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 Quarter Ended September 30, 2000 Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
445 Pine Avenue, 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: 6,101,496 outstanding as of
September 30, 2000
This Form 10-Q contains 21 pages.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------
ASSETS September 30, 2000 December 31, 1999
(unaudited)
-------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 35,413,000 $ 27,396,000
Federal funds sold 3,521,000 8,707,000
-------------------- -------------------
Cash and cash equivalents 38,934,000 36,103,000
Time deposits in other financial institutions 988,000 -
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 1,164,000 776,000
Investment securities held to maturity, at amortized cost; fair value of
$1,903,000 at September 30, 2000 and $494,000 at December 31, 1999 1,902,000 497,000
Investment securities available for sale, at fair value; cost of
$5,089,000 at September 30, 2000 and $4,986,000 at December 31, 1999 5,038,000 4,897,000
Investment securities held for trading, at fair value 6,940,000 4,836,000
Servicing assets 2,534,000 2,503,000
Loans:
Held for investment, net of allowance for loan losses of $2,772,000
at September 30, 2000 and $2,013,000 at December 31, 1999 128,123,000 109,122,000
Held for sale, at lower of cost or fair value 38,379,000 158,274,000
Securitized loans, net of allowance for loan losses of $3,136,000
for September 30, 2000 and $3,516,000 for December 31, 1999 160,322,000 184,268,000
Other real estate owned, net 198,000 346,000
Premises and equipment, net 4,346,000 4,466,000
Intangible assets 5,660,000 6,250,000
Accrued interest receivable and other assets 10,893,000 11,509,000
-------------------- -------------------
TOTAL $ 405,421,000 $ 523,847,000
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 31,645,000 $ 19,391,000
Interest-bearing demand 24,515,000 24,887,000
Savings 24,441,000 27,944,000
Time certificates of $100,000 or more 75,194,000 100,757,000
Other time certificates 64,654,000 140,152,000
-------------------- -------------------
Total deposits 220,449,000 313,131,000
Bonds payable in connection with securitized loans 138,360,000 167,332,000
Other borrowings 5,336,000 7,307,000
Accrued interest payable and other liabilities 3,875,000 2,145,000
-------------------- -------------------
Total liabilities 368,020,000 489,915,000
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 6,238,933
shares issued and outstanding at September 30, 2000 and December
31, 1999 33,757,000 33,728,000
Less: Treasury stock, at cost 137,437 shares at September 30, 2000
and at December 31, 1999 (1,236,000) (1,236,000)
Retained earnings 4,909,000 1,495,000
Accumulated other comprehensive loss (29,000) (55,000)
-------------------- -------------------
Total stockholders' equity 37,401,000 33,932,000
-------------------- -------------------
TOTAL $ 405,421,000 $ 523,847,000
==================== ===================
</TABLE>
See notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
(As restated - (As restated -
See Note 8) See Note 8)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $12,332,000 $8,774,000 $35,984,000 $22,589,000
Federal funds sold 370,000 331,000 1,136,000 883,000
Time deposits in other financial institutions 124,000 10,000 182,000 30,000
Investment securities 49,000 108,000 272,000 358,000
----------- ----------- ----------- -----------
Total interest income 12,875,000 9,223,000 37,574,000 23,860,000
INTEREST EXPENSE 6,558,000 3,331,000 19,141,000 9,483,000
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,317,000 5,892,000 18,433,000 14,377,000
PROVISION FOR LOAN LOSSES 2,043,000 1,510,000 3,567,000 4,458,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,274,000 4,382,000 14,866,000 9,919,000
OTHER INCOME:
Gains from loan sales 2,133,000 3,061,000 5,918,000 10,057,000
Income from sale of investment in subsidiary - - 2,080,000 -
Loan servicing income 40,000 236,000 1,762,000 362,000
Loan origination fees - sold or brokered loans 187,000 529,000 1,132,000 2,134,000
Document processing fees 176,000 433,000 695,000 1,606,000
Service charges 96,000 108,000 345,000 375,000
Other income 23,000 336,000 242,000 834,000
Gain from sale of other assets 186,000 - 186,000 -
----------- ----------- ----------- -----------
Total other income 2,841,000 4,703,000 12,360,000 15,368,000
