793,097 (7,816) 572,673 4,827,862
Change in unrealized
gains (losses) on
securities available-
for-sale, net (note 3) -- -- -- 1,416 -- 1,416
Net earnings -- -- -- -- 98,151 98,151
-------- ----------- ---------- ------------ ------------- -------------
Balance at
December 31, 1996 648,186 $2,469,908 1,793,097 (6,400) 670,824 4,927,429
Change in unrealized
gains (losses) on
securities available-
for-sale, net (note 3) -- -- -- 37,569 -- 37,569
Net earnings -- -- -- -- 560,712 560,712
-------- ----------- ---------- ------------ ------------- -------------
Balance at
December 31, 1997 648,186 $2,469,908 1,793,097 31,169 1,231,536 5,525,710
======== ========== ========== ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
1997 1996
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 560,712 98,151
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 32,239 39,438
(Credit) provision for loan losses (69,452) 215,488
Provisions for losses on real estate owned 70,211 15,784
Provisions for deferred income taxes 53,000 114,000
Net gain on sale of loans (288,714) (31,011)
Losses (gains) on sale of securities available-for-sale 12,019 (13,543)
Gain on early retirement of securities held-to-maturity (3,809) ---
Net loss (gain) on sale of real estate owned 1,434 (23,733)
Gain on sale of real estate investment --- (94,995)
Gain on real estate ventures (10,740) (17,499)
Federal Home Loan Bank capital stock dividends (30,400) (30,200)
Increase in deferred fees 2,559 545
Decrease in net other assets and liabilities 420,048 532,531
------------- -----------
Net cash provided by operating activities $ 749,107 804,956
------------- -----------
Cash flows from investing activities:
Loan originations held-for-investment, net of principal repayments $ (379,636) (975,157)
Purchase of securities held-to-maturity --- (1,725,156)
Purchase of securities available-for-sale (6,838,572) (5,954,473)
Proceeds from sale of securities available-for-sale 4,109,080 12,180,546
Proceeds from early retirement of securities held-for-maturity 1,000,000 ---
Principal repayments on investments 778,187 1,409,900
Proceeds from sale of loans 17,630,810 3,370,489
Loans originated for sale (17,708,207) (4,297,339)
Purchase of premises and equipment (9,740) (32,496)
Repayments from real estate ventures, net 9,198 99,842
Additions to real estate owned (9,211) (10,054)
Proceeds from sale of real estate owned 364,214 810,009
Proceeds from sale of real estate investments --- 94,995
Redemption of Federal Home Loan Bank stock --- 195,000
------------- -----------
Net cash provided by (used in) investing activities $ (1,053,877) 5,166,106
------------- -----------
Cash flows from financing activities:
Net decrease in deposits $ (61,377) (1,502,160)
Net decrease in borrowings from Federal Home Loan Bank (2,000,000) ---
------------- -----------
Net Cash Used in Financing Activities (2,061,377) (1,502,160)
------------- -----------
Net increase (decrease) in cash and cash equivalents $ (2,366,147) 4,468,902
Cash and cash equivalents at beginning of period 9,100,168 4,631,266
------------- -----------
Cash and cash equivalents at end of period $ 6,734,021 9,100,168
============= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1997 and 1996
1997 1996
----------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash (received) paid during the period for:
Income taxes $ (231,700) 819,300
=========== ==========
Interest $3,462,406 3,605,459
=========== ==========
Supplemental disclosure of noncash investing and financing activities:
Transfers from loans to real estate owned --- 602,651
=========== ==========
(Decrease) increase in net unrealized losses on securities
available-for-sale $ 56,869 (4,047)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Basis of Presentation and Summary of Significant Accounting Policies
Palomar Savings and Loan Association is a state-chartered savings and loan
association and is subject to supervision by the Office of Thrift Supervision
(the OTS), the Federal Deposit Insurance Corporation (the FDIC) and the
California Department of Savings and Loans. Palomar Savings and Loan
Association is engaged primarily in the business of mortgage loan origination in
San Diego and Riverside counties.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
transactions of Palomar Savings and Loan Association and its wholly-owned
subsidiary, Palomar Service Corporation (the Association). Intercompany
transactions and balances have been eliminate din consolidation.
