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 March 31, 1999
For the Quarter Ended March 31, 1999 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: 5,482,571 outstanding as of
April 15, 1999
This Form 10-Q contains 21 pages.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
- -----------------------------
ASSETS March 31, 1999 December 31, 1998
(unaudited) (audited)
<S> <C> <C>
Cash and due from banks $ 5,393,000 $ 6,124,000
Federal funds sold 3,535,000 43,355,000
---------------- -------------------
Cash and cash equivalents 8,928,000 49,479,000
Time deposits in other financial institutions - 1,500,000
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 818,000 810,000
Investment securities held to maturity, at amortized cost; fair value of 501,000 501,000
502,000 at March 31, 1999 and $503,000 at December 31, 1998
Investment securities available for sale, at fair value 6,967,000 8,295,000
Investment securities held for trading, at fair value 11,381,000 10,915,000
Servicing assets 1,539,000 1,473,000
Loans
Held for investment, net of allowance for loan
losses of $2,167,000 in 1999 and $2,129,000 in 1998 113,696,000 107,099,000
Held for sale, at lower of cost or fair value 153,006,000 58,836,000
Other real estate owned, net 241,000 241,000
Premises and equipment, net 4,706,000 4,539,000
Accrued interest receivable and other assets 10,172,000 8,346,000
---------------- -------------------
TOTAL $ 311,955,000 $ 252,034,000
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 19,747,000 $ 19,487,000
Interest-bearing demand 23,700,000 19,976,000
Savings 30,698,000 26,861,000
Time certificates of $100,000 or more 80,485,000 61,742,000
Other time certificates 128,868,000 95,479,000
---------------- -------------------
Total deposits 283,498,000 223,545,000
Accrued interest payable and other liabilities 4,118,000 3,936,000
---------------- -------------------
Total liabilities 287,616,000 227,481,000
---------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,482,571 and 17,317,000 17,304,000
5,479,710 shares issued and outstanding at March 31, 1999 and December 31,
1998
Less: Treasury stock, at cost 130,437 shares at March 31, 1999 and 14,807 (1,180,000) (141,000)
shares at December 31, 1998
Retained earnings 8,229,000 7,393,000
Accumulated other comprehensive loss (27,000) (3,000)
---------------- -------------------
Total stockholders' equity 24,339,000 24,553,000
TOTAL $ 311,955,000 $ 252,034,000
================ ===================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months
Ended March 31
1999 1998
---------- ----------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $5,211,000 $3,071,000
Federal funds sold 184,000 184,000
Time deposits in other financial institutions 15,000 54,000
Investment securities 391,000 244,000
---------- ----------
Total interest income 5,801,000 3,553,000
INTEREST EXPENSE ON DEPOSITS 2,564,000 1,674,000
---------- ----------
NET INTEREST INCOME 3,237,000 1,879,000
PROVISION FOR LOAN LOSSES 340,000 61,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,897,000 1,818,000
OTHER INCOME:
Gains from loan sales 3,357,000 1,449,000
Loan origination fees - sold or brokered loans 855,000 822,000
Document processing fees 604,000 319,000
Service charges 127,000 237,000
Other income 116,000 266,000
---------- ----------
Total other income 5,059,000 3,093,000
---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 4,252,000 2,535,000
Occupancy expense 816,000 564,000
Other operating expenses 429,000 346,000
Professional services 203,000 132,000
Advertising expense 202,000 162,000
Data processing/ ATM processing 111,000 36,000
Postage and freight 71,000 199,000
Office supply expense 63,000 66,000
---------- ----------
Total other expenses 6,147,000 4,040,000
---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,809,000 871,000
PROVISION FOR INCOME TAXES 753,000 317,000
---------- ----------
NET INCOME $1,056,000 $ 554,000
========== ==========
NET INCOME PER SHARE - BASIC (Note 5) $ .20 $ .10
========== ==========
NET INCOME PER SHARE - DILUTED (Note 5) $ .19 $ .09
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,056,000 $ 554,000
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 340,000 61,000
Depreciation and amortization 313,000 214,000
Gain on early retirement of debt - (14,000)
Gain on sale of loans held for sale (3,358,000) (1,449,000)
Origination of servicing and interest only strip assets, net of amortization (532,000) (983,000)
FRB/FHLB stock dividend (8,000) (8,000)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (1,826,000) (296,000)
Accrued interest payable and other liabilities 182,000 (1,917,000)
------------- -------------
Net cash used in operating activities (3,833,000) (3,838,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (3,029,000)
Paydown of principal on available-for-sale securities 1,054,000 588,000
Maturities of held-to-maturity securities - 500,000
Maturities of available-for-sale securities 250,000 -
Net decrease in time deposits in other financial institutions 1,500,000 118,000