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 3,702,000 6,103,000 11,360,000 16,527,000
Occupancy expense 990,000 985,000 2,717,000 2,799,000
Other operating expenses 817,000 933,000 1,897,000 1,890,000
Loan servicing and collection 513,000 196,000 1,827,000 553,000
Professional services 110,000 363,000 675,000 838,000
Advertising expense 152,000 329,000 502,000 731,000
Amortization of goodwill 109,000 78,000 306,000 235,000
Office supply expense 81,000 109,000 299,000 253,000
Data processing/ ATM processing 79,000 100,000 213,000 359,000
Postage and freight 64,000 89,000 210,000 265,000
----------- ----------- ----------- -----------
Total other expenses 6,617,000 9,285,000 20,006,000 24,450,000
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 498,000 (200,000) 7,220,000 837,000
PROVISION FOR INCOME TAXES 198,000 (70,000) 3,106,000 293,000
----------- ----------- ----------- -----------
NET INCOME $ 300,000 ($130,000) $ 4,114,000 $ 544,000
=========== =========== =========== ===========
EARNINGS PER SHARE (See Note 5)
BASIC $ 0.05 $ (0.05) $ 0.67 $ 0.10
=========== =========== =========== ===========
DILUTED $ 0.05 $ (0.05) $ 0.67 $ 0.10
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,114,000 $ 544,000
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 3,567,000 4,458,000
Depreciation and amortization 1,020,000 1,462,000
Gain on disposal of fixed assets (30,000) 18,000
Gain on disposal of servicing asset (156,000) -
Proceeds from disposal of servicing asset 305,000 -
Proceeds from sale of subsidiary 775,000 -
Loss (Gain) on sale / write down of other real estate owned 60,000 194,000
Gain on sale of loans held for sale (5,918,000) (10,057,000)
Origination of servicing and interest only strip assets, net of amortization (2,440,000) (2,900,000)
FRB/FHLB stock dividends (24,000) (21,000)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 689,000 (5,305,000)
Accrued interest payable and other liabilities (242,000) 3,769,000
-------------- --------------
Net cash provided by (used in) operating activities 1,720,000 (7,838,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (998,000) -
Purchase of FRB/FHLB stock (473,000) (38,000)
Paydown of principal on available-for-sale securities 886,000 3,066,000
Maturities of held-to-maturity securities 500,000 -
Purchase of held-to-maturity securities (1,902,000) -
Redemption of FHLB stock 109,000 100,000
Net (increase) decrease in time deposits in other financial institutions (988,000) 1,500,000
Net decrease (increase) in loans and loans held for sale 126,905,000 (218,404,000)
Proceeds from sale of other real estate owned 373,000 -
Purchase of premises and equipment (1,417,000) (1,102,000)
-------------- --------------
Net cash provided by (used in) investing activities 122,995,000 (214,878,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, and savings accounts 8,380,000 4,055,000
Net (decrease) increase in time certificates (101,060,000) 79,060,000
Net (decrease) increase in bonds payable (28,972,000) 102,898,000
Exercise of stock options 13,000 311,000
Purchase of treasury stock - (1,095,000)
Cash dividends paid (245,000) (742,000)
-------------- --------------
Net cash (used in) provided by financing activities (121,884,000) 184,487,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,831,000 (38,229,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,103,000 49,479,000
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,934,000 $ 11,250,000
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 19,201,000 $ 9,144,376
Cash paid for income taxes $ 3,059,000 $ 2,483,000
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real-estate owned $ 285,000 $ 297,000
Decrease in net unrealized losses on available-for-sale securities $ 26,000 $ -
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<PAGE>
COMMUNITY WEST BANCSHARES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. The unaudited consolidated
financial statements include the accounts of Community West Bancshares
("the Company") and its wholly owned subsidiaries Goleta National Bank
("GNB") and Palomar Community Bank ("Palomar"). All adjustments and
reclassifications are of a normal and recurring nature. Results for the
period ending September 30, 2000, 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 1999 financial
information to conform to the presentation used in 2000.