(b) Securities Held-to-Maturity and Securities Available-for-Sale
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Association has the
ability at the time of purchase to hold securities until maturity, they are
classified as held-to-maturity. Securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity of the related security. Securities to be held for indefinite
periods of time, but not necessarily to be held-to-maturity or on a long-term
basis are classified as available-for-sale and carried at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity, net of applicable income taxes. Realized gains or losses on the sale of
securities available-for-sale, if any, are determined using the adjusted cost of
the specific securities sold. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other related factors.
(c) Loan Interest Income
Interest on loans is credited to income as earned. Accrued interest on
loans 90 days or more contractually delinquent or in foreclosure is reversed.
Loans are restored to accrual status when the loan becomes both well-secured and
management believes both principal and interest are collectible.
(d) Loan Fee Income
Loan fees and certain direct loan origination costs are deferred, and the
net fees or costs are recognized as an adjustment to interest income over the
contractual life of the loans using a method which approximates the interest
method. The amortization of loan fees is discontinued on nonaccrual loans when,
in management's judgment, a reasonable doubt exists as to the collectibility of
the loans in the normal course of business.
(e) Loans Receivable Held-for-Sale
Loans receivable held-for-sale are stated at the lower of cost or market as
determined by outstanding commitments from investors or current investor-yield
requirements calculated on an aggregate basis.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(f) Allowance for Loan Losses
The allowance for loan losses is available for future loan charge-offs.
Many factors are collectively weighed by management in determining the adequacy
of the allowance, including management's review of the extent of the existing
risks in the loan portfolio and prevailing economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize estimated losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions and the repayment capabilities of the borrowers. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for losses on loans. Such
agencies may require the Association to recognize additions to the allowance
based on their judgments related to information available to them at the time of
their examinations.
Through its internal asset review function, the Association identifies and
measures its impaired loans by using the fair value of the collateral.
Management will establish an allowance for loan losses when the carrying value
of a loan identified as being impaired is less than the fair value of the
collateral.
(g) Real Estate Owned
Real estate owned is recorded at fair value at the date of acquisition.
Fair value is based upon current appraisals less estimated selling costs.
Write-downs to fair value at the time of acquisition of the real estate, if any,
are made by a charge to the allowance for loan losses. Any subsequent
write-downs are charged against operating expenses and recognized as a valuation
allowance. Subsequent increases in the fair value of the asset less estimated
selling costs reduces the valuation allowance and are credited to income.
Operating expenses of such properties, net of related income, are included in
other expenses.
(h) Real Estate Ventures
The Association accounts for its investment in real estate ventures on the
equity method (Note 6).
(I) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets, generally three to twenty
years. Leasehold improvements are amortized over the shorter of their remaining
useful lives or the remaining terms of the lease.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(j) Income Taxes
The Association accounts for income taxes under the asset and liability
method of accounting for income taxes whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(k) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold, and certificates of deposit with
original maturities of three months or less. Generally, federal funds sold are
held for one-day periods. A summary of cash and cash equivalents at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
--------- ---------
Cash $1,484,021 1,500,168
Federal funds sold 4,100,000 4,600,000
Certificates of deposit 1,150,000 3,000,000
---------- ---------
Cash and cash equivalents $6,734,021 9,100,168
========== =========
</TABLE>
(l) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenue, costs of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
(m) New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("Statement
125"). Statement 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of Statement 125
did not have a material impact on the Association's financial position, results
of operations or liquidity. (Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
In December, 1996, the FASB issued Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" ("Statement 127"). Statement 127 defers for one year the effective date
of certain provisions of Statement 125. Management of the Association does not
expect the adoption of Statement 127 to have a material impact on the
Association's financial position, the results of operations or liquidity.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("Statement 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. Statement 130 requires the display of
comprehensive income and its components in a financial statement that is
displayed in equal prominence with other financial statements that constitute a
full set of financial statements. The statement does not require, however, a
specific format for the financial statement but requires the display of net
income as a component of comprehensive income in that financial statement.
Enterprises may elect to display comprehensive income and its components in one
or two statements of financial performance or in a statement of changes in
equity. If an enterprise chooses to display comprehensive income in a statement
of changes in equity, that statement must be presented as part of a full set of
financial statements and not in the notes to the financial statements. Statement
130 is effective for interim and annual periods beginning after December 15,
1997. Earlier application is permitted. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect
application of the provisions of the Statement. Management of the Association
does not anticipate that the adoption of statement 130 will have a material
impact on the Association's financial position, results of operations or
liquidity.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131. "Disclosures about Segments of an Enterprise and Related Information"
(Statement 131), which establishes standards for reporting standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of Statement 131. Statement 131 is effective for fiscal years
beginning after December 15, 1997. Management of the Association does not
anticipate that the adoption of Statement 131 will have a material impact on the
Association's financial position, results of operation or liquidity.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(2) SECURITIES HELD-TO-MATURITY
Mortgage-backed securities are guaranteed by U.S. Government agencies.