Net increase in loans and loans held for sale (97,749,000) (33,925,000)
Proceeds from early retirement of debt - 750,000
Purchase of premises and equipment (480,000) (303,000)
------------- -------------
Net cash used in investing activities (95,425,000) (35,301,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, and savings accounts 7,821,000 7,669,000
Net increase in time certificates 52,132,000 26,009,000
Net increase in federal funds purchased - 10,000,000
Retirement of founders stock - (10,000)
Exercise of stock warrants - 774,000
Exercise of stock options 13,000 176,000
Purchase of treasury stock (1,039,000) -
Cash dividends paid in lieu of stock dividend - (1,000)
Cash dividends paid (220,000) -
------------- -------------
Net cash provided by financing activities 58,707,000 44,617,000
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,551,000) 5,478,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49,479,000 18,837,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,928,000 $ 24,315,000
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 2,360,000 $ 1,611,000
Cash paid for income taxes $ 2,000 $ 325,000
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned $ - $ -
Decrease in net unrealized losses on available-for-sale securities $ 24,000 $ 4,000
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 1999
1. 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 March 31, 1999, are not necessarily indicative of results
which may be expected for any other interim period or for the year as a
whole. Certain reclassifications have been made in the 1998 financial
information to conform to the presentation used in 1999.
2. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Financial Statements in Community West Bancshares' (the "Company") 1998
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 - Loans which are originated and are intended for sale
in the secondary market, are carried at the lower of cost or fair value on
an aggregate basis. Funding for SBA 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.
Investment Securities - The Company classifies as held to maturity those
debt securities it has the positive intent and ability to hold to maturity.
Securities held to maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts. 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 accumulated other comprehensive income, net of any applicable income
taxes. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined on an identification basis.
Investment Securities, Held for Trading-Interest Only Strips and Residual
Asset - The Company originates certain loans for the purpose of selling
either a portion or all of the loan into either the secondary market or a
securitization.
5
<PAGE>
The guaranteed portion of SBA loans and FHA Title 1 loans are sold into the
secondary market, servicing retained. Second mortgages ("HLTV") loans are
sold into a securitization. On these sales, the Company retains interest
only ("I/O") strips, which represent 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. Loan sales are discussed in detail in Note 3.
The I/O Strips and Residual Assets are subject to significant prepayment
risk, and accordingly have an undetermined maturity date; and therefore
cannot be classified as held to maturity. The Company has chosen to
classify these assets 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 basis.
As the gain recognized in the year of sale is equal to the net estimated
future cash flows from the I/O Strips and Residual Assets, 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.
3. Loan Sales
HLTV Loan Sales
-----------------
During the year ended December 31, 1998, the Company completed the
securitization of an $81 million pool of HLTV loans. These HLTV loans allow
borrowers to receive up to 125% of their home value for debt consolidation,
home improvement, school tuition, or any worthwhile cash outlay. There is
an upper limit on these loans of $100,000. The Company retained a residual
participation interest in the investor trust, reflecting the excess of the
total amount of loans transferred to the trust over the portion represented
by certificates sold to investors. As a result of the securitization, the
Company also recorded interest-only strips (I/O Strips). The present value
of these assets was calculated assuming a 13% discount rate, annual losses
of 2.25%, and an 18.25% constant prepayment rate (CPR). As of March 31,
1999, the Company had recorded a receivable from the underwriter of the
securitization for $3 million, which represents the amount due to the
Company upon the final sale of the remaining bonds.
6
<PAGE>
As of December 31, 1998, the Company had $24 million in loans held for sale
in future securitizations. As of March 31, 1999, the Company had $128
million in loans held for sale in future securitizations.
SBA Loan Sales
----------------
The Company sells the guaranteed portion of Small Business Administration
("SBA") loans into the secondary market in exchange for cash premium,
servicing assets, and I/O strips. The Company retains the servicing rights.
