UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
445 Pine Avenue, Goleta, California 93117
(Address of principal executive offices) (Zip Code)
(805) 692-5821
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act) [ ] YES [X] NO
Number of shares of common stock of the registrant outstanding as of May
12, 2003: 5,690,224.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
The financial statements included in this Form 10-Q should be
read with reference to Community West Bancshares' Annual Report
on Form 10-K for the fiscal year ended December 31, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 19
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 5,782 $ 10,714
Federal funds sold 14,025 20,380
------------- --------------
Cash and cash equivalents 19,807 31,094
Time deposits in other financial institutions 2,376 2,277
Federal Reserve Bank stock, at cost 812 812
Investment securities held-to-maturity, at amortized cost; fair value of $11,155 at
March 31, 2003 and $6,071 at December 31, 2002. 11,103 6,012
Investment securities available-for-sale, at fair value, amortized cost of $5,567 at
March 31, 2003 5,579 -
Interest only strips, at fair value 4,270 4,548
Loans:
Loans held for sale, at lower of cost or fair value 41,947 43,284
Loans held for investment, net of allowance for loan losses of $2,744 at March 31,
2003 and $3,379 at December 31, 2002 141,399 138,948
Securitized loans, net of allowance for loan losses of $2,354 at March 31, 2003 and
$2,571 at December 31, 2002 56,741 63,624
------------- --------------
Total loans 240,087 245,856
Servicing assets 1,960 1,897
Other real estate owned, net 710 571
Premises and equipment, net 1,842 1,959
Other assets 7,886 12,184
------------- --------------
TOTAL ASSETS $ 296,432 $ 307,210
============= ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 35,637 $ 39,698
Interest-bearing demand 33,641 35,169
Savings 17,627 11,377
Time certificates of $100,000 or more 21,317 25,325
Other time certificates 107,531 107,514
------------- --------------
Total deposits 215,753 219,083
Bonds payable in connection with securitized loans 44,423 50,473
Other liabilities 3,814 5,567
------------- --------------
Total liabilities 263,990 275,123
------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,690,224 shares issued
and outstanding 29,798 29,798
Retained earnings 2,637 2,289
Accumulated other comprehensive income 7 -
------------- --------------
Total stockholders' equity 32,442 32,087
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 296,432 $ 307,210
============= ==============
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------
2003 2002
------- --------
(IN THOUSANDS)
INTEREST INCOME
Loans $ 5,011 $ 7,377
Federal funds sold 53 105
Time deposits in other financial institutions 11 46
Investment securities 104 10
------- --------
Total interest income 5,179 7,538
------- --------
INTEREST EXPENSE
Deposits 1,226 1,477
Bonds payable and other borrowings 1,392 2,387
------- --------
Total interest expense 2,618 3,864
------- --------
NET INTEREST INCOME 2,561 3,674
Provision for loan losses 344 2,276
------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,217 1,398
NON-INTEREST INCOME
Gains from loan sales, net 1,126 1,768
Other loan fees - sold or brokered loans 713 859
Loan servicing fees, net 318 79
Document processing fees 212 463
Service charges 84 134
Other income 216 72
------- --------
Total non-interest income 2,669 3,375
------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,078 4,181
Occupancy expenses 546 736
Professional services 194 523
Loan servicing and collection 99 265
Advertising 56 228
Postage and freight 40 71
Office supplies 41 65
Other operating expenses 301 340
------- --------
Total non-interest expenses 4,355 6,409
------- --------
Income (loss) before provision (benefit) for income taxes 531 (1,636)
Provision (benefit) for income taxes 183 (687)
------- --------
NET INCOME (LOSS) $ 348 $ (949)
======= ========
INCOME (LOSS) PER SHARE - BASIC $ 0.06 $ (0.17)
======= ========
INCOME (LOSS) PER SHARE - DILUTED $ 0.06 $ (0.17)
======= ========
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
------ ------- --------- -------------- --------------
BALANCES AT DECEMBER 31, 2002 5,690 $29,798 $ 2,289 $ - $ 32,087
Comprehensive income:
Net income - - 348 - 348
Other comprehensive income - - - 7 7
-------------- --------------
Comprehensive income - - - - 355
------ ------- --------- -------------- --------------
BALANCES AT MARCH 31,
2003 5,690 $29,798 $ 2,637 $ 7 $ 32,442
====== ======= ========= ============== ==============
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------------
2003 2002
---------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 348 $ (949)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan losses 344 2,276
Provision for losses on real estate owned 14 28
Depreciation and amortization 530 240
Net amortization of discounts and premiums for securities 15 -
Gains on:
Sale of other real estate owned (132) (32)
Sale of loans held for sale (1,126) (1,768)
Changes in:
Fair value of interest only strips 278 826
Servicing assets, net of amortization and valuation adjustments (63) 20
Other assets 4,298 471
Other liabilities (1,741) (597)
---------- ---------
Net cash provided by operating activities 2,765 515
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (6,246) (202)
Purchase of available-for-sale securities (5,577) -
Principal paydowns and maturities of held-to-maturity securities 1,138 118
Additions to interest only strips - (240)
Loan originations and principal collections, net 5,908 21,438
Proceeds from sale of other real estate owned 617 55
Net decrease (increase) in time deposits in other financial institutions (99) 2,876
Purchase of premises and equipment (36) (6)
---------- ---------
Net cash provided by (used in) investing activities (4,295) 24,039
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 661 4,392
Net (decrease) in time certificates of deposit (3,991) (1,848)
Repayments of bonds payable in connection with securitized loans (6,427) (11,850)
---------- ---------
Net cash (used in) financing activities (9,757) (9,306)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,287) 15,248
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,094 29,406
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,807 $ 44,654
========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 1,942 $ 2,977
Cash paid for income taxes $ 3 $ 2
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned $ 643 $ 74
See accompanying notes.
