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, 2004
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 No.)
or organization)
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 12,
2004: 5,716,269
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 year
ended December 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 20
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES
- ----------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------- --------------------
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 (UNAUDITED) 2003
----------------- --------------
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 7,236 $ 5,758
Interest-earning deposits in other financial institutions 8,092 5,031
Federal funds sold 12,453 11,267
----------------- --------------
Cash and cash equivalents 27,781 22,056
Time deposits in other financial institutions 495 792
Investment securities available-for-sale, at fair value; amortized cost of $22,773 at
June 30, 2004 and $15,455 at December 31, 2003 22,690 15,432
Investment securities held-to-maturity, at amortized cost; fair value of $3,126 at June 30,
2004 and $5,035 at December 31, 2003 3,139 5,036
Interest only strips, at fair value 3,175 3,548
Loans:
Loans held for sale, at lower of cost or fair value 44,617 42,038
Loans held for investment, net of allowance for loan losses of $2,779 at June 30, 2004 and
$2,652 at December 31, 2003 200,542 166,874
Securitized loans, net of allowance for loan losses of $1,369 at June 30, 2004 and $2,024
at December 31, 2003 28,423 35,362
----------------- --------------
Total loans 273,582 244,274
Federal Home Loan Bank stock, at cost 1,175 -
Federal Reserve Bank stock, at cost 812 812
Servicing assets 3,204 2,499
Other real estate owned, net 16 527
Premises and equipment, net 1,574 1,632
Other assets 5,919 7,642
----------------- --------------
TOTAL ASSETS $ 343,562 $ 304,250
================= ==============
LIABILITIES
Deposits:
Non-interest-bearing demand $ 42,386 $ 42,417
Interest-bearing demand 44,861 38,115
Savings 16,706 15,559
Time certificates of $100,000 or more 32,778 19,673
Other time certificates 117,627 109,091
----------------- --------------
Total deposits 254,358 224,855
Securities sold under agreements to repurchase 19,899 14,394
Federal Home Loan Bank advances 7,500 -
Bonds payable in connection with securitized loans 19,331 26,100
Other liabilities 6,444 4,570
----------------- --------------
Total liabilities 307,532 269,919
----------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding,
5,716,269 at June 30, 2004 and 5,706,769 at December 31, 2003 29,922 29,874
Retained earnings 6,157 4,472
Accumulated other comprehensive loss, net (49) (15)
----------------- --------------
Total stockholders' equity 36,030 34,331
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 343,562 $ 304,250
================= ==============
See accompanying notes.
3
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2004 2003 2004 2003
-------------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans $ 4,962 $ 5,023 $ 9,856 $ 10,035
Investment securities 228 119 435 222
Other 55 57 115 122
-------------- ---------- ----------- -----------
Total interest income 5,245 5,199 10,406 10,379
-------------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 1,185 1,175 2,338 2,402
Bonds payable and other borrowings 760 1,252 1,546 2,643
-------------- ---------- ----------- -----------
Total interest expense 1,945 2,427 3,884 5,045
-------------- ---------- ----------- -----------
NET INTEREST INCOME 3,300 2,772 6,522 5,334
Provision for loan losses (30) 363 65 708
-------------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,330 2,409 6,457 4,626
NON-INTEREST INCOME
Gains from loan sales, net 1,422 1,121 2,351 2,247
Other loan fees 1,437 749 2,067 1,462
Loan servicing fees, net 387 272 903 590
Document processing fees 172 257 317 469
Other 20 118 233 418
-------------- ---------- ----------- -----------
Total non-interest income 3,438 2,517 5,871 5,186
-------------- ---------- ----------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,227 2,783 6,024 5,862
Occupancy and equipment expenses 496 586 1,001 1,132
Professional services 229 159 416 353
Other operating expenses 1,048 643 1,634 1,179
-------------- ---------- ----------- -----------
Total non-interest expenses 5,000 4,171 9,075 8,526
-------------- ---------- ----------- -----------
Income before provision for income taxes 1,768 755 3,253 1,286
Provision for income taxes 728 257 1,339 440
-------------- ---------- ----------- -----------
NET INCOME $ 1,040 $ 498 $ 1,914 $ 846
============== ========== =========== ===========
INCOME PER SHARE - BASIC $ .18 $ .09 $ .34 $ .15
============== ========== =========== ===========
INCOME PER SHARE - DILUTED $ .18 $ .09 $ .33 $ .15
============== ========== =========== ===========
Basic weighted average number of common shares outstanding 5,714,168 5,690,224 5,710,792 5,690,224
Diluted weighted average number of common shares outstanding 5,834,584 5,734,690 5,834,421 5,721,269
See accompanying notes.
4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS LOSS EQUITY
---------- ----------- ------------ --------------- ---------------
(IN THOUSANDS)
BALANCES AT
JANUARY 1, 2004 5,707 $ 29,874 $ 4,472 $ (15) $ 34,331
Exercise of stock options 9 48 - - 48
Comprehensive income:
Net income 1,914 - 1,914
Other comprehensive loss, net (34) (34)
Comprehensive income - 1,880
---------------
Cash dividends
($.04 per share) (229) - (229)
---------- ----------- ------------ --------------- ---------------
BALANCES AT
JUNE 30, 2004 5,716 $ 29,922 $ 6,157 $ (49) $ 36,030
========== =========== ============ =============== ===============
See accompanying notes.