The present value of the interest only strips and servicing assets was
calculated assuming an 11% discount rate, and an 8% CPR.
As of December 31, 1998, and March 31, 1999, the Company had $5 million in
SBA loans held for sale.
FHA Title 1 Loan Sales
--------------------------
Since 1995, the Company has sold FHA Title 1 loans into the secondary
market, on a whole loan basis, in exchange for cash premium, servicing
assets, and I/O strips. The Company retains the servicing rights. In 1999,
the present value of the interest only strips was calculated assuming a 11%
discount rate, and a 15% CPR.
As of December 31, 1998, and March 31, 1999, the Company had $1 million in
FHA Title 1 loans held for sale.
Traditional Mortgages
----------------------
Amount represents servicing purchased by Palomar in 1998.
The balances of these assets are as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------- -------------------------------
Servicing Asset I/O Strip(1) Servicing Asset I/O Strip(1)
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
HLTV $ - $ 8,410,000 $ - $ 8,150,000
Guaranteed Portion of SBA 1,292,000 1,478,000 1,194,000 1,030,000
FHA Title 1 12,000 1,493,000 22,000 1,735,000
Traditional Mortgages 235,000 - 256,000 -
---------------- ------------- ---------------- -------------
Total $ 1,539,000 $ 11,381,000 $ 1,472,000 $ 10,915,000
================ ============= ================ =============
<FN>
(1) Includes the residual asset recorded on the securitization of the HLTV loans.
</TABLE>
7
<PAGE>
4. 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 March 31, 1999, the Company had
entered into commitments with certain customers amounting to $17.9 million
compared to $20.5 million at December 31, 1998. There were $108,000 of
letters of credit outstanding at March 31, 1999; there were no letters of
credit outstanding at December 31, 1998.
5. Net income per share - Basic, has been computed based on the weighted
average number of shares outstanding during each period. 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. Earnings per share were computed
as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Basic weighted average shares outstanding 5,394,833 5,255,391
Dilutive effect of options 113,533 213,033
Dilutive effect of warrants - 467,859
---------- ----------
Diluted weighted average shares outstanding 5,508,366 5,936,283
========== ==========
Net income $1,056,000 $ 554,000
Net income per share - Basic $ 0.20 $ 0.10
Net income per share - Diluted $ 0.19 $ 0.09
</TABLE>
On January 20, 1999, the Company paid a quarterly dividend of $0.04 for
shareholders of record as of January 5, 1999. The Company also declared a
quarterly dividend of $0.04 for shareholders of record on April 12, 1999,
payable on April 26, 1999. Each quarterly dividend totaled approximately
$220,000.
8
<PAGE>
6. Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed and Obtained for Internal Use", issued in March 1998 requires
capitalization of certain costs of computer software developed or obtained
for internal use. The SOP describes three stages of software development
projects: the preliminary project stage, where all costs are expensed; the
application development stage, where certain costs are capitalized, while
others are expensed; and the post-implementation/operation stage, where all
costs are expensed. The SOP does not change the requirement that the
external and internal costs associated with modifying internal use software
currently in use for the year 2000 should be charged to expense as
incurred. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged. The
Company early adopted SOP 98-1 effective January 1, 1998, and has
capitalized certain costs, amounting to $549,000, related to the
development of internal use software as required by the SOP.
7. The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information in 1998. SFAS 131 established standards for reporting
information about operating segments. The March 31, 1999 and 1998
information is presented below.
The Company's management, while managing the overall company, also, looks
at individual areas considered "significant" to revenue and net income.
These significant areas, or segments, are: SBA Lending, Alternative
Lending, the Mortgage Division, Goleta National Bank Branch Operations, and
Palomar Savings and Loan. For this discussion, the remaining divisions are
considered immaterial and are consolidated into "Other." The Other segment
includes the administration areas, human resources, and tech support, along
with others. The accounting policies of the individual segments are the
same as those described in the summary of significant accounting policies.
The SBA Lending, Alternative Lending, and Mortgage Divisions from Goleta
National Bank are considered individual segments because of the different
loan products involved and the significance of the associated revenue.
Goleta National Bank Branch Operation, includes the deposits and commercial
lending. Management analyzes Palomar separately from Goleta National Bank,
as they are two different subsidiaries under Community West Bancshares.
