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 June 30, 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 (I.R.S. Employer
of incorporation 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 Exchange Act). [ ] YES [X] NO
Number of shares of common stock of the registrant outstanding as of August 8,
2003: 5,690,224
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
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 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 22
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
------------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 7,609 $ 10,714
Federal funds sold 16,820 20,380
------------- -----------
Cash and cash equivalents 24,429 31,094
Time deposits in other financial institutions 1,584 2,277
Federal Reserve Bank stock, at cost 812 812
Investment securities held-to-maturity, at amortized cost; fair value of $9,779 at June 30,
2003 and $6,071 at December 31, 2002 9,717 6,012
Investment securities available-for-sale, at fair value, amortized cost of $6,143 at June 30,
2003 6,149 -
Interest only strips, at fair value 4,008 4,548
Loans:
Loans held for sale, at lower of cost or fair value 40,516 43,284
Loans held for investment, net of allowance for loan losses of $2,698 at June 30, 2003
and $3,379 at December 31, 2002 148,705 138,948
Securitized loans, net of allowance for loan losses of $2,120 at June 30, 2003 and $2,571
at December 31, 2002 49,407 63,624
------------- -----------
Total loans 238,628 245,856
Servicing assets 2,110 1,897
Other real estate owned, net 546 571
Premises and equipment, net 1,759 1,959
Other assets 7,535 12,184
------------- -----------
TOTAL ASSETS $ 297,277 $ 307,210
============= ===========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 37,016 $ 39,698
Interest-bearing demand 34,384 35,169
Savings 15,967 11,377
Time certificates of $100,000 or more 20,563 25,325
Other time certificates 110,056 107,514
------------- -----------
Total deposits 217,986 219,083
Securities sold under agreements to repurchase 4,600 -
Bonds payable in connection with securitized loans 37,773 50,473
Other liabilities 3,982 5,567
------------- -----------
Total liabilities 264,341 275,123
------------- -----------
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 3,135 2,289
Accumulated other comprehensive income 3 -
------------- -----------
Total stockholders' equity 32,936 32,087
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 297,277 $ 307,210
============= ===========
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -----------------
2003 2002 2003 2002
--------- -------- ------- --------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Loans $ 5,023 $ 7,476 $10,035 $14,894
Federal funds sold 47 100 100 206
Time deposits in other financial institutions 10 23 22 68
Investment securities 119 23 222 33
--------- -------- ------- --------
Total interest income 5,199 7,622 10,379 15,201
--------- -------- ------- --------
INTEREST EXPENSE
Deposits 1,175 1,311 2,402 2,788
Bonds payable and other borrowings 1,252 2,131 2,643 4,518
--------- -------- ------- --------
Total interest expense 2,427 3,442 5,045 7,306
--------- -------- ------- --------
NET INTEREST INCOME 2,772 4,180 5,334 7,895
Provision for loan losses 363 1,275 708 3,551
--------- -------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,409 2,905 4,626 4,344
NON-INTEREST INCOME
Gains from loan sales, net 1,121 1,318 2,247 3,085
Other loan fees - sold or brokered loans 749 718 1,462 1,578
Loan servicing fees, net 272 75 590 153
Document processing fees 257 404 469 873
Service charges 85 93 169 227
Other income 33 89 249 169
--------- -------- ------- --------
Total non-interest income 2,517 2,697 5,186 6,085
--------- -------- ------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,783 3,599 5,862 7,780
Occupancy expenses 586 935 1,132 1,667
Professional services 159 392 353 916
Loan servicing and collection 109 263 208 527
Advertising 80 75 136 303
Postage and freight 40 82 80 153
Office supplies 48 68 89 137
Impairment of SBA interest only strips and servicing assets - 1,788 - 1,788
Lower of cost or market provision on loans held for sale - 1,340 - 1,340
Other expenses 366 459 666 854
--------- -------- ------- --------
Total non-interest expenses 4,171 9,002 8,526 15,465
--------- -------- ------- --------
Income (loss) before provision (benefit) for income taxes 755 (3,400) 1,286 5,036
Provision (benefit) for income taxes 257 (1,428) 440 (2,115)
--------- -------- ------- --------
NET INCOME (LOSS) $ 498 $(1,972) $ 846 $(2,921)
========= ======== ======= ========
INCOME (LOSS) PER SHARE - BASIC $ .09 $ (.35) $ .15 $ (.51)
========= ======== ======= ========
INCOME (LOSS) PER SHARE - DILUTED $ .09 $ (.35) $ .15 $ (.51)
========= ======== ======= ========
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
-------------------- --------- -------------- --------------
(IN THOUSANDS)