Securities held-to-maturity, net of related discounts and premiums, consist of
the following:
<TABLE>
<CAPTION>
1997
------------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ----------- -----------
Federal National Mortgage $3,419,885 --- (187,021) 3,232,864
Association REMICs
FNMA bonds 736,143 1,670 --- 737,813
---------- ---------- ----------- -----------
$4,156,028 1,670 (187,021) 3,970,677
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ----------- -----------
Federal National Mortgage
Association REMICs $3,421,378 --- (245,948) 3,175,430
FNMA bonds 1,726,313 13,531 --- 1,739,844
---------- ---------- ----------- -----------
$5,147,691 13,531 (245,948) 4,915,274
========== ========== =========== ===========
</TABLE>
Proceeds from the early retirement of securities held-to-maturity during the
year ended December 31, 1997 were $1,000,000 and resulted in a gross gain of
$3,809.
There were no sales of securities held-to-maturity during the years ended
December 31, 1997 and 1996.
Mortgage-backed securities included above have contractual terms to maturity,
but require periodic payments to reduce principal. In addition, expected
maturities will differ from contractual maturities because borrowers have the
right to prepay the underlying mortgages.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(3) SECURITIES AVAILABLE-FOR-SALE
Mortgage-backed securities are guaranteed by U.S. Government agencies.
The mutual funds in which the Association has invested, invests primarily
in adjustable-rate mortgage securities.
The amortized cost, gross unrealized gains and losses and approximate fair
value of securities available-for-sale at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Government National Mortgage
Association participation
certificates $3,838,357 35,396 --- 3,873,753
Federal National Mortgage
Association and Federal Home
Loan Mortgage Corporation
participation certificates 4,276,174 9,585 --- 4,285,759
U.S. Treasury Securities 750,178 2,188 --- 752,366
---------- ---------- ---------- -----------
$8,864,709 47,169 --- 8,911,878
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ----------- -----------
Federal Home Loan Mortgage
Corporation REMICs $1,215,670 --- (31,843) 1,183,827
Government National Mortgage
Association participation
certificates 4,142,624 28,331 --- 4,170,955
Federal National Mortgage
Association and Federal Home
Loan Mortgage Corporation
participation certificates 584,607 --- (149) 584,458
Mutual Funds 986,650 --- (6,039) 980,611
---------- ---------- ----------- -----------
$6,929,551 28,331 (38,031) 6,919,851
========== ========== =========== ===========
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Proceeds from the sale of securities available-for-sale during 1997 were
$4,109,080 resulting in gross gains and losses of $27,560 and $39,579,
respectively. Proceeds from the sale of securities available-for-sale during
1996 were $12,180,546 resulting in gross gains and losses of $33,020 and
$19,477, respectively.
Mortgage-backed securities included above have contractual terms to
maturity, but require periodic payments to reduce principal. In addition,
expected maturities will differ from contractual maturities because borrowers
have the right to prepay the underlying mortgages.
(4) LOANS RECEIVABLE HELD-FOR-INVESTMENT
Loans receivable held-for-investment at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Single-family residential $39,301,014 38,077,700
Construction of single-family residential --- 107,250
Multi-family residential 3,948,629 3,394,696
Nonresidential 11,782,970 12,585,199
Land 1,234,202 1,877,456
Loans secured by savings accounts 54,857 215,632
Consumer and commercial 534,910 313,648
----------- ----------
56,856,582 56,571,581
Less:
Undisbursed loan funds --- 171
Deferred loan fees 154,432 151,873
Allowance for loan losses 781,000 970,000
----------- ----------
$55,921,150 55,449,537
=========== ==========
</TABLE>
The majority of the Association's loans are made to finance the purchase of
single-family homes in southern California. These loans are collateralized by
the related property, and management intends for loan-to-value ratios not to
exceed 95% upon origination.
Real estate construction loans are made primarily to builder-owners of
individual homes, generally in San Diego and Riverside Counties. Construction
loans are collaterilized by the related property and management intends for the
loan-to-value ratios not to exceed 75% upon origination.
