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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the fiscal year ended December 31, 1997
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 (I.R.S. Employer Identification No.)
incorporation or organization)
5638 Hollister Avenue, Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 692-1862
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered:
Common Stock, no par value National Market tier of The NASDAQ Stock Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act and 12CFR16.3 during the
past 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained, and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There were 3,171,364 shares of common stock for the registrant issued and
outstanding as of March 2, 1998. The aggregate market value of the voting stock,
based on the closing price of the stock on the NASDAQ National Market on March
2, 1998, held by nonaffiliates of the registrant was approximately $31,000,000.
This Form 10-K contains 65 pages.
COMMUNITY WEST BANCSHARES
FORM 10-K
INDEX
PART I PAGES
ITEM 1. Description of Business 3
ITEM 2. Description of Property 5
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
ITEM 6. Selected Financial Data 8
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 8. Consolidated Financial Statements 40
PART III
ITEM 9. Changes in and Disagreements with Accountants on 60
Accounting and Financial Disclosure
ITEM 10. Directors and Executive Officers of the Registrant 60
ITEM 11. Executive Compensation 61
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 62
ITEM 13. Certain Relationships and Related Transactions 63
PART IV
ITEM 14. Exhibits and Reports of Form 8-K 63
SIGNATURES 65
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- -----------------------------------
General
Community West Bancshares was incorporated in the State of California on
November 26, 1996, for the purpose of forming a single bank holding company. On
December 31, 1997, Community West Bancshares ("the Holding Company") acquired a
100% interest in Goleta National Bank ("the Bank"). Effective that date,
shareholders of the Bank (NASDAQ:GLTB) became shareholders of the Holding
Company (NASDAQ:CWBC) in a one-for-one exchange.
The Company opened for business as a national banking association on August 21,
1989. The deposits of the Company are insured up to the applicable limits by the
FDIC, and the Company is a member of the Federal Reserve System. The Company's
main office is located at 5827 Hollister Avenue, Goleta, California.
The Company offers a full range of commercial banking services, including the
acceptance of demand, savings and time deposits, and the origination of
commercial, U.S. Small Business Administration ("SBA"), accounts receivable,
real estate, construction, home improvement, and other installment and term
loans. It also offers cash management, remittance processing, electronic
banking, merchant credit card processing, and other customary bank services to
its customers.
The banking industry as a whole offers a broad range of products and services.
Few companies today can effectively offer every product and service available.
Accordingly, the Company continually investigates products and services with
which it can attain a competitive advantage over others in the banking industry.
In this way, management positions the Company to offer those products and
services requested by its customers ahead of its competition.
The Company has been an approved lender/servicer of loans guaranteed by the SBA
since late 1990. The Company originates SBA loans, sells the guaranteed portion
into the secondary market, and services the loans. During 1995, the Company was
designated as a Preferred Lender by the SBA. As a Preferred Lender, the Company
has the ability to move loans through the approval process at the SBA much more
quickly than financial institutions which do not have such a designation. As of
December 31, 1997, the Company was the only SBA Preferred Lender head quartered
in Santa Barbara County. In early 1998, the Company, through the Bank, was
granted SBA Preferred Lender status in Georgia and Florida.
During 1994, the Company established a Mortgage Loan Processing Center. Through
the Mortgage Loan Processing Center, the Company takes applications for
residential real estate loans and processes those loans for a fee for lenders
located throughout the nation. At any point in time, the Company processes loans
for 50-70 such lenders. Because it has so many lenders for which it processes,
the Company can offer many more loan programs than normally offered by any
single institution. By virtue of the large number of loan programs being
offered, the Company has developed the ability to remain ahead of its
competition.
Also in 1994, the Company began offering home improvement loans under Title I of
FHA regulations. This is the oldest government insured loan program in
existence, having begun in 1934. The Company originates Title I loans and sells
them into the secondary market and retains the servicing. In early 1995, the
Company was approved as one of a small number of financial institutions to be
able to sell Title I loans directly to the Federal National Mortgage Association
("FNMA"). This approval has given the Company a competitive advantage over
nonapproved lenders because it can price loans at lower rates to customers and
reduce or eliminate fees normally charged to customers, while at the same time
increasing the profitability to the Company.
During 1996, the Company began offering 125 Loan-to-Value ( LTV') loans. These
loans allow the borrower to receive up to 125% of their home value for debt
consolidation, home improvement, school tuition, or any worthwhile cash outlay.
There is an upper limit on these loans of $100,000. The Company relies
principally on the creditworthiness of the borrower, and to a lesser extent on
the underlying collateral, for repayment of these LTV loans; even though, the
loans are secured primarily by a second lien on the property. The loan terms
under the
3
program range from one to 25 years. In 1997, the Company sold these loans at a
premium to third-parties. Goleta National Company is one of the few national
banks offering the LTV loans; the competition is mainly mortgage and financing
companies.
In 1996, the Company began accounts receivable financing, providing working
capital to small and mid-sized manufacturers, distributors and merchants
throughout Southern California. This division complements the Company's SBA and
commercial lending products, in addition to generating a high annual yield.
Because of the development costs involved, most small community banks have
difficulty providing electronic banking services to their customers. From its
inception, the Company has invested heavily in the hardware and software
necessary to offer today's electronic banking services. In addition to the
normal banking services, the Company offers such services as on-line cash
management, automated clearinghouse origination, electronic data interchange,
remittance processing, draft preparation and processing, and merchant credit
card processing. Not only do these services generate significant fee income,
they attract companies with large deposit balances. These services have helped
the Company remain at a competitive advantage over most institutions its size
and many which are significantly larger than the Company.
On October 16, 1997, the Company paid $570,000 for a 70% interest in Electronic
Paycheck, LLC, a California company that has developed systems to allow
companies to pay their employees by issuing them a card or "electronic
paycheck". The systems were originally developed to pay factory workers in
Kazakhstan. The card is currently being used by companies in the agricultural
sector to pay their workers, many of whom do not have bank accounts. The Company
provides access to ATM and Point-of-Sale (POS) networks so that the cardholders
have access to their cash at thousands of locations virtually worldwide.
Competition and Service Area
The banking business in California is highly competitive with respect to both
loans and deposits; and is dominated overall by a relatively small number of
major banks with many offices operating over wide geographic areas. Some of the
major commercial banks operating in the communities nearby the Company's service
area offer certain services such as trust and investment services and
international banking which are not offered directly by the Company, and by
virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank. To help offset the numerous branch offices
of banks, thrifts, and credit unions, as well as competition from mortgage
brokers, insurance companies, credit card companies, and brokerage houses within
the Bank's service area, the Company has established loan production offices in
Fresno, Bakersfield, Costa Mesa, Modesto, Santa Maria, Santa Barbara,
Ventura/Oxnard, and West Covina in California, and in Las Vegas, Nevada,
Atlanta, Georgia and Jacksonville, Pensacola, and Panama City Beach, Florida.
The Company's on-line capabilities allow it to support these offices from its
main computer center in Goleta, California. Part of the Company's strategy is to
establish loan production offices in areas where there is high demand for the
loan products which it originates.
In order to compete for loans and deposits within its primary service area, the
Company uses to the fullest extent possible the flexibility which its
independent status permits. This includes an emphasis on meeting the specialized
banking needs of its customers, including personal contact by the Company's
directors, officers, and employees, newspaper publications, direct mailings and
other local advertising, and by providing experienced management and staff
trained to deal with the specific banking needs of the Company's customers.
Management has established a highly personal banking relationship with the
Company's customers and is attuned and responsive to their financial and service
requirements. In the event there are customers whose loan demands exceed the
Company's lending limits, the Company seeks to arrange for such loans on a
participation basis with other financial institutions and intermediaries. The
Company also assists those few customers requiring highly specialized services
not offered by the Company to obtain such services from correspondent
institutions.
4
Employees
As of December 31, 1997, the Company employed 157 persons, including 2
principal officers. The Company's employees are not represented by a union or
covered by a collective bargaining agreement. Management of the Company believes
that, in general, its employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
- -----------------------------------
The Company owns the following property:
The Goleta National Bank Branch office, located at 5827 Hollister Avenue,
Goleta, California. This 4,000 square foot facility houses the Company's main
office. An adjacent 200 square foot buiding provides additional office space.
The Company leases the following properties:
The Company leases, under three separate leases, four suites in an office
building at 5638 Hollister Avenue, Goleta, California, from an independent third
party. The leases are for a term expiring May 31, 1998, with a current monthly
rent of $8,188 per month for all four suites. The leases also provide the
Company with two additional consecutive options of three years each to extend
the leases. The suites consist of approximately 5,435 square feet of office
space. These suites house the company's Corporate Office, Finance, Data
Processing, Compliance, and Electronic Business Services departments of the
Company, as well as the offices of the Company's subsidiary, Electronic
Paycheck, LLC.
The Company leases approximately 1,500 square feet of office space located
at 310 South Pine Avenue, Goleta, California, from an independent third party.
The lease is for a term expiring October 1, 1998, with a current monthly rent of
$800 per month. The lease also provides the company with two additional
consecutive options of three years each to extend the lease. This facility
houses the Special Assets and Loan Collection departments of the Company .
The Company leases under two separate leases approximately 2,718 square
feet of office space located at 3891 State Street, Santa Barbara, California,
from an independent third party. The lease is for a term expiring March 31,
2001, with a current monthly rent of $6,691 per month for both leases. The lease
also provides the Company with two additional consecutive options of three years
each to extend the lease. This facility houses the Retail and Wholesale Mortgage
Lending departments of the Company.
The Company leases approximately 1,500 square feet of office space located
at 1300 Eastman Avenue, Ventura, California, from an independent third party.
The lease is for a term expiring August 31, 1998, with a current monthly rent of
$2,506 per month. The lease also provides the Company with one option of three
years to extend the lease. This facility houses the Ventura County Loan
Production office and the Accounts Receivable Financing department of the
Company.
The Company leases approximately 630 square feet of storefront space
located at 2222 South Broadway, Suite E, Santa Maria, California, from an
independent third party. The lease is for a term expiring October 31, 1998, with
a current monthly rent of $900 per month. The lease also provides the Company
with one option of 12 months to extend the lease. This facility houses the Santa
Maria Loan Production office of the Company.
The Company leases approximately 1,032 square feet of storefront space
located at 4170 South Decatur, Unit D-4, Las Vegas, Nevada, from an independent
third party. The lease is for a term expiring February 28, 2000, with a current
monthly rent of $1,806 per month. This facilitiy houses the Las Vegas, Nevada
Loan Production office of the Company.
The Company leases approximately 6,380 square feet of space located at 5383
Hollister Avenue, 2nd Floor, Goleta, California, from an independent third
party. The lease is for a term expiring November 30, 2002, with a current
monthly rent of $8,613 per month. The lease also provides the Company with two
options of
5
36 months to extend the lease. This facility houses the Alternative Mortgage
lending, SBA lending, and Human Resources departments of the Company.
The Company also leases small executive suites on a month-to-month basis in
Bakersfield, Fresno, Modesto, West Covina and Costa Mesa, California. The
Company also has executive suites in Woodstock, Georgia, and Jacksonville,
Pensacola, and Panama City Beach, Florida. These offices allow the Company to
have a local presence for the production of loans while controlling the
underwriting and funding of the loans at the main office in Goleta. The Company
also leases on a month-to-month basis a storage unit and a portion of a parking
lot, both, are located in Goleta.
The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1997, was $774,000. Management believes
that its existing facilities are adequate for its present purposes.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
From time to time the Company is party to claims and legal proceedings arising
in the ordinary course of business. After taking into consideration information
furnished by counsel to the Company, management believes that the ultimate
aggregate liability represented thereby, if any, will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
A special meeting of security holders of the Company was held October 30, 1997.
The security holders voted on and passed a plan for a Company reorganization and
consolidation. Under this plan, the Company became a wholly owned subsidiary of
the newly formed holding company, Community West Bancshares in a one-for-one
exchange of stock; for each share of Goleta National Bank held, they received a
share of Community West Bancshares. This applied to both common stock and the
outstanding common stock warrants. There was a total of 1,118,602, or 73.52%,
proxies voted out of 1,521,423 possible votes. The following shows how the votes
were cast:
FOR AGAINST ABSTAIN NON-VOTES
Number of Votes Received 1,073,838 19,932 24,832 402,821
Percentage of Total Shares 70.58% 1.31% 1.63% 26.48%
As prospective shareholders of Community West Bancshares, the security holders
also voted and passed the proposed Stock Option Plan for Community West
Bancshares. This proposal received 1,118,602, or 73.52%, votes out of 1,521,423
possible votes. The following shows how the votes were cast:
FOR AGAINST ABSTAIN NON-VOTES
Number of Votes Received 1,102,128 2,431 14,043 402,821
Percentage of Total Shares 72.44% 0.16% 0.92% 26.48%
6
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------
As of the close of business December 31, 1997, the common stock and warrants for
Goleta National Bank, symbol "GLTB" and "GLTBW", respectively, were converted to
Community West Bancshares common stock and warrants, symbol "CWBC" and "CWBCW"
respectively. On January 5, 1998, NASDAQ National Market ("NASDAQ") listed the
new common stock symbol "CWBC" for trading and the old symbol "GLTB" was
removed. The outstanding warrants, "CWBCW" continue to trade Over-the-Counter
("OTC").
Prior to listing on NASDAQ, the stock was traded OTC under the symbol "GLTB".
OTC quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The common stock was
listed on NASDAQ on November 19, 1996, under the symbol "GLTB". During the
secondary stock offering which took place in the third quarter of 1996, warrants
were issued. Each warrant entitles the holder to purchase two shares of common
stock at an exercise price of $4.375 per share. The warrants expire on June 30,
1998, and are traded OTC under the new symbol "CWBCW". The following table sets
forth the high and low sales prices on a per share basis for the common stock
and a per warrant basis for the warrants, as reported by the respective
exchanges for the period indicated:
Common Stock(1) Warrants
Low High Low High
--------------- -------- ---------- ----------
1996 First Quarter 3 3 7/32 Not Issued Not Issued
Second Quarter 3 1/2 3 1/2 Not Issued Not Issued
Third Quarter 3 5/8 4 1/2 1/2 1 1/8
Fourth Quarter 4 3/8 5 3/8 2 4
1997 First Quarter 5 1/4 8 1/4 3 1/2 7 1/2
Second Quarter 6 5/8 7 5/8 7 1/2 7 1/2
Third Quarter 6 3/8 9 3/4 5 3/4 7
Fourth Quarter 8 3/8 9 1/2 6 1/2 10 1/2
1998 First Quarter 8 7/8 14 9 5/8 16 1/2
(1) As adjusted for the 1996 and 1998 2-for-1 stock splits.