BALANCES AT
DECEMBER 31, 2002 5,690 $29,798 $ 2,289 $ - $ 32,087
Comprehensive income:
Net income - - 846 - 846
Other comprehensive income - - - 3 3
-------------- --------------
Comprehensive income - - - - 849
----------- ------- --------- -------------- --------------
BALANCES AT
JUNE 30, 2003 5,690 $29,798 $ 3,135 $ 3 $ 32,936
=========== ======= ========= ============== ==============
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 846 $ (2,921)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan losses 708 3,551
Provision for losses on real estate owned 20 32
Depreciation and amortization 1,025 438
Net amortization of discounts and premiums for securities 118 -
Gains on:
Sale of other real estate owned (75) (32)
Sale of loans held for sale (2,247) (3,085)
Changes in:
Fair value of interest only strips 540 2,724
Servicing assets, net of amortization and valuation adjustments (213) 562
Other assets 4,649 (2,046)
Other liabilities (1,638) (304)
----------- -----------
Net cash provided by (used in) operating activities 3,733 (1,081)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (6,246) (6,107)
Purchase of available-for-sale securities (11,766) -
Principal paydowns and maturities of held-to-maturity securities 2,487 118
Principal paydowns and maturities of available-for-sale securities 5,553 -
Additions to interest only strips - (240)
Loan originations and principal collections, net 8,124 23,110
Proceeds from sale of other real estate owned 779 60
Net decrease (increase) in time deposits in other financial institutions 693 3,561
Purchase of premises and equipment (100) (12)
----------- -----------
Net cash provided by (used in) investing activities (476) 20,490
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 1,123 4,005
Net increase (decrease) in time certificates of deposit (2,220) 1,455
Proceeds from securities sold under agreements to repurchase 4,600
Repayments of bonds payable in connection with securitized loans (13,425) (22,965)
----------- -----------
Net cash (used in) financing activities (9,922) (17,505)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,665) 1,904
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,094 29,406
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,429 $ 31,310
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 4,037 $ 6,906
Cash paid for income taxes 67 2
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 643 288
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 June 30, 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
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/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; and, all other unsecured loans past due 120 or more days. Subsequent
recoveries, if any, are credited to the ALL.
INTEREST ONLY STRIPS AND SERVICING ASSETS - The Company often sells either a
portion of, or the entire loan, 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, the
Company recognizes 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,
based upon the fair value of the rights as compared to amortized cost. 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 any resulting increase or decrease in fair value recorded through
operations in the current period.
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 amended 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 amended 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
ended 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 may 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 SIX MONTHS ENDED,
JUNE 30, JUNE 30
---------------------- ---------------------
2003 2002 2003 2002
---------- ---------- -------- -----------
Annual dividend yield 0.0% 0.0% 0.0% 0.00%
Expected volatility 34.3% 45.1% 32.4% 45.1%
Risk-free interest rate 3.5% 4.0% 3.8% 4.0%
Expected life (in years) 7.3 7.3 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 following:
8
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2003 2002 2003 2002
---------- ----------- --------- ----------
Net income (loss):
As reported $ 498 $ (1,972) $ 846 $ (2,921)
Deduct: stock-based employee compensation expense
determined under fair value based method for all awards net
of related tax 36 34 69 65
---------- ----------- --------- ----------
Pro forma $ 462 $ (2,006) $ 777 $ (2,986)
========== =========== ========= ==========
Basic earnings (loss) per share:
As reported $ .09 $ (.35) $ .15 $ (.51)
Pro forma .08 (.35) .14 (.52)
Diluted income (loss) per share:
As reported $ .09 $ (.35) $ .15 $ (.51)
Pro forma .08 (.35) .14 (.52)
INCOME TAXES - As of December 31, 2002, the Company recognized that it was not
certain that the future tax benefits related to the Company's state deferred tax
assets would be realized and established a valuation allowance of $486,000.
During the quarter, the Company was able to utilize $77,000 of these previously
reserved amounts, resulting in a reduction to the Company's state tax expense.