The Association's nonresidential loans are secured by office buildings,
small shopping centers and small industrial centers in San Diego County.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
The Association has established a monitoring system for its loans in order
to identify potential problem loans and to permit the periodic evaluation of
impairment and the adequacy of the allowance for loan losses in a timely manner.
Impaired loans included in the Association's loan portfolio were $930,000 and
$1,659,000 at December 31, 1997 and 1996, respectively. At December 31, 1997
and 1996, $16,000 and $1,312,000 respectively, of these loans were assigned
specific allowances totaling $16,000 and $304,000, respectively. During the
years ended December 31, 1997 and 1996, the average balance of impaired loans
was $1,155,000 and $1,675,000, respectively, and $77,000 and $130,000 of
interest was recognized on these loans on a cash basis in accordance with
Association policy, respectively. During the years ended December 31, 1997 and
1996, $73,000 and $105,000 of interest was recognized using the accrual method
of impaired loans, respectively.
At December 31, 1997 and 1996, Troubled Debt Restructurings ("TDR's")
amounted to $914,000 and $1,395,000, respectively. The Association has not
committed to lend any additional funds on TDR's and TDR's are current in
accordance with their modified terms. Interest recorded on TDR's for the years
ended December 31, 1997 and 1996 totaled $68,000 and $103,000, respectively.
A summary of the activity in the allowance for loan losses, which includes
provisions for impaired loans, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $891,000
Provision 215,488
Charge-offs (136,488)
---------
Balance at December 31, 1996 970,000
Credit (69,452)
Charge-offs (119,548)
---------
Balance at December 31, 1997 $781,000
=========
</TABLE>
During the year ended December 31, 1997, the Association recaptured $90,225
of what had been previously provided for as a specific reserve. During the
year, the related loan receivable was paid off in full, and the excess of the
specific reserve over the actual loss incurred was recognized into income.
Nonaccrual loans amounted to $455,000 and $16,000 at December 31, 1997 and
1996, respectively. The additional interest that would have been earned on
these loans during the years ended December 31, 1997 and 1996, if nonaccrual
loans had been on a current basis in accordance with their original terms, was
approximately $17,300 and $300 respectively.
The Association services loans for others approximating $20,088,000 and
$23,482,000 at December 31, 1997 and 1996, respectively.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
The Association has pledged real estate loans held for investment
approximating $23,100,000 and $26,000,000 at December 31, 1997 and 1996 to
secure advances from the Federal Home Loan Bank (Note 10).
(5) LOANS RECEIVABLE HELD-FOR-SALE
Loans receivable held-for-sale at December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Single-family residential loans $1,298,888 957,861
========== =======
</TABLE>
(6) INVESTMENT IN REAL ESTATE VENTURES
The Association had entered into a certain venture agreement with a real
estate developer for the acquisition, development and sale of commercial and
single-family lots. The Association had a 50% interest in the venture through
its 49.5% limited partnership interest in the venture and its 50% stock
ownership in the 1% general partner.
Investments in and advances to real estate ventures at December 31, 1997
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Investments in real estate venture $79,883 83,341
Allowance for losses (3,000) (8,000)
-------- -------
$76,883 75,341
======== =======
</TABLE>
Activity in the allowance for losses on investments in and advances to real
estate ventures is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 18,000
Reduction (10,000)
---------
Balance at December 31, 1996 8,000
Reduction (5,000)
---------
Balance at December 31, 1997 $ 3,000
=========
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Gain on real estate ventures at December 31, 1997 and 1996 is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Reduction of loss provisions and write-downs
of real estate $ 5,000 10,000
Income from operations 5,740 7,499
------- ------
$10,740 17,499
======= ======
</TABLE>
Under the provisions of the Financial Institution Reform, Recovery and
Enforcement Act ("FIRREA") signed into law in August 1989, state-chartered
savings associations can no longer engage directly in the business of real
estate development activities and, in general, must divest themselves of such
investments as quickly as can be prudently done.
At December 31, 1997, the Association's remaining venture interest is
Rancho California Associates I, owned by the Association's wholly-owned
subsidiary, Palomar Service Corporation.