5
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2003
--------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,914 $ 846
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 65 708
Provision for losses on real estate owned - 20
Depreciation and amortization 676 1,025
Net amortization of discounts and premiums for securities 88 118
Gains from:
Sale of other real estate owned (2) (75)
Sale of loans held for sale (2,351) (2,247)
Changes in:
Fair value of interest only strips, net of accretion 373 540
Servicing assets, net of amortization and valuation adjustments (705) (213)
Other assets 1,723 4,649
Other liabilities 1,907 (1,638)
--------- -----------
Net cash provided by operating activities 3,688 3,733
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities - (6,246)
Purchase of available-for-sale securities (7,940) (11,766)
Principal pay downs and maturities of held-to-maturity securities 1,879 2,487
Principal pay downs and maturities of available-for-sale securities 612 5,553
Loan originations and principal collections, net (27,105) 8,124
Purchase of Federal Home Loan Bank stock (1,175) -
Proceeds from sale of other real estate owned 529 779
Net decrease in time deposits in other financial institutions 297 693
Purchase of premises and equipment, net (205) (100)
--------- -----------
Net cash used in investing activities (33,108) (476)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 48 -
Cash dividends paid on common stock (229) -
Net increase in demand deposits and savings accounts 7,862 1,123
Net increase (decrease) in time certificates of deposit 21,641 (2,220)
Proceeds from securities sold under agreements to repurchase 10,724 4,600
Repayments of securities sold under agreements to repurchase (5,219) -
Proceeds from Federal Home Loan Bank advances 7,500 -
Repayments of bonds payable in connection with securitized loans (7,182) (13,425)
--------- -----------
Net cash provided by (used in) financing activities 35,145 (9,922)
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,725 (6,665)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,056 31,094
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,781 $ 24,429
========= ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 3,059 $ 4,037
Cash paid for income taxes 300 67
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 83 643
See accompanying notes.
6
COMMUNITY WEST BANCSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements reflect all adjustments and
reclassifications that, 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 ("GNB"). All adjustments and reclassifications in the periods
presented are of a normal and recurring nature. Results for the period ended
June 30, 2004 are not necessarily indicative of results that 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, 2003.
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, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
INTEREST ONLY STRIPS AND SERVICING ASSETS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing assets are recognized
as separate assets when loans are sold with servicing retained. Servicing assets
are amortized in proportion to, and over the period of, estimated future net
servicing income. Also, at the time of the loan sale, it is the Company's policy
to recognize the related gain on the loan sale in accordance with generally
accepted accounting principals ("GAAP"). The Company uses industry prepayment
statistics and its own prepayment experience in estimating the expected life of
the loans. Management periodically evaluates servicing assets for impairment.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost on a loan-by-loan basis. Fair value is
determined using discounted future cash flows calculated on a loan-by-loan basis
and aggregated to the total asset level. Impairment to the asset is recorded if
the aggregate fair value calculation drops below the net book value of the
asset. The initial servicing assets and resulting gain on sale are calculated
based on the difference between the best actual par and premium bids on an
individual loan basis. Additionally, on certain SBA loan sales that occurred
prior to 2003, 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 I/O strips are classified as trading securities. Accordingly, the Company
records the I/O's strips at fair value with the resulting increase or decrease
in fair value being recorded through operations in the current period.
Quarterly, the Company verifies the reasonableness of its valuation estimates by
comparison to the results of an independent third party valuation analysis.
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
and, accordingly, the mortgage loans and related bonds issued are included in
the Company's consolidated balance sheets. 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 that approximates the
level-yield method over the estimated life of the bonds.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the
allowance for loan losses. Subsequent to foreclosure, management periodically
performs a new valuation and the asset is carried at the lower of carrying
amount or fair value. Operating expenses or income, and gains or losses on
disposition of such properties, are charged to current operations.
STOCK-BASED COMPENSATION - GAAP permits the Company to use either of two
methodologies to account for compensation cost in connection with employee stock
options. The first method requires issuers to record
7
compensation expense over the period the options are expected to be outstanding
prior to exercise, expiration or cancellation. The amount of compensation
expense to be recognized over this term is the "fair value" of the options at
the time of the grant as determined by the Black-Scholes valuation model.
Black-Scholes computes fair value of the options based on the length of their
term, the volatility of the stock price in past periods and other factors. Under
this method, the issuer recognizes compensation expense regardless of whether or
not the employee eventually exercises the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense is recognized. GAAP requires that issuers electing the second method
must present pro forma disclosure of net income and earnings per share as if the
first method had been elected.