COMPREHENSIVE INCOME
THREE MON THS ENDED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, JUNE 30,
------------------------ ---------------------
2003 2002 2003 2002
----------- ----------- --------- ----------
Net income (loss) $ 498 $ (1,972) $ 846 $ (2,921)
Other comprehensive income, net of tax:
Unrealized gains (losses) during the period, net of tax (4) - 3 -
----------- ----------- --------- ----------
Comprehensive income (loss) $ 494 $ (1,972) $ 849 $ (2,921)
=========== =========== ========= ==========
NEW ACCOUNTING PRONOUNCEMENTS - In November 2002, the FASB issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
changed current practice in the accounting for, and disclosure of, guarantees.
Guarantees meeting the characteristics described (and not included in a long
list of exceptions) are required to be initially recorded at fair value, which
is different from the general current practice of recording a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement No. 5, Accounting for Contingencies. FIN 45 also requires a
guarantor to make significant new disclosures for virtually all guarantees. The
FIN 45 disclosure requirements are effective for financial statements of interim
or annual periods ended after December 15, 2002, while the initial recognition
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and existing guarantees
for the interim period beginning July 1, 2003. Management does not believe that
the impact of the adoption of this pronouncement will have a material impact on
the Company or its financial statements.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51 (FIN 46). FIN 46 requires the consolidation
of entities in which an enterprise absorbs a majority of the entity's expected
losses, receives a majority of the entity's expected residual returns, or both,
as a result of ownership, contractual or other financial interests in the
entity. Currently, entities are generally consolidated by an enterprise when it
has a controlling financial interest through ownership of a majority voting
interest in the entity. The Company was required to adopt this interpretation
for new entities established after January 1, 2003 and for existing entities
beginning July 1, 2003. Management is currently assessing the impact of the
adoption of FIN 46.
2. LOAN SALES AND SERVICING
SBA LOAN SALES
- ----------------
The Company often 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
9
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 periodically
sold to a third party for a cash premium. As of June 30, 2003 and December 31,
2002, the Company had approximately $27.5 and $26.2 million, respectively, in
SBA loans held for sale.
A summary of activity in I/O strips and servicing assets follows:
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
I/O STRIPS 2003 2002
----------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 4,548 $ 7,693
Additions through loan sales - 240
Valuation adjustments (540) (2,725)
----------- -----------
Balance, end of period $ 4,008 $ 5,208
=========== ===========
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
SERVICING ASSETS 2003 2002
----------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 1,897 $ 2,490
Additions through loan sales 460 382
Amortization (247) (181)
Valuation adjustments - (762)
----------- -----------
Balance, end of period $ 2,110 $ 1,929
=========== ===========
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
JUNE 30, DECEMBER 31,
2003 2002
--------------- --------------
(IN THOUSANDS)
Installment $ 39,115 $ 30,971
Commercial 21,236 26,256
Real estate 55,029 51,666
SBA 37,099 34,073
Securitized 50,402 64,732
--------------- --------------
202,881 207,698
Less:
Allowance for loan losses 4,818 5,950
Deferred fees, net of costs (331) (544)
Purchased premiums on securitized loans (949) (1,237)
Discount on SBA loans 1,231 957
--------------- --------------
Loans held for investment, net $ 198,112 $ 202,572
=============== ==============
10
An analysis of the allowance for loan losses for loans held for investment
follows:
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2003 2002
---------------- ------------
(IN THOUSANDS)
Balance, beginning of period $ 5,950 $ 8,275
Provision for loan losses 708 3,551
Loans charged off (2,859) (5,267)
Recoveries on loans previously charged off 1,019 867
---------------- ------------
Balance, end of period $ 4,818 $ 7,426
================ ============
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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ----------- ---------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,690 5,690 5,690 5,690
Dilutive effect of options 45 - 31 -
------------ ----------- ----------- ---------------
Weighted average shares - Diluted 5,735 5,690 5,721 5,690
============ =========== =========== ===============
Net income (loss) $ 498 $ (1,972) $ 846 $ (2,921)
Earnings (loss) per share - Basic .09 ( .35) .15 (.51)
Earnings (loss) per share - Diluted .09 ( .35) .15 (.51)
The incremental shares from assumed conversion of stock options for both the
three and six months ended June 30, 2002 were excluded from the computation of
diluted earnings per share because the Company had a net loss for both the three
and six months ended June 30, 2002, which made them anti-dilutive.