6
COMMUNITY WEST BANCSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for the fair presentation of the results of operations and financial
condition for the interim periods. The unaudited consolidated financial
statements include Community West Bancshares ("Company") and its wholly-owned
subsidiary, Goleta National Bank ("Goleta"). All adjustments and
reclassifications in the periods presented are of a normal and recurring nature.
Results for the period ended March 31, 2003 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 to the 2002 interim financial
statements to conform to the presentation used in the 2003 interim financial
statements.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Community West
Bancshares included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTEREST ONLY STRIPS AND SERVICING ASSETS - The Company originates certain loans
for the purpose of selling either a portion of, or the entire loan, into the
secondary market. The guaranteed portion of SBA loans are generally sold into
the secondary market. Servicing assets are recognized as separate assets when
loans are sold with servicing retained. Servicing assets are amortized in
proportion to, and over the period of, estimated future net servicing income.
Also, at the time of the loan sale, it is the Company's policy to recognize the
related gain on the loan sale in accordance with generally accepted accounting
principles. The Company uses industry prepayment statistics and its own
prepayment experience in estimating the expected life of the loans. Quarterly,
management evaluates servicing assets for impairment. Servicing assets are
evaluated for impairment based upon the fair value of the rights as compared to
amortized cost on a loan by loan basis. Fair value is determined using
discounted future cash flows calculated on a loan by loan basis and aggregated
to the total asset level. Impairment to the asset is recorded if the aggregate
fair value calculation drops below net book value of the asset.
Additionally, on some SBA loan sales, the Company has retained interest only
("I/O") strips, which represent the present value of excess net cash flows
generated by the difference between (a) interest at the stated rate paid by
borrowers and (b) the sum of (i) pass-through interest paid to third-party
investors and (ii) contractual servicing fees. The Company determined the
present value of this estimated cash flow at the time each loan sale transaction
closed, utilizing valuation assumptions as to discount rate, prepayment rate and
default rate appropriate for each particular transaction. Periodically, the
Company verifies the reasonableness of its valuation estimates by comparison to
the results of an independent third party valuation analysis.
The I/O strips are accounted for like investments in debt securities classified
as trading securities. Accordingly, the Company records the I/O's at fair value
with the resulting increase or decrease in fair value being recorded through
operations in the current period.
ALLOWANCE FOR LOAN LOSSES -The Company maintains a detailed, systematic analysis
and procedural discipline to determine the amount of the allowance for loan
losses ("ALL"). The ALL is based on estimates and is intended to be adequate to
provide for probable losses inherent in the loan portfolio. This process
involves deriving probable loss estimates that are based on individual loan loss
estimation, migration analysis/historical loss rates and management's judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, collateral value and the input of the Special Assets group, functioning
as a workout unit.
Management reviews the ALL on a monthly basis and records additional provision
to the allowance as required. The review of the adequacy of the allowance takes
into consideration such factors as changes in the growth, size and composition
of the loan portfolio, overall portfolio quality, review of specific problem
loans, collateral, guarantees and economic conditions that may affect the
borrowers' ability to pay and and/or the value of the underlying collateral.
These estimates depend on the outcome of future events and, therefore, contain
inherent uncertainties.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans. A provision for
loan losses is charged to expense. The allowance is charged for losses when
management believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a "loss"; portions of loans which are
deemed to be uncollectible; overdrafts which have been outstanding for more than
30 days; consumer finance loans which are past due 120 or more days; and, all
other unsecured loans past due 120 or more days. Subsequent recoveries, if any,
are credited to the ALL.
7
SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the
Company transferred $122 million and $81 million in loans to special purpose
trusts ("Trusts"). The transfers have been accounted for as secured borrowings
with a pledge of collateral and, accordingly, the mortgage loans and related
bonds issued are included in the Company's balance sheet. Such loans are
accounted for in the same manner as loans held to maturity. Deferred debt
issuance costs and bond discount related to the bonds are amortized on a method
which approximates the level yield basis over the estimated life of the bonds.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation to
employees and directors using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its related interpretations. Under APB No. 25, compensation
cost for stock-based awards is measured as the excess, if any, of the market
price of the underlying stock on the grant date over the employees' exercise
price for the stock options. As all options have been granted with an exercise
price equal to the fair value at the grant date, no compensation expense has
been recognized for the Company's stock option program. SFAS No. 123,
Accounting for Stock-Based Compensation, requires pro forma disclosure of net
income and earnings per share using the fair value method, and provides that
employers may continue to account for stock-based compensation under APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. Although the Company has not currently
elected to expense the fair value of stock options granted, it continues to
evaluate this alternative. The Company adopted the disclosure provisions of
SFAS No. 148 effective in the first quarter of 2003.
The fair value of stock-based compensation to employees is calculated using the
option pricing models that are developed to estimate the fair value of freely
tradable and fully transferable options without vesting restrictions, which
differ from the Company's stock option program. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect calculated value.