These unaudited consolidated financials should be read in conjunction with
the consolidated financial statements and notes thereto of Community West
Bancshares included in the Company's 1999 Annual Report on Form 10-K.
2. Summary of Significant Accounting Policies.
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 a specific identification basis.
Investment Securities, Held for Trading - The Company originates certain
loans for the purpose of selling either a portion or all of the loan into
the secondary market. The guaranteed portion of SBA loans are typically
sold into the secondary market servicing retained. Second mortgages
("HLTV") loans are typically sold into the secondary market servicing
released. On some of 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 and is based on 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.
5
<PAGE>
The I/O Strips 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 or losses in the current
period. The determination of fair value is based on the same basis as when
valued at transaction close.
Loans Held for Sale - Loans that 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.
3. Loan Sales
HLTV Loan Sales
----------------
As of December 31, 1999, the Company had $152 million in HLTV loans held
for sale. As of September 30, 2000, the Company had $20 million in HLTV
loans held for sale. The Company sells these loans in the secondary market
on a servicing released basis.
SBA Loan Sales
----------------
The Company sells the guaranteed portion of Small Business Administration
("SBA") loans into the secondary market in exchange for a combination of
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 a 12 to 13% discount rate and an
8% CPR.
As of December 31, 1999, the Company had approximately $7 million in SBA
loans held for sale. As of September 30, 2000, the Company had
approximately $9 million in SBA loans held for sale.
6
<PAGE>
The balances of servicing assets and I/O strips are as follows:
As Restated, see note 8
---------------------- ----------------------
September 30, 2000 December 31, 1999
---------------------- ----------------------
Servicing I/O Strip Servicing I/O Strip
Asset Asset
---------- ---------- ---------- ----------
Guaranteed Portion of SBA 1,944,000 6,940,000 1,771,000 4,836,000
FHA Title 1 590,000 - 547,000 -
Traditional Mortgages - - 185,000 -
---------- ---------- ---------- ----------
Total $2,534,000 $6,940,000 $2,503,000 $4,836,000
========== ========== ========== ==========
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 September 30, 2000, the Company
had entered into commitments with certain customers amounting to $19.93
million compared to $18.96 million at December 31, 1999. There were
$604,000 of letters of credit outstanding at September 30, 2000; there were
$713,000 of letters of credit outstanding at December 31, 1999.
5. Earnings per share - Basic, has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share -
Diluted, has been computed based on the weighted average number of shares
outstanding during each period plus the dilutive effect of granted options.
Earnings per share were computed as follows:
For the three months ended
September September
30, 2000 30, 1999
(As restated,
see Note 8)
---------- -----------
Basic weighted average shares outstanding 6,107,216 5,394,833
Dilutive effect of options 30,408 113,533
---------- -----------
Diluted weighted average shares outstanding 6,137,624 5,508,366
========== ===========
Net income (loss) $ 300,000 $ (130,000)
Net income (loss) per share - Basic $ 0.05 $ (0.05)
Net income (loss) per share - Diluted $ 0.05 $ (0.05)
7
<PAGE>
For the nine months ended
September September
30, 2000 30, 1999
(As restated,
see Note 8)
---------- -----------
Basic weighted average shares outstanding 6,107,216 5,394,833
Dilutive effect of options 35,476 113,533
---------- -----------
Diluted weighted average shares outstanding 6,142,692 5,508,366
========== ===========
Net income $ 4,114,000 $ 544,000
Net income per share - Basic $ 0.67 $ 0.10
Net income per share - Diluted $ 0.67 $ 0.10
The Company declared a quarterly dividend of $0.04 a share for shareholders
of record on January 4, 2000, payable January 20, 2000. No other subsequent
dividend payments have been declared.
6. The following table denotes the financial performance of the Company's
operational segments for its periods ending September 30, 2000 and
September 30, 1999 in compliance with Statement of Financial Accounting
Standards No. 131.