5. CAPITAL
Goleta is currently 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 June 30, 2003 and December 31, 2002, Goleta
had total capital to risk weighted assets of 14.04% and 13.31%, respectively,
and Tier 1 capital to risk-weighted assets of 12.79% 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.
6. REPURCHASE AGREEMENTS
The Company has entered into a financing arrangement with a third party by which
its government-guaranteed securities can be pledged as collateral for short-term
borrowings. As of June 30, 2003, under this agreement, the Company had borrowed
$4.6 million at the rate of 1.31%, due April 29, 2004.
11
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-SECOND QUARTER COMPARISON
The Company recorded net income of $498,000 for the three months ended June 30,
2003, or $.09 per share, compared to a net loss of $2 million, or ($.35) per
share, during the three months ended June 30, 2002 an increase of $2.5 million.
Both basic and diluted earnings per share for the second quarter of 2003 were
$.09 compared to ($.35) for the comparable period in 2002.
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
------------------------------------- INCREASE
JUNE 30, 2003 JUNE 30, 2002 (DECREASE)
------------------ ----------------- ---------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income $ 5,199 $ 7,622 $ (2,423)
Interest expense 2,427 3,442 (1,015)
------------------ ----------------- ---------------
Net interest income 2,772 4,180 (1,408)
Provision for loan losses 363 1,275 (912)
------------------ ----------------- ---------------
Net interest income after provision for loan losses 2,409 2,905 (496)
Non-interest income 2,517 2,697 (180)
Non-interest expenses 4,171 9,002 (4,831)
------------------ ----------------- ---------------
Income (loss) before provision (benefit)
for income taxes 755 (3,400) 4,155
Provision (benefit) from income taxes 257 (1,428) 1,685
------------------ ----------------- ---------------
Net income (loss) $ 498 $ (1,972) $ 2,470
================== ================= ===============
Earnings per share - Basic $ .09 $ (.35) $ .44
================== ================= ===============
Earnings per share - Diluted $ .09 $ (.35) $ .44
================== ================= ===============
Net interest income after provision for loan losses decreased by 17% for the
second quarter of 2003 from $2.9 million for the three months ended June 30,
2002 to $2.4 million for the three months ended June 30, 2003. Net interest
income before provision for loan losses decreased by $1.4 million from $4.2
million to $2.8 million for the comparable period. Although declining interest
rates have compressed the Company's net interest margin, the primary reason for
the decline in interest margin between periods is the Company's exit from the
12
high yielding short-term consumer lending business. Provision for loan losses
decreased 71.5% from $1.3 million for the second quarter 2002 to $363,000 for
the second quarter 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 underwriting standards in the SBA loan portfolio.
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 second quarter 2003 decreased by $180,000,
or 6.7%, compared to the second quarter 2002. The decrease was primarily due to
a reduction of $197,000 in net gain on loan sales and a $148,000 reduction in
document processing fees which were partially offset by a $197,000 increase in
loan servicing income. Before the Company's exit from the alternative mortgage
lending business in the second quarter of 2002, alternative mortgage loan sales
had contributed $673,000 to the net gain on loan sales and $239,000 to document
processing fees for the second quarter 2002. The decrease for the second
quarter 2003 in gains on sale of loans and document processing fee income
resulting from the termination of the alternative mortgage business line was
partially offset by increases in mortgage loan gains on sale of loans and
document processing fees and an increase in SBA net gains on loan sales.
Total non-interest expenses decreased $4.8 million, or 53.7%, from $9 million
for the second quarter 2002 to $4.2 million for the second quarter 2003.
Non-interest expenses include salaries and employee benefits, occupancy and
equipment and other operating expenses. Included in non-interest expenses for
the second quarter 2002 were a $1.8 million impairment writedown of the SBA
interest only strips and servicing assets and a $1.3 million lower of cost or
market provision on the HLTV loans held for sale. Also contributing to the
decrease in non-interest expenses were 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 which resulted in a $1.2 million decrease in
salaries and employee benefits and occupancy expense from $4.5 million for the
three months ended June 30, 2002 to $3.3 million for the same period in 2003.