All of the Company's assets and operations are located within the United
States. The assets shown for each segment, other than Palomar, are
estimates.
9
<PAGE>
The following table sets forth various revenue and expense items that
management relies on in decision making.
<TABLE>
<CAPTION>
Goleta National Palomar
Three Months Ended Alternative Mortgage Bank Branch Savings Consolidated
MARCH 31, 1999 SBA Lending Lending Division Operations and Loan Other Total
------------ ------------ ----------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 591,000 $ 2,280,000 $ 257,000 $ 618,000 $ 1,465,000 $ 590,000 $ 5,801,000
Interest Expense 239,000 920,000 104,000 468,000 830,000 3,000 2,564,000
------------ ------------ ----------- ---------------- ----------- ------------ -------------
Net Interest Income 352,000 1,360,000 153,000 150,000 635,000 587,000 3,237,000
Provision For Loan Losses 145,000 106,000 - 69,000 20,000 - 340,000
Noninterest Income 980,000 1,995,000 1,391,000 334,000 277,000 82,000 5,059,000
Noninterest Expense 226,000 1,241,000 1,198,000 272,000 667,000 2,543,000 6,147,000
------------ ------------ ----------- ---------------- ----------- ------------ -------------
Segment Profit $ 961,000 $ 2,008,000 $ 346,000 $ 143,000 $ 225,000 $(1,874,000) $ 1,809,000
============ ============ =========== ================ =========== ============ =============
MARCH 31, 1999
Segment Assets $ 33,454,000 $116,613,000 $12,778,000 $ 60,495,000 $80,564,000 $ 8,051,000 $ 311,955,000
============ ============ =========== ================ =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
Goleta National Palomar
Three Months Ended Alternative Mortgage Bank Branch Savings Consolidated
MARCH 31, 1998 SBA Lending Lending Division Operations and Loan Other Total
------------ ------------ ----------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 614,000 $ 103,000 $ 149,000 $ 1,096,000 $ 1,407,000 $ 184,000 $ 3,553,000
Interest Expense 257,000 43,000 62,000 458,000 854,000 - 1,674,000
------------ ------------ ----------- ---------------- ----------- ----------- -------------
Net Interest Income 357,000 60,000 87,000 638,000 553,000 184,000 1,879,000
Provision For Loan Losses 27,000 20,000 - 13,000 1,000 - 61,000
Noninterest Income 508,000 862,000 1,026,000 324,000 171,000 202,000 3,093,000
Noninterest Expense 468,000 806,000 863,000 172,000 503,000 1,228,000 4,040,000
------------ ------------ ----------- ---------------- ----------- ------------ -------------
Segment Profit $ 370,000 $ 96,000 $ 250,000 $ 777,000 $ 220,000 $ (842,000) $ 871,000
============ ============ =========== ================ =========== =========== =============
MARCH 31, 1998
Segment Assets $ 22,690,000 $ 26,093,000 $19,418,000 $ 61,885,000 $80,902,000 $6,330,000 $ 217,318,000
============ ============ =========== ================ =========== =========== =============
</TABLE>
8. In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage
banking enterprises and other enterprises that conduct operations that are
substantially similar. SFAS No. 134 requires that after the securitization
of mortgage loans held for sale, the resulting mortgage-backed securities
and other retained interests should be classified in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," based on the company's ability and intent to sell or hold
those investments. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of SFAS No. 134 did not
have a material impact on the Bank's results of operations or financial
position.
10
<PAGE>
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 following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------- Amount of Percent of
March 31, March 31, Increase Increase
1999 1998 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income $5,801,000 $3,553,000 $2,248,000 63.3%
Interest Expense 2,564,000 1,674,000 890,000 53.2%
---------- ---------- ----------
Net Interest Income 3,237,000 1,879,000 1,358,000 72.3%
Provision for Loan Losses 340,000 61,000 279,000 457.4%
---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 2,897,000 1,818,000 1,079,000 59.4%
Other Income 5,059,000 3,093,000 1,966,000 63.6%
Other Expense 6,147,000 4,040,000 2,107,000 52.2%
---------- ---------- ----------
Income before Provision
for Income Taxes 1,809,000 871,000 938,000 107.7%
Provision for Income Taxes 753,000 317,000 436,000 137.5%
---------- ---------- ----------
Net Income $1,056,000 $ 554,000 $ 502,000 90.6%
========== ========== ==========
Net Income Per Share - Basic $ 0.20 $ 0.10 $ 0.10 100.0%
========== ========== ==========
Net Income Per Share -
Diluted $ 0.19 $ 0.09 $ 0.10 111.1%
========== ========== ==========
</TABLE>
Net Income Per Share -- Basic is calculated using weighted average number of
shares outstanding for the period. Net Income Per Share -- Diluted 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 17.3% for the three months ended
March 31, 1999, and 12.0% for the three months ended March 31, 1998.
