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 September 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 of incorporation (I.R.S. Employer Identification
or organization) 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.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES [_] NO [X]
Number of shares of common stock of the registrant outstanding as of November 7,
2003: 5,701,769
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL 7
STATEMENTS
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 DISCLOSURES
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
SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED)
--------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 8,713 $ 10,714
Interest-earning deposits in other financial institutions 5,000 -
Federal funds sold 12,033 20,380
--------------- -------------
Cash and cash equivalents 25,746 31,094
Time deposits in other financial institutions 990 2,277
Federal Reserve Bank stock, at cost 812 812
Investment securities held-to-maturity, at amortized cost; fair value of
$5,133 at September 30, 2003 and $6,071 at December 31, 2002 5,166 6,012
Investment securities available-for-sale, at fair value, amortized cost of
$9,007 at September 30, 2003 9,020 -
Interest only strips, at fair value 3,763 4,548
Loans:
Loans held for sale, at lower of cost or fair value 50,900 43,284
Loans held for investment, net of allowance for loan losses of $2,652 at
September 30, 2003 and $3,379 at December 31, 2002 153,417 138,948
Securitized loans, net of allowance for loan losses of $2,111
at September 30, 2003 and $2,571 at December 31, 2002 42,214 63,624
--------------- -------------
Total loans 246,531 245,856
Servicing assets 2,276 1,897
Other real estate owned, net 527 571
Premises and equipment, net 1,709 1,959
Other assets 6,916 12,184
--------------- -------------
TOTAL ASSETS $ 303,456 $ 307,210
=============== =============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 36,277 $ 39,698
Interest-bearing demand 38,548 35,169
Savings 16,170 11,377
Time certificates of $100,000 or more 20,028 25,325
Other time certificates 111,692 107,514
--------------- -------------
Total deposits 222,715 219,083
Securities sold under agreements to repurchase 10,716 -
Bonds payable in connection with securitized loans 32,151 50,473
Other liabilities 4,012 5,567
--------------- -------------
Total liabilities 269,594 275,123
--------------- -------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding, 29,833 29,798
5,698,769 at September 30, 2003 and 5,690,224 at December 31, 2002
Retained earnings 4,020 2,289
Accumulated other comprehensive income 9 -
--------------- -------------
Total stockholders' equity 33,862 32,087
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 303,456 $ 307,210
=============== =============
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------
2003 2002 2003 2002
---------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Loans $ 4,914 $ 7,488 $ 14,917 $ 22,382
Federal funds sold 35 88 135 294
Time deposits in other financial institutions 8 20 30 88
Investment securities 63 81 316 114
---------- ----------- --------- -----------
Total interest income 5,020 7,677 15,398 22,878
---------- ----------- --------- -----------
INTEREST EXPENSE
Deposits 1,120 1,365 3,522 4,153
Bonds payable and other borrowings 1,078 1,806 3,721 6,324
Total interest expense 2,198 3,171 7,243 10,477
---------- ----------- --------- -----------
NET INTEREST INCOME 2,822 4,506 8,155 12,401
---------- ----------- --------- -----------
Provision for loan losses 298 1,180 1,006 4,731
---------- ----------- --------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,524 3,326 7,149 7,670
NON-INTEREST INCOME
Gains from loan sales, net 1,274 1,160 3,520 4,245
Other loan fees 917 810 2,380 2,388
Loan servicing fees, net 332 381 922 534
Document processing fees 341 234 810 1,107
Service charges 109 102 278 329
Other income 40 65 289 234
---------- ----------- --------- -----------
Total non-interest income 3,013 2,752 8,199 8,837
---------- ----------- --------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,905 2,916 8,767 10,696
Occupancy and equipment expenses 571 657 1,703 2,333
Professional services 117 346 470 1,262
Loan servicing and collection 117 287 326 772
Advertising 68 119 203 422
Impairment of interest only strips and servicing assets - - - 1,788
Lower of cost or market provision on loans held for sale - (25) - 1,315