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,
--------------------------- --------------------
2004 2003 2004 2003
--------- ---------------- -------- ----------
Annual dividend yield 1.9% 0.0% 1.9% 0.0%
Expected volatility 43.2% 34.3% 37.2% 32.4%
Risk-free interest rate 4.6% 3.5% 4.2% 3.8%
Expected life (in years) 6.8 7.3 6.8 7.3
Statement of Financial Accounting Standards 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 SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
---------------------- --------------------
2004 2003 2004 2003
---------- ---------- -------- ----------
Income:
As reported $ 1,040 $ 498 $ 1,914 $ 846
Pro forma 998 462 1,836 777
Income per common share - basic
As reported $ .18 $ .09 $ .34 $ .15
Pro forma .17 .08 .32 .14
Income per common share - diluted
As reported $ .18 $ .09 $ .33 $ .15
Pro forma .17 .08 .31 .14
COMPREHENSIVE INCOME
The following schedule reflects comprehensive income for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, JUNE 30,
------------------------ ---------------------
2004 2003 2004 2003
----------- ----------- --------- ----------
Net income $ 1,040 $ 498 $ 1,914 $ 846
Other comprehensive income, net of tax:
Unrealized gains on investment securities, net of tax (119) (4) (34) 3
----------- ----------- --------- ----------
Comprehensive income $ 921 $ 494 $ 1,880 $ 849
=========== =========== ========= ==========
2. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company sells the guaranteed portion of selected 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. The SBA
program stipulates that the Company retains a minimum of 5% of the loan balance,
which is unguaranteed. The percentage of each unguaranteed loan in excess of 5%
may be periodically sold to a third party for a cash premium. 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.
8
The balances of all servicing assets are subsequently amortized over the
estimated life of the loans using an estimated prepayment rate of 20-22%.
Quarterly, the servicing and I/O strip assets are analyzed for impairment.
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing released basis, in exchange
for a cash premium.
As of June 30, 2004 and December 31, 2003, the Company had approximately $39.6
and $36.9 million, respectively, in SBA loans held for sale.
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,
2004 2003
---------- --------------
(IN THOUSANDS)
Commercial $ 25,555 $ 24,592
Real estate 89,261 71,010
SBA 28,618 30,698
Manufactured housing 53,927 39,073
Other installment 7,700 5,770
Securitized 29,171 36,563
---------- --------------
234,232 207,706
Less:
Allowance for loan losses 4,148 4,676
Deferred fees, net of costs (47) (65)
Purchased premiums on securitized loans (621) (689)
Discount on SBA loans 1,787 1,548
---------- --------------
Loans held for investment, net $ 228,965 $ 202,236
========== ==============
An analysis of the allowance for loan losses for loans held for investment loans
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2004 2003 2004 2003
----------- ----------- --------- -----------
(IN THOUSANDS)
Balance, beginning of period $ 2,858 $ 2,744 $ 2,652 $ 3,379
Provision for loan losses 36 138 188 77
Loans charged off (129) (321) (130) (1,504)
Recoveries on loans previously charged off 14 137 69 746
----------- ----------- --------- -----------
Balance, end of period $ 2,779 $ 2,698 $ 2,779 $ 2,698
=========== =========== ========= ===========
An analysis of the allowance for loan losses for securitized loans follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
(IN THOUSANDS)
Balance, beginning of period $ 1,515 $ 2,354 $ 2,024 $ 2,571
Provision for loan losses (66) 225 (123) 631
Loans charged off (265) (667) (844) (1,355)
Recoveries on loans previously charged off 185 207 312 272
----------- ----------- ---------- ----------
Balance, end of period $ 1,369 $ 2,120 $ 1,369 $ 2,120
=========== =========== ========== ==========
The recorded investment in loans that is considered to be impaired:
JUNE 30, DECEMBER 31,
2004 2003
---------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 147 $ 235
Impaired loans with specific valuation allowances 4,547 6,843
Specific valuation allowances allocated to impaired loans (579) (640)
---------- --------------
Impaired loans, net $ 4,115 $ 6,436
========== ==============
Average investment in impaired loans $ 6,134 $ 6,584
========== ==============
9
4. EARNINGS PER SHARE
Earnings per share - Basic has been computed based on the weighted average
number of shares outstanding during each period. Earnings per share - Diluted
has been computed based on the weighted average number of shares outstanding
during each period plus the dilutive effect of granted options. Earnings per
share were computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------------
2004 2003 2004 2003
------------ ---------- -------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Weighted average shares - Basic 5,714 5,690 5,711 5,690
Dilutive effect of options 120 45 123 31
------------ ---------- -------------- -------------
Weighted average shares - Diluted 5,834 5,735 5,834 5,721
============ ========== ============== =============
Net income $ 1,040 $ 498 $ 1,914 $ 846
Earnings per share - Basic .18 .09 .34 .15
Earnings per share - Diluted .18 .09 .33 .15
5. REPURCHASE AGREEMENTS AND OTHER BORROWINGS
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, 2004 and December 31, 2003, securities with a
carrying value of $20.8 million and $14.7 million respectively, were pledged as
collateral for short-term borrowings. As of June 30, 2004 and December 31, 2003,
the Company had $19.9 million and $14.4 million, respectively, of outstanding
repurchase agreements, with interest rates of 1.25% to 2.10%, all of which
mature within one year.