RESULTS OF OPERATIONS - SIX MONTH COMPARISON
FOR THE SIX MONTHS ENDED AMOUNT OF
------------------------------ INCREASE
JUNE 30, 2003 JUNE 30, 2002 (DECREASE)
-------------- --------------- -----------
(DOLLARS IN THOUSANDS)
Interest income $ 10,379 $ 15,201 $ (4,822)
Interest expense 5,045 7,306 (2,261)
-------------- --------------- -----------
Net interest income 5,334 7,895 (2,561)
Provision for loan losses 708 3,551 (2,843)
-------------- --------------- -----------
Net interest income after provision for loan losses 4,626 4,344 282
Non-interest income 5,186 6,085 (899)
Non-interest expenses 8,526 15,465 (6,939)
-------------- --------------- -----------
Income (loss) before provision (benefit) for income taxes 1,286 (5,036) 6,322
Provision (benefit) from income taxes 440 (2,115) 2,555
-------------- --------------- -----------
Net income (loss) $ 846 $ (2,921) $ 3,767
============== =============== ===========
Earnings per share - Basic $ .15 $ (.51) $ .66
============== =============== ===========
Earnings per share - Diluted $ .15 $ (.51) $ .66
============== =============== ===========
The Company earned $846,000 for the first half of 2003, an increase of $3.8
million compared to the same period of 2002. Basic and diluted earnings per
share for the six months ended June 30, 2003 were $.15 compared to ($.51) for
the comparable period in 2002.
Net interest income after allowance for loan losses increased 6.5% from $4.3
million for the six months ended June 30, 2002 to $4.6 million for the
equivalent period in 2003. Total interest income decreased $4.8 million from
$15.2 million for the six months ended June 30, 2002 to $10.4 million for the
six months ended June 30, 2003. This decrease was partially offset by a
decrease in total interest expense of $2.3 million from $7.3 million for the six
months ended June 30, 2002 to $5 million for the six months ended June 30, 2003.
Provision for loan losses declined 80% to $708,000 for the six months ended June
30, 2003 from $3.6 million for the six months ended June 30, 2002. Non-interest
income declined $899,000 from $6.1 million for the six months ended June 30,
2002 to $5.2 million for the six months ended June 30, 2003. Non-interest
expenses declined $6.9 million or 44.6% from $15.5 million for the six months
ended June 30, 2002 to $8.5 million for the six months ended June 30, 2003. The
general decline in interest rates, the termination of the high-yield short-term
13
consumer lending business, the annualized prepayment rate of 44% experienced in
Goleta's securitized loan portfolio and the Company's internal cost reduction
programs are the primary reasons for the decreases in interest income, interest
expense, provision for loan losses, and non-interest expense.
INTEREST RATES AND DIFFERENTIALS
The following table illustrates average yields on our interest-earning assets
and average rates on our interest-bearing liabilities for the years indicated.
These average yields and rates are derived by dividing interest income by the
average balances of interest-earning assets and by dividing interest expense by
the average balances of interest-bearing liabilities for the periods indicated.
Amounts outstanding are averages of daily balances during the applicable period.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ------------------------
2003 2002 2003 2002
------------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Time deposits in other financial institutions:
Average balance $ 2,025 $ 2,678 $ 1,975 $ 5,066
Interest income 10 23 22 68
Average yield 2.04% 3.42% 2.23% 2.72%
Federal funds sold:
Average balance 16,108 24,663 16,949 25,545
Interest income 47 100 100 206
Average yield 1.18% 1.63% 1.19% 1.62%
Investments securities:
Average balance 16,390 2,056 12,557 1,473
Interest income 119 23 222 33
Average yield 2.9% 4.51% 3.57% 4.54%
Gross loans excluding securitized:
Average balance 189,099 158,474 187,159 157,355
Interest income 3,327 4,796 6,500 9,354
Average yield 7.06% 12.14% 7.00% 11.99%
Securitized loans:
Average balance 56,572 92,828 60,075 94,053
Interest income 1,696 2,680 3,535 5,540
Average yield 12.03% 11.58% 11.87% 11.88%
TOTAL INTEREST-EARNING ASSETS:
Average balance 280,194 280,699 278,715 283,492
Interest income 5,199 7,622 10,379 15,201
Average yield 7.44% 10.89% 7.51% 10.81%
14
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits:
Average balance $ 33,478 $ 27,274 $ 33,717 $ 25,809
Interest expense 83 149 182 284
Average yield 1.00% 2.19% 1.09% 2.22%
Savings deposits:
Average balance 16,299 13,573 15,036 14,163
Interest expense 54 73 106 178
Average yield 1.32% 2.17% 1.43% 2.53%
Time certificates of deposit:
Average balance 132,267 122,209 131,336 125,103
Interest expense 1,038 1,089 2,113 2,326
Average yield 3.15% 3.57% 3.24% 3.75%
Bonds payable:
Average balance 42,260 73,871 45,276 79,402
Interest expense 1,241 2,131 2,633 4,518
Average yield 11.78% 11.57% 11.73% 11.47%
Other borrowings:
Average balance 3,214 11 1,623 5
Interest expense 11 - 11 -
Average yield 1.36% 1.94% 1.35% 1.90%
TOTAL INTEREST-EARNING LIABILITIES:
Average balance 227,518 236,938 226,988 244,482
Interest expense 2,427 3,442 5,045 7,306
Average yield 4.28% 5.83% 4.48% 6.03%
NET INTEREST INCOME 2,772 4,180 5,334 7,895
NET INTEREST MARGIN 3.97% 5.97% 3.86% 5.62%
Nonaccrual loans are included in the average balance of loans outstanding.