Other expenses 418 619 1,253 1,796
---------- ----------- --------- -----------
Total non-interest expenses 4,196 4,919 12,722 20,384
---------- ----------- --------- -----------
Income (loss) before provision (benefit) for income taxes 1,341 1,159 2,626 (3,877)
Provision (benefit) for income taxes 456 487 895 (1,628)
---------- ----------- --------- -----------
NET INCOME (LOSS) $ 885 $ 672 $ 1,731 $ (2,249)
========== =========== ========= ===========
INCOME (LOSS) PER SHARE - BASIC $ .16 $ .12 $ .30 $ (.40)
========== =========== ========= ===========
INCOME (LOSS) PER SHARE - DILUTED $ .15 $ .12 $ .30 $ (.40)
========== =========== ========= ===========
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
------ ------- --------- -------------- --------------
(IN THOUSANDS)
BALANCES AT
DECEMBER 31, 2002 5,690 $29,798 $ 2,289 $ - $ 32,087
Exercise of stock options 9 35 - - 35
Comprehensive income:
Net income - - 1,731 - 1,731
Other comprehensive income - - - 9 9
--------------
Comprehensive income - - - - 1,740
------ ------- --------- -------------- --------------
BALANCES AT
SEPTEMBER 30, 2003 5,699 $29,833 $ 4,020 $ 9 $ 33,862
====== ======= ========= ============== ==============
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2003 2002
---------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,731 $ (2,249)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses 1,006 4,731
Provision for losses on real estate owned 25 86
Depreciation and amortization 1,451 2,429
Net amortization of discounts and premiums for securities 131 -
Gains on:
Sale of other real estate owned (79) (14)
Sale of loans held for sale (3,520) (4,245)
Changes in:
Fair value of interest only strips 785 3,088
Servicing assets, net of amortization and valuation adjustments (379) 470
Other assets 5,268 (531)
Other liabilities (1,596) (5)
---------- -----------
Net cash provided by operating activities 4,823 3,760
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (6,246) (9,667)
Purchase of available-for-sale securities (17,690) -
Principal paydowns and maturities of held-to-maturity securities 7,005 288
Principal paydowns and maturities of available-for-sale securities 8,626 -
Additions to interest only strips - (240)
Loan originations and principal collections, net 269 26,112
Proceeds from sale of other real estate owned 1,718 88
Net decrease in time deposits in other financial institutions 1,287 2,869
Purchase of premises and equipment (193) (2)
---------- -----------
Net cash provided by (used in) investing activities (5,224) 19,448
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 35 -
Net increase in demand deposits and savings accounts 4,751 5,555
Net (decrease) increase in time certificates of deposit (1,119) 1,333
Proceeds from securities sold under agreements to repurchase 13,334 -
Repayments of securities sold under agreements to repurchase (2,618) -
Repayments of bonds payable in connection with securitized loans (19,330) (32,967)
---------- -----------
Net cash (used in) financing activities (4,947) (26,079)
---------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (5,348) (2,871)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,094 29,406
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,746 $ 26,535
========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,937 $ 10,077
Cash paid for income taxes 547 2
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 1,570 728
See accompanying notes.
6
COMMUNITY WEST BANCSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements 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
September 30, 2003 are not necessarily indicative of results which may be
expected for any other interim period or for the year as a whole.
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.
This process is explained in detail in the notes to the Company's Consolidated
Financial Statements in its Annual Report on Form 10-K for the year ended
December 31, 2002.
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 estimate drops below net book value of the
asset.
Additionally, on some Small Business Association (SBA) loan sales in prior
years, the Company 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 strips at fair
value with any resulting increase or decrease in fair value recorded through
operations in the current period.
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. 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.