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, Consumer Finance,
Mortgage Division, Goleta National Bank Branch Operations, and Palomar
Community Bank. For this discussion, the remaining divisions are considered
immaterial and are consolidated into "Other." The Other segment primarily
includes the administration areas, human resources, and data processing.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies.
The SBA Lending, Consumer Finance, 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. The
Goleta National Bank Branch operations, includes 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 are estimates.
The following table sets forth various revenue and expense items that
management relies on in decision making.
8
<PAGE>
<TABLE>
<CAPTION>
Goleta National
Nine Months Ended Consumer Mortgage Bank Branch Palomar Savings Consolidated
SEPTEMBER 30, 2000 SBA Lending Finance Division Operations and Loan Other Total
----------- ------------ ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 3,068,000 $ 24,469,000 $ 205,000 $ 5,473,000 $ 4,359,000 $ - $ 37,574,000
Interest Expense 1,595,000 12,721,000 107,000 2,845,000 1,873,000 - 19,141,000
----------- ------------ ----------- ----------- ------------ ------------- -------------
Net Interest Income 1,473,000 11,748,000 98,000 2,628,000 2,486,000 - 18,433,000
Provision For Loan Losses 321,000 2,562,000 21,000 573,000 90,000 - 3,567,000
Noninterest Income 3,845,000 3,055,000 1,863,000 ,161,000 397,000 2,039,000 12,360,000
Noninterest Expense 3,292,000 5,184,000 2,049,000 1,561,000 2,086,000 5,834,000 20,006,000
----------- ------------ ----------- ----------- ------------ ------------- -------------
Segment Profit $ 1,705,000 $ 7,057,000 $ (109,000) $ 1,655,000 $ 707,000 $ (3,795,000) $ 7,220,000
=========== ============ =========== =========== ============ ============= =============
SEPTEMBER 30, 2000
Segment Assets $46,643,000 $184,985,000 $24,151,000 $67,250,000 $ 73,954,000 $ 8,438,000 $405,421,000
=========== ============ =========== =========== ============ ============= =============
===============================================================================================================================
Nine Months Ended Goleta National
SEPTEMBER 30, 1999 Consumer Mortgage Bank Branch Palomar Savings Consolidated
(As restated, see note 8) SBA Lending Finance Division Operations and Loan Other Total
----------- ------------ ----------- ----------- ------------ ------------ -------------
Interest Income $ 2,264,000 $ 12,400,000 $ 499,000 $ 4,263,000 $ 4,434,000 $ - $ 23,860,000
Interest Expense 932,000 4,266,000 205,000 1,754,000 2,326,000 - 9,483,000
----------- ------------ ----------- ----------- ------------ ------------- -------------
Net Interest Income 1,332,000 8,134,000 294,000 2,509,000 2,108,000 - 14,377,000
Provision For Loan Losses 217,000 3,678,000 48,000 410,000 105,000 - 4,458,000
Noninterest Income 2,991,000 2,651,000 3,295,000 202,000 631,000 5,598,000 15,368,000
Noninterest Expense 1,518,000 5,275,000 2,331,000 1,118,000 2,193,000 12,015,000 24,450,000
----------- ------------ ----------- ----------- ------------ ------------- -------------
Segment Profit $ 2,588,000 $ 1,832,000 $ 1,210,000 $ 1,183,000 $ 441,000 $ (6,417,000)$ 837,000
=========== ============ =========== =========== ============ ============= =============
SEPTEMBER 30, 1999
Segment Assets $35,265,000 $350,387,000 $ 7,440,000 $37,617,000 $ 81,649,000 $ 4,167,000 $516,525,000
=========== ============ =========== =========== ============ ============= =============
</TABLE>
7. On March 30, 2000, a majority owned subsidiary, ePacific.com redeemed
1,800,000 of the Company's 2,100,000 shares and repaid a loan from the
Company with a balance of $3,725,000 for $4,500,000 in cash. As a result of
this, the Company reversed previously consolidated losses and now reflects
this investment on the balance sheet under the equity method. The Company
continues to hold a 10% interest in ePacific.com.