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.
FINANCIAL CONDITION
Average assets for the six months ended June 30, 2003 were $297.4 million
compared to $307 million for the six months ended June 30, 2002. Average equity
increased to $33.5 million for the six months ended June 30, 2003, from $32.7
million for the same period in 2002.
The book value per share increased to $5.79 at June 30, 2003 from $5.35 at June
30, 2002.
15
AMOUNT OF PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS JUNE 30, DECEMBER 31, INCREASE INCREASE
(IN THOUSANDS) 2003 2002 (DECREASE) (DECREASE)
--------- ------------- ----------- -----------
Cash and cash equivalents $ 24,429 $ 31,094 $ (6,665) (21.4%)
Time deposits in other financial institutions 1,584 2,277 (693) (30.4%)
Federal reserve bank stock 812 812 - -
Investment securities held-to-maturity 9,717 6,012 3,705 61.6%
Investment securities available-for-sale 6,149 - 6,149 -
I/O strips 4,008 4,548 (540) (11.9%)
Loans - Held for sale 40,516 43,284 (2,768) (6.4%)
Securitized loans, net 49,407 63,624 (14,217) (22.3%)
Loans - Held for investment, net 148,705 138,948 9,757 7.0%
Total Assets $ 297,277 $ 307,210 $ (9,933) (3.2%)
========= ============= =========== ===========
Total Deposits $ 217,986 $ 219,083 $ (1,097) (.5%)
Securities sold under agreements to repurchase 4,600 - 4,600 -
Bonds payable in connection with securitized loans 37,773 50,473 (12,700) (25.2%)
Total Liabilities 264,341 275,123 (10,782) (3.9%)
Total Stockholders' Equity 32,936 32,087 849 2.6%
Total Liabilities and Stockholder's Equity $ 297,277 $ 307,210 $ (9,933) (3.2%)
========= ============= =========== ===========
16
Total assets of the Company declined $9.9, million or 3.2%, from $307.2 million
at December 31, 2002 to $297.3 million at June 30, 2003. This decrease was
primarily due to the continued net reductions in the two securitized loan pools
of $14.2 million as well as a $2.8 million reduction in loans held for sale. The
reduction in loans held for sale included a $4.1 million reduction in mortgage
loans held for sale and a net increase in SBA guaranteed loans held for sale of
$1.3 million. These decreases in loans were partially offset by a net increase
in other loan types of $9.1 million.
Cash and cash equivalents decreased by $6.7 million, or 21.4%, from $31.1
million at December 31, 2002 to $24.4 million at June 30, 2003. The Company
continues to use these funds primarily to purchase additional investment
securities and fund loans. Investment securities increased by $9.9 million, or
163.9%, from $6 million at December 31, 2002 to $15.9 million at June 30, 2003.
The Company held $6.1 million of available-for-sale securities at June 30, 2003.
The Company used the investment securities to enhance net interest income and as
collateral for short-term borrowings as needed for liquidity purposes.