The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ---------
Annual dividend yield 0.0% 0.00%
Expected volatility 30.8% 45.1%
Risk-free interest rate 4.0% 4.0%
Expected life (in years) 7.3 7.3
SFAS No. 123 requires pro forma disclosure of net income and earnings per share
using the fair value method. If the computed fair values of the awards had been
amortized to expense over the vesting period of the awards, the Company's net
income, basic net income per share and diluted net income per share would have
been reduced to the pro forma amounts indicated below:
8
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
----------- -----------
Net income (loss):
As reported $ 348 $ (949)
Deduct: stock-based employee compensation expense determined under 49 48
fair value based method for all awards
Related tax effects (17) (16)
----------- -----------
Pro forma $ 316 $ (981)
=========== ===========
Basic earnings (loss) per share:
As reported $ 0.06 $ (0.17)
Pro forma 0.06 (0.17)
Diluted income (loss) per share:
As reported $ 0.06 $ (0.17)
Pro forma 0.06 (0.17)
OTHER COMPREHENSIVE INCOME - For the three months ended March 31, 2002, other
comprehensive income equals net income.
2. LOAN SALES AND SERVICING
SBA Loan Sales
- ----------------
The Company generally sells the guaranteed portion of SBA loans into the
secondary market, on a servicing retained basis, in exchange for a combination
of a cash premium, servicing assets and/or I/O strips. The Company retains the
non-guaranteed portion of these loans and services the loans as required under
the SBA programs to retain specified yield amounts. A portion of the yield is
recognized as servicing fee income as it occurs and the remainder is capitalized
as excess servicing and is included in the gain on sale calculation. The fair
value of the I/O strips and servicing assets prior to April 1, 2002 was
determined using a 9.25%-10.25% discount rate based on the term of the
underlying loan instrument and a 13.44% prepayment rate. For loans sold after
March 31, 2002, the initial values of the servicing assets and resulting gain on
sale were calculated based on the difference between the best actual par and
premium bids received for each individual loan. The balance of all servicing
assets are subsequently amortized over the estimated life of the loans using an
estimated prepayment rate of 22-25%. Quarterly, the servicing asset and I/O
strip assets are analyzed for impairment. The SBA program stipulates that the
Company retain a minimum of 5% of the unguaranteed portion of the loan balance.
The percentage of each unguaranteed loan in excess of 5% can be sold to a third
party from time to time for a cash premium. As of March 31, 2003 and December
31, 2002, the Company had approximately $27.7 and $26.2 million, respectively,
in SBA loans held for sale.
The following is a summary of activity in I/O strips and servicing assets:
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------
I/O Strips 2003 2002
--------------- --------------
(IN THOUSANDS)
Balance, beginning of period $ 4,548 $ 7,693
Additions through loan sales - 240
Valuation adjustments (278) (826)
--------------- --------------
Balance, end of period $ 4,270 $ 7,107
=============== ==============
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------
Servicing Assets 2003 2002
--------------- --------------
(IN THOUSANDS)
Balance, beginning of period $ 1,897 $ 2,490
Additions through loan sales 185 257
Amortization (122) (45)
Valuation adjustments - (232)
--------------- --------------
Balance, end of period $ 1,960 $ 2,470
=============== ==============
9
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio:
MARCH 31, DECEMBER 31,
2003 2002
----------- --------------
(IN THOUSANDS)
Installment $ 31,569 $ 30,971
Commercial 20,803 26,256
Real estate 53,423 51,666
SBA 39,156 34,073
Securitized 57,813 64,732
----------- --------------
202,764 207,698
Less:
Allowance for loan losses 5,098 5,950
Deferred fees, net of costs (368) (544)
Purchased premiums on securitized (1,083) (1,237)
Discount on SBA loans 977 957
----------- --------------
Loans held for investment, net $ 198,140 $ 202,572
=========== ==============
An analysis of the allowance for loan losses for loans held for investment is as
follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
--------------- --------------
(IN THOUSANDS)
Balance, beginning of period $ 5,950 $ 8,275
Provision for loan losses 344 2,276
Loans charged off (1,870) (2,706)
Recoveries on loans previously charged off 674 414
--------------- --------------
Balance, end of period $ 5,098 $ 8,259
=============== ==============
4. EARNINGS PER SHARE
Earnings per share - Basic have been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
have 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
MARCH 31,
------------------------------
2003 2002
-------------- --------------
(IN THOUSANDS)
Basic weighted average shares outstanding 5,690 5,690
Dilutive effect of options 21 34
Diluted weighted average shares outstanding 5,711 5,724
============== ==============
Net income (loss) $ 348 $ (949)
Earnings (loss) per share - Basic $ .06 $ (.17)
Earnings (loss) per share - Diluted $ .06 $ (.17)
The incremental 34,000 shares from assumed conversion of stock options at March
31, 2002 were excluded from the computation of diluted earnings per share
because the Company had a net loss for the three months ended March 31, 2002,
which makes them anti-dilutive.