8. Subsequent to the issuance of the Company's 1999 third quarter 10-Q, the
Company's management determined that (1) the acquisition of Palomar
Community Bank in December 1998 which was previously accounted for under
the pooling-of-interests method of accounting, should have been accounted
for under the purchase method of accounting, (2) the securitization of
loans completed in December 1998, which was previously accounted for as a
sale should have been accounted for as a secured borrowing with a pledge of
collateral, (3) as a result of loan sales to a collateralized borrowing, as
mentioned in (1) and (2), certain costs related to second mortgage loans
which were previously capitalized, should have been charged to expense as
incurred, (4) as a result of the reclass of loan sales to a collateralized
borrowing, certain loan fees which were previously recognized, should have
been deferred and amortized, and (5) as a result of (1) through (4), the
calculation of regulatory capital amounts and ratios as of September
30, 1999 was incorrect. In addition, management also identified certain
other insignificant errors in the September 30, 1999 10-Q. As a result,
the September 30, 1999 financial statements have been restated from amounts
previously reported to properly account for these transactions.
9
<PAGE>
9. On March 23, 2000, Goleta National Bank entered into a formal written
agreement with the Comptroller of the Currency of the United States of
America. Under the terms of the Agreement, by September 30, 2000, and
thereafter, GNB is, among other things, required to maintain total capital
at least equal to 12% of risk-weighted assets, and Tier 1 capital at least
equal to 7% of adjusted total assets. GNB is also required to reduce the
concentration of second mortgage loans to 100% of capital by September 30,
2000. As of September 30, 2000, GNB has met or exceeded these requirements
and management believes it is in compliance with the terms of the
agreement.
10. On September 20, 2000, the Company signed a letter of intent to sell its
wholly owned subsidiary Palomar Community Bank for a combination of debt
and cash. The purchase price is estimated to be between $10.5 and $11.0
million. The transaction is subject to the signing of a definitive
agreement and is expected to close in the first half of 2001.
10
<PAGE>
COMMUNITY WEST BANCSHARES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight into
the consolidated results of operations and the financial condition of Community
West Bancshares, and subsidiaries (the "Company").
Statements 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 and its
subsidiaries, changes in SBA policy or funding, competition in the financial
services market for both deposits and loans, and general economic conditions.
RESULTS OF OPERATIONS
For the Third Quarter Ended September 30,
-----------------------------------------------
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
September September 30, Increase Increase
30, 2000 1999 (Decrease) (Decrease)
------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
(As restated, see
Note 8)
Interest Income $ 12,875,000 $ 9,223,000 $ 3,652,000 39.6%
Interest Expense 6,558,000 3,331,000 3,227,000 96.9%
Net Interest Income 6,317,000 5,892,000 425,000 7.2%
------------- ------------ --------------
Provision for Loan Losses 2,043,000 1,510,000 533,000 35.3%
Net Interest Income after
Provision for Loan Losses 4,274,000 4,382,000 (108,000) (2.5%)
------------- ------------ --------------
Other Income 2,841,000 4,703,000 (1,862,000) (39.6%)
Other Expense 6,617,000 9,285,000 (2,668,000) (28.7%)
------------- ------------ --------------
Income before Provision
for Income Taxes 498,000 (200,000) 698,000 349.0%
------------- ------------ --------------
Provision for Income Taxes 198,000 (70,000) 268,000 382.9%
------------- ------------ --------------
Net Income $ 300,000 $ (130,000) $ 430,000 330.8%
============= ============ ==============
Net Income Per Share - Basic $ 0.05 $ (0.05) $ 0.10 200.0%
============= ============ ==============
Net Income Per Share -
Diluted $ 0.05 $ (0.05) $ 0.10 200.0%
============= ============ =============
</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 stock options using the treasury stock method.