On March 20, 1998, the last reported sale price per share for the Company's
stock and warrants was $13 5/16 and $17 1/2 respectively.
The Company has declared and paid cash dividends per share of $.03, $.03, and
$.04 in 1994, 1995 and 1996, respectively. The Company declared and issued a 10%
stock dividend in 1995, and effected a 2-for-1 stock split in 1996. On January
23, 1998, the holding company, Community West Bancshares, announced a 2-for-1
stock split. This was effective for holders of record on February 3, 1998, and
paid February 27, 1998.
The Company had approximately 423 shareholders of record of its common stock as
of March 2, 1998.
7
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------
SUMMARY OF EARNINGS
The following Summary of Earnings of the Company for the five years ended
December 31, 1997, has been derived from the audited financial statements
included elsewhere in this document. This summary should be read in conjunction
with Financial Statements and Notes relating thereto which appear herein.
YEAR ENDED DECEMBER 31,(1)
----------------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Interest income $ 8,009 $ 6,812 $ 6,504 $ 5,180 $ 3,682
Interest expense 2,910 2,425 2,451 1,680 1,104
---------- ---------- ---------- ---------- ----------
Net interest income 5,099 4,387 4,053 3,500 2,578
Provision for possible loan losses 260 435 360 700 305
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 4,839 3,952 3,693 2,800 2,273
Other operating income 9,432 6,620 4,481 2,514 828
Other operating expense 11,524 8,667 6,436 4,204 2,590
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 2,747 1,905 1,738 1,110 511
Provision for income taxes 1,158 800 730 463 0
---------- ---------- ---------- ---------- ----------
Net income $ 1,589 $ 1,105 $ 1,008 $ 647 $ 511
========== ========== ========== ========== ==========
Earnings per common share - Basic $ 0.53 $ 0.47 $ .50 $ .35 $ 0.28
Earnings per common share - Diluted $ 0.44 $ 0.44 $ .47 $ .31 $ 0.25
Number of shares used in earnings per share
calculation (2) 3,016,208 2,356,162 2,013,830 1,829,284 1,825,284
Net Loans $ 59,315 $ 54,206 $ 46,472 $ 40,752 $ 43,263
Total Assets 87,468 72,718 64,245 57,136 57,392
Deposits 75,962 65,032 58,256 51,712 52,346
Total Liabilities 76,623 65,169 58,610 52,223 52,908
Total Equity 10,845 7,549 5,635 4,913 4,484
(1) See Notes to Financial Statements for a summary of significant accounting
policies and other related data.
(2) Earnings per common share information is based on the weighted average
number of common shares
outstanding during each period. Earnings per share amounts have been restated to
reflect the
10% stock dividend issued in 1995 and the 2-for-1 stock splits in 1996 and 1998.
8
The following table sets forth selected ratios for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
-------- ------ ------ ------ ------
Net earnings to average stockholder equity 14.64% 13.67% 17.89% 13.17% 12.86%
Net earnings to average total assets 1.82% 1.52% 1.57% 1.13% 1.10%
Total interest expense to total interest income 36.33% 35.59% 37.69% 32.43% 29.98%
Other operating income to other operating expense 81.85% 76.39% 69.63% 59.78% 31.97%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------
The following is management's discussion and analysis of the significant changes
in income and expense accounts presented in the Summary of Earnings for the
three years ended December 31, 1997, 1996, and 1995.
INTRODUCTION
- ------------
This discussion is designed to provide a better understanding of significant
trends related to the Company's financial condition, results of operations,
liquidity, capital resources, and interest rate sensitivity. It should be read
in conjunction with the audited financial statements and notes thereto and the
other financial information appearing elsewhere in this filing.
NET INTEREST INCOME AND NET INTEREST MARGIN
- -------------------------------------------------
Total interest income increased from $6,812,072 in 1996 to $8,009,432 in 1997,
representing a 17.6% increase in 1997 over 1996. This increase in 1997 over 1996
was reflected by a 21.0% increase because of an increase in interest-earning
assets offset by a 3.4% decrease because of lower rates. Total interest expense
increased from $2,424,730 in 1996 to $2,910,450 in 1997, representing a 20.0%
increase in 1997 compared to 1996. This increase was reflected by a 15.9%
increase in interest-bearing liabilities and a 4.1% increase in rates paid on
deposits. The result of these changes was net interest income increased from
$4,387,342 in 1996 to $5,098,982 in 1997.
Total interest income increased from $6,504,315 in 1995 to $6,812,072 in 1996,
representing a 4.7% increase in 1996 over 1995. This increase in 1996 over 1995
was reflected by a 7.1% increase because of an increase in interest-earning
assets offset by a 2.4% decrease because of lower interest rates. Total interest
expense decreased from $2,451,472 in 1995 to $2,424,730 in 1996, representing a
1.1% decrease in 1996 over 1995. This decrease was reflected by a 6.0% increase
because of an increase in interest-bearing liabilities offset by a 7.1% decrease
because of lower rates paid on deposits. The result of these changes was net
interest income increased from $4,052,843 in 1995 to $4,387,342 in 1996.
1997 1996 1995
----------- ----------- -----------
Interest Income $8,009,432 $6,812,072 $6,504,315
Interest Expense 2,910,450 2,424,730 2,451,472
Net Interest Income 5,098,982 4,387,342 4,052,843
Net Interest Margin 6.6% 6.8% 7.0%
The net interest margin (net interest income divided by average
interest-earning assets) was 7.0% in 1995, 6.8% in 1996, and 6.6% in 1997. The
difference in net interest margins in 1996 vs. 1995, and in 1997 vs. 1996, was
primarily because of increases in volumes of earning assets. It should be noted,
as a benchmark rate, the prime rate quoted in the Wall Street Journal was 9.0%
at midyear 1995, by 1995 year-end, prime had fallen to 8.5%. In 1996, prime
decreased slightly to 8.25%. Early in 1997, prime increased to 8.5% and has held
steady at that rate.
9
The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:
Analysis of Changes in Net Interest Income
------------------------------------------------
Year Ended December 31,
-----------------------
(Dollars in thousands) 1997 Versus 1996 1996 Versus 1995 1995 Versus 1994
---------------------------- ---------------------------- ---------------------------
Change Change Change Change Change Change
Total Due to Due to Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume Change Rate Volume
-------- -------- -------- -------- -------- -------- ------- -------- --------
Time deposits in other
financial institutions $ 33 $ - $ 33 $ (86) $ (15) $ (71) $ 24 $ 53 $ (29)
Federal Funds sold 141 11 130 (22) (28) 6 105 81 24
Investment securities 15 (32) 47 52 (6) 58 33 3 30
Loans, net 1,008 3 1,005 364 (150) 514 1,163 388 775
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-earnings
assets 1,197 (18) 1,215 308 (199) 507 1,324 525 800
-------- -------- -------- -------- -------- -------- ------- -------- --------
Interest bearing demand
(NOW, MMDA) 8 (14) 22 (21) (24) 3 107 89 18
Savings (23) (12) (11) (27) (62) 35 184 62 122
Time certificates of deposit 500 66 434 22 (93) 115 481 435 46
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 485 40 445 (26) (179) 153 772 586 186
-------- -------- -------- -------- -------- -------- ------- -------- --------
Net interest income $ 712 ($58) $ 770 $ 334 $ (20) $ 354 $ 553 $ (61) $ 614
======== ======== ======== ======== ======== ======== ======= ======== ========
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
The following is a summary of changes in earnings of the Company for the years
ended December 31, 1997, 1996, and 1995. This summary of changes in earnings
should be read in conjunction with the Financial Statements and Notes relating
thereto appearing elsewhere herein.
Year Ended December 31,
(Dollars in thousands) 1997 over 1996 1996 over 1995 1995 over 1994
--------------------- --------------------- --------------------
Amount Amount Amount
of % of of % of of % of
Change(1) Change(1) Change(1) Change(1) Change(1) Change(1)
---------- --------- ---------- --------- ---------- ---------
INTEREST INCOME
Interest and fees on loans $ 1,008 15.9% $ 364 6.1% $ 1,163 24.2%
Interest on federal funds sold 141 49.6 (22) (7.2) 105 51.7
Interest on time deposits in other
financial institutions 33 37.4 (86) (49.4) 24 16.0
Interest on investment securities 15 14.9 52 108.3 33 200.0
10
Year Ended December 31,
(Dollars in thousands) 1997 over 1996 1996 over 1995 1995 over 1994
Amount Amount Amount
of % of of % of of % of
Change(1) Change(1) Change(1) Change(1) Change(1) Change(1)
---------- --------- ---------- --------- ---------- ---------
Total interest income 1,197 17.6 308 4.7 1,325 25.5
INTEREST EXPENSE
Interest on deposits 485 20.0 (26) (1.1) 772 45.9
---------- --------- ---------- --------- ---------- ---------
Net interest income 712 16.2 334 8.2 553 15.8
PROVISION FOR LOAN
LOSSES (175) (40.2) 75 20.8 (340) (48.6)
---------- --------- ---------- --------- ---------- ---------
Net interest income after
provision for loan losses 887 22.4 259 7.0 893 31.9
OTHER INCOME
Gains from loan sales 2,980 265.8 (313) (21.8) 63 4.7
Servicing from loan sales (1,493) (100.0) 405 37.1 1,089 100.0
Loan origination fees - sold or
brokered loans 903 43.9 1,326 181.4 477 187.8
Loan servicing fees (43) (6.4) 96 16.6 95 19.6
Service charges 306 51.9 218 58.6 85 29.6
Document processing fees 309 60.8 426 507.1 35 71.4
Other income (150) (86.2) (19) (9.8) 124 179.7
---------- --------- ---------- --------- ---------- ---------
Total other income 2,812 42.5 2,139 47.7 1,969 78.2
OTHER EXPENSE
Salaries and employee benefits 1,862 34.2 1,528 38.9 1,532 64
Occupancy expenses 323 27.2 199 20.2 269 37.5
Other operating expenses 71 (9.0) 139 21.5 197 43.5
Postage & freight 279 51.4 378 229.1 110 200.0
Advertising expense 166 53.3 29 10.3 117 70.9
Professional services 180 73.3 (72) (22.6) (8) (2.5)
Office supplies (24) (16.3) 31 27.9 15 15.6
---------- --------- ---------- --------- ---------- ---------
Total other expenses 2,857 33.0 2,231 34.7 2,232 53.1
Income before provision for
income taxes 842 44.2 167 9.7 629 56.7
---------- --------- ---------- --------- ---------- ---------
PROVISION FOR INCOME
TAXES 358 44.7 70 9.6 267 57.7
---------- --------- ---------- --------- ---------- ---------
NET INCOME $ 484 43.7% $ 97 9.6% $ 362 55.8%
========== ========= ========== ========= ========== =========
(1) Increase or (decrease) over previous year amount.
11
OTHER INCOME
- --------------
Other income increased from $4,481,256 in 1995, to $6,620,491 in 1996, and to
$9,432,215 in 1997, representing a 47.7% increase in 1996 over 1995 and a 42.5%
increase in 1997 over 1996. The increase was because of continued emphasis by
the Company on generating noninterest income. These year to year gains are a
reflection of the increases in SBA loan originations, sales, and servicing, as
well as increased growth in mortgage loan processing over the years, and the
significant growth in the origination, sales, and servicing of home equity loans
started in 1995. In addition, fees from electronic banking services have
increased dramatically over the last three years. The Company's percentage
coverage of other expenses with other income rose from 69.6% in 1995 to 76.4% in
1996 and 81.8% in 1997.
OTHER EXPENSES
- ---------------
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Company required
additional staff and overhead expense to support the continued high level of
customer service and increased the cost of occupying the Company's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Company personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other expenses increased
from $6,436,271 in 1995 to $8,666,933 in 1996 and to $11,523,906 in 1997,
representing a 34.7% in 1996 over 1995 and a 33.0% increase in 1997 over 1996.
The increases in other expenses for the periods compared were primarily because
of compensation related to loan originations and sales, the increase in the
number of loan production and processing offices, the upgrading of data
processing hardware and software, and increased advertising.
The following table compares the various elements of other expenses as a
percentage of average assets for the three years ended December 31, (in
thousands except percentage amounts.)
Salaries Other
Average and Employee Occupancy Operating
Period Assets(1) Benefits Expenses Expenses
1997 $ 87,468 8.36% 1.72% 3.09%
1996 72,718 7.50% 1.63% 2.79%
1995 64,245 6.11% 1.54% 2.37%
(1) Based on the average of daily balances.
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses corresponds directly to the level of the allowance
that management deems sufficient to offset potential loan losses. The balance in
the loan loss allowance reflects the amount which, in management's judgment, is
adequate to provide for these potential loan losses, after weighing the mix of
the loan portfolio, current economic conditions, past loan experience and such
other factors as deserve recognition in estimating loan losses.
Management allocated $260,000 as a provision for loan losses in 1997, $435,000
in 1996 and $360,000 in 1995. Loans charged off, net of recoveries, in 1997 were
$383,469, in 1996 were $488,618 and in 1995 were $288,377. The ratio of the
allowance for loan losses to total gross loans was 1.8% at December 3l, 1997,
2.4% at December 31, 1996, and 2.7% at December 31, 1995.
In management's opinion, the balance of the allowance for loan losses at
December 31, 1997, was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
INCOME TAXES
- -------------
Income taxes were $1,158,351 in 1997, $800,478 in 1996, and $730,000 in 1995.