As of June 30, 2004, the Company had advances of $7.5 million from the Federal
Home Loan Bank ("FHLB") with interest rates of 1.34% to 2.59%, $5.5 million of
which matures in less than one year.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
FORWARD LOOKING STATEMENTS
This 2004 Report on Form 10-Q contains statements that 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. Those forward-looking statements include statements regarding the
intent, belief or current expectations of the Company and its management. Any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those projected in the forward-looking statements. 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
EXECUTIVE OVERVIEW
The Company experienced overall loan growth of $28.8 million, or 11.6%, for the
first half of 2004 compared to a $7.7 million decrease in loans for the first
half of 2003. Total loans increased 14.1% from $243.4 million at June 30, 2003
to $277.7 million at June 30, 2004. The Company continues to benefit from the
pay down of the high-interest bonds related to the securitized loans, as well as
a reduction in charge-offs due to the general portfolio credit quality
stabilization.
RESULTS OF OPERATIONS-SECOND QUARTER COMPARISON
The Company recorded net income of $1,040,000 for the three months ended June
30, 2004, or $.18 per share diluted, compared to net income of $498,000, or $.09
per share diluted, during the three months ended June 30, 2003.
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
JUNE 30,
-------------------------------------- INCREASE
2004 2003 (DECREASE)
----------------------- ------------- ---------------
(DOLLARS IN THOUSANDS , EXCEPT PER SHARE AMOUNTS)
----------------------- ------------- ---------------
Interest income $ 5,245 $ 5,199 $ 46
Interest expense 1,945 2,427 (482)
----------------------- ------------- ---------------
Net interest income 3,300 2,772 528
----------------------- ------------- ---------------
Provision for loan losses (30) 363 (393)
----------------------- ------------- ---------------
Net interest income after provision for loan losses 3,330 2,409 921
Non-interest income 3,438 2,517 921
Non-interest expenses 5,000 4,171 829
----------------------- ------------- ---------------
Income before provision for income taxes 1,768 755 1,013
Provision for income taxes 728 257 471
----------------------- ------------- ---------------
Net income $ 1,040 $ 498 $ 542
======================= ============= ===============
Earnings per share - Basic $ .18 $ .09 $ .09
======================= ============= ===============
Earnings per share - Diluted $ .18 $ .09 $ .09
======================= ============= ===============
Comprehensive income $ 921 $ 494 $ 427
======================= ============= ===============
General
The Company experienced net loan growth of $14.5 million for the second quarter
of 2004 compared to a net decline in loans of $1.2 million for the second
quarter of 2003. Non-interest income from SBA loan origination and sales
increased by almost 100% to $2.4 million for the second quarter of 2004 compared
to 2003. Interest income, interest expense and provision for loan losses
continue to be impacted both positively and negatively by the pay downs in the
securitized loan portfolio.
Interest Income
Total interest income was virtually the same for the comparative quarters. Due
to loan growth, interest income from commercial real estate, manufactured
housing, commercial and SBA loans increased by $248,000, or 25.8%, $379,000, or
49.0%, $144,000, or 41.7% and $49,000, or 5.0%, respectively, for the second
quarter of 2004 compared to 2003. This increase was offset by a decline in the
securitized loan interest income of $759,000, or 44.7%, from $1.7 million for
the second quarter of 2003 to $938,000 for the second quarter of 2004. Mortgage
11
loan interest income also decreased for the second quarter of 2004 by $124,000,
or 70.7%, compared to the second quarter of 2003. The mortgage loan volume
decreased and the loans were held in inventory for a shorter period of time.
Interest Expense
The decline in interest expense for the second quarter of 2004 compared to the
second quarter of 2003 was primarily due to the pay down in the securitized loan
portfolio and the correlated pay downs in the high-interest securitized bonds.
The bond interest expense for the three months ended June 30, 2004 declined by
$570,000, or 45.9%, to $671,000 from $1.2 million for the three months ended
June 30, 2003. This decline was partially offset by slight increases in interest
on deposits and other borrowings. Average deposits increased for the second
quarter of 2004 over 2003 by $23.3 million, or 10.6%, as well as average other
borrowed funds by $19.8 million. Total average cost of funds declined from 4.28%
for the second quarter of 2003 to 3.19% for the second quarter of 2004.
Provision for Loan Losses
The provision for loan losses for the second quarter of 2004 declined by
$393,000 from the second quarter of 2003. This decrease was primarily due to a
$291,000 change in the provision for loan losses for the securitized loans
resulting from improvements in the credit quality of the underlying loans, as
well as the $4.2 million of pay downs in the portfolio during the period and a
$180,000 decrease in the provision for SBA loans. The decrease in SBA provision
is the net result of unguaranteed SBA loan sales during the quarter and
increased credit quality within the SBA portfolio. As a result of loan growth
within the other product lines, this decrease was partially offset by
volume-related increases in certain other loan products.