11
<PAGE>
For the Nine Months Ended September 30,
---------------------------------------------
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 Nine Months Ended Percent
------------------------- Amount of of
September September 30, Increase Increase
30, 2000 1999 (Decrease) (Decrease)
------------- ----------- ------------ ----------
(As Restated, see
Note 8)
<S> <C> <C> <C> <C>
Interest Income $ 37,574,000 $23,860,000 $13,714,000 57.5%
Interest Expense 19,141,000 9,483,000 9,658,000 101.8%
------------- ----------- -------------
Net Interest Income 18,433,000 14,377,000 4,056,000 28.2%
Provision for Loan Losses 3,567,000 4,458,000 (891,000) (20.0%)
------------- ----------- -------------
Net Interest Income after
Provision for Loan Losses 14,866,000 9,919,000 4,947,000 49.9%
Other Income 10,280,000 15,368,000 (5,088,000) (33.1%)
Sale of Investment in Subsidiary 2,080,000 - 2,080,000 N/A
Other Expense 20,006,000 24,450,000 (4,444,000) (18.2%)
------------- ----------- -------------
Income before Provision
for Income Taxes 7,220,000 837,000 6,383,000 762.6%
Provision for Income Taxes 3,106,000 293,000 2,813,000 960.1%
------------- ----------- -------------
Net Income $ 4,114,000 $ 544,000 $ 3,570,000 656.3%
============= =========== ============
Net Income Per Share - Basic $ 0.67 $ 0.10 $ 0.57 570.0%
============= =========== ============
Net Income Per Share -
Diluted $ 0.67 $ 0.10 $ 0.57 570.0%
============= =========== ============
</TABLE>
The book value per share increased from $5.56 at December 31, 1999 to $6.12 at
September 30, 2000.
Average assets for the nine months ended September 30, 2000, were $443,708,000
compared to $403,031,000 for the same period in 1999; average equity increased
to $31,555,000 for the nine months ended September 30, 2000, from $25,056,000
for the same period in 1999.
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 5.9% for the nine months ended September
30, 2000 compared to an annualized net interest margin of 5.6% for the year
ended December 31, 1999. Earning assets averaged $415,646,000 for the nine
months ended September 30, 2000. This represented an increase of $53,970,000, or
14.9% from the average earning assets of $361,676,000 for the nine months ended
September 30, 1999.
12
<PAGE>
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 For the Nine Months Ended
------------------------------------ ---------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------- --------------- --------------- ----------------
(As restated, see (As restated, see
Note 8) Note 8)
<S> <C> <C> <C> <C>
Interest and Fees $ 12,332,000 $ 8,774,000 $ 35,984,000 $ 22,589,000
Average Loans 332,154,000 375,114,000 381,796,000 303,216,000
Annualized Yield 14.8% 9.4% 12.6% 9.9%
</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
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
inherent within the loan portfolio, which have not been specifically identified.
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.
13
<PAGE>
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. Current 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
September 30, December 31, Increase Increase
2000 1999 (Decrease) (Decrease)
--------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
BALANCES:
Gross loans $ 332,732,000 $ 457,193,000 $(124,461,000) (27.2%)
Allowance for loan losses 5,908,000 5,529,000 379,000 6.8%
Nonaccrual loans 1,973,000 3,091,000 (1,118,000) (36.1%)
RATIOS:
Allowance for loan losses to gross loans 1.8% 1.2%
Net loans charged off to allowance for loan
losses 71.6% 71.9%
</TABLE>
The provision for loan losses was $3,567,000 for the nine months ended September
30, 2000. This is a decrease of $891,000 or 20.0%, over the $4,458,000 for the
nine months ended September 30, 1999, primarily due to the establishment of an
initial reserve for loans securitized in 1999. Gross loans outstanding decreased
27.2% from December 1999 to September 2000. For the nine months ended September
30, 2000, losses charged to the allowance for loan losses totaled $4,230,000.
This was offset by $164,000 recovery; with the net effect being $4,066,000 of
loans were charged to the allowance. The increase in the ratio of allowance for
loan losses to gross loans was due to the decrease in loans available for sale
which are carried at the lower of cost or market and as such no allowance is
recorded.