5. CAPITAL
10
At March 31, 2003, Goleta is operating under a consent order ("Order") with the
Office of the Comptroller of the Currency ("OCC"). Under the terms of the Order,
among other things, Goleta is 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. The Order also places limitations on growth and payments
of dividends until Goleta is in compliance with both the Order and receives the
appropriate approval from the OCC. Goleta is required to submit monthly
progress reports to the OCC detailing actions taken to comply with the Order,
results of those actions, and a description of actions needed to achieve full
compliance with the Order. As of March 31, 2003 and December 31, 2002, Goleta
had total capital to risk weighted assets of 13.94% and 13.31%, respectively,
and Tier 1 capital to risk-weighted assets of 12.68% and 12.04%, respectively.
In addition, the Company is operating under a Memorandum of Understanding with
the Federal Reserve Bank which requires, among other things, that the Company
refrain from paying dividends without the approval of the Federal Reserve Bank.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters addressed in this Item 2 that are not historical information
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that the expectations
reflected in these forward-looking statements are reasonable, such statements
are inherently subject to risks and uncertainties, and the Company can give no
assurances that its expectations will prove to be correct. Actual results could
differ from those described in the forward-looking statements because of
numerous factors, many of which are beyond the control of the Company. These
factors include, without limitation, those described below under the heading
"Factors That May Affect Future Results of Operations" and elsewhere in this
Report and the other reports the Company files with the Securities and Exchange
Commission ("SEC"). The Company does not undertake any obligation to revise or
update publicly any forward-looking statements for any reason.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
This discussion is designed to provide insight into management's assessment of
significant trends related to the Company's consolidated financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto and the other financial
information appearing elsewhere in this report.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
RESULTS OF OPERATIONS
The Company recorded net income of $348,000 in the first three months of 2003,
or $0.06 per share, compared to a net loss of $949,000, or $0.17 per share,
during the comparable period of 2002. Net interest income after provision for
losses increased by 58.6% from $1.4 million for the three months ended March 31,
2002 to $2.2 million for the three months ended March 31, 2003 while net
interest income decreased by $1.1 million or 30.3% from $3.7 million for the
three months ended March 31, 2002 to $2.6 million for the three months ended
March 31, 2003. Total non-interest expense decreased $2.1 million, or 32%, from
$6.4 million for the three months ended March 31, 2002 to $4.3 million for the
three months ended March 31, 2003. Provision for loan losses decreased 84.9%
from $2.3 million for the three months ended March 31, 2002 to $344,000 for the
three months ended March 31, 2003. The provision for loan losses decreased
primarily due to the paydown in the securitized loan portfolio, the exit from
the riskier short-term consumer and high-loan-to-value mortgage lending, and the
strengthening of the credit quality in the SBA loan portfolio.
11
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:
FOR THE THREE MONTHS ENDED AMOUNT OF PERCENT OF
------------------------------- INCREASE INCREASE
MARCH 31,2003 MARCH 31,2002 (DECREASE) (DECREASE)
-------------- --------------- ----------- -----------
(IN THOUSANDS)
Interest income $ 5,179 $ 7,538 $ (2,359) (31.3%)
Interest expense 2,618 3,864 (1,246) (32.2%)
-------------- --------------- -----------
Net interest income 2,561 3,674 (1,113) (30.3%)
Provision for loan losses 344 2,276 (1,932) (84.9%)
-------------- --------------- -----------
Net interest income after
provision for loan losses 2,217 1,398 819 58.6%
Non-interest income 2,669 3,375 (706) (20.9%)
Non-interest expenses 4,355 6,409 (2,054) (32.0%)
-------------- --------------- -----------
Income (loss) before
provision (benefit) for
income taxes 531 (1,636) 2,167 132.5%
Provision (benefit) from
income taxes 183 (687) 870 126.6%
-------------- --------------- -----------
Net income (loss) $ 348 $ (949) $ 1,297 136.7%
============== =============== ===========
Earnings per share - Basic $ 0.06 $ (0.17) $ 0.23 135.3%
============== =============== ===========
Earnings per share - Diluted $ 0.06 $ (0.17) $ 0.23 135.3%
============== =============== ===========
Total interest income decreased 31.3% from $7.5 million for the three months
ended March 31, 2002 to $5.2 million for the equivalent period in 2003. Total
interest expense decreased 32.2% from $3.9 million for the three months ended
March 31, 2002 to $2.6 million for the three months ended March 31, 2003. There
was a general decline in interest rates which have narrowed the Company's net
interest margin, but the primary reason for the margin decrease is the
termination of the high-yield, short-term consumer lending business. For the
three months ended March 31, 2002, short-term consumer lending contributed $1.8
million in interest income and $841,000 to indirect expenses and pretax profits.
Also contributing to the decrease in both interest income and interest expense
was an annualized prepayment rate of approximately 43% experienced in Goleta's
securitized loan portfolio. The securitzed loan interest income decreased $1.1
million from $2.9 million for the three months ended March 31, 2002 to $1.8
million for the three months ended March 31, 2003. In addition, the Company was
somewhat asset sensitive during the comparative periods of declining interest
rates. As a result, net interest income decreased 30.3% from $3.7 million for
the three months ended March 31, 2002 to $2.6 million for the first quarter of
2003.
CHANGES IN NET INTEREST INCOME
Net interest income is the difference between the interest and fees earned on
loans and investments and the interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest expense
depends on the volume or balance of earning assets compared to the volume or
balance of interest-bearing deposits and liabilities and the interest rate
earned on those interest-earning assets compared to the interest rate paid on
those interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate
of interest earned on assets and the average rate of interest that must be paid
on liabilities used to fund those assets. To maintain its net interest margin,
the Company must manage the relationship between interest earned and paid.