12
NET INCOME
-----------
The net income of the Company was $1,588,940 in 1997, $1,105,422 in 1996, and
$1,007,828 in 1995. Earnings per share were $0.53 basic and $.44 diluted in
1997; $.47 basic and $.44 diluted in 1996; and $.50 basic and $.47 diluted in
1995; as adjusted to reflect the 1996 and 1998 2-for-1 stock splits and the 1995
10% stock dividend. The increases in net income for the past three years were
the result of several factors. First, the earning assets of the Company have
increased, resulting in an increase in net interest income. Second, the
origination and sale of SBA loans has continued to grow, resulting in increased
gains on sales and increased servicing income. Third, the increased volume of
business in the Mortgage Loan Processing Center and Home Improvement Lending
Department increased fee income, income from loan sales, and servicing income.
Offsetting the income increase was an overall increase in expenses related to
the production of income.
LIQUIDITY
- ---------
The Company has an asset and liability management program allowing the Company
to maintain its interest margins during times of both rising and falling
interest rates and to maintain sufficient liquidity. Liquidity of the Company at
December 31, 1997, was 37.4%, at December 31, 1996, was 29.7%, and at December
31, 1995, was 23.8% based on liquid assets (consisting of cash and due from
banks, deposits in other financial institutions, security investments, federal
funds sold and loans available for sale) divided by total assets. Management
believes it maintains adequate liquidity levels.
CAPITAL RESOURCES
- ------------------
The shareholders' equity accounts of the Company increased from $6,113,041 at
December 31, 1995, to $10,059,141 at December 31, 1996, and to $12,128,864 at
December 31, 1997. In 1996, the Company raised approximately $2,800,000 through
a secondary stock offering. This increased capital may be used for merger or
acquisition activity, as well as to allow continued internal growth. As part of
the secondary offering, 472,653 warrants were issued which entitle each holder
to acquire two shares of common stock at an exercise price of $4.375 per share.
The warrants expire on June 30, 1998. As of December 31, 1997, 33,770 warrants
had been exercised, leaving 438,883 warrants outstanding, or $3,840,226 in
potential additional capital.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Quantitative measures established
by regulation to ensure capital adequacy require the Company to maintain minimum
amounts and ratios of total and Tier 1 capital (primarily common stock and
retained earnings less goodwill) to risk-weighted assets, and of Tier 1 capital
to average assets. Management believes, as of December 31, 1997, that the
Company exceeds all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the FDIC
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events since
that notification which management believes have changed the Company's category.
13
The Company's actual capital ratios are presented below.
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------ ----------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1997:
Total Capital (to Risk
Weighted Assets) $12,357,179 17.20% $5,746,643 >= 8% $7,183,304 >=10%
Tier I Capital (to Risk
Weighted Assets) $11,454,477 15.95% $2,873,321 >=4% $4,309,982 >=6%
Tier I Capital (to Average
Assets) $11,454,477 12.02% $3,812,315 >=4% $4,765,393 >=5%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets) $ 9,406,022 14.88% $5,057,001 >= 8% $ 6,321,21 >=10%
Tier I Capital (to Risk
Weighted Assets) $ 8,608,032 13.61% $2,529,914 >=4% $3,794,871 >=6%
Tier I Capital (to Average
Assets) $ 8,608,032 11.33% $3,039,023 >=4% $3,798,778 >=5%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk
Weighted Assets) $ 6,149,829 10.99% $4,476,673 >= 8% $5,595,841 >=10%
Tier I Capital (to Risk
Weighted Assets) $ 5,441,181 9.73% $2,236,868 >=4% $3,355,302 >=6%
Tier I Capital (to Average
Assets) $ 5,441,181 7.62% $2,856,263 >=4% $3,570,329 >=5%
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------
The following schedule shows the average balances of the Company's assets,
liabilities and shareholders' equity accounts and the percentage distribution of
the items, computed using the daily a average balances, for the periods
indicated.
Year Ended December 31,
-----------------------
1997 1996 1995
------- ---------- -------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------- ---------- ------- ---------- ------- ----------
ASSETS
- --------------------------------
Cash and due from banks $ 3,203 3.7% $ 2,726 3.7% $ 2,378 3.7%
Federal funds sold 8,129 9.3 5,632 7.7 5,506 8.6
Time deposits in other financial
institutions 2,092 2.4 1,524 2.1 2,763 4.3
Investment Securities 3,887 4.4 1,636 2.2 672 1.0
14
Year Ended December 31,
-----------------------
1997 1996 1995
-------- ---------- --------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ----------
Loans:
Commercial $13,637 15.6% $14,300 19.7% $13,821 21.5%
Real estate 20,612 23.6 19,418 26.7 14,546 22.6
Unguaranteed portions of loans
insured by the SBA 21,345 24.4 15,617 21.5 15,886 24.7
Installment 4,239 4.8 5,925 8.1 3,532 5.5
Loan participations purchased - real
estate 1,333 1.5 746 1.0 876 1.4
Less allowance for loan losses (1,333) (1.5) (1,351) (1.9) (1,484) (2.3)
Less net deferred loan fees and
premiums (30) - (26) - (41) (.1)
Less discount on loan pool purchase (488) (.6) (423) (.6) (664) (1.0)
-------- ---------- -------- ---------- -------- ----------
Net Loans 59,315 67.8 54,206 74.5 46,472 72.3
Loans held for sale 5,428 6.2 1,682 2.3 2,668 4.2
Other real estate owned 216 0.3 173 0.2 408 0.6
Premises and equipment, net 2,547 2.9 1,856 2.6 1,384 2.2
Excess servicing asset 788 .9 1,705 2.2 271 0.4
Accrued interest receivable and other
assets 1,863 2.1 1,578 2.2 1,994 2.7
-------- ---------- -------- ---------- -------- ----------
TOTAL ASSETS $87,468 100.0% $72,718 100.0% $64,245 100.0%
======== ========== ======== ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $16,915 19.3% $13,862 19.1% $10,292 16.0%
Interest-bearing demand 12,936 14.8 12,277 16.9 12,185 19.0
Savings 10,413 11.9 10,699 14.7 9,703 15.1
Time certificates, $100,000 or more 14,533 16.6 10,336 14.2 7,651 11.9
Other time certificates 21,165 24.2 17,858 24.6 18,425 28.7
-------- ---------- -------- ---------- -------- ----------
Total deposits 75,962 86.8 65,032 89.4 58,256 90.7
Accrued interest payable and other
liabilities 661 0.8 137 0.2 354 0.5
-------- ---------- -------- ---------- -------- ----------
Total Liabilities 76,623 87.6 65,169 89.6 58,610 91.2
15
Year Ended December 31,
1997 1996 1995
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------- ---------- ------- ---------- ------- ----------
Stockholders' equity
Common Stock 8,332 9.5 6,207 8.6 4,787 7.5
Retained earnings 2,513 2.9 1,342 1.8 848 1.3
------- ---------- ------- ---------- ------- ----------
Total stockholders' equity 10,845 12.4 7,549 10.4 5,635 8.8
------- ---------- ------- ---------- ------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $87,468 100.0% $72,718 100.0% $64,245 100.0%
======= ========== ======= ========== ======= ==========
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
- ---------------------
distributions and yields of the Company's investment securities as of December
31, 1997. As of year end, all securities were held at the Company level.
(Dollars in thousands)
One Year After One Year
or Less to Five Years Total
--------- ---------------- -------
December 31, 1997 Amount Yield Amount Yield Amount Yield
--------- ---------------- ------- ------ ------- ------
U.S. Treasury & Government Agencies $ 998 5.59% $ - N/A $ 998 5.59%
FRB Stock $ - $ - $ 251 5.99% $ 251 5.99%
--------- ---------------- ------- ------ ------- ------
Total $ 998 5.59% $ 251 5.99% $ 1,249 5.64%
========= ================ ======= ====== ======= ======
In addition to the above, the Company holds Interest-Only strip assets in the
amount of $2,528,587. These Interest-Only strips represent the present value of
the right to the excess cash flows generated by the sold loans that represent
the difference between (a) interest at the stated rate paid by borrowers and (b)
the sum of (i) pass-through interest paid to third-party investors, (ii)
stipulated servicing fees and (iii) estimated loan portfolio losses. The Company
determines the present value of this anticipated cash flow stream at the time of
the loan sale close, utilizing valuation assumptions appropriate for each
particular transaction.
The signnificant valuation assumptions are related to the anticipated average
lives of the loans sold, the anticipated prepayment speeds and the anticipated
credit losses related thereto. In order to determine the present value of this
excess cash flow, the Company currently applies an estimated market discount
rate of 11% to the expected pro forma gross cash flows, which are calculated
utilizing the weighted average lives of the loans,. Accordingly, the overall
effective discount rate utilized on the cash flows, net of expected credit
losses is approximatley 11%. The annual prepayment rate of the loans is a
function of full and partial prepayments and defaults. In the Interest-Only
Strips' fair value estimates, the Company makes assumptions of the prepayment
rates of the underlying loans, which the Company believes are reasonable. During
fiscal 1997, the Company utilized proprietary prepayment curves generated by the
Company (reaching an approximate maximum annual rate of 15%)
16
The following table summarizes the year-end balances and distributions of the
Company's investment securities held on December 31, 1997, 1996, and 1995.
(Dollars in thousands):a
December 31,
-------------
1997 1996 1995
------------- ------ ------
U.S. Treasury & Government Agencies $ 998 $1,998 $ 994
FRB Stock 251 156 137
------------- ------ ------
Total $ 1,249 $2,154 $1,131
============= ====== ======
LOAN PORTFOLIO
The Company's largest lending categories are commercial loans, real estate
loans, unguaranteed portion of loans insured by the SBA, installment loans,
loans held for sale and real estate loan participations purchased. These
categories accounted for approximately 23.1%, 34.9%, 25.3%, 6.1%, 6.6% and 4.0%,
respectively, of the Company's total loan portfolio at December 31, 1997, and
approximately 26.8%, 36.6%, 15.1%, 7.2%, 13.0% and 1.3%, respectively, at
December 31, 1996. Loans are carried at face amount, less payments collected,
the allowance for possible loan losses, deferred loan fees and discounts on
loans purchased. Interest on all loans is accrued daily on primarily a simple
interest basis. It is generally the Company's policy to place loans on
nonaccrual status when they are 90 days past due. Thereafter, interest income is
no longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. Problem
loans are maintained on accrual status only when management of the Company is
confident of full repayment within a very short period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to the Company's published prime lending rate or other
appropriate indices and vary as those indices vary. At December 31, 1997,
approximately 72% of the Company's loan portfolio was comprised of variable
interest rate loans. At December 31, 1996, variable rate loans comprised
approximately 62% of the Company's loan portfolio.
DISTRIBUTION OF LOANS
- -----------------------
The distribution of the Company's total loans by type of loan as of the dates
indicated is shown in the following table (dollars in thousands):
December 31,
--------------
Type of loan 1997 1996 1995
- ---------------------------------------------------- -------------- ------- -------
Commercial $ 13,195 $14,017 $14,615
Real estate 19,924 19,172 17,442
Unguaranteed portion of loans insured by SBA 19,602 14,708 13,581
Installment 3,467 3,777 4,345
Loan participations purchased 2,247 709 833
-------------- ------- -------
TOTAL 58,435 52,383 50,816
-------------- ------- -------
Less:
Allowance for loan losses 1,286 1,409 1,463
Deferred loan fees and premiums (3) 39 32
Discount on loan pool purchase 428 344 490
-------------- ------- -------
NET LOANS $ 56,724 $50,591 $48,831
============== ======= =======
Guaranteed and unguaranteed portion of certain loans
insured by SBA and FHA Title I loans held-for-sale $ 14,440 $ 6,809 $ 2,743
============== ======= =======
17
COMMERCIAL LOANS
-----------------
In addition to traditional commercial loans made to business customers, the
Company occasionally extends lines of credit. On business credit lines, the
Company specifies a maximum amount which it stands ready to lend to the customer
during a specified period, in return for which the customer agrees to maintain
its primary banking relationship with the Company. The purpose for which such
loans will be used and the security therefor, if any, are generally determined
before the Company's commitment is extended. Normally, the Company does not make
loan commitments in material amounts for periods in excess of one year.
REAL ESTATE LOANS
- -------------------
Real estate loans are primarily made for the purpose of purchasing, improving or
constructing single family residences, and commercial and industrial properties.
Approximately 67% of the Company's real estate construction loans consist of
loans secured by first trust deeds on the construction of owner-occupied single
family dwellings and approximately 13% of the Company's construction loans
consist of loans secured by second trust deeds on the construction of
owner-occupied single family dwellings. Approximately 7% of the Company's
construction loans consist of first trust deeds on commercial properties, and
approximately 13% of the Company's construction loans consist of second trust
deeds on commercial properties. Construction loans are generally written with
terms of six to twelve months and usually do not exceed a loan to appraised
value of 80%.
UNGUARANTEED PORTION OF LOANS GUARANTEED BY THESBA
- --------------------------------------------------------
The Company is approved as a Preferred Lender by the SBA. Loans made by the
Company under programs offered by the SBA are generally made to small businesses
for the purchase of businesses, purchase or construction of facilities, purchase
of equipment or working capital. The loans generally carry guarantees from the
SBA ranging from 75% - 90% of the balance loaned. Borrowers usually are required
to provide adequate collateral for these loans, similar to other commercial
loans. The SBA does allow less-collateralized loans for its "Low Doc" program,
loans of less than $100,000. When the Company originates SBA loans, it sells the
guaranteed portion of the loans into the secondary market. The Company retains
the unguaranteed portion of the loans, as well as the servicing on the loans,
for which it is paid a fee. The loans are all variable rate based upon the Wall
Street Journal Prime Rate. The servicing spread is a minimum of 1.00% on all
loans. The gains recognized by the Company on the sales of the guaranteed
portion of these loans and the ongoing servicing income received, are
significant revenue streams for the Company.
INSTALLMENT LOANS
- ------------------
While not a large portion of its loan portfolio, the Company does originate
installment loans. These loans are comprised of automobile, small equity lines
of credit and general personal loans. These loans are primarily variable rate
with terms of five years or less.
LOAN PARTICIPATIONS PURCHASED
- -------------------------------
When the Company first opened, in an effort to generate earnings as quickly as
possible, management made the decision to purchase several packages of
commercial real estate loans. As these loans have been repaid, the Company has
had the ability to utilize the funds elsewhere and these loans have become a
very small portion of the portfolio. The Company occasionally participates in a
loan with another community bank in an overline capacity.