Combined unaudited summary financial information of the ventures is as
follows:
<TABLE>
<CAPTION>
ASSETS December 31, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Cash $ 61 11,194
Interest receivable --- 1,223
Real estate held for sale or development, at lower of
cost or market 158,700 158,700
------------------ -----------------
$ 158,761 171,117
================== =================
LIABILITIES AND EQUITY
Accrued liability --- 5,218
Equity:
Association $ 79,380 82,949
Others 79,381 82,950
------------------ -----------------
Total equity $ 158,761 165,899
------------------ -----------------
Total liabilities and equity $ 158,761 171,117
================== =================
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Year ended Year ended
December 31, 1997 December 31, 1996
------------------- ------------------
<S> <C> <C>
Operations:
Sales --- 181,683
Cost and expenses --- (180,523)
------------------- ------------------
1,160
Interest income $ 13,739 13,226
Other (1,477) 3,811
------------------- ------------------
Equity in income from joint ventures $ 12,262 18,197
=================== ==================
</TABLE>
(7) REAL ESTATE OWNED
A summary of real estate owned by property type at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Single-family $126,971
Nonresidential 369,677
---------
$496,648
Loss allowance for losses (70,000)
---------
$426,648
=========
</TABLE>
There was no real estate owned at December 31, 1997.
Activity in the allowance for losses on REO is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 69,000
Provision for loss 15,784
Charge-offs (14,784)
---------------
Balance at December 31, 1996 70,000
Provision for loss 70,211
Charge-offs (140,211)
---------------
Balance at December 31, 1997 ---
===============
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(8) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Premises $ 174,666 174,666
Office fixtures and equipment 460,825 453,915
---------- ---------
635,491 628,581
Less accumulated depreciation and amortization (508,332) (478,523)
---------- ---------
Total $ 127,159 150,058
========== =========
</TABLE>
(9) DEPOSITS
Deposits at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Weighted- Weighted-
Amount average rate Amount average rate
----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 463,762 --- 357,168 ---
NOW accounts 5,595,494 1.40% 4,756,568 1.42%
Money market deposit accounts 12,864,329 2.59% 11,741,281 2.66%
Certificates of Deposit 53,515,048 5.67% 55,644,993 5.55%
----------- ------------- ---------- -------------
Total deposits $72,438,633 4.76% 72,500,010 4.78%
=========== ============= ========== =============
</TABLE>
Certificates of deposit with balances of $100,000 or more amounted to
approximately $14,066,000 and $12,391,000 at December 31, 1997 and 1996,
respectively.
Included in deposits are certificates of deposit scheduled to mature as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998 $447,453,545
1999 4,307,827
2000 1,753,676
------------
$ 53,515,048
============
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
NOW $ 66,456 57,975
Money Market 303,923 348,920
Certificates of Deposit 3,051,202 3,041,083
------------------ -----------------
$ 3,421,581 3,447,978
================== =================
</TABLE>
(10) INVESTMENT IN AND BORROWINGS FROM FEDERAL HOME LOAN BANK
The Association had borrowings of $2,000,000 outstanding from the FHLB at
December 31, 1996. This borrowing was secured by real estate loans and matured
in August 1997.
In addition, the Association has a line of credit agreement with the
Federal Home Loan Bank (FHLB). Advances are to be secured by real estate loans
and by its investment in FHLB stock and are due on demand. The interest rate is
variable and is to be adjusted daily based on a rate established by FHLB. At
December 31, 1997, the Association had no outstanding advances under this line
of credit.