The book value per share decreased from $4.48 at December 31, 1998, to $4.44 at
March 31, 1999. This decrease was because of the increase in treasury stock
holdings, the payment of cash dividends, and the unrealized loss on securities
held as available-for-sale. Average assets for the three months ended March 31,
1999, were $281,995,000 compared to $195,619,000 for the same period in 1998;
average equity increased to $24,446,000 for the three months ended March 31,
1999, from $18,416,000 for the same period in 1998.
11
<PAGE>
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.
The annualized net interest margin was 4.9% for the three months ended March 31,
1999, compared to an annualized net interest margin of 4.0% for the three months
ended March 31, 1998. Earning assets averaged $266,366,000 for the three months
ended March 31, 1999. This represented an increase of $78,380,000, or 41.7%,
over average earning assets of $187,986,000 for the three months ended March 31,
1998. The increase was primarily a result of a 201% increase in loans held for
sale at March 31, 1999, from March 31, 1998. The Company has increased its
balance of HLTV second mortgage loans through retail, brokers, and bulk
purchases since the second quarter of 1998. These HLTV loans are used in
securitizations. During the fourth quarter of 1998, the Company completed its
first securitization of $81 million in HLTV loans. The Company is currently
increasing its HLTV loans in anticipation of another securitization later in the
year.
The net interest income figures above include income from the Company's
securities. The following table shows the interest and fees and corresponding
yields for loans only.
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------
March 31, 1999 March 31, 1998
---------------- ----------------
<S> <C> <C>
Interest and Fees $ 5,211,000 $ 3,071,000
Average Loans $ 216,319,000 $ 145,920,000
Annualized Yield 9.6% 8.4%
</TABLE>
CREDIT LOSS EXPERIENCE
As a natural corollary to the Company's lending activities, some loan losses are
experienced. The risk of loss varies with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. The degree of
perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Company attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.
The Company maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Company's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Company's Loan Committee.
The Company charges off that portion of any loan which management considers to
represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond any collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
12
<PAGE>
economic conditions in the borrower's industry. The principal amount of any loan
which is declared a loss is charged against the Company's allowance for loan
losses.
The Company's allowance for loan losses is designed to provide for loan losses
which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Actual loan losses or recoveries are charged or credited, directly
to the allowance for loan losses. The amount of the allowance is determined by
management of the Company. Among the factors considered in determining the
allowance for loan losses are the current financial condition of the Company's
borrowers and the value of the security, if any, for their loans. Estimates of
future economic conditions and their impact on various industries and individual
borrowers are also taken into consideration, as are the Company's historical
loan loss experience and reports of banking regulatory authorities. Because
these estimates, factors and evaluations are primarily judgmental, no assurance
can be given as to whether or not the Company will sustain loan losses
substantially higher in relation to the size of the allowance for loan losses or
that subsequent evaluation of the loan portfolio may not require substantial
changes in such allowance.
The following table summarizes the Company's allowance for loan loss for the
dates indicated:
<TABLE>
<CAPTION>
Amount of Percent of
March 31, December 31, Increase Increase
1999 1998 (Decrease) (Decrease)
------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
BALANCES:
Gross loans $268,869,000 $ 168,002,000 $100,867,000 60.0%
Allowance for loan losses 2,167,000 2,129,000 38,000 1.8%
Nonaccrual loans 2,547,000 2,971,000 (424,000) (14.3%)
RATIOS:
Allowance for loan losses to gross loans 0.81% 1.27%
Net loans charged off to allowance
for loan losses 13.94% 17.24%
</TABLE>
The provision for loan losses was $340,000 for the three months ended March 31,
1999. This is an increase of $279,000, or 457.4%, over the $61,000 for the three
months ended March 1998. Gross loans outstanding increased 63.2% from March 1998
to March 1999. For the three months ended March 31, 1999, losses charged to the
allowance for loan losses totaled $303,000. This was offset by $1,000 recovery;
with the net effect being $302,000 loans were charged to the allowance.