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------------
The following table sets forth the amount of gross loans outstanding, of the
Company as of December 31, 1997, 1996, and 1995, which, based on the remaining
scheduled repayments of principal, have the ability to be repriced or are due
in less than one year, in one to five years, or in more than five years.
18
1997 1996 1995
------- ---- ---------
(Dollars in Thousands) Fixed Variable Fixed Variable Fixed Variable
------- --------- ------- --------- ------- ---------
Less than One Year $ 8,319 $ 43,676 $ 6,269 $ 37,011 $ 3,345 $ 37,622
One Year to Five Years 7,996 - 9,011 - 9,964 -
After Five Years 12,884 - 6,901 - 1,615 -
Total $29,199 $ 43,676 $22,181 $ 37,011 $14,924 $ 37,622
======= ========= ======= ========= ======= =========
Yearly Total 1997 $ 72,875 1996 $ 59,192 1995 $ 52,546
The following table shows the Company's loan commitments outstanding at the
dates indicated:
December 31,
-------------
(Dollars in thousands) 1997 1996 1995
------------- ------- ------
Commercial $ 12,298 $ 7,412 $6,077
Real estate 2,015 2,781 2,349
Loans insured by the SBA 4,177 1,195 142
Installment loans 1,171 1,429 1,304
Standby letters of credit 30 50 96
------------- ------- ------
Total commitments $ 20,391 $12,867 $9,968
============= ======= ======
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 90% of the commitments at December 31, 1997, will
be exercised during 1998. All commercial commitments in the preceding table are
commitments to grant such loans.
SUMMARY OF LOAN LOSSES EXPERIENCE
- -------------------------------------
As a natural corollary to the Company's lending activities, some loan losses are
experienced. The risk of loss varies with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. The degree of
perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Company attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.
The Company maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Company's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Company's Loan Committee.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was as follows:
19
DECEMBER 31,
1997 1996 1995
Impaired loans without specific valuation allowances $ 1,547,168 $ 764,388 $1,531,318
Impaired loans with specific valuation allowances 1,250,964 1,178,435 1,432,783
Specific Valuation allowance allocated to impaired loans (505,994) (432,853) (583,600)
-------------- ----------- -----------
Impaired loans, net $ 2,292,138 $1,509,970 $2,380,501
============== =========== ===========
Average investment in impaired loans $ 1,901,054 $1,945,236 $1,805,251
============== =========== ===========
Interest Income recognized on impaired loans $ 287,309 $ 85,559 $ 66,919
============== =========== ===========
It is generally the Company's policy to place loans on nonaccrual status when
they are 90 days past due. Thereafter, interest income is no longer recognized
and the full amount of all payments received, whether principal or interest, are
applied to the principal balance of the loan. As such, interest income may be
recognized on impaired loans to the extent they are not past due by 90 days or
more.
At December 31, 1997, loans on nonaccrual status totaled $1,259,107, compared to
$618,095 and $1,036,782 at December 31, 1996 and 1995. Upon the adoption of SFAS
No. 114, the Company classified all loans on nonaccrual status as impaired.
Accordingly, the impaired loans disclosed above include all loans that were on
nonaccrual status as of December 31, 1997, 1996 and 1995.
Financial difficulties encountered by certain borrowers may cause the Company to
restructure the terms of their loans to facilitate loan payments. As of December
31, 1997, 1996 and 1995, gross troubled debt restructured loans totaled
$2,375,000, $843,000, and $436,000. In accordance with the provisions of SFAS
No. 114, a troubled loan that is restructured subsequent to the adoption of SFAS
No. 114 would generally be considered impaired, while a loan restructured prior
to adoption would not be considered impaired if, at the date of measurement, it
was probable that the Company would collect all amounts due under the
restructured terms. Accordingly, the balance of impaired loans disclosed above
includes all troubled debt restructured loans that, as of December 31, 1997,
1996, and 1995 are considered impaired.
Interest foregone on nonaccrual loans and troubled debt restructurings
outstanding during the years ended December 31, 1997, 1996, and 1995 amounted to
approximately $190,750, $225,955, and $96,036, respectively.
The Company charges off that portion of any loan which management considers to
represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond any collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrower's industry. The principal amount of any loan
which is declared a loss is charged against the Company's allowance for loan
losses.
The following table sets forth the amount of loans which were 30 to 89 days
past due at the dates indicated:
December 31,
(Dollars in thousands) 1997 1996 1995
------------- ----- ------
Commercial $ 631 $ 786 $ 567
Real estate - 52 468
------------- ----- ------
Total $ 631 $ 838 $1,035
============= ===== ======
20
The following table sets forth the amount of loans which were on nonaccrual
status at the dates indicated:
December 31,
(Dollars in thousands) 1997 1996 1995
------------- ----- ------
Commercial $ 1,259 $ 618 $ 595
Real estate - - 442
------------- ----- ------
Total $ 1,259 $ 618 $1,037
============= ===== ======
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
BALANCES
Loans:
Average gross loans $66,595 $57,688 $51,329
Gross loans at end of period 72,875 59,192 53,559
Loans charged off 401 510 308
Recoveries of loans previously charged off 17 22 20
-------- -------- --------
Net loans charged off 384 489 288
-------- -------- --------
Allowance for possible loan losses 1,286 1,409 1,463
Provisions for possible loan losses 260 435 360
Ratios:
Net loan charge-offs to average loans .6% .8% .6%
Net loan charge-offs to loans at end of period .5% .9% .5%
Allowance for possible loan losses to average loans 1.9% 2.4% 2.9%
Allowance for possible loan losses to loans at end of period 1.8% 2.4% 2.7%
Net loan charge-offs to allowance for possible loan losses at
end of period 29.9% 34.7% 19.7%
Net loan charge-offs to provision for possible loan losses at
end of period 147.7% 112.4% 80.0%
The Company's allowance for loan losses is designed to provide for loan losses
which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Provisions for possible loan losses amounted to $260,000 in 1997,
$435,000 in 1996 and $360,000 in 1995. Actual loan losses or recoveries are
charged or credited, directly to the allowance for loan losses. The amount of
the allowance is determined by management of the Company. Among the factors
considered in determining the allowance for loan losses are the current
financial condition of the Company's borrowers and the value of the security, if
any, for their loans. Estimates of future economic conditions and their impact
on various industries and individual borrowers are also taken into
consideration, as are the Company's historical loan loss experience and reports
of banking regulatory authorities. Because these estimates, factors and
evaluations are primarily judgmental, no assurance can be given as to whether or
not the Company will sustain loan losses substantially higher in relation to the
size of the allowance for loan losses or that subsequent evaluation of the loan
portfolio may not require substantial changes in such allowance.
21
At December 31, 1997, 1996, and 1995, the allowance was 1.8%, 2.4%, and 2.7%
respectively, of the gross loans then outstanding, respectively. Although the
current level of the allowance is deemed adequate by management, future
provisions will be subject to continuing reevaluation of risks in the loan
portfolio.
Management of the Company reviews with the Board of Directors the adequacy of
the allowance for possible loan losses on a quarterly basis. The loan loss
provision is adjusted when specific items reflect a need for such an adjustment.
Management of the Company charged off loans totaling $400,745 in 1997, $510,494
in 1996, and $308,287 in 1995. Recoveries of loans previously charged off were
$17,276 in 1997, $21,876 in 1996, and $19,910 in 1995. Management believes that
there were no material loan losses during the last fiscal year that have not
been charged off. Management also believes that the Company has adequately
reserved for all individual items in its portfolio which may result in a
material loss to the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
SUMMARY OF EARNINGS - Provision for Loan Losses".
INVESTMENT SECURITIES
- ----------------------
The Investment Policy of the Company sets forth the types and maturities of
investments the Company may hold. The policy is quite conservative and allows no
derivative type investments. As a practical matter, because the Company
originates such a high volume of loans and, therefore uses most of its resources
to fund those loans, the Company's investment portfolio is short term in nature
and of high quality. As of December 31, 1997, the only investment securities
held by the Company were the Federal Reserve Bank stock required to be held by
the Company and two $500,000 U.S. Treasury Notes pledged as collateral for the
Company's Treasury, Tax & Loan Account. The Company's investment portfolio is
reviewed by the Chief Financial Officer of the Company on a daily basis and by
the Investment Committee of the Board of Directors on a quarterly basis.
INTEREST RATES AND DIFFERENTIALS
- -----------------------------------
Certain information concerning interest-earning assets and interest-bearing
liabilities and yields thereon is set forth in the following table. Amounts
outstanding are daily average balances:
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------- -------- --------
INTEREST-EARNING ASSETS:
Time deposits in other
financial institutions:
Average outstanding $ 2,092 $ 1,524 $ 2,763
Average yield 5.8% 5.8% 6.3%
Interest income $ 121 $ 88 $ 174
Federal funds sold:
Average outstanding $ 8,129 $ 5,632 $ 5,506
Average yield 5.2% 5.0% 5.5%
Interest income $ 424 $ 283 $ 305
U.S. Government Investment
securities:
Average outstanding $ 1,830 $ 1,489 $ 535
Average yield 5.6% 6.1% 7.5%
Interest income $ 102 $ 91 $ 40
Federal Reserve Bank Stock
Investment securities:
Average outstanding $ 215 $ 147 $ 137
Average yield 6.0% 6.1% 5.8%
Interest income $ 13 $ 9 $ 8
22
Loans:
Average net outstanding $64,743 $55,888 $49,140
Average yield 11.4% 11.3% 12.2%
Interest income $ 7,350 $ 6,341 $ 5,977
TOTAL INTEREST-EARNING ASSETS:
Average outstanding $77,009 $64,680 $58,081
Average Yield 10.4% 10.5% 11.2%
Interest income $ 8,009 $ 6,812 $ 6,504
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
accounts:
Average outstanding $12,936 $12,277 $12,185
Average yield 3.4% 3.5% 3.7%
Interest expense $ 442 $ 434 $ 455
Savings deposits:
Average outstanding $10,413 $10,699 $ 9,703
Average yield 3.8% 3.9% 4.5%
Interest expense $ 391 $ 414 $ 441
Time certificates of deposit:
Average outstanding $35,698 $28,194 $26,076
Average yield 5.8% 5.6% 6.0%
Interest expense $ 2,077 $ 1,577 $ 1,555
TOTAL INTEREST-BEARING
LIABILITIES:
Average outstanding $59,047 $51,170 $47,964
Average yield 4.9% 4.7% 5.1%
1997 1996 1995
-------- -------- --------
Interest expense $ 2,910 $ 2,425 $ 2,451
Net interest income 5099 4387 4053
AVERAGE NET INTEREST MARGIN
ON INTEREST-EARNING ASSETS 6.6% 6.8% 7.0%
LIQUIDITY MANAGEMENT
---------------------
The Company has two federal funds lines of credit with its correspondent banks,
of $2,700,000. This line has never been used. At times when the Company has more
funds than it needs for its reserve requirements or short term liquidity needs,
the Company increases its securities investments and sells federal funds. It is
management's policy to maintain a substantial portion of its portfolio of assets
and liabilities on a short-term or highly liquid basis in order to maintain rate
flexibility and to meet loan funding and liquidity needs.
23
The following table shows the Company's average deposits for each of the periods
indicated below, based upon average daily balances:
Year Ended December 31,
-----------------------
(Dollars in thousands) 1997 1996 1995
-------- --------- --------
Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
-------- --------- -------- --------- -------- ---------
Non-interest-bearing demand $ 16,915 22.3% $ 13,853 21.3% $ 10,292 17.7%
Interest-bearing demand 12,936 17.0% 12,277 18.9% 12,185 20.9%
Savings 10,413 13.7% 10,699 16.5% 9,703 16.7%
TCDs of $100,000 or more 14,533 19.1% 10,336 15.9% 7,651 13.1%
Other TCDs 21,165 27.9% 17,858 27.4% 18,425 31.6%
-------- --------- -------- --------- -------- ---------
Total deposits $ 75,962 100.0% $ 65,023 100.0% $ 58,256 100.0%
======== ========= ======== ========= ======== =========
DEPOSITS
- --------
The maturities of time certificates of deposit ("TCDs") were as follows:
December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited) TCDs TCDs
over Other over Other
$100,000 TCDs $100,000 TCDs
-------- ------- -------- -------
(Dollars in thousands)
Less than three months $ 8,643 $ 8,336 $ 5,512 $ 9,704
Over three months
through six months 2,257 2,917 2,796 7,439
Over six months
through twelve months 5,833 9,960 2,941 4,188
Over twelve months
through five years 100 483 100 749
-------- ------- -------- -------
Total $ 16,833 $21,696 $ 11,349 $22,080
======== ======= ======== =======
While the deposits of the Company may fluctuate up and down somewhat with local
and national economic conditions, management of the Company does not believe
that such deposits, or the business of the Company in general, are seasonal in
nature. Liability management is monitored by the Chief Financial Officer daily
and by the Asset/Liability Committee of the Company's Board of Directors which
meets quarterly,
YEAR 2000
- ----------
As the year 2000 approaches, a critical issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. In brief, many existing application software products in the marketplace
were designed to only accommodate a two digit date position which represents the
year (for example, '97' is stored on the system and represents the year as
1997). As a result, the year 1999 could be the maximum date value these systems
will be able to accurately process. A time-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
24
The Company has adopted a plan of action to minimize the risk of the year 2000
event including the establishment of an oversight committee. The committee will
coordinate the identification, evaluation, and implementation of changes to
computer systems and software. The committee's goal is to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. The Company plans on completing the testing process of all
significant applications by December 31, 1998.
The Company has initiated formal communications with all of its vendors,
including the U.S. Government, to determine their Year 2000 compliance
readiness. The Company is reviewing the extent the interface systems are
vulnerable to any third parties' year 2000 issues. There can be no guarantee
that the systems of other companies on which the Company systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
Many of the Company's systems include new hardware and software purchased from
vendors who have represented that these systems are already year 2000 compliant.