7
The fair value of stock-based compensation to employees is calculated using the
option pricing models that were 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2003 2002 2003 2002
---------- ---------- --------- ----------
Annual dividend yield 0.0% 0.0% 0.0% 0.0%
Expected volatility 27.9% 45.1% 31.0% 45.1%
Risk-free interest rate 3.9% 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:
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- --------- -----------
Net income (loss):
As reported $ 885 $ 672 $ 1,731 $ (2,249)
Deduct: stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax 90 68 159 133
---------- ---------- --------- -----------
Pro forma $ 795 $ 604 $ 1,572 $ (2,382)
========== ========== ========= ===========
Basic earnings (loss) per share:
As reported $ .16 $ .12 $ .30 $ (.40)
Pro forma .14 .11 .28 (.42)
Diluted income (loss) per share:
As reported $ .15 $ .12 $ .30 $ (.40)
Pro forma .14 .11 .27 (.42)
INCOME TAXES - As of December 31, 2002, the Company determined 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 $73,000 of these previously
reserved amounts, resulting in a reduction to the Company's state tax expense.
COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- --------- -----------
Net income (loss) $ 885 $ 672 $ 1,731 $ (2,249)
Other comprehensive income, net of tax:
Unrealized gains during the period, net of tax 6 - 9 -
---------- ---------- --------- -----------
Comprehensive income (loss) $ 891 $ 672 $ 1,740 $ (2,249)
========== ========== ========= ===========
NEW ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued Statement of
Financial Accounting Standards No. 149, Amendment to Statement 133 on Derivative
Instruments and Hedging Activities (SFAS No.149). The provisions of SFAS No.
149 amend and clarify financial accounting and reporting for derivative
instruments. The changes in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149: (1) clarifies under what circumstances
a contract with an
8
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS No. 133; (2) clarifies when a derivative contains a
financing component; (3) amends the definition of an underlying financial
instrument to conform it to language used in FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; and (4) amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except as
stated above, and for hedging relationships designated after June 30, 2003. In
addition, all provisions of SFAS No. 149 should be applied prospectively. The
Company holds no such financial instruments and the implementation of SFAS No.
149 had no impact on its consolidated financial statements.
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
unguaranteed 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 balances 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 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 September 30, 2003 and December 31,
2002, the Company had approximately $34.4 and $26.2 million, respectively, in
SBA loans held for sale.
A summary of activity in I/O strips and servicing assets follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
I/O STRIPS 2003 2002
---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 4,548 $ 7,693
Additions through loan sales - 240
Valuation adjustments (785) (3,288)
---------- -----------
Balance, end of period $ 3,763 $ 4,845
========== ===========
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
SERVICING ASSETS 2003 2002
---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 1,897 $ 2,490
Additions through loan sales 763 597
Amortization (384) (304)
Valuation adjustments - (763)
---------- -----------
Balance, end of period $ 2,276 $ 2,020
========== ===========
9
3. LOANS HELD FOR INVESTMENT AND SECURITIZED LOANS
The composition of the Company's loans held for investment and securitized loan
portfolio follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
(IN THOUSANDS)
Installment $ 41,365 $ 30,971
Commercial 20,306 26,256
Real estate 65,050 51,666
SBA 30,668 34,073
Securitized 43,361 64,732
--------------- --------------
200,750 207,698
Less:
Allowance for loan losses 4,763 5,950
Deferred fees, net of costs (162) (544)
Purchased premiums on securitized loans (811) (1,237)
Discount on SBA loans 1,329 957
--------------- --------------
Loans held for investment, net $ 195,631 $ 202,572
=============== ==============
An analysis of the allowance for loan losses for loans held for investment
follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2003 2002
---------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 5,950 $ 8,275
Provision for loan losses 1,006 4,731
Loans charged off (3,489) (7,490)
Recoveries on loans previously charged off 1,296 1,630
---------- -----------
Balance, end of period $ 4,763 $ 7,146
========== ===========
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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,693 5,690 5,691 5,690
Dilutive effect of options 80 5 47 -
---------- ---------- --------- -----------
Weighted average shares - Diluted 5,773 5,695 5,738 5,690
========== ========== ========= ===========
Net income (loss) $ 885 $ 672 $ 1,731 $ (2,249)
Earnings (loss) per share - Basic .16 .12 .30 (.40)
Earnings (loss) per share - Diluted .15 .12 .30 (.40)
The incremental shares from assumed conversion of stock options for the nine
months ended September 30, 2002 were excluded from the computation of diluted
earnings per share because the Company had a net loss, which made them
anti-dilutive.