Total loans decreased by $8.4 million, or 3.3%, from $251.8 million at December
31, 2002 to $243.4 million at June 30, 2003. This decrease was primarily due to
the continued principal reductions of the securitized loans. The securitized
loan portfolio decreased $14.7 million, or 22.2%, from $66.2 million at December
31, 2002 to $51.5 million at June 30, 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 actual performance of the first
half of 2003, the securitized portfolio would experience an annualized reduction
of over 44%. All other held for investment loan types increased by 6.4% from
$142.3 million at December 31, 2002 to $151.4 million at June 30, 2003. This
increase is primarily due to a $10.8 million increase in commercial, commercial
real estate and construction loans and a $4.1 million increase in manufactured
housing loans. The Company's manufactured housing portfolio increased from
$28.2 million at December 31, 2002 to $32.3 million at June 30, 2003. These
increases were partially offset by a $4.1 million decrease in net held for
investment SBA loans and a $1.7 million net decrease in all other types of
loans.
Held-for-sale loans decreased $2.8 million from $43.3 million at December 31,
2002 to $40.5 million at June 30, 2003. This decrease was primarily due to a
$4.1 million net decrease in mortgage loans from $17.1 million at December 31,
2002 to $13 million at June 30, 2003 which was partially offset by a net
increase, after selling $18.1 million in SBA guaranteed loans, of $1.3 million
in SBA loans held-for-sale.
All other types of assets decreased by $5 million, or 24.5%, from $20 million at
December 31, 2002 to $15 million at June 30, 2003. This decrease is primarily
due to receipt of tax refunds of $2.6 million and a $1.1 million reduction in
other receivables due to the continued payoff in the securitized loan pools and
the exit from short-term consumer lending.
The following schedule shows the balance and percentage change in the various
deposits:
AMOUNT OF PERCENT OF
JUNE 30, DECEMBER 31, INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
-------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 37,016 $ 39,698 $ (2,682) (6.7%)
Interest-bearing deposits 34,384 35,169 (785) (2.2%)
Savings 15,967 11,377 4,590 40.3%
Time certificates of $100,000 or more 20,563 25,325 (4,762) (18.8%)
Other time certificates 110,056 107,514 2,542 2.3%
-------- ------------- ----------- ----------
Total deposits $217,986 $ 219,083 $ (1,097) (.5%)
======== ============= =========== ==========
The Company's deposits decreased slightly by .5%, or $1.1 million, from December
31, 2002 to June 30, 2003. Time certificates over $100,000 experienced a
decrease from $25.3 million to $20.6 million, or 18.8%, non-interest-bearing
deposits decreased from $39.7 million to $37 million, or 6.7%, and
interest-bearing deposits decreased from $35.2 million to $34.4 million or 2.2%.
These decreases were offset by an increase in savings deposits from $11.4
million to $16 million, and an increase in other time certificates of deposit
$2.5 million from December 31, 2002 to June 30, 2003.
Net bonds payable in connection with securitized loans decreased by $12.7
million, or 25.2%, from $50.5 million at December 31, 2002 to $37.8 million at
June 30, 2003. The bonds will continue to pay down as a correlation result of
the securitized loan payoffs.
All other liabilities decreased by $1.6 million from $5.6 million at December
31, 2002 to $4 million at June 30, 2003, due to various miscellaneous changes.
17
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
Total ALL decreased $1.1 million, or 19%, from $5.9 million at December 31, 2002
to $4.8 million at June 30, 2003. Of this decrease, $566,000 or 51.5%, relates
to the exit from short-term consumer lending and the elimination in the ALL net
of charge-offs and recoveries, $451,000 relates to decreases in the ALL required
for securitized loans as a result of the continued paydown in the portfolios and
the remaining $83,000 decrease primarily relates to the net decrease in impaired
loans. During the second quarter 2003, the Company received $1.5 million in
payoffs of impaired loans that had specific reserves of $153,000 at March 31,
2003.