The Company is in the process of obtaining assurances from vendors that timely
updates will be made available to make all remaining systems compliant.
Management does not anticipate the Company will be required to purchase any
additional hardware or sftware to be year 2000 compliant. However, management
does anticipate some administrative costs relative to the identification and
testing of the Company's electronic data processing systems. The costs and
timing of the year 2000 project is based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from these plans.
SUPERVISION AND REGULATION
Community West Bancshares (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "Act"), and is
subject to supervision by the Federal Reserve Board (the "FRB"). As a bank
holding company, the Company is required to file with the FRB an annual report
and such other additional information as the FRB may require pursuant to the
Act. The FRB may also make examinations of the Company and its subsidiaries.
The Act requires prior approval by the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank or for a merger or consolidation by a bank holding company with any other
bank holding company.
Goleta National Bank (the "Bank") is a wholly-owned subsidiary of the Company.
The Company and any subsidiaries it may organize are deemed to be affiliates of
the Bank within the meaning of the Act. Pursuant thereto, loans by the Bank to
affiliates, investments by the Bank in affiliates' stock, and taking affiliates'
stock by the Bank as collateral for loans to any borrower will be limited to 10%
of the Bank's capital, in the case of any one affiliate, and will be limited to
20% of the Bank's capital in the case of all affiliates. In addition, such
transactions must be on terms and conditions that are consistent with safe and
sound banking practices; in particular, a bank and its subsidiaries generally
may not purchase from an affiliate a low-quality asset, as defined in the Act.
Such restrictions also prevent a bank holding company and its other affiliates
from borrowing from a banking subsidiary of the bank holding company unless the
loans are secured by marketable collateral of designated amounts. The Company
and the Bank are also subject to certain restrictions with respect to engaging
in the underwriting, public sale and distribution of securities.
25
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to or performing services for its
authorized subsidiaries. A bank holding company may, however, engage or acquire
an interest in a company that engages in activities which the FRB has determined
to be closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the FRB is required
to consider whether the performance of such activities can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices. Although the
future scope of permitted activities is uncertain and cannot be predicted, some
of the activities that the FRB has determined by regulation to be closely
related to banking are: (i) making or acquiring loans or other extensions of
credit for its own account or for the account of others; (ii) servicing loans
and other extensions of credit for any person; (iii) operating an industrial
bank, Morris Plan bank, or industrial loan company, as authorized under state
law, so long as the institution is not a bank; (iv) operating a trust company in
the manner authorized by federal or state law, so long as the institution is not
a bank and does not make loans or investments or accept deposits, except as
permitted under the FRB's Regulation Y; (v) subject to certain limitations,
acting as an investment or financial adviser to investment companies and other
persons; (vi) leasing personal and real property or acting as agent, broker, or
adviser in leasing such property in accordance with various restrictions imposed
by Regulation Y, including a restriction that it is reasonably anticipated that
each lease will compensate the lessor for not less than the lessor's full
investment in the property; (vii) making equity and debt investments in
corporations or projects designed primarily to promote community welfare; (viii)
providing financial, banking, or economic data processing and data transmission
services, facilities, data bases, or providing access to such services,
facilities, or data bases; (ix) acting as principal, agent, or broker for
insurance directly related to extensions of credit which are limited to assuring
the repayment of debts in the event of death, disability, or involuntary
unemployment of the debtor; (x) acting as agent or broker for insurance directly
related to extensions of credit by a finance company subsidiary; (xi) owning,
controlling, or operating a savings association provided that the savings
association engages only in activities permitted for bank holding companies
under Regulation Y; (xii) providing courier services of limited character;
(xiii) providing management consulting advice to non-affiliated bank and nonbank
depository institutions, subject to the limitations imposed by Regulation Y;
(xiv) selling money orders, travelers' checks and U.S. Savings Bonds; (xv)
appraisal of real estate and personal property; (xvi) acting as an intermediary
for the financing of commercial or industrial income-producing real estate;
(xvii) providing securities brokerage services, related securities credit
activities pursuant to Regulation T, and other incidental activities; (xiii)
underwriting and dealing in obligations of the U.S., general obligations of
states and their political subdivisions, and other obligations authorized for
state member banks under federal law; and (xix) providing general information
and statistical forecasting, advisory and transactional services with respect to
foreign exchange through a separately incorporated subsidiary.
Federal law prohibits a holding company and any subsidiary banks from engaging
in certain tie-in arrangements in connection with the extension of credit.
Thus, for example, the Bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) the customer must obtain or provide some additional
credit, property or services from or to the Bank other than a loan, discount,
deposit or trust service; or (ii) the customer must obtain or provide some
additional credit, property or service from or to the Company or any other
subsidiary of the Company; or (iii) the customer may not obtain some other
credit, property or services from competitors, except reasonable requirements to
assure soundness of credit extended.
The FRB's risk-based capital adequacy guidelines for bank holding companies and
state member banks, discussed in more detail below (see "SUPERVISION AND
REGULATION - THE BANK - RECENT LEGISLATION AND REGULATORY CHANGES - 3.
Risk-Based Capital Guidelines"), assign various risk percentages to different
categories of assets, and capital is measured as a percentage of risk assets.
While in many cases total risk assets calculated in accordance with the
guidelines is less than total assets calculated absent the rating, certain non-
balance sheet assets, including loans sold with recourse, legally binding loan
commitments and standby letters of credit, are treated as risk assets, with the
assigned rate varying with the type of asset. As a result, it is possible that
total risk assets for purposes of the guidelines exceeds total assets under
generally accepted accounting principles, thereby reducing the capital-to-assets
ratio. Under the terms of the guidelines, bank holding companies are expected
to meet capital adequacy guidelines based both on total assets and on total risk
assets.
The Company is also a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, the Company and its subsidiaries are
subject to examination by, and may be required to file reports with, the
Commissioner. Regulations have not yet been proposed or adopted or steps
otherwise taken to implement the Commissioner's powers under this statute.
26
SUPERVISION AND REGULATION - THE BANK
GENERAL. The Bank is organized under the laws of the United States. As a
- -------
national bank whose deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum extent provided by law, the Bank is
subject to supervision, examination and regulation by the Office of the
Comptroller of the Currency (the "OCC"). The Bank's primary federal bank
regulatory agency is the OCC but the Bank is also subject to certain regulations
of the FDIC. The regulations of these agencies govern most aspects of the
Bank's business, including capital adequacy ratios, reserves against deposits,
restrictions on the rate of interest which may be paid on some deposit
instruments, limitations on the nature and amount of loans which may be made,
the location of branch offices, borrowings, and dividends. Supervision,
regulation and examination of the Bank by the regulatory agencies are generally
intended to protect depositors and are not intended for the protection of the
Bank's shareholders.
RECENT LEGISLATION AND REGULATORY CHANGES.
- ---------------------------------------------
.INTRODUCTION
------------
General. From time to time legislation is proposed or enacted which has the
- -------
effect of increasing the cost of doing business and changing the competitive
balance between banks and other financial and non-financial institutions.
Various federal laws enacted over the past several years have provided, among
other things, for the maintenance of mandatory reserves with the Federal Reserve
Bank on deposits by depository institutions (state reserve requirements have
been eliminated); the phasing-out of the restrictions on the amount of interest
which financial institutions may pay on certain of their customers' accounts;
and the authorization of various types of new deposit accounts, such as NOW
accounts, "Money Market Deposit" accounts and "Super NOW" accounts, designed to
be competitive with money market mutual funds and other types of accounts and
services offered by various financial and non-financial institutions. The
lending authority and permissible activities of certain non-bank financial
institutions such as savings and loan associations and credit unions have been
expanded, and federal regulators have been given increased authority and means
for providing financial assistance to insured depository institutions and for
effecting interstate and cross-industry mergers and acquisitions of failing
institutions. These laws have generally had the effect of altering competitive
relationships existing among financial institutions, reducing the historical
distinctions between the services offered by banks, savings and loan
associations and other financial institutions, and increasing the cost of funds
to banks and other depository institutions.
Other legislation has been proposed or is pending before the United States
Congress which would effect the financial institutions industry. Such
legislation includes wide-ranging proposals to further alter the structure,
regulation and competitive relationships of the nation's financial institutions,
to reorganize the federal regulatory structure of the financial institutions
industry, to subject banks to increased disclosure and reporting requirements,
and to expand the range of financial services which banks and bank holding
companies can provide. Other proposals which have been introduced or are being
discussed would equalize the relative powers of savings and loan holding
companies and bank holding companies, and authorize such holding companies to
engage in insurance underwriting and brokerage, real estate development and
brokerage, and certain securities activities, including underwriting and dealing
in United States Government securities and municipal securities, sponsoring and
managing investment companies and underwriting the securities thereof. It
cannot be predicted whether or in what form any of these proposals will be
adopted, or to what extent they will effect the various entities comprising the
financial institutions industry.
Certain of the potentially significant changes which have been enacted in the
past several years are discussed below.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency
- ------------------
Act of 1994 (the "Riegle-Neal Act"), enacted on September 29, 1994, repealed the
McFadden Act of 1927, which required states to decide whether national or state
banks could enter their state, and, effective June 1, 1997, allows banks to open
branches across state lines. The Riegle-Neal Act also repealed the 1956 Douglas
Amendment to the Bank Holding Company Act, which placed the same requirements on
bank holding companies. The repeal of the Douglas Amendment made it possible
for bank holding companies to buy out-of-state banks in any state after
September 29, 1995, which, after June 1, 1997, may now be converted into
interstate branches.
27
The Riegle-Neal Act permitted interstate banking to begin effective September
29, 1995. The amendment to the Bank Holding Company Act permits bank holding
companies to acquire banks in other states provided that the acquisition does
not result in the bank holding company controlling more than 10 percent of the
deposits in the United States, or 30 percent of the deposits in the state in
which the bank to be acquired is located. However, the Riegle-Neal Act also
provides that states have the authority to waive the state concentration limit.
Individual states may also require that the bank being acquired be in existence
for up to five years before an out-of-state bank or bank holding company may
acquire it.
The Riegle-Neal Act provides that, since June 1, 1997, interstate branching and
merging of existing banks is permitted, provided that the banks are at least
adequately capitalized and demonstrate good management. Interstate mergers and
branch acquisitions were permitted at an earlier time if the state choose to
enact a law allowing such activity. The states were also authorized to enact
laws to permit interstate banks to branch de novo.
On September 28, 1995, the California Interstate Banking and Branching Act of
1995 ("CIBBA") was enacted and signed into law. CIBBA authorized out-of-state
banks to enter California by the acquisition of or merger with a California bank
that has been in existence for at least 5 years, unless the California bank is
in danger of failing or in certain other emergency situations. CIBBA allows a
California state bank to have agency relationships with affiliated and
unaffiliated insured depository institutions and allows a bank subsidiary of a
bank holding company to act as an agent to receive deposits, renew time
deposits, service loans and receive payments for a depository institution
affiliate.
Proposed Expansion of Securities Underwriting Authority. Various bills have
- -----------------------------------------------------------
been introduced in the United States Congress which would expand, to a lesser or
greater degree and subject to various conditions and limitations, the authority
of bank holding companies to engage in the activity of underwriting and dealing
in securities. Some of these bills would authorize securities firms (through
the holding company structure) to own banks, which could result in greater
competition between banks and securities firms. No prediction can be made as to
whether any of these bills will be passed by the United States Congress and
enacted into law, what provisions such a bill might contain, or what effect it
might have on the Bank.
Expansion of Investment Opportunities for California State-Chartered Banks.
- -------------------------------------------------------------------------------
Legislation enacted by the State of California has substantially expanded the
authority of California state-chartered banks to invest in real estate,
corporate stock and other corporate securities. National banks are governed in
these areas by federal law, the provisions of which are more restrictive than
California law. However, provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, discussed below, limit state-authorized
activities to that available to national banks, unless approved by the FDIC.
Recent Accounting Pronouncements: In March 1997, the Financial Accounting
- -------------------------------------
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing net income applicable to
common stockholders by the weighted -average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. Restatement of all
prior period EPS data presented is required. This statement was adopted for the
year ended December 31, 1997, and is reflected in the Company's consolidated
financial statements. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements for the year ended
December 31, 1997.
In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company adopted this
statement for the year ended December 31, 1997, and is reflected in the
Company's consolidated financial statements. the adoption of this statement did
not have a material impact on the Company's consolidated financial statements
for the year ended December 31, 1997.
28
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement further requires that an entity display an amount
representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain debt and
equity securities. Reclassification of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is not expected to have a
material impact on the Company's financial statements.
Reclassifications - Certain amounts in the accompanying financial statements for
1996 and 1995 have been reclassified to conform to the 1997 presentation.
2. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989
--------------------------------------------------------------------
General. On August 9, 1989, the Financial Institutions Reform, Recovery, and
- -------
Enforcement Act of 1989 ("FIRREA") was signed into law. This legislation has
resulted in major changes in the regulation of insured financial institutions,
including significant changes in the authority of government agencies to
regulate insured financial institutions.
Under FIRREA, the Federal Savings and Loan Insurance Corporation ("FSLIC") and
the Federal Home Loan Bank Board were abolished and the FDIC was authorized to
insure savings associations, including federal savings associations, state
chartered savings and loans and other corporations determined to be operated in
substantially the same manner as a savings association. FIRREA established two
deposit insurance funds to be administered by the FDIC. The money in these two
funds is separately maintained and not commingled. The FDIC Permanent Insurance
Fund was replaced by the Bank Insurance Fund (the "BIF") and the FSLIC deposit
insurance fund was replaced by the Savings Association Insurance Fund (the
"SAIF").
Deposit Insurance Assessments. Under FIRREA, the premium assessments made on
- -------------------------------
banks and savings associations for deposit insurance were initially increased,
with rates set separately for banks and savings associations, subject to
statutory restrictions. The Omnibus Budget Reconciliation Act of 1990, designed
to address the federal budget deficit, increased the insurance assessment rates
for members of the BIF and the SAIF over that provided by FIRREA, and eliminated
FIRREA's maximum reserve-ratio constraints on the BIF. The FDIC raised BIF
premiums to 23 per $100 in insured deposits for 1993 from a base of 12 in
1990.