10
5. 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 September 30, 2003, under this agreement, the Company had
borrowed $10.7 million at an average interest rate of 1.25%.
6. SUBSEQUENT EVENTS
The Company received notification, dated October 21, 2003, from the Office of
the Comptroller of the Currency that terminated the Consent Order under which
the Company's banking subsidiary, Goleta National Bank, had been operating since
October 28, 2002. The letter from the Comptroller of the Currency and the Order
Terminating the Consent Order were filed as attachments to the Company's current
Report on Form 8-K dated October 27, 2003.
The Company received notification, dated November 6, 2003, from the Federal
Reserve Bank of San Francisco (FRB) that rescinded the Memorandum of
Understanding (MOU) under which the Company had been operating since February
22, 2001.
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. See discussion under "Factors
That May Affect Future Results of Operations" for further information on risks
and uncertainties as well as information on the strategies adopted by the
Company to address these risks.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
RESULTS OF OPERATIONS-THIRD QUARTER COMPARISON
The Company recorded net income of $885,000 for the three months ended September
30, 2003, or $.16 per share basic, compared to net income of $672,000, or $.12
per share basic, during the three months ended September 30, 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:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------ INCREASE
2003 2002 (DECREASE)
-------------- -------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 5,020 $ 7,677 $ (2,657)
Interest expense 2,198 3,171 (973)
-------------- -------------- ---------------
Net interest income 2,822 4,506 (1,684)
-------------- -------------- ---------------
Provision for loan losses 298 1,180 (882)
-------------- -------------- ---------------
Net interest income after provision for loan losses 2,524 3,326 (802)
Non-interest income 3,013 2,752 261
Non-interest expenses 4,196 4,919 (723)
-------------- -------------- ---------------
Income before provision for income taxes 1,341 1,159 182
Provision (benefit) for income taxes 456 487 (31)
-------------- -------------- ---------------
Net income (loss) $ 885 $ 672 $ 213
============== ============== ===============
Earnings per share - Basic $ .16 $ .12 $ .04
============== ============== ===============
Earnings per share - Diluted $ .15 $ .12 $ .03
============== ============== ===============
General
The Company continues to be impacted by its decision in 2002 to decrease risk
and exit the high-yield, short-term consumer and high loan to value mortgage
(HLTV) lending businesses. Also contributing to the third quarter results were
the strong mortgage loan business, particularly due to refinancings and the
continued rapid paydown in the securitized loan portfolio. The interest rate
environment continues to remain near historically low levels with no significant
changes expected in the short term.
12
Interest Income
Interest income decreased by 34.6% for the third quarter of 2003 compared to the
third quarter of 2002. As noted above, this decline is primarily due to the
exit from high-yield businesses which contributed $2.2 million in interest
income for the quarter ended September 30, 2002 as compared to $4,000 for the
quarter ended September 30, 2003. Additionally, interest income earned on the
securitized loan pools declined by $1 million from $2.4 million for the three
months ended September 30, 2002 to $1.4 million for the three months ended
September 30, 2003. These declines were partially offset by increased interest
income from the mortgage, SBA, manufactured housing and real estate commercial
loan portfolios.
Interest Expense
The decline in interest expense was primarily due to the continued payoff in the
securitized loan portfolio and the correlated paydown in the high-interest
bonds. The bond interest expense for the three months ended September 30 2003
declined to $1 million from $1.8 million for the three months ended September
30, 2002. Also contributing to the decline in interest expense was a $244,000
reduction in interest paid on deposits, despite an increase of 7% in average
interest bearing deposits for the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002. Annualized average cost
of deposits has declined 23.2% from 3.15% to 2.42%, respectively, for the
comparable third quarters of 2002 and 2003.