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains from sale of loans, servicing fees and other revenues not
derived from interest on earning assets. The $921,000, or 36.6%, increase in
non-interest income for the three months ended June 30, 2004 as compared to the
same period in 2003 is primarily due to an increase in SBA loan origination and
sale income of $1.2 million for the second quarter of 2004 as compared to 2003.
Of the $1.2 million increase, $615,000 is a result of increased SBA loan
referral fees and $457,000 in gain from SBA loan sales, which was primarily
generated from the unguaranteed SBA loan sales. During the second quarter of
2004, the Company sold $2.6 million in unguaranteed portions of SBA 7(a) loans.
Mortgage loan origination and sale income declined by $266,000 for the second
quarter of 2004 compared to 2003.
Non-Interest Expenses
Total non-interest expenses increased $829,000 for the second quarter of 2004
compared to the second quarter of 2003. This increase is primarily related to an
increase in personnel expense of $450,000 and a $402,000 charge relating to
sub-lease costs incurred in connection with a former lending relationship. The
increase in personnel costs is primarily a result of increased commissions due
to loan growth, general salary increases and increased employee benefit costs
such as insurance and recruiting.
RESULTS OF OPERATIONS - SIX MONTH COMPARISON
The Company recorded net income of $1,914,000 for the six months ended June 30,
2004, or $.34 per share basic, compared to net income of $846,000, or $.15 per
share basic, during the six months ended June 30, 2003.
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:
SIX MONTHS ENDED
JUNE 30,
------------------------------------ INCREASE
2004 2003 (DECREASE)
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------- ----------------- -----------------
Interest income $ 10,406 $ 10,379 $ 27
Interest expense 3,884 5,045 (1,161)
----------------- ----------------- -----------------
Net interest income 6,522 5,334 1,188
----------------- ----------------- -----------------
Provision for loan losses 65 708 (643)
----------------- ----------------- -----------------
Net interest income after provision for loan losses 6,457 4,626 1,831
Non-interest income 5,871 5,186 685
Non-interest expenses 9,075 8,526 549
----------------- ----------------- -----------------
Income before provision for income taxes 3,253 1,286 1,967
Provision for income taxes 1,339 440 899
----------------- ----------------- -----------------
Net income $ 1,914 $ 846 $ 1,068
================= ================= =================
Earnings per share - Basic $ .34 $ .15 $ .19
================= ================= =================
Earnings per share - Diluted $ .33 $ .15 $ .18
================= ================= =================
Comprehensive income $ 1,880 $ 849 $ 1,031
================= ================= =================
12
Interest Income
Total interest income was virtually the same for the comparative period.
Investment income increased by $206,000, or 59.9%, for the first half of 2004
compared to 2003. This increase was mostly offset by a decrease in loan interest
income of $179,000, or 1.8%. The decline in loan interest income was due to the
decrease in securitized loan interest income of $1.5 million, or 43.1%, from
$3.5 million for the six months ended June 30, 2003 to $2.0 million for 2004, as
well as a decline in mortgage loan interest income of $247,000 for the first
half of 2004 compared to 2003. These declines were partially offset by increases
in manufactured housing interest income of $673,000, real estate commercial and
construction loan interest income of $466,000, commercial loan interest income
of $313,000 and SBA loan interest income of $207,000.
Interest Expense
The decline in interest expense for the six months ended June 30, 2004 compared
to 2003 was primarily due to the pay down in the securitized loan portfolio and
the correlated pay downs in the high-interest securitized bonds. The bond
interest expense for the six months ended June 30, 2004 declined by $1.2 million
to $1.4 million from $2.6 million for 2003. Interest expense on deposits
decreased slightly by $63,000 for the six months ended June 30, 2004 compared to
2003, but was offset by an increase in interest expense on other borrowings of
$126,000. Weighted average cost of deposits has declined from 2.3% to 2.0%,
respectively, for the comparable six months periods ended June 30 of 2004 and
2003. Total average cost of funds for the first six months of 2004 was 3.26%
compared to 4.48% for the first six months of 2003.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 2004 decreased
by $643,000 compared to the first six months of 2003. The primary decreases were
in the securitized and SBA loan portfolios of $754,000 and $186,000,
respectively. The securitized loan loss provision decline was due to the
continued pay downs in the portfolio as well as a decrease in charge-offs. The
decrease in the loan loss provision for SBA loans is the result of increased
credit quality within the portfolio
Non-Interest Income
Non-interest income includes loan document fees, service charges on deposit
accounts, gains from sale of loans, servicing fees and other revenues not
derived from interest on earning assets. The $685,000 or 13.2%, increase in
non-interest revenue for the six months ended June 30, 2004 as compared to the
same period in 2003 is primarily due to an increase of $989,000 in SBA related
loan fees and $414,000 gain on SBA loan sales. These increases were partially
offset by the decline of $259,000 in mortgage related fee income and $310,000 in
gain from mortgage loan sales.
Non-Interest Expenses
Total non-interest expenses increased 6.4%, or $549,000, for the six months
ended June 30, 2004 compared to 2003. Salaries and employee benefits increased
by $162,000, or 2.8%, and other operating expenses increased by $455,000, or
38.6%. The increase in other operating expense primarily relates to an increase
in marketing expense of $92,000, or 67.6%, and a $402,000 charge relating to
sub-lease costs incurred in connection with a former lending relationship.