Effective January 1, 1994, the FDIC implemented a risk-based assessment system,
under which an institution's premium assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of such loss, and the revenue needs of the deposit insurance
fund. As long as BIF's reserve ratio is less than a specified "designated
reserve ratio," 1.25%, the total amount raised from BIF members by the
risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were 23 per $100 in insured
deposits. The FDIC determined that the designated reserve ratio was achieved on
May 31, 1995. Accordingly, on August 8, 1995, the FDIC issued final regulations
adopting an assessment rate schedule for BIF members of 4 to 31 per $100 in
insured deposits that became effective June 1, 1995. On November 14, 1995, the
FDIC further reduced the BIF assessment rates by 4 so that effective January 1,
1996, the premiums ranged from zero to 27 per $100 in insured deposits, but in
any event not less than $2,000 per year.
29
Under the risk-based assessment system, a BIF member institution such as the
Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the Comptroller). The three supervisory categories are: financially sound with
only a few minor weaknesses (Group A), demonstrates weaknesses that could result
in significant deterioration (Group B), and poses a substantial probability of
loss (Group C). The capital ratios used by the Comptroller to define
well-capitalized, adequately capitalized and undercapitalized are the same as in
the Comptroller's prompt corrective action regulations (discussed below). The
BIF assessment rates since January 1, 1997 are summarized below; assessment
figures are expressed in terms of cents per $100 in insured deposits.
Assessment Rates Effective January 1, 1997
- -----------------------------------------------
Supervisory Group
------------------
Capital Group Group A Group B Group C
- ---------------------- ------- ------- -------
Well Capitalized . . . 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized . . . 10 24 27
The Deposit Insurance Funds Act of 1996, signed into law on September 30, 1996,
eliminated the minimum assessment, commencing with the fourth quarter of 1996.
In addition, after December 31, 1996, banks are required to share in the payment
of interest on Financing Corp. ("FICO") bonds. Previously, the FICO debt was
paid out of the SAIF assessment base. The assessments imposed on insured
depository institutions with respect to any BIF-assessable deposit will be
assessed at a rate equal to 1/5 of the rate of the assessments imposed on
insured depository institutions with respect to any SAIF-assessable deposit.
Although the FICO assessment rates are annual rates, they are subject to change
quarterly. For the first quarter of 1997, the SAIF-FICO assessment rate was
6.48 per $100 in insured deposits. Accordingly, the BIF-FICO assessment rate
was 1.296 per $100 in insured deposits. For the second quarter of 1997, the
SAIF-FICO assessment rate was 6.5 per $100 in insured deposits and the BIF-FICO
assessment rate was 1.3 per $100 in insured deposits. For the third quarter of
1997, the SAIF- FICO assessment rate was 6.3 and the BIF-FICO assessment rate
was 1.26 . For the fourth quarter of 1997, the SAIF-FICO assessment rate was
6.32 and the BIF-FICO assessment rate was 1.264 . Since the FICO bonds do not
mature until the year 2019, it is conceivable that banks will continue to share
in the payment of the interest on the bonds until then.
With certain limited exceptions, FIRREA prohibits a bank from changing its
status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.
FDIC Receiverships. Pursuant to FIRREA, the FDIC may be appointed conservator
- -------------------
or receiver of any insured bank or savings association. In addition, FIRREA
authorized the FDIC to appoint itself as sole conservator or receiver of any
insured state bank or savings association for any, among others, of the
following reasons: (i) insolvency of such institution; (ii) substantial
dissipation of assets or earnings due to any violation of law or regulation or
any unsafe or unsound practice; (iii) an unsafe or unsound condition to transact
business, including substantially insufficient capital or otherwise; (iv) any
willful violation of a cease and desist order which has become final; (v) any
concealment of books, papers, records or assets of the institution; (vi) the
likelihood that the institution will not be able to meet the demands of its
depositors or pay its obligations in the normal course of business; (vii) the
incurrence or likely incurrence of losses by the institution that will deplete
all or substantially all of its capital with no reasonable prospect for the
replenishment of the capital without federal assistance; and (viii) any
violation of any law or regulation, or an unsafe or unsound practice or
condition which is likely to cause insolvency or substantial dissipation of
assets or earnings, or is likely to weaken the condition of the institution or
otherwise seriously prejudice the interest of its depositors.
30
As a receiver of any insured depository institution, the FDIC may liquidate such
institution in an orderly manner and make such other disposition of any matter
concerning such institution as the FDIC determines is in the best interests of
such institution, its depositors and the FDIC. Further, the FDIC shall as the
conservator or receiver, by operation of law, succeed to all rights, titles,
powers and privileges of the insured institution, and of any stockholder,
member, account holder, depositor, officer or director of such institution with
respect to the institution and the assets of the institution; may take over the
assets of and operate such institution with all the powers of the members or
shareholders, directors and the officers of the institution and conduct all
business of the institution; collect all obligations and money due to the
institution and preserve; and conserve the assets and property of such
institution.
Enforcement Powers. Some of the most significant provisions of FIRREA were the
- -------------------
expansion of regulatory enforcement powers. FIRREA has given the federal
regulatory agencies broader and stronger enforcement authorities reaching a
wider range of persons and entities. Some of those provisions included those
which: (i) expanded the category of persons subject to enforcement under the
Federal Deposit Insurance Act; (ii) expanded the scope of cease and desist
orders and provided for the issuance of a temporary cease and desist orders;
(iii) provided for the suspension and removal of wrongdoers on an expanded basis
and on an industry-wide basis; (iv) prohibited the participation of persons
suspended or removed or convicted of a crime involving dishonesty or breach of
trust from serving in another insured institution; (v) required regulatory
approval of new directors and senior executive officers in certain cases; (vi)
provided protection from retaliation against "whistleblowers" and establishes
rewards for "whistleblowers" in certain enforcement actions resulting in the
recovery of money; (vii) required the regulators to publicize all final
enforcement orders; (viii) required each insured financial institution to
provide its independent auditor with its most recent Report of Condition ("Call
Report"); (ix) significantly increased the penalties for failure to file
accurate and timely Call Reports; and (x) provided for extensive increases in
the amounts and circumstances for assessment of civil money penalties, civil and
criminal forfeiture and other civil and criminal fines and penalties.
Crime Control Act of 1990. The Crime Control Act of 1990 further strengthened
- ---------------------------
the authority of federal regulators to enforce capital requirements, increased
civil and criminal penalties for financial fraud, and enacted provisions
allowing the FDIC to regulate or prohibit certain forms of golden parachute
benefits and indemnification payments to officers and directors of financial
institutions.
2. RISK-BASED CAPITAL GUIDELINES
-------------------------------
The federal banking agencies have established risk-based capital guidelines.
The risk- based capital guidelines include both a new definition of capital and
a framework for calculating risk weighted assets by assigning assets and
off-balance sheet items to broad credit risk categories. A bank's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk weighted assets (the denominator of the ratio).
A bank's qualifying total capital consists of two types of capital components:
"core capital elements" (comprising Tier 1 capital) and "supplementary capital
elements" (comprising Tier 2 capital). The Tier 1 component of a bank's
qualifying capital must represent at least 50% of qualifying total capital and
may consist of the following items that are defined as core capital elements:
(i) common stockholders' equity; (ii) qualifying noncumulative perpetual
preferred stock (including related surplus); and (iii) minority interest in the
equity accounts of consolidated subsidiaries. The Tier 2 component of a bank's
qualifying total capital may consist of the following items: (i) allowance for
loan and lease losses (subject to limitations); (ii) perpetual preferred stock
and related surplus (subject to conditions); (iii) hybrid capital instruments
(as defined) and mandatory convertible debt securities; and (iv) term
subordinated debt and intermediate-term preferred stock, including related
surplus (subject to limitations).
Assets and credit equivalent amounts of off-balance sheet items are assigned to
one of several broad risk categories, according to the obligor, or, if relevant,
the guarantor or the nature of collateral. The aggregate dollar value of the
amount in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk categories
are added together, and this sum is the bank's total risk weighted assets that
comprise the denominator of the risk-based capital ratio.
31
Risk weights for all off-balance sheet items are determined by a two-step
process. First, the "credit equivalent amount" of off-balance sheet items such
as letters of credit and recourse arrangements is determined, in most cases by
multiplying the off-balance sheet item by a credit conversion factor. Second,
the credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the obligor,
or, if relevant, the guarantor or the nature of the collateral.
The supervisory standards set forth below specify minimum supervisory ratios
based primarily on broad risk considerations. The risk-based ratios do not take
explicit account of the quality of individual asset portfolios or the range of
other types of risks to which banks may be exposed, such as interest rate,
liquidity, market or operational risks. For this reason, banks are generally
expected to operate with capital positions above the minimum ratios.
All banks are required to meet a minimum ratio of qualifying total capital to
risk weighted assets of 8%, of which at least 4% should be in the form of Tier 1
capital net of goodwill, and a minimum ratio of Tier 1 capital to risk weighted
assets of 4%. The maximum amount of supplementary capital elements that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of
goodwill. In addition, the combined maximum amount of subordinated debt and
intermediate-term preferred stock that qualifies as Tier 2 capital is limited to
50% of Tier 1 capital. The maximum amount of the allowance for loan and lease
losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk
weighted assets. Allowance for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in a bank's risk-based
capital calculation.
In addition to the risk-based guidelines, the federal banking agencies require
all banks to maintain a minimum amount of Tier 1 capital to total assets,
referred to as the leverage ratio. For a bank rated in the highest of the five
categories used by regulators to rate banks, the minimum leverage ratio of Tier
1 capital to total assets is 3%. For all banks not rated in the highest
category, the minimum leverage ratio must be at least 4% to 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
In December, 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by the policy statement is the sum of: (a) assets
classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over the
upcoming twelve months.
The federal banking agencies have recently revised their risk-based capital
rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations where
a lender has a relatively large proportion of loans involving one borrower,
industry, location, collateral or loan type. Non-traditional activities are
considered those that have not customarily been part of the banking business but
that start to be conducted as a result of developments in, for example,
technology or financial markets. The regulations require institutions with high
or inordinate levels of risk to operate with higher minimum capital standards.
The federal banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and consistency with
safety and soundness standards regarding internal controls, credit underwriting
or other operational and managerial areas.
Further, the banking agencies recently have adopted modifications to the
risk-based capital rules to include standards for interest rate risk exposures.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital arising from adverse movements in interest rates. While interest
rate risk is inherent in a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank. The banking
agencies have addressed this problem by implementing changes to the capital
standards to include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor that the banking agencies
will consider in evaluating an institution's capital adequacy. Bank examiners
consider a bank's historical financial performance and its earnings exposure to
interest rate movements as well as qualitative factors such as the adequacy of a
bank's internal interest rate risk management. The federal banking agencies
recently considered adopting a uniform supervisory framework for all
institutions to measure and assess each bank's exposure to interest rate risk
and establish an explicit capital charge based on the assessed risk, but
ultimately elected not to adopt such a uniform framework. Even without such a
uniform framework, however, each bank's interest rate risk exposure is assessed
by its primary federal regulator on an individualized basis, and it may be
required by the regulator to hold additional capital for interest rate risk if
it has a significant exposure to interest rate risk or a weak interest rate risk
management process.
32
Effective April 1, 1995, the federal banking agencies issued rules which limit
the amount of deferred tax assets that are allowable in computing a bank's
regulatory capital. The standard had been in effect on an interim basis since
March, 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of: (i) the amount that can be realized within one year
of the quarter-end report date; or (ii) 10% of Tier 1 capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1 capital,
total assets and regulatory capital calculations.
3. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
--------------------------------------------------------------------
General. The Federal Deposit Insurance Corporation Improvement Act of 1991
- -------
("FDICIA") was signed into law on December 19, 1991. FDICIA recapitalized the
FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to increase
deposit insurance premium assessments and to borrow from other sources, and
continued the expansion of regulatory enforcement powers, along with many other
significant changes.
Prompt Corrective Action. FDICIA established five categories of bank
- ---------------------------
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under FDICIA, banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if the bank is still solvent.
The federal banking agencies have promulgated substantially similar regulations
to implement this system of prompt corrective action. Under the regulations, a
bank shall be deemed to be: (i) "well capitalized" if it has a total risk-based
capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or
more, has a leverage capital ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more
and a leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized"; (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1
risk- based capital ratio that is less than 4.0%, or a leverage capital ratio
that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
FDICIA and the implementing regulations also provide that a federal banking
agency may, after notice and an opportunity for a hearing, reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category if the institution
is in an unsafe or unsound condition or engaging in an unsafe or unsound
practice. (The federal banking agency may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
Operational Standards. FDICIA also granted the regulatory agencies authority to
- ---------------------
prescribe standards relating to internal controls, credit underwriting, asset
growth and compensation, among others, and required the regulatory agencies to
promulgate regulations prohibiting excessive compensation or fees. Many
regulations have been adopted by the regulatory agencies to implement these
provisions and subsequent legislation (the Riegal Community Development Act,
discussed below) gave the regulatory agencies the option of prescribing the
safety and soundness standards as guidelines rather than regulations.
33
Regulatory Accounting Reports. Each bank with $500 million or more in assets is
- -----------------------------
required to submit an annual report to the FDIC, as well as any other federal
banking agency with authority over the bank, and any appropriate state banking
agency; in the Bank's case, the OCC. This report must contain a statement
regarding management's responsibilities for: (i) preparing financial statements;
(ii) establishing and maintaining adequate internal controls; and (iii)
complying with applicable laws and regulations. In addition to having an
audited financial statement by an independent accounting firm on an annual
basis, the accounting firm must determine and report as to whether the financial
statements are presented fairly and in accordance with generally accepted
accounting principles and comply with other requirements of the applicable
federal banking authority. In addition, the accountants must attest to and
report to the regulators separately on management's compliance with internal
controls.
Truth in Savings. FDICIA further established a new truth in savings scheme,
- ------------------
providing for clear and uniform disclosure of terms and conditions on which
interest is paid and fees are assessed on deposits. The FRB's Regulation DD,
implementing the Truth in Savings Act, became effective June 21, 1993.