Provision for Loan Losses
The exit from the high-yield, higher-risk businesses contributed 54.2% of the
74.8% decline in provision for loan losses for the three months ended September
30, 2003 compared to the three months ended September 30, 2002. Additionally,
the provision for loan losses on the SBA portfolio decreased by $452,000 from
$353,000 for the three months ended September 30, 2002 to ($99,000) for the
three months ended September 30, 2003. This reduction is the result of a
significant decline in net charge offs of SBA loans from $343,000 for the three
months ended September 30, 2002 to ($32,000) for the three months ended
September 30, 2003. The strengthening of the credit underwriting standards in
the SBA loan portfolio has also contributed to the decline in provision for loan
losses as the Company has experienced a decrease in the percentage of performing
SBA loans moving to non-performing status.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains on sale of loans, servicing fees and other revenues not derived
from interest on earning assets. The 9% increase in non-interest revenue for
the three months ended September 30, 2003 as compared to the same period in 2002
is primarily due to the increase in mortgage loan volume primarily due to
refinancing activities. Net gains on mortgage loan sales increased by 73.7% to
$336,000, mortgage loan document processing fees increased 68.9% to $341,000 and
other mortgage loan fees increased by 12.4% to $918,000. These increases were
partially offset by the decrease to zero from $294,000 in income received for
the three months ended September 30, 2002 from the exited alternative mortgage
lending business. The gains from the sale of SBA loans remained fairly
consistent with a slight increase of $53,000 or 7.6% from $698,000 for the
quarter ended September 30, 2002 to $751,000 for the quarter ended September 30,
2003.
Non-Interest Expenses
Total non-interest expenses decreased $723,000 for the third quarter of 2003
compared to the third quarter of 2002. Of this decrease, $493,000 relates to
employee and other costs incurred during the third quarter of 2002 related to
the discontinuance of the short-term consumer lending business. Also
contributing to the decrease in non-interest expenses were the Company's exit
from the alternative mortgage lending business, relocation of the Company's
mortgage department, consolidation of the SBA lending support functions and
general cost cutting measures.
RESULTS OF OPERATIONS - NINE MONTH COMPARISON
The Company recorded net income of $1,731,000, or $.30 per share, for the nine
months ended September 30, 2003, compared to a net loss of $2,249,000, or ($.40)
per share, for the nine months ended September 30, 2002.
13
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:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------- INCREASE
2003 2002 (DECREASE)
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $ 15,398 $ 22,878 $ (7,480)
Interest expense 7,243 10,477 (3,234)
-------------- --------------- ---------------
Net interest income 8,155 12,401 (4,246)
Provision for loan losses 1,006 4,731 (3,725)
-------------- --------------- ---------------
Net interest income after provision for loan losses 7,149 7,670 (521)
Non-interest income 8,199 8,837 (638)
Non-interest expenses 12,722 20,384 (7,662)
-------------- --------------- ---------------
Income (loss) before provision (benefit) for income taxes 2,626 (3,877) 6,503
Provision (benefit) for income taxes 895 (1,628) 2,523
-------------- --------------- ---------------
Net income (loss) $ 1,731 $ (2,249) $ 3,980
============== =============== ===============
Earnings per share - Basic $ .30 $ (.40) $ .70
============== =============== ===============
Earnings per share - Diluted $ .30 $ (.40) $ .70
============== =============== ===============
Interest Income
Interest income declined by 32.7% due to both the exit from the high yielding
short-term consumer lending business, which contributed $5.9 million in interest
income for the nine months ended September 30, 2002, and the 41.2% decrease in
the principal balances of the securitized loans which contributed an additional
$3 million to the total decline of $7.5 million. Growth in both the
manufactured housing and SBA loan portfolios contributed an increase to interest
income of $1.2 million for the nine months ended September 30, 2003 compared to
the nine months ended September 30, 2002. Although the Company has purchased
additional securities, due to a comparative decline in interest rates, total
interest income from investments, including federal funds sold and time
certificates of deposits, remained relatively flat with a decline of only
$15,000 for the year to date 2003 as compared to 2002.