Management of the Company reviews with the Board of Directors the adequacy of
the allowance for 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 provided for all individual items in its portfolio which may result
in a material loss to the Company.
OTHER INCOME
Other 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 income for the three months ended September 30, 2000, decreased
39.6% over the three months ended September 30, 1999. Other operating income
for the nine months ended September 30, 2000 decreased 33.1% over the nine
months ended September 30, 1999. This decrease was due to the Company focusing
its resources on the sale of its portfolio of HLTV loans of which the majority
were sold at book value and, accordingly, the Company did not recognize any gain
on their sale.
14
<PAGE>
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Other expenses for the three months ended
September 30, 2000, decreased 28.7% over the three months ended September 30,
1999. Other expenses for the nine months ended September 30, 2000, decreased
18.2% over the nine months ended September 30, 1999. The decrease in other
expenses for the periods compared was primarily because of lower commission and
administrative expenses associated with the reduction in other income.
<TABLE>
<CAPTION>
BALANCE SHEET ANALYSIS
Amount of Percent of
September 30, December 31, Increase Increase
2000 1999 (Decrease) (Decrease)
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 38,934,000 $ 36,103,000 $ 2,831,000 7.8%
Investment Securities and Time Deposits 16,032,000 11,006,000 5,026,000 45.7%
Loans, held for investment 128,123,000 109,122,000 19,001,000 17.4%
Loans, held for sale 38,379,000 158,274,000 (119,895,000) (75.8%)
Securitized Loans 160,322,000 184,268,000 (23,946,000) (13.0%)
Total Assets 405,421,000 523,847,000 (118,426,000) (22.6%)
Total Deposits 220,449,000 313,131,000 (92,682,000) (29.6%)
Total Stockholders' Equity 37,401,000 33,932,000 3,469,000 10.2%
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash and federal funds sold.
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 increase of 45.7% is primarily from an increase in interest only strips
created through the sale of loans.
LOANS
The 75.8% decrease in loans held for sale is because of planned sales of HLTV
Loans.
15
<PAGE>
DEPOSITS
The following shows the balance and percentage change in the various deposits:
<TABLE>
<CAPTION>
Amount of Percent of
September 30, December 31 Increase Increase
2000 1999 (Decrease) Decrease)
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Noninterest-Bearing Deposits $ 31,645,000 $ 19,391,000 $ 12,254,000 63.2%
Interest-Bearing Deposits 24,515,000 24,887,000 (372,000) (1.5%)
Savings 24,441,000 27,944,000 (3,503,000) (12.5%)
Time Certificates over $100,000 75,194,000 100,757,000 (25,563,000) (25.4%)
Other Time Certificates 64,654,000 140,152,000 (75,498,000) (53.9%)
-------------- ------------ -------------
Total Deposits $ 220,449,000 $313,131,000 $(92,682,000) (29.6%)
============== ============ =============
</TABLE>
The decrease in deposits is a result of the maturity of short-term time
deposits, which were used to fund loans available for sale. During fiscal year
2000, the Company has actively sought to reduce its high interest bearing
deposits and, when appropriate, has replaced them with non-interest bearing
deposits.
LIQUIDITY
The Company has an asset and liability management program that aids management
in maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Company
at September 30, 2000 was 21% and at December 31, 1999, was 38%, 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
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 $8,000,000. In addition, the Company has a
line of credit with the Federal Home Loan Bank. This line had approximately
$19,000,000 available at September 30, 2000.
CAPITAL RESOURCES
The Company's equity capital was $37,401,000 at September 30, 2000. The primary
source of capital for the Company has been the retention of net income. The
Company declared a quarterly dividend of $0.04 a share for shareholders of
record on January 4, 2000 payable January 20, 2000.
16
<PAGE>
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 December
31, 1999 and September 30, 2000 management had repurchased 137,437 shares of
common stock at a cost of $1,236,000. No additional shares have been purchased
in 2000.