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:
JUNE 30, DECEMBER 31,
2003 2002
---------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ - $ -
Impaired loans with specific valuation allowances 5,503 8,394
Specific valuation allowances allocated to impaired loans (966) (1,278)
---------- --------------
Impaired loans, net $ 4,537 $ 7,116
========== ==============
Average investment in impaired loans $ 7,010 $ 7,565
========== ==============
The following schedule reflects recorded investment at the dates indicated in certain
types of loans:
JUNE 30, DECEMBER 31,
2003 2002
---------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 9,747 $ 13,965
SBA guaranteed portion of loans included above (5,951) (8,143)
---------- --------------
Nonaccrual loans, net $ 3,796 $ 5,821
========== ==============
Troubled debt restructured loans, gross $ 502 $ 829
Loans 30 through 89 days past due with interest accruing 2,326 5,122
Allowance for loan losses to gross loans 2.0% 2.4%
Total nonaccrual loans declined $4.2 million from $14 million at December 31,
2002 to $9.8 million at June 30, 2003. 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
18
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 24% at December 31, 2002 and June 30,
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. In 2003,
the Company has invested more resources in the purchase of government-guaranteed
investment securities and obtained a financing arrangement allowing it to pledge
these securities as collateral for short-term borrowing. During the second
quarter 2003, the Company used this arrangement to borrow $4.6 million at 1.31%,
due April 29, 2004. This arrangement allows for additional borrowing capacity
and provides improved flexibility in managing the Company's liquidity.
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 qualifies for primary credit as it has been deemed to be in sound financial
condition. The rate on primary credit is 50 basis points less than the
secondary credit rate and generally is 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%). 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 $32.9 million at June 30, 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 it is
operating under an agreement with its principal regulator, as in the case of
Goleta. See "Supervision and Regulation-Consent Order with the Office of the
Comptroller of the Currency ("OCC")."
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 JUNE 30, 2003: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------------ ------- ----------------------- ------- ---------
(DOLLARS IN THOUSANDS)
Total Risk-Based Capital (to Risk Weighted Assets)
Consolidated $35,714 15.03% $19,006 8.00% N/A N/A
Goleta National Bank $33,306 14.04% $18,971 8.00% $23,714 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $32,722 13.77% $ 9,503 4.00% N/A N/A
Goleta National Bank $30,319 12.79% $ 9,486 4.00% $14,229 6.00%
Tier I Capital (to Average Assets)
Consolidated $32,722 10.95% $11,957 4.00% N/A N/A
Goleta National Bank $30,319 10.27% $11,820 4.00% $14,775 5.00%
19
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: submits monthly progress reports that inform the OCC of
the progress made towards compliance with the Order; has ceased all short-term
consumer lending as of December 31, 2002 and has completed the required loan
file audit of short-term consumer loans; has written and implemented both a
three-year capital and strategic plan; has achieved and maintained the required
capital levels as stated in the Order; and has 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.
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 substantive 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. 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
20
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.
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 DISCLOSURES 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, 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-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer believe that, as of the end of the
period covered by this report, 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 was no change in the Company's internal control over financial reporting,
known to the Chief Executive Officer or the Chief Financial Officer, that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
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
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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
- ------- ---------------------------------------------------
The Company held its 2003 annual meeting of shareholders ("Meeting") on May
22, 2003. At the Meeting the Company's shareholders considered and voted on
the following matters:
1. Election of Directors. The Election of the following seven persons to
---------------------
the Board of Directors to serve until the 2004 annual meeting of
shareholders and until their successors are elected and have qualified:
VOTES
VOTES FOR WITHHELD
---------- ---------
Michael A. Alexander 4,612,625 415,357
Robert H. Bartlein 4,641,399 386,583
Jean W. Blois 4,599,729 428,253
John D. Illgen 4,632,037 395,945
Lynda Nahra 4,631,715 396,267
William R. Peeples 4,629,764 398,218
James R. Sims, Jr. 4,667,007 360,975
2. Approval of Increase in Shares Reserved for Issuance Under Stock Option
-----------------------------------------------------------------------
Plan. The ratification of an amendment to the 1997 Stock Option Plan
----
increasing from 842,014 to 1,292,014 the number of shares of the Company's
Common Stock which may be subject to awards granted thereunder:
VOTES
---------
For 2,246,215
Against 785,639
Abstain 125,198
Broker non-votes 1,870,930
ITEM 5. OTHER INFORMATION
- ------- -----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits.
31.1 Certification by the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
22
31.2 Certification by the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 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.
None.
23
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: August 8, 2003 /s/Charles G. Baltuskonis
-------------------------
Charles G. Baltuskonis
Executive Vice President
Chief Financial Officer
On Behalf of Registrant and as
Principal Financial and Accounting
Officer
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