13
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 periods 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
periods.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- --------------------
2004 2003 2004 2003
---------------- ---------------- --------- ---------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning deposits in other financial institutions:
Average balance $ 6,480 $ 2,025 $ 6,132 $ 1,975
Interest income 37 10 69 22
Average yield 2.30% 2.04% 2.26% 2.23%
Federal funds sold:
Average balance $ 7,388 $ 16,108 $ 9,157 $ 16,949
Interest income 18 47 46 100
Average yield .98% 1.18% 1.01% 1.19%
Investment securities:
Average balance $ 26,418 $ 16,390 $ 25,098 $ 12,557
Interest income 228 119 435 222
Average yield 3.47% 2.9% 3.49% 3.57%
Gross loans, excluding securitized:
Average balance $ 237,102 $ 189,099 $227,713 $187,159
Interest income 4,025 3,327 7,845 6,500
Average yield 6.83% 7.06% 6.93% 7.00%
Securitized loans:
Average balance $ 32,176 $ 56,572 $ 33,930 $ 60,075
Interest income 937 1,696 2,011 3,535
Average yield 11.71% 12.03% 11.92% 11.87%
TOTAL INTEREST-EARNING ASSETS:
Average balance $ 309,564 $ 280,194 $302,030 $278,715
Interest income 5,245 5,199 10,406 10,379
Average yield 6.81% 7.44% 6.93% 7.51%
14
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ----------------------------
JUNE 30, JUNE 30,
------------------------ ----------------------------
2004 2003 2004 2003
----------- ----------- --------------- -----------
INTEREST-BEARING LIABILITIES: (DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average balance $ 38,163 $ 33,478 $ 37,998 $ 33,717
Interest expense 121 83 226 182
Average cost of funds 1.28% 1.00% 1.20% 1.09%
Savings deposits:
Average balance $ 19,130 $ 16,299 $ 19,438 $ 15,036
Interest expense 61 54 119 106
Average cost of funds 1.28% 1.32% 1.23% 1.43%
Time certificates of deposit:
Average balance $ 143,704 $ 132,267 $ 140,319 $ 131,336
Interest expense 1,003 1,038 1,994 2,113
Average cost of funds 2.81% 3.15% 2.86% 3.24%
Bonds payable:
Average balance $ 21,307 $ 42,260 $ 22,981 $ 45,276
Interest expense 671 1,241 1,408 2,633
Average cost of funds 12.67% 11.78% 12.32% 11.73%
Other borrowings:
Average balance $ 23,192 $ 3,214 $ 18,778 $ 1,623
Interest expense 89 11 137 11
Average cost of funds 1.54% 1.36% 1.47% 1.35%
TOTAL INTEREST-BEARING LIABILITIES:
Average balance $ 245,496 $ 227,518 $ 239,514 $ 226,988
Interest expense 1,945 2,427 3,884 5,045
Average cost of funds 3.19% 4.28% 3.26% 4.48%
NET INTEREST INCOME $ 3,300 $ 2,772 $ 6,522 $ 5,334
NET INTEREST SPREAD 3.62% 3.16% 3.67% 3.03%
AVERAGE NET MARGIN 4.29% 3.97% 4.34% 3.86%
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, 2004 were $317.5 million
compared to $297.4 million for the six months ended June 30, 2003. Average
equity increased to $35.4 million for the six months ended June 30, 2004 from
$33.5 million for the same period in 2003. Average loans increased to $261.6
million for the six months ended June 30, 2004 from $246.2 million for the six
months ended June 30, 2003. Average deposits also increased for the six months
ended June 30, 2004 to $235.2 million from $214.1 million for the six months
ended June 30, 2003.
The book value per share increased to $6.30 at June 30, 2004 from $6.02 at
December 31, 2003.
15
PERCENT OF
SELECTED BALANCE SHEET ACCOUNTS JUNE 30, DECEMBER 31, INCREASE INCREASE
(DOLLARS IN THOUSANDS) 2004 2003 (DECREASE) (DECREASE)
-------------- ------------- -------------------- -----------
Cash and cash equivalents $ 27,781 $ 22,056 $ 5,725 26.0%
Time deposits in other financial institutions 495 792 (297) (37.5%)
Investment securities available-for-sale 22,690 15,432 7,258 47.0%
Investment securities held-to-maturity 3,139 5,036 (1,897) (37.7%)
I/O strips 3,175 3,548 (373) (10.5%)
Loans-Held for sale 44,617 42,038 2,579 6.1%
Loans-Held for investment, net 200,542 166,874 33,668 20.2%
Securitized loans, net 28,423 35,362 (6,939) (19.6%)
Federal Home Loan Bank stock, at cost 1,175 - 1,175 -
Federal Reserve Bank stock, at cost 812 812 - -
Total Assets 343,562 304,250 39,312 12.9%
Total Deposits 254,358 224,855 29,503 13.1%
Securities sold under agreements to repurchase 19,899 14,394 5,505 38.2%
Federal Home Loan Bank advances 7,500 - 7,500 -
Bonds payable in connection with securitized loans 19,331 26,100 (6,769) (25.9%)
Total Stockholders' Equity 36,030 34,331 1,699 4.9%
The securitized loans are paying off at a current annualized rate of 52.5%. The
Company has effectively focused on replacing these loans with growth in the
manufactured housing, SBA, commercial and commercial real estate loan
portfolios.