The annualized net interest margin was 3.7% for the three months ended March 31,
2003, compared to an annualized net interest margin of 5.4% for the three months
ended March 31, 2002. The decrease in net interest margin is primarily due to
the exit from high yielding short-term consumer lending.
The net interest income amounts above include income from the Company's
investment securities. The following table summarizes the interest income and
corresponding yields for loans only:
12
For the Three Months Ended
--------------------------
MARCH 31, MARCH 31,
(IN THOUSANDS) 2003 2002
----------- -------------
Interest Income on Loans $ 5,011 $ 7,377
Average Loans 245,710 251,376
Annualized Yield 8.2% 11.7%
Non-interest income includes service charges on deposit accounts, gains on sale
of loans, servicing fees and other revenues not derived from interest on earning
assets. Non-interest income for the three months ended March 31, 2003 decreased
by $706,000, or 20.9%, compared to the three months ended March 31, 2002. The
decrease was primarily due to a reduction of $251,000 and $642,000 in loan
document processing fees and net gain on loan sales, respectively. These
decreases are due to the Company's exit from the alternative mortgage lending
business in 2002, which business had contributed $568,000 to the gain on loan
sales and $234,000 to document processing fees for the three months ended March
31, 2002.
Non-interest expenses include salaries and employee benefits, occupancy and
equipment and other operating expenses. Non-interest expenses for the three
months ended March 31, 2003 decreased by $2.1 million, or 32%, compared to the
three months ended March 31, 2002. This decrease is principally a result of the
Company's exit from the alternative mortgage and short-term consumer lending
businesses, relocation of the Company's mortgage department, consolidation of
the SBA lending support functions and general cost cutting measures.
For the three months ended March 31, 2003, income tax expense totaled $183,000,
or an effective tax rate of 34.5%, compared to ($687,000), or an effective tax
benefit of 42%, for the three months ended March 31, 2002.
The annualized return on average equity was 4.2% for the three months ended
March 31, 2003, compared to annualized loss on average equity of 11.4% for the
same period in 2002.
FINANCIAL CONDITION
Average assets for the three months ended March 31, 2003 were $296.5 million
compared to $302 million at December 31, 2002. Average equity increased to
$33.3 million for the three months ended March 31, 2003, from $31.8 million for
the year ended December 31, 2002.
The book value per share was $5.70 at March 31, 2003 and March 31, 2002.
AMOUNT OF PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS INCREASE INCREASE
(IN THOUSANDS) MARCH 31, 2003 DECEMBER 31, 2002 (DECREASE) (DECREASE)
--------------- ------------------ ----------- -----------
Cash and cash equivalents $ 19,807 $ 31,094 $ (11,287) (36.3%)
Time deposits in other financial
institutions 2,376 2,277 99 4.3%
Federal reserve bank stock 812 812 - -
Investment securities held-to-
maturity 11,103 6,012 5,091 84.7%
Investment securities available-for-
sale 5,579 - 5,579 100%
I/O strips 4,270 4,548 278 (6.1%)
Loans - Held for sale 41,947 43,284 (1,337) (3.1%)
Securitized loans, net 56,741 63,624 (6,883) (10.8%)
Loans - Held for investment, net 141,399 138,948 2,451 1.8%
Total Assets $ 296,432 $ 307,210 $ (10,778) (3.5%)
=============== ================== =========== ===========
Total Deposits $ 215,753 $ 219,083 $ (3,330) (1.5%)
=============== ================== =========== ===========
Total Stockholders' Equity $ 32,442 $ 32,087 $ 355 1.1%
=============== ================== =========== ===========
13
Total assets of the Company declined $10.8, million or 3.5%, from $307.2 million
at December 31, 2002 to $296.4 million at March 31, 2003. This decrease was
primarily due to the continued net pay down in the two securitized loan pools of
$6.9 million as well as a $4.2 million decrease in other assets which was
partially offset by a $1.1 million net increase in other types of loans.
Cash and cash equivalents decreased by $11.3 million, or 36.3%, from $31.1
million at December 31, 2002 to $19.8 million at March 31, 2003. The Company
used these funds primarily to purchase additional investment securities.
Investment securities increased by $10.7 million, or 177.5%, from $6 million at
December 31, 2002 to $16.7 million at March 31, 2003. Held-to-maturity
investment securities increased by $5.1 million, or 84.7%, from $6 million at
December 31, 2002 to $11.1 million at March 31, 2003. In addition, the Company
began purchasing available-for-sale investment securities in the first quarter
of 2003. The Company held $5.6 million of available-for-sale securities at
March 31, 2003. The Company plans to use the investment securities to enhance
net interest income and as collateral for future short-term borrowings as needed
for liquidity purposes.
Total loans decreased by $6.6 million, or 2.6%, from $251.8 million at December
31, 2002 to $245.2 million at March 31, 2003. This decrease was primarily due
to the continued principal pay downs of the securitized loans. The securitized
loan portfolio decreased $7.1 million, or 10.7%, from $66.2 million at December
31, 2002 to $59.1 million at March 31, 2003. As the Company has discontinued
high-loan-to-value lending and plans no more securitization activity, these
loans will continue to run off. Based on the first quarter of 2003's actual
performance, the securitized portfolio would experience an annualized reduction
of 43%.