Management of the Company reviews with the Board of Directors the adequacy of
the allowance for possible loan losses on a quarterly basis. The loan loss
provision is adjusted when specific items reflect a need for such an adjustment.
Management believes that there were no material loan losses during the last
fiscal year that has not been charged off. Management also believes that the
Company has adequately reserved for all individual items in its portfolio which
may result in a material loss to the Company.
13
<PAGE>
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 months ended March 31,
1999, increased 63.6% over the three months ended March 31, 1998. A large part
of this increase was from gains on the sale of loans; which increased 131.7%.
The Company continued to emphasize generating noninterest income. The Company's
percentage coverage of other expenses with other income was 82.3% for the three
months ended March 31, 1999, an increase from 76.6% for the same period in 1998.
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, 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 for the three months ended March 31, 1999, increased
52.2% over the three months ended March 31, 1998. 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 52.2% was partially offset by the 63.6% increase in other operating
income.
BALANCE SHEET ANALYSIS
<TABLE>
<CAPTION>
Amount of Percent of
March 31, December 31, Increase Increase
1999 1998 (Decrease) (Decrease)
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 8,928,000 $ 49,479,000 $(40,551,000) (82.0%)
Investment Securities 19,667,000 22,021,000 (2,354,000) (10.7%)
Loans, held for investment 113,696,000 107,099,000 6,597,000 6.2%
Loans, held for sale 153,006,000 58,836,000 94,170,000 160.1%
Total Assets 311,955,000 252,034,000 59,921,000 23.8%
Total Deposits 283,498,000 223,545,000 59,953,000 26.8%
Total Stockholders' Equity $ 24,339,000 $ 24,553,000 $ (214,000) (0.9%)
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash and federal funds sold. The
decrease of 82.0% is because at December 31, 1998, the Company had recently
completed its first HLTV securitization. This caused the Company's loans held
for trading to decrease and its available cash to increase. The federal funds
sold balance had decreased in the first quarter of 1999 as the Company increased
the loans held for sale in anticipation of a securitization to be completed
later in the year.
14
<PAGE>
INVESTMENT SECURITIES
The investment securities are made up of time deposits held in other financial
institutions, Federal Reserve Bank and Federal Home Loan Bank stock, U.S.
Treasury Notes and Bills, mortgage-backed securities and interest only strips.
The decrease of 10.7% is because the mortgage-backed securities have principal
repayments monthly, decreasing the securities. Also, at December 31, 1998, the
Company held short-term time deposits in other financial institutions. During
the first quarter of 1999, these time deposits matured and were not renewed.
LOANS
The 160.1% increase in loans held for sale is because the Company is actively
increasing those balances in anticipation of another securitization of HLTV
loans. This is also the reason cash and cash equivalents had such a large
decrease.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
<TABLE>
<CAPTION>
Amount of Percent of
March 31, December 31 Increase Increase
1999 1998 (Decrease) (Decrease)
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Noninterest-Bearing Deposits $ 19,747,000 $ 19,487,000 $ 260,000 1.3%
Interest-Bearing Deposits 23,700,000 19,976,000 3,724,000 18.6%
Savings 30,698,000 26,861,000 3,837,000 14.3%
Time Certificates over $100,000 80,485,000 61,742,000 18,743,000 30.4%
Other Time Certificates 128,868,000 95,479,000 33,389,000 35.0%
------------ ------------ ------------ ----------
Total Deposits $283,498,000 $223,545,000 $ 59,953,000 26.8%
============ ============ ============ ==========
</TABLE>
The increase in deposits is a result of the Company using short-term time
deposits, along with available cash, to fund the planned increase in loans.
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 March 31, 1999, was 58.2% and at December 31, 1998, was 51.7%, based on
liquid assets (consisting of cash and due from banks, federal funds sold,
deposits in other financial institutions, investments, and loans held for sale)
divided by total assets. Management believes it maintains adequate liquidity
levels.