Brokered Deposits. Effective June 16, 1992, FDICIA placed restrictions on the
- ------------------
ability of banks to obtain brokered deposits or to solicit and pay interest
rates on deposits that are significantly higher than prevailing rates. FDICIA
provides that a bank may not accept, renew or roll over brokered deposits
unless: (i) it is "well capitalized"; or (ii) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.
Lending. New regulations have been issued in the area of real estate lending,
- -------
prescribing standards for extensions of credit that are secured by real property
or made for the purpose of the construction of a building or other improvement
to real estate. In addition, the aggregate of all loans to executive officers,
directors and principal shareholders and related interests may now not exceed
100% (200% in some circumstances) of the depository institution's capital.
State Authorized Activities. The new legislation also created restrictions on
- ----------------------------
activities authorized under state law. FDICIA generally restricts activities
through subsidiaries to those permissible for national banks, unless the FDIC
has determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements, thereby effectively eliminating real estate investment
authorized under California law, and provided for a five-year divestiture period
for impermissible investments. Insurance activities were also limited, except
to the extent permissible for national banks.
5. RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF 1994
--------------------------------------------------------------------
The Riegle Community Development and Regulatory Improvement Act of 1994 (the
"1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of FDICIA, was signed into law on September 23,
1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups, the 1994 Act mandated changes
to a wide range of banking regulations. These changes included modifications to
the publication requirements for Call Reports, less frequent regulatory
examination schedules for small institutions, small business and commercial real
estate loan securitization, amendments to the money laundering and currency
transaction reporting requirements of the Bank Secrecy Act, clarification of the
coverage of the Real Estate Settlement Procedures Act for business, commercial
and agricultural real estate secured transactions, amendments to the national
flood insurance program, and amendments to the Truth in Lending Act to provide
greater protection for consumers by reducing discrimination against the
disadvantaged.
34
The "Paperwork Reduction and Regulatory Improvement Act," Title III of the 1994
Act, required the federal banking agencies to consider the administrative
burdens that new regulations will impose before their adoption and requires a
transition period in order to provide adequate time for compliance. This Act
also requires the federal banking agencies to work together to establish uniform
regulations and guidelines as well as to work together to eliminate duplicative
or unnecessary requests for information in connection with applications or
notices. This act reduces the frequency of examinations for well-rated
institutions, simplifies the quarterly Call Reports and eliminated the
requirement that financial institutions publish their Call Reports in local
newspapers. This Act also established an internal regulatory appeal process and
independent ombudsman to provide a means for review of material supervisory
determinations. The Paperwork Reduction and Regulatory Improvement Act also
amended the Bank Holding Company Act and Securities Act of 1933 to simplify the
formation of bank holding companies.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the reporting
requirements imposed on financial institutions for large currency transactions,
expanding the ability of financial institutions to provide exemptions to the
reporting requirements for businesses that regularly deal in large amounts of
currency, and providing for the delegation of civil money penalty enforcement
from the Treasury Department to the individual federal banking agencies.
6. SAFETY AND SOUNDNESS STANDARDS
---------------------------------
In July, 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA and the
1994 Act. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured depository institutions before capital becomes impaired. If
an institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
The federal banking agencies issued regulations prescribing uniform guidelines
for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be conducted by
either state certified or state licensed appraisers for transactions in excess
of certain amounts. State certified appraisers are required for all
transactions with a transaction value of $1,000,000 or more; for all
nonresidential transactions valued at $250,000 or more; and for "complex" 1- 4
family residential properties of $250,000 or more. A state licensed appraiser
is required for all other appraisals. However, appraisals performed in
connection with "federally related transactions" must now comply with the
agencies' appraisal standards. Federally related transactions include the sale,
lease, purchase, investment in, or exchange of, real property or interests in
real property, the financing or refinancing of real property, and the use of
real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
4. CONSUMER PROTECTION LAWS AND REGULATIONS
--------------------------------------------
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with various consumer protection
laws and their implementing regulations. Banks are subject to many federal
consumer protection laws and their regulations including, but not limited to,
the Community Reinvestment Act (the "CRA"), the Truth in Lending Act (the
"TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit Opportunity Act
(the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the Real Estate
Settlement Procedures Act ("RESPA").
35
The CRA, enacted into law in 1977, is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs
of their communities. The CRA specifically directs the federal bank regulatory
agencies, in examining insured depository institutions, to assess their record
of helping to meet the credit needs of their entire community, including low-
and moderate-income neighborhoods, consistent with safe and sound banking
practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, consummating
mergers or acquisitions, or holding company formations.
The federal banking agencies have adopted regulations which measure a bank's
compliance with its CRA obligations on a performance-based evaluation system.
This system bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. The ratings range from "outstanding" to a low of
"substantial noncompliance."
The ECOA, enacted into law in 1974, prohibits discrimination in any credit
transaction, whether for consumer or business purposes, on the basis of race,
color, religion, national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance programs, or good faith
exercise of any rights under the Consumer Credit Protection Act. In March,
1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact. This means that if a creditor's actions have had the effect
of discriminating, the creditor may be held liable - even when there is no
intent to discriminate.
The FH Act, enacted into law in 1968, regulates may practices, including making
it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap, or familial status. The FH Act is broadly written and has been
broadly interpreted by the courts. A number of lending practices have been
found to be, or may be considered, illegal under the FH Act, including some that
are not specifically mentioned in the FH Act itself. Among those practices that
have been found to be, or may be considered, illegal under the FH Act are:
declining a loan for the purposes of racial discrimination; making excessively
low appraisals of property based on racial considerations; pressuring,
discouraging, or denying applications for credit on a prohibited basis; using
excessively burdensome qualifications standards for the purpose or with the
effect of denying housing to minority applicants; imposing on minority loan
applicants more onerous interest rates or other terms, conditions or
requirements; and racial steering, or deliberately guiding potential purchasers
to or away from certain areas because of race.
The TILA, enacted into law in 1968, is designed to ensure that credit terms are
disclosed in a meaningful way so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology and expressions of rates, the annual percentage rate,
the finance charge, the amount financed, the total payments and the payment
schedule.
HMDA, enacted into law in 1975, grew out of public concern over credit shortages
in certain urban neighborhoods. One purpose of HMDA is to provide public
information that will help show whether financial institutions are serving the
housing credit needs of the neighborhoods and communities in which they are
located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.
36
RESPA, enacted into law in 1974, requires lenders to provide borrowers with
disclosures regarding the nature and costs of real estate settlements. Also,
RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
Violations of these various consumer protection laws and regulations can result
in civil liability to the aggrieved party, regulatory enforcement including
civil money penalties, and even punitive damages.
8. CONCLUSION
----------
As a result of the recent federal and California legislation, there has been a
competitive impact on commercial banking. There has been a lessening of the
historical distinction between the services offered by banks, savings and loan
associations, credit unions, and other financial institutions, banks have
experienced increased competition for deposits and loans which may result in
increases in their cost of funds, and banks have experienced increased costs.
Further, the federal banking agencies have increased enforcement authority over
banks and their directors and officers.
Future legislation is also likely to impact the Bank's business. Consumer
legislation has been proposed in Congress which may require banks to offer
basic, low-cost, financial services to meet minimum consumer needs. Various
proposals to restructure the federal bank regulatory agencies are currently
pending in Congress, some of which include proposals to expand the ability of
banks to engage in previously prohibited businesses. Further, the regulatory
agencies have proposed and may propose a wide range of regulatory changes,
including the calculation of capital adequacy and limiting business dealings
with affiliates. These and other legislative and regulatory changes may have
the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing and full extent
of the impact of these proposals cannot be predicted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into derivative financial
instruments. The Company's primary market risk is interest rate risk. Interest
rate risk is the potential of economic losses caused by future interest rate
change. These economic losses can be reflected as a loss of future net interest
income and/or a loss of current fair market values. The objective is to measure
the effect on net interest income and to adjust the balance sheet to minimize
the risks. Community West Bancshares' exposure to market risk is reviewed on a
regular basis by the Asset/Liability committee. Tools used by management include
the standard GAP report. The Company has no market risk instruments held for
trading purposes except for its interest only strip. Management believes the
Company's market risk is reasonable at this time.
See "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management".
The table below provides information about the Company's non-derivative
financial instruments that are sensitive to changes in interest rates. For all
outstanding financial instruments, the table presents the principle outstanding
balance at December 31, 1997 and the weighted average interest yield/rate of the
instruments by either the date the instrument can be repriced for variable rate
financial instruments or the expected maturity date for fixed rate financial
instruments,
37
At December 31, 1997
Expected maturity dates or repricing dates by year
Fair
Value
at
(Dollars in thousands) 1998 1999 2000 2001 2002 Total 12/31/97
-------- ----- ----- ----- ----- -------- ---------
Balance sheet financial
instruments:
ASSETS:
Federal Funds Sold $ 8,440 - - - - $ 8,440 $ 8,440
Average Yield 5.2% - - - - 5.2% -
Time deposits in other
financial institutions 2,477 - - - - 2,477 2,477
Average Yield 5.8% - - - - 5.8% -
Investment securities
- -held to maturity 998 - - - - 998 993
Average yield 6.0% - - - - 6.0% -
Interest only strip 2,529 - - - - 2,529 2,529
Average Yield 11% - - - - 11% -
Servicing Assets 664 - - - - 664 664
Average yield 11% - - - - 11% -
LIABILITIES:
Non-interest bearing
demand $15,133 - - - - $15,133 $ 15,133
Average Yield 0% - - - - 0% -
Interest- bearing
demand 13,608 - - - - 13,608 13,608
Average yield 3.4% - - - - 3.4% -
Savings 12,983 - - - - 12,983 12,983
Average Yield 3.8% - - - - 3.8% -
Time certificates of
deposit 37,105 522 47 11 3 38,529 38,683
Average yield 5.8% 5.8% 5.3% 5.3% 5.1% 5.8% -
38
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Community West Bancshares:
We have audited the consolidated balance sheets of Community West Bancshares and
its wholly-owned subsidiary, Goleta National Bank, (together, known as the
"Company") as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows, for the three years
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes the examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Community West
Bancshares at December 31, 1997 and 1996 and the results of their operations and
their cash flows for the three years ended December 31, 1997 in conformity with
generally accepted accounting principles.
February 6, 1998
Los Angeles, California
40
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,662,513 $ 3,776,649
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,440,000 9,015,000
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 12,102,513 12,791,649
Time deposits in other financial institutions. . . . . . . . . . . . . . 2,477,000 2,378,000
Federal reserve bank stock . . . . . . . . . . . . . . . . . . . . . . . 251,300 155,650
Investment securities held to maturity, at cost; fair value of $992,851
in 1997 and $1,988,450 in 1996 (Note 2). . . . . . . . . . . . . . . . 998,451 1,997,705
Interest Only Strip, held for trading, at fair value . . . . . . . . . . 2,528,587 -
Loans (Notes 3 and 4):
Held for investment, net of allowance for loan losses of $1,285,852
in 1997 and $1,409,321 in 1996 . . . . . . . . . . . . . . . . . . . 56,724,346 50,590,863
Held for sale, at lower of cost or fair value. . . . . . . . . . . . . 14,440,356 6,808,800
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . - 59,524
Premises and equipment, net (Note 5) . . . . . . . . . . . . . . . . . . 2,725,465 2,406,837
Servicing assets (Note 3). . . . . . . . . . . . . . . . . . . . . . . . 664,402 2,233,641
Accrued interest receivable and other assets (Note 7). . . . . . . . . . 2,400,025 1,460,877
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,312,445 $80,883,546
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: (Note 6)
Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . $15,132,830 $15,235,335
Interest-bearing demand. . . . . . . . . . . . . . . . . . . . . . . . 13,607,852 11,578,510
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,982,741 10,361,875
Time certificates of $100,000 or more. . . . . . . . . . . . . . . . . 16,832,753 11,349,493
Other time certificates. . . . . . . . . . . . . . . . . . . . . . . . 21,696,263 22,080,385
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 80,252,439 70,605,598
Accrued interest payable and other liabilities (Note 7). . . . . . . . . 2,931,142 218,807
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 83,183,581 70,824,405
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common stock, no par value; 20,000,000 shares authorized;
3,081,316, and 2,946,984 shares issued and outstanding at
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 8,570,310 8,089,527
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,558,554 1,969,614
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 12,128,864 10,059,141
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,312,445 $80,883,546
See notes to consolidated financial statements.
41
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995
INTEREST INCOME:
Loans, including fees . . . . . . . . . . . . . $ 7,349,925 $6,340,842 $5,977,282
Federal funds sold. . . . . . . . . . . . . . . 423,666 283,137 305,249
Time deposits in other financial institutions . 120,588 87,793 173,571
Investment securities . . . . . . . . . . . . . 115,253 100,300 48,213
Total interest income. . . . . . . . . . 8,009,432 6,812,072 6,504,315
INTEREST EXPENSE ON DEPOSITS . . . . . . . . . . . 2,910,450 2,424,730 2,451,472
NET INTEREST INCOME. . . . . . . . . . . . . . . . 5,098,982 4,387,342 4,052,843
PROVISION FOR LOAN LOSSES (Note 3) . . . . . . . . 260,000 435,000 360,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES. . . . . . . . . . . . . . . . . . . . . 4,838,982 3,952,342 3,692,843
OTHER INCOME:
Gains from loan sales . . . . . . . . . . . . . 4,101,222 2,614,360 2,522,355
Loan origination fees - sold or brokered loans. 2,960,385 2,057,282 731,249
Loan servicing fees . . . . . . . . . . . . . . 631,551 674,598 578,943
Service charges . . . . . . . . . . . . . . . . 896,295 590,239 371,511
Document processing fees. . . . . . . . . . . . 819,355 509,650 83,786
Other income . . . . . . . . . . . . . . . . . . 23,407 174,362 193,412
Total other income . . . . . . . . . . . 9,432,215 6,620,491 4,481,256
OTHER EXPENSES:
Salaries and employee benefits (Note 11). . . . 7,315,447 5,452,981 3,925,434
Occupancy expenses (Note 9) . . . . . . . . . . 1,508,435 1,185,502 986,986
Other operating expenses. . . . . . . . . . . . 714,119 787,064 647,967
Postage & Freight. . . . . . . . . . . . . . . 822,162 542,890 165,110
Advertising Expense . . . . . . . . . . . . . . 582,636 311,187 281,561
Professional Services . . . . . . . . . . . . . 425,828 245,766 317,920
Office Supplies . . . . . . . . . . . . . . . . 155,279 141,543 111,293
Total other expenses . . . . . . . . . . 11,523,906 8,666,933 6,436,271
INCOME BEFORE PROVISION FOR INCOME TAXES . . . . . 2,747,291 1,905,900 1,737,828
PROVISION FOR INCOME TAXES (Note 7). . . . . . . . 1,158,351 800,478 730,000
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 1,588,940 $1,105,422 $1,007,828
NET INCOME PER SHARE -- BASIC. . . . . . . . . . . $ 0.53 $ 0.47 $ 0.50
NET INCOME PER SHARE -- DILUTED. . . . . . . . . . $ 0.44 $ 0.44 $ 0.47
See notes to consolidated financial statements.