As a member of the FHLB system, the Association is required to own capital
stock in the FHLB of San Francisco in an amount at least equal to the greater of
1% of the aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts and similar obligations at the end of each year, or 5%
of its advances from the FHLB of San Francisco. The Association's investment in
FHLB stock at December 31, 1997 and 1996 amounted to $512,000 and $481,600, at
cost, respectively. The FHLB stock is subject to credit risk if it should
become permanently impaired.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(11) INCOME TAXES
The components of income taxes (benefit) at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Current income taxes
Federal $ 103,000 (237,000)
State 2,000 11,000
---------- ---------
105,000 (226,000)
---------- ---------
Deferred income taxes:
Federal 250,000 246,000
State 81,000 24,000
---------- ---------
331,000 270,000
---------- ---------
Change in valuation allowance (261,000) (158,000)
Taxes allocated to stockholders' equity (17,000) 2,000
---------- ---------
Income tax expense (benefit) $ 158,000 (112,000)
========== =========
</TABLE>
A reconciliation between the expected income taxes computed using the
federal income tax rate of 34% to taxes actually provided is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
------------------- ------------------
<S> <C> <C>
"Computed" expected income tax expense (benefit) $ 244,000 (5,000)
State franchise taxes, net of federal benefit 55,000 1,000
Increase (decrease) in valuation allowance
Decrease in valuation allowance (261,000) (158,000)
Prior year state tax assessment --- 11,000
Other 120,000 39,000
------------------- ------------------
Total income taxes $ 158,000 (112,000)
=================== ==================
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities under SFAS No. 109 at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets:
Write-downs and losses from joint venture activities $ 61,000 62,000
Gains and losses from real estate owned --- 27,000
Allowance for loan losses 301,000 396,000
Reserve for securities available-for-sale 21,000 4,000
Fixed assets due to differences in depreciation methods 2,000 4,000
SAIF assessment --- 210,000
Other 30,000 32,000
Net operating loss carryforward-state 87,000 93,000
---------- ---------
Total gross deferred tax assets 502,000 828,000
Less valuation allowance (172,000) (433,000)
---------- ---------
Net deferred tax assets 330,000 395,000
---------- ---------
Deferred tax liabilities:
Federal Home Loan Bank dividends (69,000) (56,000)
Deferred loan fees (63,000) (88,000)
---------- ---------
Total gross deferred tax liabilities (132,000) (144,000)
---------- ---------
Net deferred tax asset $ 198,000 251,000
========== =========
</TABLE>
Based upon the level of historical taxable income, net operating loss
carrybacks, tax planning strategies available to the Association and projections
of future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Association will
receive the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Association had $1,290,000 in operating loss
carryforwards for state income tax purposes. The Association had no operating
loss carryforwards for federal tax purposes.
Under the Internal Revenue Code, the Association is allowed a special bad
debt deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. This deduction amount represents an allocation of
income to bad debt reserves for tax computation purposes. The amount of the bad
debt reserves, for which income taxes have not been accrued, included in
retained earnings is $446,452 at December 31, 1997.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(12) COMMITMENTS
The Association leases its facilities under a noncancelable operating
lease. Annual future minimum lease payments as of December 31 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------
<S> <C>
1998 $ 153,900
1999 153,900
2000 153,900
2001 153,900
2002 153,900
Thereafter 744,044
----------
$1,513,544
==========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $152,200
and $148,600 respectively.
At December 31, 1997, the Association had commitments to originate loans of
$1,580,000. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
These commitments expire in less than one year and the Association anticipates
no loss on the fulfillment of these commitments. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
(13) RELATED PARTY TRANSACTIONS
In the normal course of business, the Association accepts deposits and
makes loans to certain officers, directors and employees under terms consistent
with its general interest rates and lending policies.
Certain officers, directors, employees and their affiliated companies
maintain savings accounts at the Association, which amounted to $953,699 and
$838,407 at December 31, 1997 and 1996, respectively.
The Association has loans outstanding to directors and employees at
December 31, 1997 aggregating $345,579. Activity was as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 534,271
Additions 15,422
Repayments (18,681)
----------
Balance at December 31, 1996 531,012
Repayments (185,433)
----------
Balance at December 31, 1997 $ 345,579
==========
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(14) WHOLLY-OWNED SUBSIDIARY
The accompanying consolidated financial statements include the accounts and
transactions of the Association's wholly-owned subsidiary, Palomar Service
Corporation. Palomar Service Corporation's condensed financial information is
summarized as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Cash $ 8,598 20,537
Note receivable 24,866 27,200
Investment in joint venture 77,980 81,157
------------------------ -----------------
$ 111,444 128,894
======================== =================
STOCKHOLDER'S EQUITY
Stockholder's equity 111,444 128,894
======================== =================
CONDENSED STATEMENTS OF EARNINGS
Year ended
December 31,
1997 1996
------------------------ -----------------
Trustee fee income $ 2,760 2,055
Interest income 2,467 2,439
Corporation's share of income from operations of
joint venture 6,022 11,112
------------------------ -----------------
Net earnings $ 11,249 15,606
======================== =================
</TABLE>
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(15) STOCK TRANSACTIONS
The Association has an employee stock ownership plan (the "Plan"), which is
available to all employees who are 21 years of age or older and who have
completed at least one year of service with the Association. The purpose of the
Plan is to establish a fund from contributions made by the Association. The
funds will be used by the trustee (certain members of the Board of Directors) to
purchase the Association's guarantee stock from time to time. The contribution
by the Association to the Plan is determined annually based on a percentage of
eligible compensation, up to a maximum of 15%, as determined by the Board of
Directors. There was no contribution for the year ended December 31, 1997. For
the year ended December 31, 1996, the rate was 2% of eligible compensation,
which resulted in a contribution of $10,334. The contributions are expensed at
the time they are made. The total number of shares in the ESOP at December 31,
1997 and 1996 are 28,649. The ESOP purchased no shares from the Association in
1997 or 1996.