Held-for-sale loans decreased $1.3 million from $43.3 million at December 31,
2002 to $42 million at March 31, 2003. This decrease was primarily due to $2.9
million decrease in mortgage loans from $17.1 million at December 31, 2002 to
$14.2 million at March 31, 2003. This decrease was partially offset by a net
increase in SBA guaranteed loans of $1.6 million which includes $5.7 million in
SBA guaranteed loan sales completed during the first quarter of 2003.
Total loans held for investment increased $1.8 million from $142.3 million at
December 31, 2002 to $144.1 million at March 31, 2003. Commercial, commercial
real estate, land and construction loans increased by $2.6 million from $66.8
million at December 31, 2002 to $69.4 million at March 31, 2003. The Company's
manufactured housing portfolio increased by $1.7 million from $28.2 million at
December 31, 2002 to $29.9 million at March 31, 2003. These increases were
partially offset by decreases in the SBA and short-term consumer loans. SBA
unguaranteed loans decreased by $1.8 million from $39.6 million at December 31,
2002 to $37.8 million at March 31, 2003. The Company sells SBA unguaranteed
loans periodically in the normal course of business. This decrease is primarily
due to the sale of $2.1 million of the unguaranteed portion of SBA loans in the
first quarter of 2003. At December 31, 2002, the Company held $1.6 million in
short-term consumer loans. The Company has exited the short-term consumer
lending and has none of these loans at March 31, 2003.
All other types of assets decreased by $4.2 million, or 25.4%, from $16.6
million at December 31, 2002 to $12.4 million at March 31, 2003. This decrease
is primarily due to receipt of tax refunds of $2.6 million and reduction in
assets of $500,000 due to the exit from short-term consumer lending.
The following schedule shows the balance and percentage change in the various
deposits:
AMOUNT OF PERCENT OF
INCREASE INCREASE
MARCH 31, 2003 DECEMBER 31,2002 (DECREASE) (DECREASE)
--------------- ----------------- ----------- ----------
(IN THOUSANDS)
Non-interest-bearing deposits $ 35,637 $ 39,698 $ (4,061) (10.2%)
Interest-bearing deposits 33,641 35,169 (1,528) (4.3%)
Savings 17,627 11,377 6,250 54.9%
Time certificates of $100,000 or more 21,317 25,325 (4,008) (15.8%)
Other time certificates 107,531 107,514 17 0.0%
--------------- ----------------- -----------
Total deposits $ 215,753 $ 219,083 $ (3,330) (1.5%)
=============== ================= ===========
The Company's deposits decreased slightly by 1.5%, or $3.3 million, from
December 31, 2002 to March 31, 2003 due to deposit account changes experienced
through the normal course of business. Time certificates over $100,000
experienced a decrease from $25.3 million to $21.3 million, or 15.8%,
non-interest-bearing deposits decreased from $39.7 million to $35.6 million, or
10.2%, and interest-bearing deposits decreased from $35.2 million to $33.6
million or 4.3%. These decreases were partially offset by an increase in
savings deposits from $11.4 million to $17.6 million, or 54.9%.
14
Net bonds payable in connection with securitized loans decreased by $6.1
million, or 12%, from $50.5 million at December 31, 2002 to $44.4 million at
March 31, 2003. The bonds will continue to pay down as a correlation result of
the securitized loan payoffs.
All other liabilities decreased by $1.8 million from $5.6 million at December
31, 2002 to $3.8 million at March 31, 2003. This decrease is primarily due to
changes in accrued liabilities.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
Total ALL decreased $852,000, or 14.3%, from $5.9 million at December 31, 2002
to $5.1 million at March 31, 2003. Of this decrease, $465,000 or 54.6%, relates
to the exit from short-term consumer lending and the reduction in the ALL net of
charge-offs and recoveries, $265,000 relates to decreases in the ALL required
for securitized loans as a result of the continued paydown in the portfolios and
the remaining $170,000 decrease is primarily relates to one SBA loan which was
converted to OREO during the quarter and had a specific reserve of $88,000 at
December 31, 2002.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest under the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value and the probability of collecting scheduled principal
and interest payments. Loans that experience insignificant payment delays or
payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis. When determining the possibility of impairment, management
considers the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record and the amount of the shortfall in relation to the principal and interest
owed. For collateral dependent loans, the Company uses the fair value of
collateral method to measure impairment. All other loans, except for
securitized loans, are measured for impairment based on the present value of
future cash flows. Impairment is measured on a loan-by-loan basis for all loans
in the portfolio except for the securitized loans, which are evaluated for
impairment on a collective basis.
The recorded investment in loans that is considered to be impaired:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ - $ -
Impaired loans with specific valuation allowances 7,341 8,394
Specific valuation allowances allocated to impaired loans (1,325) (1,278)
----------- ------------
Impaired loans, net $ 6,016 $ 7,116
=========== ============
Average investment in impaired loans $ 8,039 $ 7,565
=========== ============
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(IN THOUSANDS)
Nonaccrual loans $ 12,623 $ 13,965
SBA guaranteed portion of loans included above (7,014) (8,143)
----------- ------------
Nonaccrual loans, net $ 5,609 $ 5,821
=========== ============
Troubled debt restructured loans, gross $ 611 $ 829
Loans 30 through 89 days past due with interest accruing $ 2,900 $ 5,122
Allowance for loan losses to gross loans 2.0% 3.4%
15
Goleta generally repurchases the guaranteed portion of SBA loans from investors
when those loans become past due 120 days. After the foreclosure and collection
process is complete, the SBA reimburses Goleta for this principal balance.