Interest Expense
Year to date 2003 interest expense has decreased as compared to year to date
interest expense for 2002 primarily due to the 44.8% paydown in the high rate
bonds payable in connection with the securitized loans and the continued low
rates paid on deposits. Average cost of deposits declined by 21.7% to 2.60% for
year to date 2003 from 3.32% for the same period in 2002.
Provision for Loan Losses
The exit from the higher-risk, short-term consumer and HLTV lending businesses
in 2002 contributed $1.7 million of the decline in provision expense for 2003.
Provision expense for the SBA loan portfolio declined by $1.5 million as the
Company continues to benefit from its tightening of credit underwriting
standards at the end of 2001. Net charge offs in the SBA loan portfolio have
declined to $376,000 for the nine months ended September 30, 2003 from $1.6
million for the same period in 2002. The continued paydown of principal in the
securitized loan portfolio also contributed $500,000 to the decrease in expense
between the two periods.
Non-Interest Income and Non-Interest Expenses
Non-interest income decreased primarily due to the exit from the HLTV lending
business, which contributed $1.5 million in net gains on sale of loans, as well
as $505,000 in document processing fees for the period ended September 30, 2002.
The loss of this income in 2003 was partially offset by the increase in mortgage
loan originations which contributed $492,000 and $208,000 more in net gains on
sale of loans and document processing fees, respectively, for the nine months
ended September 30, 2003 compared to 2002. Also negatively affecting
non-interest income in 2002 was a $1.2 million increase in amortization of the
servicing assets and the I/O strips.
Non-interest expenses have declined primarily due to the exit from short-term
consumer and HLTV lending which incurred $4.8 million in non-interest expenses
for the nine months ended September 30, 2002. Additionally, the Company
incurred $1.8 million of financial asset impairment charges and a one-time $1.3
million in lower of cost or market adjustment to the HLTV loans in 2002. The
Company continues an emphasis on general cost reduction which also contributed
to the decrease in non-interest expenses.
14
INTEREST RATES AND DIFFERENTIALS
The following table illustrates average yields on the interest-earning assets
and average rates on the 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits in other financial institutions:
Average balance $ 1,677 $ 2,995 $ 1,872 $ 4,367
Interest income 8 20 30 88
Average yield 1.95% 2.57% 2.15% 2.68%
Federal funds sold:
Average balance 14,409 20,770 16,096 23,942
Interest income 35 88 135 294
Average yield .97% 1.68% 1.12% 1.64%
Investment securities:
Average balance 13,852 7,820 12,718 3,607
Interest income 63 81 316 114
Average yield 1.81% 4.12% 3.33% 4.24%
Gross loans, excluding securitized:
Average balance 204,950 166,647 193,186 160,392
Interest income 3,500 5,113 9,969 14,467
Average yield 6.78% 12.17% 6.90% 12.06%
Securitized loans:
Average balance 48,597 81,043 56,216 89,682
Interest income 1,414 2,375 4,948 7,915
Average yield 11.54% 11.63% 11.77% 11.80%
TOTAL INTEREST-EARNING ASSETS:
Average balance 283,485 279,275 280,088 281,990
Interest income 5,020 7,677 15,398 22,878
Average yield 7.03% 10.91% 7.35% 10.85%
15
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits:
Average balance $ 36,252 $ 30,458 $ 34,562 $ 27,372
Interest expense 89 162 272 446
Average cost of funds .98% 2.10% 1.05% 2.18%
Savings deposits:
Average balance 16,257 13,090 15,447 13,804
Interest expense 55 69 161 247
Average cost of funds 1.34% 2.10% 1.40% 2.40%
Time certificates of deposit:
Average balance 131,209 128,100 131,291 126,115
Interest expense 976 1,134 3,089 3,460
Average cost of funds 2.95% 3.51% 3.15% 3.67%
Bonds payable:
Average balance 36,460 63,378 42,312 74,014
Interest expense 1,049 1,806 3,681 6,324
Average cost of funds 11.41% 11.31% 11.63% 11.42%
Other borrowings:
Average balance 9,285 - 4,201 3
Interest expense 29 - 40 -
Average cost of funds 1.23% - 1.27% 1.90%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance 229,463 235,026 227,813 241,308
Interest expense 2,198 3,171 7,243 10,477
Average cost of funds 3.80% 5.35% 4.25% 5.80%
NET INTEREST INCOME 2,822 4,506 8,155 12,401
NET INTEREST MARGIN 3.95% 6.40% 3.89% 5.88%
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 nine months ended September 30, 2003 were $298.9 million
compared to $302.5 million for the nine months ended September 30, 2002.