(16) REGULATORY CAPITAL
The Financial Institution Reform, Recovery and Enforcement Act (FIRREA) of
1989 requires institutions to have a minimum regulatory tangible capital ratio
equal to 1.5% of adjusted total assets, a minimum 3% core capital ratio and a 8%
total risk-based capital ratio. At December 31, 1997, the Association exceeded
all minimum capital requirements for tangible, core and risk-based capital as
shown in the table below.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
was signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA include significant changes to the legal
and regulatory environment for insured depository institutions, including
reductions in insurance coverage for certain kinds of deposits, increased
supervision by the federal regulatory agencies, increased reporting requirements
for insured institutions, and new regulations concerning internal controls,
accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly under capitalized," and "critically undercapitalized."
To be considered "well capitalized" an institution must generally have a
core capital ratio of at least 5% and a total risk-based capital ratio of at
least 10%. Additionally, FDICIA imposed in 1994 a new Tier 1 risk-based capital
ratio of at least 6% to be considered "well capitalized." At December 31, 1997,
the Association exceeds all these requirements s shown in the table below.
(Continued)
<PAGE>
PALOMAR SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
The following table compares the capital amounts of the Association as
calculated according to both FIRREA and FDICIA regulatory capital requirements
at December 31, 1997:
<TABLE>
<CAPTION>
FIRREA FDICIA
-------------------------------------- ---------------------------------------
Total-risk Tier 1 risk Total risk-
Tangible Core based Leverage based based
capital capital capital capital capital capital
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity
capital 5,525,710 5,525,710 5,525,710 5,525,710 5,525,710 5,525,710
Unrealized gains on
securities available-
for-sale, net (31,169) (31,169) (31,169) (31,169) (31,169) (31,169)
General loan loss
allowance --- --- 561,000 --- --- 561,000
------------ ----------- ----------- ----------- ------------ ------------
Regulatory capital
measure 5,494,541 5,494,541 6,055,441 5,494,541 5,494,541 6,055,441
Regulatory capital
required (1,179,000) (2,357,000) (3,591,000) (3,929,000) (2,693,000) (4,489,000)
------------ ----------- ----------- ----------- ------------ ------------
Regulatory capital in
excess of required
regulatory capital $ 4,315,541 3,139,541 2,444,541 1,565,541 2,801,541 1,566,541
============ =========== =========== =========== ============ ============
Total tangible assets $78,568,000 78,568,000 78,568,000
============ =========== ===========
Total risk-weighted
assets 44,875,000 44,875,000 44,875,000
=========== ============ ============
Regulatory capital
ration requirements:
OTS 1.5% 3% 8% -- -- --
FDICIA (well
capitalized) -- -- -- 5.0% 6.0% 10.0%
Association's
capital ratios 7.0% 7.0% 12.5% 7.0% 12.2% 13.5%
</TABLE>
Deposits in the Association are presently insured by the Savings
Association Insurance Fund (SAIF). The Association's regular assessment rate
and the premiums paid to the SAIF for the year ended December 31, 1997 were 9.41
basis points and $67,000, respectively. In September 1996, the Association
recorded a one-time special assessment of $506,000 payable to the SAIF in
accordance with the enactment of the Direct Insurance Funds Act of 1995. This
assessment was based on a rate of 65.7 basis points applied to the Association's
SAIF assessable deposits as of March 31, 1995.
(17) Subsequent Events
On October 27, 1997, the Board of Directors of the Association approved a
5% stock dividend on issued and outstanding shares. The dividend was issued on
February 18, 1998 to the stockholders of record at the close of business on
February 2, 1998. All references to the number of shares, except shares
authorize have been restated to reflect the stock dividend for all periods
presented.
On December 14, 1998, the Association finalized a merger agreement with
Community West Bancshares (CWB), tendering all the shares of its outstanding
guarantee stock in exchange for shares of the common stock of CWB.
<PAGE>