The following schedule shows the balance and percentage change in the various
deposits:
PERCENT OF
JUNE 30, DECEMBER 31, INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
--------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits $ 42,386 $ 42,417 $ (31) (0.1%)
Interest-bearing deposits 44,861 38,115 6,746 17.7%
Savings 16,706 15,559 1,147 7.4%
Time certificates of $100,000 or more 32,778 19,673 13,105 66.6%
Other time certificates 117,627 109,091 8,536 7.8%
--------- ------------- ----------- -----------
Total deposits $ 254,358 $ 224,855 $ 29,503 13.1%
========= ============= =========== ===========
The Company's deposits increased by $29.5 million, or 13.1%, from December 31,
2003 to June 30, 2004.
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 or 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.
16
The recorded investment in loans that is considered to be impaired:
JUNE 30, DECEMBER 31,
2004 2003
---------- --------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 147 $ 235
Impaired loans with specific valuation allowances 4,547 6,843
Specific valuation allowances allocated to impaired loans (579) (640)
---------- --------------
Impaired loans, net $ 4,115 $ 6,436
========== ==============
Average investment in impaired loans $ 6,134 $ 6,584
========== ==============
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
JUNE 30, DECEMBER 31,
2004 2003
------------- --------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 7,702 $ 7,174
SBA guaranteed portion of loans included above (4,774) (4,106)
------------- --------------
Nonaccrual loans, net $ 2,928 $ 3,068
============= ==============
Troubled debt restructured loans, gross $ 128 $ 193
Loans 30 through 89 days past due with interest accruing 1,821 3,907
Allowance for loan losses to gross loans 1.49 % 1.84%
As specified under governing documents, GNB generally repurchases the guaranteed
portion of SBA loans from investors, on behalf of the SBA, when those loans
become past due 120 days. After the foreclosure and collection process is
complete, the SBA reimburses GNB 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 GNB.
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 GNB 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 28% at June 30, 2004
and 26% at December 31, 2003. 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. The Company
has obtained a financing arrangement allowing it to pledge securities as
collateral for short-term borrowings. At June 30, 2004 and December 31, 2003,
the Company had outstanding repurchase borrowings of $19.9 million and $14.4
million, respectively. The interest rates range from 1.25% to 2.10%, all of
which mature within one year. This arrangement allows for additional borrowing
capacity and provides improved flexibility in managing the Company's liquidity.
The Company, through GNB, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window a portion of what is pledged at
the Federal Reserve Bank. The facility is available on a short-term basis,
typically overnight. GNB qualifies for primary credit as it has been deemed to
be in sound financial condition. The rate on primary credit is currently at 100
basis points above the Federal Open Market Committee's (FOMC) target federal
funds rate (currently at 1.25%).
During the first quarter of 2004, GNB became a member of the Federal Home Loan
Bank ("FHLB"). This membership allows for additional borrowing capacity and
provides an additional source to utilize in managing the Company's liquidity.
Outstanding borrowings from the FHLB were $7.5 million at June 30, 2004.
17
GNB also maintains two unsecured federal funds purchased credit lines of $6
million each from other financial institutions, which it may periodically use
for short-term liquidity needs.
CAPITAL RESOURCES
The Company's equity capital was $36.0 million at June 30, 2004. Under the
Prompt Corrective Action provisions of the Federal Deposit Insurance Act
("FDICIA"), national banks are assigned regulatory capital classifications based
on the specified capital ratios of the institutions. The capital classifications
are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized".
To be considered "well capitalized", an institution must have a core capital
ratio of at least 5% and a total risk-based capital ration of at least 10%.
Additionally, FDICIA imposed in 1994 a new Tier 1 risk-based capital ration of
at least 6% to be considered "well capitalized". Tier I risk-based capital is,
defined as common stock and retained earnings net of goodwill and other
intangible assets.
To be categorized as "well capitalized" or "adequately capitalized", GNB must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
and values as set forth in the tables below:
Total
Risk - Risk - Adjusted Total Tier 1 Tier 1
Based Tier 1 Weighted Average Capital Capital Leverage
(dollars in thousands) Capital Capital Assets Assets Ratio Ratio Ratio
-------- -------- --------- --------- -------- -------- ---------
June 30, 2004
CWBC (Consolidated) $ 39,180 $ 35,759 $ 272,933 $ 323,342 14.36% 13.10% 11.06%
GNB 36,719 33,304 272,457 319,622 13.48 12.22 10.42
December 31, 2003
CWBC (Consolidated) 37,150 34,096 242,730 305,666 15.31 14.05 11.15
GNB 34,695 31,648 242,170 301,024 14.33 13.07 10.51
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
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 GNB, 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 GNB, please see the discussion in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Supervision and Regulation."