Therefore, although these balances do not earn interest during this period, they
generally do not result in a loss of principal to Goleta.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
LIQUIDITY MANAGEMENT
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The Company's liquidity
management is viewed from both a long-term and short-term perspective as well as
from an asset and liability perspective. Management monitors liquidity through
regular reviews of maturity profiles, funding sources and loan and deposit
forecasts to minimize funding risk. The Company has asset/liability committees
("ALCO") at the Board and Goleta management level to review asset/liability
management and liquidity issues. The Company maintains strategic liquidity and
contingency plans. The liquidity ratio of the Company was 25% and 23.5% at
December 31, 2002 and March 31, 2003, respectively. The liquidity ratio
consists of cash and due from banks, deposits in other financial institutions,
available for sale investments, federal funds sold and loans held for sale,
divided by total assets. Recently, the Company has invested more resources in
the purchase of government-guaranteed investment securities and obtained a
financing arrangement, which allows it to pledge these securities as collateral
for short-term borrowing in case of increased liquidity needs. This arrangement
(repurchase agreements) gives the Company improved flexibility in managing its
liquidity resources.
The Company, through the Bank, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window up to 50% of what is pledged at
the Federal Reserve Bank. On January 9, 2003, the Reserve Bank replaced the
existing discount window program with new primary and secondary credit programs.
GNB was notified it qualifies for primary credit as it has been deemed to be in
sound financial condition. The rate on primary credit will be 50 basis points
less than the secondary credit rate and will generally be granted on a "no
questions asked basis" at a rate that initially will be at 100 basis points
above the Federal Open Market Committee's (FOMC) target federal funds rate
(currently at 1.25%). As the rate is currently not attractive, it is unlikely
it will be used as a regular source of funding, but is noted as available as an
alternative funding source.
CAPITAL RESOURCES
The Company's equity capital was $32.4 million at March 31, 2003. 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.
Additionally, an institution may not be deemed to be well capitalized if its is
operating under an agreement with its principal regulator, as in the case of
Goleta. See "Supervision and Regulation-Consent Order with the OCC."
16
The Company's actual capital amounts and ratios for the periods indicated are as
follows:
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
--------------- ----------------------- -------------------------
AS OF MARCH 31, 2003: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------------ --------- ----------- ------------
(DOLLARS IN THOUSANDS)
Total Risk-Based Capital (to Risk Weighted Assets)
Consolidated $35,291 14.57% $ 19,376 8.00% N/A N/A
Goleta National Bank $32,793 13.94% $ 18,821 8.00% $ 23,527 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $32,238 13.31% $ 9,688 4.00% N/A N/A
Goleta National Bank $29,827 12.68% $ 9,411 4.00% $ 14,116 6.00%
Tier I Capital (to Average Assets)
Consolidated $32,238 10.79% $ 11,954 4.00% N/A N/A
Goleta National Bank $29,827 10.11% $ 11,805 4.00% $ 14,756 5.00%
AS OF DECEMBER 31, 2002:
Total Risk-Based Capital (to Risk Weighted Assets)
Consolidated $35,080 13.92% $ 20,162 8.00% N/A N/A
Goleta National Bank $32,492 13.31% $ 19,537 8.00% $ 24,421 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $31,897 12.66% $ 10,081 4.00% N/A N/A
Goleta National Bank $29,405 12.04% $ 9,768 4.00% $ 14,652 6.00%
Tier I Capital (to Average Assets)
Consolidated $31,897 10.48% $ 12,170 4.00% N/A N/A
Goleta National Bank $29,405 9.80% $ 12,004 4.00% $ 15,005 5.00%
SUPERVISION AND REGULATION
- ----------------------------
Banking is a complex, highly regulated industry. The banking regulatory scheme
serves not to protect investors, but is designed to maintain a safe and sound
banking system, to protect depositors and the FDIC insurance fund, and to
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress and the states have created several largely autonomous regulatory
agencies and enacted numerous laws that govern banks, bank holding companies,
and the banking industry. Consequently, the Company's growth and earnings
performance, as well as that of Goleta, may be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Board of Governors of
the Federal Reserve Bank ("FRB"), the Federal Deposit Insurance Corporation
("FDIC"), the Office of the Comptroller of the Currency ("OCC") and the
California Department of Financial Institutions ("DFI"). For a detailed
discussion of the regulatory scheme governing the Company and Goleta, please see
the discussion in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Supervision and Regulation."
CONSENT ORDER WITH THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
On October 28, 2002, Goleta entered into a Consent Order ("Order") with its
principal regulator, the OCC. As of this date, the Order replaced the Formal
Agreement with the OCC. The Order requires that Goleta maintain certain capital
levels, adhere to certain operational and reporting requirements and take
certain actions. In compliance with the terms of the Order, Goleta has taken
the following actions; Goleta submits monthly progress reports that inform the
OCC of the progress made towards compliance with the Order, Goleta has ceased
all short-term consumer lending as of December 31, 2002 and is in process of the
required loan file audit of short-term consumer loans, Goleta has written and
implemented both a three-year capital and strategic plan, achieved and
maintained the required capital levels as stated in the Order, and implemented a
risk management program.