At times when the Company has more funds than it needs for its reserve
requirements or short term liquidity needs, the Company increases its securities
investments and sells federal funds. It is management's policy to maintain a
15
<PAGE>
substantial portion of its portfolio of assets and liabilities on a short-term
or highly liquid basis in order to maintain rate flexibility and to meet loan
funding and liquidity needs. The Company has two federal funds lines of credit
with its correspondent banks totaling $6,500,000. In addition, the Company has a
line of credit with the Federal Home Loan Bank. This line had $20,100,000
available at March 31, 1999.
CAPITAL RESOURCES
The Company's equity capital was $24,339,000 at March 31, 1999. The primary
source of capital for the Company has been the retention of net income.
On January 20, 1999, the Company paid a quarterly cash divided of $.04 per
share for shareholders of record on January 5, 1999. On December 28, 1998, the
Board of Directors of the Company authorized a stock buy-back plan. Under this
plan management is authorized to repurchase up to $2,000,000 worth of the
outstanding shares of its common stock . As of March 31, 1999, management had
repurchased 130,437 shares of common stock at a cost of $1,180,000. As of
December 31, 1998, management had repurchased 14,807 shares of common stock at a
cost of $141,000. Additionally, on March 26, 1999, the Company declared a
quarterly cash divided of $.04 per share for shareholders of record on April
12, 1999, to be paid on April 26, 1999.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Total and Tier I
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of March 31, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
The Company's actual capital amounts and ratios for the periods indicated are as
follows:
16
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999:
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
Total Capital (to Risk Weighted assets)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED $25,929,000 9.47% $21,904,000 8.00% $27,380,000 10.00%
Goleta National Bank $17,803,000 8.25% $17,264,000 8.00% $21,579,000 10.00%
Palomar Savings and Loan $ 6,587,000 11.66% $ 4,520,000 8.00% $ 5,650,000 10.00%
Tier I Capital (to Risk Weighted assets)
CONSOLIDATED $23,762,000 8.68% $10,950,000 4.00% $16,425,000 6.00%
Goleta National Bank $16,283,000 7.54% $ 8,638,000 4.00% $12,957,000 6.00%
Palomar Savings and Loan $ 5,998,000 10.62% N/A N/A $ 3,390,000 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $23,762,000 8.44% $11,262,000 4.00% $14,077,000 5.00%
Goleta National Bank $16,283,000 9.20% $ 7,080,000 4.00% $ 8,849,000 5.00%
Core Capital (to Adjusted Tangible Assets)
Palomar Savings and Loan $ 5,998,000 7.44% $ 3,224,000 4.00% $ 4,030,000 5.00%
Tangible Capital (to Tangible Assets)
Palomar Savings and Loan $ 5,998,000 7.44% $ 1,209,000 1.50% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
Total Capital (to Risk Weighted assets)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED $26,110,000 15.27% $13,675,000 8.00% $17,094,000 10.00%
Goleta National Bank $16,153,000 13.88% $ 9,310,000 8.00% $11,637,000 10.00%
Palomar Savings and Loan $ 6,492,000 12.45% $ 4,172,000 8.00% $ 5,215,000 10.00%
Tier I Capital (to Risk Weighted assets)
CONSOLIDATED $23,973,000 14.02% $ 6,837,000 4.00% $10,256,000 6.00%
Goleta National Bank $14,698,000 12.63% $ 4,655,000 4.00% $ 6,982,000 6.00%
Palomar Savings and Loan $ 5,865,000 11.25% N/A N/A $ 3,128,000 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $23,973,000 9.49% $10,102,000 4.00% $12,628,000 5.00%
Goleta National Bank $14,698,000 8.07% $ 7,285,000 4.00% $ 9,107,000 5.00%
Core Capital (to Adjusted Tangible Assets)
Palomar Savings and Loan $ 5,865,000 7.11% $ 3,299,000 4.00% $ 4,124,000 5.00%
Tangible Capital (to Tangible Assets)
Palomar Savings and Loan $ 5,865,000 7.11% $ 1,237,000 1.50% N/A N/A
</TABLE>
17
<PAGE>
YEAR 2000
As the year 2000 approaches, a critical issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. In brief, many existing application software products in the marketplace
were designed to only accommodate a two digit date position which represents the
year (for example, '98' is stored on the system and represents the year as
1998). As a result, the year 1999 could be the maximum date value these systems
will be able to accurately process. A time-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities. The Company believes it has adequately
tested all its systems and is extremely well prepared for the year 2000.