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.
- Lag Risk- lag risk results from the inherent timing difference between
the repricing of the Company's adjustable rate assets and liabilities.
For instance, certain loans tied to the prime rate index may only
reprice on a quarterly basis. However, at a community bank such as
GNB, when rates are rising, funding sources tend to reprice more
slowly than the loans. Therefore, for GNB, the effect of this timing
18
difference is generally favorable during a period of rising interest
rates and unfavorable during a period of declining interest rates.
This lag can produce some short-term volatility, particularly in times
of numerous prime rate changes. The last prime rate change was
effected on July 1, 2004.
- Repricing Risk - repricing risk is caused by the mismatch in the
maturities / repricing periods between interest-earning assets and
interest-bearing liabilities. If GNB was perfectly matched, the net
interest margin would generally expand during rising rate periods and
generally contract during falling rate periods. This is so since loans
tend to reprice more quickly than do funding sources. Typically, since
GNB is somewhat asset sensitive, this would also tend to expand the
net interest margin during times of interest rate increases. However,
to some extent, banks are also subject to the steepness of the yield
curve that is, the spread between rates at different maturity points.
- Basis Risk - item pricing tied to different indices may tend to react
differently, however, all GNB's variable products are priced off the
prime rate.
- Prepayment Risk - prepayment risk results from borrowers paying down /
off their loans prior to maturity. Prepayments on fixed-rate products
increase in falling interest rate environments and decrease in rising
interest rate environments. Since a majority of GNB's loan
originations are adjustable rate and set based on prime, and there is
little lag time on the reset, GNB does not experience significant
prepayments. However, GNB does have more prepayment risk on its
securitized and manufactured housing loans and its mortgage-backed
investment securities. Offsetting the prepayment risk on the
securitized loans are the related bonds payable, which were issued at
a fixed rate. When the bonds payable prepay, given the current
interest rate environment, this reduces GNB's interest expense as a
higher, fixed rate is, in effect, traded for a lower, variable rate
funding source.
MANAGEMENT OF INTEREST RATE RISK
To mitigate the impact of changes in market interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are
generally retained as they have similar repricing characteristics as our funding
sources. GNB sells mortgage products and a portion of its SBA loan originations.
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.
Loan sales- 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 GNB. A
significant decline in interest rates could also decrease the size of the GNB's
servicing portfolio and the related servicing income by increasing the level of
prepayments.
DEPENDENCE ON REAL ESTATE
Approximately 48% 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, the change 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.
ECONOMIC CONDITIONS
The economy continued to expand in the second quarter of 2004 across all
sectors. In California, loan demand remains strong with good credit quality on
existing loans. Business loan demand increased in most areas. In general,
consumer borrowing across the country also rose, but more moderately than
commercial borrowing.
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.
CURTAILMENT OF GOVERNMENT GUARANTEED LOAN PROGRAMS
A major segment of the Company's business consists of originating and selling
loans guaranteed by the SBA. From time to time, the government agencies that
guarantee these loans reach their internal limits and cease to guarantee loans.
In addition, these agencies may change their 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 small businesses that now qualify for
19
government guaranteed loans could decline. Also, the profitability of these
loans could decline. From January 2004 to April 2004, the SBA implemented a
maximum loan size of $750,000 in its 7(a) loan program. A bill was passed in
April 2004 by Congress approving changes to the 7(a) program that take effect
immediately and it is scheduled to expire on September 30, 2004. The major
program changes include: an increase in the 7(a) loan limit back to $2.0
million, an increase in the guarantee limit to $1.5 million, restoration of the
piggyback loan structure, and approval of new fees for lenders, that include an
increase in the ongoing annual lender fee paid to the SBA from .25% to .36%. The
effects from changes to SBA lending from the new bill structure on the Company's
future performance and results of operations are not practical to quantify at
this time.
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
- ------- -------------------
The Company is involved in various litigation of a routine nature that 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 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
- -------- --------------------------------------------------
The Company held its 2004 annual meeting of shareholders ("Meeting") on May
27, 2004. 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
TheBoard of Directors to serve until the 2005 Meeting and until their
successors are elected and have qualified:
20
VOTES FOR VOTES WITHHELD
--------- --------------
Robert H. Bartlein 5,055,832 112,758
Jean W. Blois 5,058,893 109,697
John D. Illgen 5,058,873 109,717
Lynda J. Nahra 5,110,007 58,583
William R. Peeples 5,006,079 162,511
James R. Sims, Jr. 5,082,722 85,868
Kirk B. Stovesand 5,100,551 68,039
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.
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.
April 20, 2004: The Company furnished a Current Report on Form 8-K to
report that, on April 20, 2004, the Company issued a press release
announcing its financial results for the quarter ended March 31, 2004.
June 30, 2004: The Company furnished a Current Report on Form 8-K to
report that on June 30, 2004, the Company issued a press release
announcing the appointment of a new director, C. Richard Whiston.
21
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 12, 2004 /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
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
======= ===================================================================================================
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. 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.