Average equity increased to $33.7 million for the nine months ended September
30, 2003, from $32 million for the same period in 2002.
The book value per share increased to $5.94 at September 30, 2003 from $5.47 at
September 30, 2002.
16
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2003 2002 (DECREASE) (DECREASE)
-------------- ------------- ----------- -----------
Cash and cash equivalents $ 25,746 $ 31,094 $ (5,348) (17.2%)
Time deposits in other financial institutions 990 2,277 (1,287) (56.5%)
Federal Reserve Bank stock 812 812 - -
Investment securities held-to-maturity 5,166 6,012 (846) (14.1%)
Investment securities available-for-sale 9,020 - 9,020 -
I/O strips 3,763 4,548 (785) (17.3%)
Loans-Held for sale 50,900 43,284 7,616 17.6%
Loans-Held for investment, net 153,417 138,948 14,469 10.4%
Securitized loans, net 42,214 63,624 (21,410) (33.7%)
Total Assets 303,456 307,210 (3,754) (1.2%)
Total Deposits 222,715 219,083 3,632 1.7%
Securities sold under agreements to repurchase 10,716 - 10,716 -
Bonds payable in connection with securitized loans 32,151 50,473 (18,322) (36.3%)
Total Stockholders' Equity $ 33,862 $ 32,087 $ 1,775 5.5%
The securitized loans are currently paying off at an annualized rate of 44% and
the Company has focused on replacing these loans with growth in the manufactured
housing, SBA, commercial real estate and construction loan portfolios.
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
SEPTEMBER 30, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2003 2002 (DECREASE) (DECREASE)
-------------- ------------- ----------- -----------
Non-interest-bearing deposits $ 36,277 $ 39,698 $ (3,421) (8.6%)
Interest-bearing deposits 38,548 35,169 3,379 9.6%
Savings 16,170 11,377 4,793 42.1%
Time certificates of $100,000 or more 20,028 25,325 (5,297) (20.9%)
Other time certificates 111,692 107,514 4,178 3.9%
-------------- ------------- ----------- -----------
Total deposits $ 222,715 $ 219,083 $ 3,632 1.7%
============== ============= =========== ===========
The Company's deposits increased slightly. There was a Company-wide new deposit
campaign which brought in $1.4 million in new deposits, but overall, deposits
have remained steady throughout the year.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
A loan is considered impaired when, based on current information, 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.
17
The recorded investment in loans that is considered to be impaired:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ - $ -
Impaired loans with specific valuation allowances 4,827 8,394
Specific valuation allowances allocated to impaired loans (750) (1,278)
--------------- --------------
Impaired loans, net $ 4,077 $ 7,116
=============== ==============
Average investment in impaired loans $ 6,345 $ 7,565
=============== ==============
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 7,623 $ 13,965
SBA guaranteed portion of loans included above (4,206) (8,143)
--------------- --------------
Nonaccrual loans, net $ 3,417 $ 5,822
=============== ==============
Troubled debt restructured loans, gross $ 259 $ 829
Loans 30 through 89 days past due with interest accruing 2,125 5,122
Allowance for loan losses to gross loans 1.9% 2.4%
The Company continues to experience a decline in impaired loans. During the
third quarter of 2003, the Company received payment on a $1.3 million loan
previously classified as nonaccrual.
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 levels 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 29% at
December 31, 2002 and September 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 third quarter 2003, the Company used this
arrangement to borrow $6.1 million for a total borrowed against securities of
$10.7 million at September 30, 2003 at an average interest rate of 1.25%. This
arrangement allows for additional borrowing capacity and provides improved
flexibility in managing the Company's liquidity.