However, unexpected issues could arise as a result of the date change, which
might result in operational delays.
The Company has adopted a plan of action to minimize the risk of the year 2000
event including the establishment of an oversight committee. This plan is fully
supported by management and the Board of Directors. The committee's goal is to
achieve a year 2000 date conversion with no effect on customers or disruption to
business operations. The plan consists of five phases; awareness, assessment,
renovation, validation, and implementation. In the awareness phase, the
committee 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 were tested for compliance and
any non-compliant systems were replaced. Nothing determined as critical needed
replacement. During the validation phase, further testing is done on any new
equipment or systems installed. At the end of 1998, the Company re-tested all
systems in a mock exercise as if it was January 2000. In 1999, customer
awareness of the Year 2000 issue and what the Company has done to address the
issue will intensify. This will be, but is not limited to, mailings to our
customers, public announcements, and training for Company employees to address
customer concerns.
The Company has initiated formal communications with all of its vendors,
including the U.S. Government, to determine their Year 2000 compliance
readiness. The Company is reviewing the extent the interface systems are
vulnerable to any third parties' year 2000 issues. There can be no guarantee
that the systems of other companies on which the Company systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
18
<PAGE>
Many of the Company's systems include new hardware and software purchased from
vendors who have represented that these systems are already year 2000 compliant.
The Company is in the process of obtaining assurances from vendors that timely
updates will be made available to make all remaining systems compliant.
Management does not anticipate the Company will be required to purchase any
additional hardware or software to be year 2000 compliant. However, management
has incurred and will continue to incur some administrative costs relative to
the identification and testing of the Company's electronic data processing
systems. The costs and timing of the year 2000 project is based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. As of March 31, 1999, the Company had
incurred $111,476 in expenses getting Year 2000 compliant and anticipates
spending $100,000 in 1999. However, there can be no guarantee that these
estimates will be achieved and actual results could differ from these plans.
COMMUNITY WEST BANCSHARES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the end of
the last fiscal year end of December 31, 1998. For details, reference the
Company's annual filing on Form 10K.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities and Use of Proceeds
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
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
On January 7, 1999, the Company filed a Current
Report on Form 8-K, announcing the completion of
a $81 million loan securitization.
On February 26, 1999, the Company filed a Current
Reporton Form 8-K/A amending the Current Report on
Form 8-K filed on December 29, 1998, which reported
the merger of Community West Bancshares and Palomar
Savings and Loan. The Form 8-K/A reported unaudited
pro forma combined condensed financial data combining
the historical consolidated condensed financial
statements of Community West Bancshares and Palomar
Savings and Loan Association after giving effect to the
merger as if it had been effective on September 30,
1998, and December 31, 1997. The merger was actually
consummated on December 14, 1998; and accounted for as
a pooling-of-interest. The filing includes Pro Forma
Combined Condensed Balance Sheets and Pro Forma
Combined Condensed Statements of Income.
20
<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: April 29, 1999 C. Randy Shaffer
Executive Vice President
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 5393
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3535
<TRADING-ASSETS> 11381
<INVESTMENTS-HELD-FOR-SALE> 6967
<INVESTMENTS-CARRYING> 501
<INVESTMENTS-MARKET> 502
<LOANS> 268869
<ALLOWANCE> 2167
<TOTAL-ASSETS> 311955
<DEPOSITS> 283498
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4118
<LONG-TERM> 0
0
0
<COMMON> 17317
<OTHER-SE> 7022
<TOTAL-LIABILITIES-AND-EQUITY> 311955
<INTEREST-LOAN> 5211
<INTEREST-INVEST> 406
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 5801
<INTEREST-DEPOSIT> 2564
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 3237
<LOAN-LOSSES> 340
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6147
<INCOME-PRETAX> 1809
<INCOME-PRE-EXTRAORDINARY> 1809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1056
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 4
<LOANS-NON> 2547
<LOANS-PAST> 1198
<LOANS-TROUBLED> 3962
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2129
<CHARGE-OFFS> 303
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2167
<ALLOWANCE-DOMESTIC> 2167
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