Under the Prompt Corrective Action provisions of the Federal Deposit Insurance
Act, national banks are assigned regulatory capital classifications based on
specified capital ratios of the institutions. The capital classifications are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
The relevant capital ratios of the institution in this determination are (i) the
ratio of Tier I capital (primarily common stock and retained earnings less
goodwill and other intangible assets) to adjusted average total assets (the
"Tier I capital to average assets ratio"), (ii) the ratio of Tier I capital to
risk-weighted assets (the "Tier I risk-based capital ratio"), and (iii) the
ratio of qualifying total capital to risk-weighted assets (the "total risk-based
capital ratio"). To be considered "well capitalized," an institution must have
a Tier I capital to average assets ratio of at least 5%, a Tier I risk-based
capital ratio of at least 6%, and a total risk-based capital ratio of at least
10%. Generally, for an institution to be considered "adequately capitalized"
these three ratios must be at least 4%, 4% and 8%, respectively. An institution
will generally be considered (1) "undercapitalized" if any one of these three
ratios is less than 4%, 4% and 8%, respectively, and (2) "significantly
undercapitalized" if any one of these three ratios is less than 3%, 3% and 6%,
respectively. As of September 30, 2000, based on the most recent regulatory
notification, the Company was determined to be adequately capitalized.
17
<PAGE>
The Company's actual capital amounts and ratios for the periods indicated are as
follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
CAPITAL AMOUNTS AND Under Prompt
RATIOS AS OF SEPTEMBER For Capital Adequacy Corrective Action
30, 2000: Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted assets)
CONSOLIDATED $36,702,000 10.80% $27,194,000 8.00% $33,992,000 10.00%
Goleta National Bank $34,861,000 12.05% $23,141,000 8.00% $28,927,000 10.00%
Palomar Community Bank $ 7,189,000 13.79% $ 4,172,000 8.00% $ 5,214,000 10.00%
Tier I Capital (to Risk Weighted assets)
CONSOLIDATED $31,060,000 9.14% $13,597,000 4.00% $20,395,000 6.00%
Goleta National Bank $31,228,000 10.80% $11,571,000 4.00% $17,356,000 6.00%
Palomar Community Bank $ 6,539,000 12.54% $ 2,086,000 4.00% $ 3,129,000 6.00%
Tier I Capital (to Average Assets)
CONSOLIDATED $31,060,000 6.41% $19,383,000 4.00% $24,229,000 5.00%
Goleta National Bank $31,228,000 8.50% $14,703,000 4.00% $18,378,000 5.00%
Palomar Community Bank $ 6,539,000 8.87% $ 2,947,000 4.00% $ 3,684,000 5.00%
AS OF DECEMBER 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)
CONSOLIDATED $39,475,000 8.34% $37,857,000 8.00% $47,321,000 10.00%
Goleta National Bank $33,100,000 8.01% $33,047,000 8.00% $41,309,000 10.00%
Palomar Savings and Loan $ 7,185,000 11.94% $ 4,814,000 8.00% $ 6,018,000 10.00%
Tier I Capital (to Risk Weighted assets)
CONSOLIDATED $33,945,000 7.17% $18,928,000 4.00% $28,393,000 6.00%
Goleta National Bank $28,182,000 6.82% $16,523,000 4.00% $24,785,000 6.00%
Palomar Savings and Loan $ 6,573,000 10.92% $ 2,407,000 4.00% $ 3,611,000 6.00%
Tier I Capitals (to Average Asset)
CONSOLIDATED $33,945,000 7.52% $18,061,000 4.00% $22,576,000 5.00%
Goleta National Bank $28,182,000 7.27% $15,499,000 4.00% $19,374,000 5.00%
Palomar Savings and Loan $ 6,573,000 12.22% $ 2,151,000 4.00% $ 2,689,000 5.00%
</TABLE>
18
<PAGE>
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, 1999. 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 September 20, 2000 the Company filed
a current report on Form 8-K regarding
the intent to sell subsidiary, Palomar
Community Bank
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)
----------------------------------
Date: November 13, 2000 Lynda Pullon Radke
Senior Vice President
Chief Financial Officer
21
<PAGE>