The Company, through Goleta, 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
18
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.
During the third quarter of 2003, the Bank obtained an unsecured federal funds
purchased credit line of $3 million from another financial institution. The
Bank has not borrowed against this line.
CAPITAL RESOURCES
The Company's equity capital was $32.9 million at September 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.
The Company's actual capital amounts and ratios for the periods indicated are as
follows:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- ------------------------ -----------------------
AS OF SEPTEMBER 30, 2003: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ---------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
Total Risk-Based Capital (to Risk Weighted Assets)
Consolidated $36,689 15.12% $ 19,414 8.00% N/A N/A
Goleta National Bank $34,220 14.28% $ 19,167 8.00% $ 23,958 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $33,634 13.86% $ 9,707 4.00% N/A N/A
Goleta National Bank $31,204 13.02% $ 9,583 4.00% $ 14,375 6.00%
Tier I Capital (to Average Assets)
Consolidated $33,634 10.93% $ 12,304 4.00% N/A N/A
Goleta National Bank $31,204 10.27% $ 12,163 4.00% $ 15,204 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
19
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 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
The Company received notification, dated October 21, 2003, from the OCC that
terminated the Consent Order (Order) under which the Company's banking
subsidiary, Goleta National Bank, had been operating since October 28, 2002.
The Company anticipates that the termination of the Order will positively impact
its ability to move forward with its business plan. Among other things, the
termination of the Order removes capital requirement restraints, improves
funding and liquidity access and has a pervasive effect in reducing non-interest
expenses.
MEMORANDUM OF UNDERSTANDING WITH THE FEDERAL RESERVE BANK
The Company received notification, dated November 6, 2003, from the FRB that
rescinded the Memorandum of Understanding (MOU) under which the Company had been
operating since February 22, 2001. Among other things, the termination of the
MOU removes restrictions on the payment of dividends and redeeming of the
Company's stock.
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 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. 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. 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.
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.
20
ECONOMIC CONDITIONS
The effects of deterioration in economic conditions particularly in California
may have an impact on the future performance of the Company. Recent increases
in unemployment insurance and worker's compensation costs as well as legislated
employer benefits are causing a drag on growth. It is also unknown how the
recent California recall election and change in government may impact the
Company.
INCREASED COMPETITION
The financial services industry is extremely competitive. As new competitors
and new products enter the market, the increase in competition may reduce market
share or cause the prices the Company can charge for products and services to
fall.
GOVERNMENT GUARANTEED LOAN PROGRAMS
A major segment of the Company's business consists of originating and selling
loans guaranteed by the SBA. This agency may reach its internal limit and cease
to guarantee loans for a stated time period. In addition, the SBA may change
its rules for loans or Congress may adopt legislation that would have the effect
of discontinuing or changing the programs. Non-governmental programs could
replace government programs for some borrowers, but the terms might not be
equally acceptable. Therefore, if these changes occur, the volume of loans to
borrowers that now qualify for SBA loans could decline. The profitability of
these loans might also decline.
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
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
21
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 REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits.
10.19 Letter dated November 6, 2003 issued by the Federal Reserve
Bank of San Francisco rescinding the Memorandum of
Understanding,
31.1 Certification by the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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.
July 24, 2003: The Company furnished a Current Report on Form 8-K to
report that, on July 23, 2003, the Company issued a press release
announcing its financial results for the quarter ended June 30, 2003
22
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: November 7, 2003 /s/ Charles G. Baltuskonis
--------------------------
CHARLES G. BALTUSKONIS
Executive Vice President and
Chief Financial Officer
On Behalf of Registrant and as
Principal Financial and Accounting Officer
23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
======= ===========================================================================================
10.19 Letter dated November 6, 2003 from the Federal Reserve Bank of San Francisco rescinding the
Memorandum of Understanding dated February 2001.
31.1 Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) and Rule 15d-
14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32* Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to
Rule 13a-13(b) and Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C.1350.
====================
* This certification is furnished to, but not filed, with the Commission.
This certification shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that the Registrant specifically incorporates
it by reference.
24