Failure to comply with the provisions of the Order could adversely affect the
safety or soundness of Goleta. Management believes it is in substantive
compliance with the provisions of the Order.
17
MEMORANDUM OF UNDERSTANDING WITH THE FEDERAL RESERVE BANK
In March 2000, the Company entered into a Memorandum of Understanding ("MOU")
with its principal regulator, the Federal Reserve Bank of San Francisco
("Reserve Bank"). The MOU requires that the Company maintain certain capital
levels and adhere to certain operational and reporting requirements. The
Company believes that it is in substantial compliance with the MOU.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
- ----------------------------------------------------
The Company's short and long-term success is subject to many factors that are
beyond its control. Shareholders and prospective investors in the Company
should carefully consider the following risk factors, in addition to other
information contained in this report. This Quarterly Report on Form 10-Q
contains forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
numerous risks and uncertainties, including those described below.
INTEREST RATE RISK
The Company is exposed to different types of interest rate risks. These risks
include lag, repricing, basis and prepayment risk. To mitigate the impact of
changes in market interest rates on the Company's interest-earning assets and
interest-bearing liabilities, the amounts and maturities are actively managed.
Short-term, adjustable-rate assets are generally retained as they have similar
repricing characteristics as our funding sources. The Company sells mortgage
products and a portion of its SBA loan originations. The held for sale mortgage
loans have no pricing or interest rate risk as they are covered by delivery
commitments to investors. While the Company has some interest rate exposure in
excess of five years, it has internal policy limits designed to minimize risk
should interest rates rise. Currently, the Company does not use derivative
instruments to help manage risk, but will consider such instruments in the
future if the perceived need should arise.
The Company's ability to originate, purchase and sell loans is also
significantly impacted by changes in interest rates. Increases in interest
rates may also reduce the amount of loan and commitment fees received by the
Company. A significant decline in interest rates could also decrease the size
of the Company's servicing portfolio and the related servicing income by
increasing the level of prepayments. The Company does not currently utilize any
specific hedging instruments to minimize exposure to fluctuations in the market
price of loans and interest rates with regard to loans held for sale in the
secondary mortgage market. Therefore, in the short time between when the
Company originates and sells the loans, the Company is exposed to decreases in
the market price of such loans due to increases in interest rates.
EXIT FROM SHORT-TERM CONSUMER LENDING
The Company is working to replace the income derived from the high-yielding
short-term consumer loans with products that are less risky. In the current
interest rate environment, interest margins are compressed making replacement of
the contribution to income from these loans much more difficult. There is no
guarantee of the time it will take to replace this income nor assurance that the
Company will be ultimately be successful.
DEPENDENCE ON REAL ESTATE
Approximately 53% of the loan portfolio of the Company is secured by various
forms of real estate, including residential and commercial real estate. A
decline in current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
loans. The real estate securing the Company's loan portfolio is concentrated in
California. If real estate values decline significantly, especially in
California, higher vacancies and other factors could harm the financial
condition of the Company's borrowers, the collateral for its loans will provide
less security, and the Company would be more likely to suffer losses on
defaulted loans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change in the Company's market risk since the end of
the last fiscal year. For information about the Company's market risk, see the
information contained in the Company's Annual Report on Form 10-K under the
caption "Item 7A. Quantitative And Qualitative Disclosure about Market Risk,"
which is incorporated herein by this reference.
18
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Chief Executive
Officer and the Chief Financial Officer of the Company, with the participation
of the Company's management, carried out an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the date of the evaluation, the Company's
disclosure controls and procedures are effective in making known to them
material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objections is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls, known to the Chief
Executive Officer or the Chief Financial Officer, subsequent to the date of the
evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------ -----------------
There has been no material change in the Company's legal proceedings since the
end of the last fiscal year. For information about the Company's legal
proceedings, see the information contained in the Company's Annual Report on
Form 10-K under the caption "Item 3. Legal Proceedings," which is incorporated
herein by this reference.
OTHER LITIGATION
The Company is involved in various other litigation of a routine nature which is
being handled and defended in the ordinary course of the Company's business. In
the opinion of management, based in part on consultation with legal counsel, the
resolution of these other litigation matters will not have a material impact on
the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURTIES 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 REPORT ON FORM 8-K
- ------- ------------------------------------
(a) Exhibits.
10.0 Revised employment and confidentiality agreement between Goleta
National Bank, its parent company Community West Bancshares and Lynda J.
Nahra.
19
99.1 Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed a Form 8-K report on March 4, 2003 attaching its
press release announcing a management change under Item 5.
The Company filed a Form 8-K report on April 28, 2003 attaching its
press release announcing the results of operations and financial
conditions for the quarter ended March 31, 2003 under Item 12.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY WEST BANCSHARES
-------------------------
(Registrant)
Date: May 12, 2003 /s/ Charles G. Baltuskonis
--------------------------
Charles G. Baltuskonis
Senior Vice President
Chief Financial Officer
On Behalf of Registrant and as
Principal Financial Officer
21
CERTIFICATIONS
I, Michael A. Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community West
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 12, 2003
/s/ Michael A. Alexander
------------------------
Michael A. Alexander
President and Chief Executive Officer
22
I, Charles G. Baltuskonis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community West
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 12, 2003
/s/ Charles G. Baltuskonis
--------------------------
Charles G. Baltuskonis
Chief Financial Officer
23