42
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
TOTAL
STOCK-
COMMON STOCK RETAINED HOLDERS'
SHARES AMOUNT EARNINGS EQUITY
BALANCE, JANUARY 1, 1995 . . . . . . . . . . . . . 1,829,284 $4,573,210 $ 522,316 $ 5,095,526
Stock dividend. . . . . . . . . . . . . . . . . 182,904 548,724 (548,724) -
Cash dividend . . . . . . . . . . . . . . . . . - - (45,793) (45,793)
Exercise of stock options . . . . . . . . . . . 24,412 55,480 - 55,480
Net income. . . . . . . . . . . . . . . . . . . - - 1,007,828 1,007,828
BALANCE, DECEMBER 31, 1995 . . . . . . . . . . . . 2,036,600 5,177,414 935,627 6,113,041
Secondary offering of common stock and warrants 859,368 2,788,048 - 2,788,048
Cash dividend . . . . . . . . . . . . . . . . . - - (71,435) (71,435)
Exercise of warrants. . . . . . . . . . . . . . 3,848 16,835 - 16,835
Exercise of stock options . . . . . . . . . . . 47,168 107,230 - 107,230
Net income. . . . . . . . . . . . . . . . . . . - - 1,105,422 1,105,422
BALANCE, DECEMBER 31, 1996 . . . . . . . . . . . . 2,946,984 8,089,527 1,969,614 10,059,141
Issuance of founders stock. . . . . . . . . . . - 10,000 - 10,000
Exercise of warrants. . . . . . . . . . . . . . 63,692 278,653 - 278,653
Exercise of stock options . . . . . . . . . . . 70,640 192,130 - 192,130
Net income. . . . . . . . . . . . . . . . . . . - - 1,588,940 1,588,940
BALANCE, DECEMBER 31, 1997 . . . . . . . . . . . . 3,081,316 $8,570,310 $3,558,554 $12,128,864
See notes to consolidated financial statements.
43
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,588,940 $ 1,105,422 $ 1,007,828
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 260,000 435,000 360,000
Deferred income taxes provision (benefit) . . . . . . . . . . . . . . . 77,892 203,094 (117,174)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 593,433 477,101 309,154
(Gain) loss on sale of other real estate owned. . . . . . . . . . . . . (38,707) (41,430) 27,106
Gain on sale of loans held for sale . . . . . . . . . . . . . . . . . . (4,101,222) (1,121,312) (1,433,737)
(Transfer) origination of servicing assets, net of amortization. . . . 2,233,641 (1,191,149) (1,042,492)
Origination of interest-only strip assets, net of amortization. . . . . (2,528,588) - -
Net change in deferred loan fees and premiums . . . . . . . . . . . . . (42,059) 6,549 (33,708)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets. . . . . . . . . . . . . (1,561,491) 800,155 (552,770)
Accrued interest payable and other liabilities. . . . . . . . . . . . 2,634,443 (394,009) (372,409)
Net cash provided by (used in) operating activities. . . . . . . . (883,718) 279,421 (1,848,202)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock. . . . . . . . . . . . . . . . . . . . . (1,096,395) (2,022,218) (993,581)
Maturities of held-to-maturity investment securities. . . . . . . . . . . 2,000,000 1,000,000 485,052
Net (increase) decrease in time deposits in other financial institutions. (99,000) (1,000,000) 2,474,000
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . (10,196,186) (5,551,129) (5,120,625)
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . 370,600 393,430 625,964
Purchase of premises and equipment. . . . . . . . . . . . . . . . . . . . (912,061) (1,308,297) (658,263)
Net cash used in investing activities. . . . . . . . . . . . . . . (9,933,042) (8,488,214) (3,187,453)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts . . . . 4,547,703 (600,306) 10,499,382
Net increase (decrease) in time certificates. . . . . . . . . . . . . . . 5,099,138 7,613,846 (1,811,112)
Proceeds from the secondary offering of common stock and warrants . . . . - 2,788,048 -
Proceeds from the exercise of stock options and warrants. . . . . . . . . 480,783 124,065 55,480
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . - (71,435) (45,793)
Net cash provided by financing activities. . . . . . . . . . . . . 10,127,624 9,854,218 8,697,957
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (689,136) 1,645,425 3,662,302
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . . . . . . 12,791,649 11,146,224 7,483,922
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . $ 12,102,513 $12,791,649 $11,146,224
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,869,088 $ 2,386,367 $ 2,483,069
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789,956 460,000 1,469,000
NONCASH INVESTING ACTIVITY -
Loans transferred to other real estate owned. . . . . . . . . . . . . . . 272,369 411,524 -
See notes to consolidated financial statements.
44
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997____
- ----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Community West Bancshares (the
"Company") and its wholly-owned subsidiary, Goleta National Bank are in
accordance with generally accepted accounting principles and general practices
within the financial services industry. All material intercompany transactions
and accounts have been eliminated. The following are descriptions of the more
significant of those policies.
Nature of Operations - The Company's primary operations are related to
traditional banking activities, including the acceptance of deposits and the
lending and investing of money. In addition, the Company also engages in
electronic services. The Company's customers consist of small to mid-sized
businesses and individuals located in California, Georgia, Nevada and Florida.
The Company also originates and sells U. S. Small Business Administration
("SBA"), FHA Title I and 125 LTV loans through its normal operations and
thirteen loan production offices.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased for one day periods.
Loans - Generally, loans are stated at amounts advanced less payments
collected. Interest on loans is accrued daily on a simple-interest basis, except
where serious doubt exists as to collectibility of the loan, in which case the
accrual of interest income is discontinued.
Loans Held for Sale - The guaranteed portion on loans insured by the SBA
and FHA Title I home improvement loans and 125 loan-to-value loans, which are
originated and are intended for sale in the secondary market, are carried at the
lower of cost or fair value. Funding for SBA and FHA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans under
these programs is dependent on the continuation of such programs.
Investment Securities - The Company classifies as held to maturity those
debt securities it has the positive intent and ability to hold to maturity.
Securities held to maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts.
Provision and Allowance for Loan Losses - The allowance for loan losses is
maintained at a level believed adequate by management to absorb possible losses
on existing loans through a provision for loan losses charged to expense. The
allowance is charged for losses when management believes that full recovery on
loans is unlikely. Management's determination of the adequacy of the allowance
is based on periodic evaluations of the loan portfolio, which take into
consideration such factors as changes in the growth, size and composition of the
loan portfolio, overall portfolio quality, review of specific problem loans,
collateral, guarantees and economic conditions that may affect the borrowers'
ability to pay and/or the value of the underlying collateral. These estimates
depend on the outcome of future events and, therefore, contain inherent
uncertainties.
Management believes the level of the allowance for loan losses as of
December 31, 1997, is adequate to absorb future losses; however, changes in the
local economy, the ability of borrowers to repay amounts borrowed and other
factors may result in the need to increase the allowance through charges to
earnings.
Loan Fees and Costs - Loan origination fees and costs are deferred and
recognized as an adjustment to the loan yield over the life of the loan using
the straight-line method, which approximates the interest method.
45
Interest Only Strips - The Company retains an interest only ("I/O") strip,
which represents the present value of the right to the excess cash flows
generated by the serviced loans which represents the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors, (ii) trustee fees, (iii)
FHA insurance fees (if applicable), (iv) third-party credit enhancement fees (if
applicable), and (v) stipulated servicing fees. The Company determines the
present value of this anticipated cash flow stream at the time each loan sale
transaction closes, utilizing valuation assumptions appropriate for each
particular transaction.
The significant valuation assumptions are related to the anticipated
average lives of the loans sold, including the anticipated prepayment speeds and
the anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flows, which is
calculated utilizing the weighted average lives of the serviced loans.
The I/O Strips are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Investments in Certain Debt and
Equity Marketable Securities." As an I/O Strip is subject to significant
prepayment risk, and therefore has an undetermined maturity date, it cannot be
classified as held to maturity. The Company has chosen to classify its I/O
Strips as trading securities. Based on this classification, the Company is
required to mark these securities to fair value with the accompanying increases
or decreases in fair value being recorded as earnings in the current period. The
determination of fair value is based on the previously mentioned basis.
As the gain recognized in the year of sale is equal to the net estimated
future cash flows from the I/O Strips, discounted at a market interest rate, the
amount of cash actually received over the lives of the loans is expected to
exceed the gain previously recognized at the time the loans are sold. The I/O
Strips are amortized based on an accelerated method against the cash flows
resulting in income recognition that is not materially different from the
interest method. The Company generally retains the fight to service loans it
originates or purchases and subsequently sales.
Other Real Estate Owned - Real estate acquired by foreclosure is recorded
at fair value at the time of foreclosure, less estimated selling costs. Any
subsequent operating expenses or income, reduction in estimated values, and
gains or losses on disposition of such properties are charged to current
operations.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from 2 to 31.5 years. Leasehold improvements are amortized over the term of the
lease or the estimated useful lives, whichever is shorter.
Income Taxes - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
Net Income per Share and Share Equivalent - Net income per share - basic
has been computed based on the weighted average number of shares outstanding
during each year, which was 3,016,208, 2,356,162 and 2,013,830 in 1997, 1996,
and 1995. Net income per share - diluted has been computed based on the weighted
average number of shares outstanding during each year plus the dilutive effect
of outstanding warrants and options, which was 3,588,477, 2,510,352, and
2,128,212 in 1997, 1996, and 1995. Net income per share amounts have been
retroactively restated to reflect the 10% stock dividend issued in 1995 and the
two-for-one stock splits in 1996 and 1998.
46
Reserve Requirements - All depository institutions are required by law to
maintain reserves on transaction accounts and nonpersonal time deposits in the
form of cash balances at the Federal Reserve Bank. These reserve requirements
can be offset by cash balances held at the Company. At December 31, 1997, the
Company's cash balance was sufficient to offset the Federal Reserve requirement.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Current Accounting Pronouncements - In March 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing net income applicable to
common stockholders by the weighted -average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. Restatement of all
prior period EPS data presented is required. This statement was adopted for the
year ended December 31, 1997, and is reflected in the Company's consolidated
financial statements. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements for the year ended
December 31, 1997.
In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company adopted this
statement for the year ended December 31, 1997, and is reflected in the
Company's consolidated financial statements. the adoption of this statement did
not have a material impact on the Company's consolidated financial statements
for the year ended December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain debt and
equity securities. Reclassification of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is not expected to have a
material impact on the Company's financial statements.
Reclassifications - Certain amounts in the accompanying financial
statements for 1996 and 1995 have been reclassified to conform to the 1997
presentation.
47
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31 were as follows:
1997 AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 5.125%, due 2/28/98 $ 499,700 $ - $ 3,200
U.S. Treasury note, par value $500,000, 5.125%, due 6/30/98 498,751 - 2,400
--------------- ---------------------- ----------------------
$ 998,451 $ - $ 5,600
=============== ====================== ======================
1996 AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 4.75%, due 2/15/97. $ 499,632 $ - $ 3,232
U.S. Treasury note, par value $500,000, 5.625%, due 6/30/97 499,531 519 -
U.S. Treasury note, par value $500,000, 5.625%, due 8/31/97 499,792 - 3,392
U.S. Treasury note, par value $500,000, 5.25%, due 12/31/97 498,750 - 3,150
--------------- ---------------------- ----------------------
$ 1,997,705 $ 519 $ 9,774
=============== ====================== ======================
1997 FAIR VALUE
-----------
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 5.125%, due 2/28/98
$ 496,500
U.S. Treasury note, par value $500,000, 5.125%, due 6/30/98
496,351
-----------
$ 992,851
===========
1996 FAIR VALUE
-----------
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 4.75%, due 2/15/97. $ 496,400
U.S. Treasury note, par value $500,000, 5.625%, due 6/30/97 500,050
U.S. Treasury note, par value $500,000, 5.625%, due 8/31/97 496,400
U.S. Treasury note, par value $500,000, 5.25%, due 12/31/97 495,600
-----------
$ 1,988,450
===========
48
3. LOANS
The composition of the Company's loan portfolio at December 31 was as
follows:
1997 1996
Installment . . . . . . . . . . . . . . . . $ 3,466,774 $ 3,776,425
Commercial. . . . . . . . . . . . . . . . . 13,195,325 14,017,173
Real estate . . . . . . . . . . . . . . . . 19,924,139 19,172,017
Loan participations purchased - real estate 2,246,855 709,040
Unguaranteed portion of SBA loans . . . . . 19,602,136 14,708,048
------------ -----------
58,435,229 52,382,703
Less:
Allowance for loan losses . . . . . . . . 1,285,852 1,409,321
Net deferred loan fees and premiums . . . (3,245) 38,813
Other discount on SBA loans . . . . . . . 428,276 343,706
------------ -----------
Loans held for investment, net. . . . . . . $56,724,346 $50,590,863
============ ===========
Loans held for sale . . . . . . . . . . . . $14,440,356 $ 6,808,800
============ ===========
Loans held for sale include the guaranteed and unguaranteed portion of
loans insured by the SBA and FHA Title I, first and second mortgages, and high
loan to value loans. Loans are held for sale and are recorded at the lower of
cost or fair value.
The Company generates substantial revenues from the origination of home
improvement loans under Title I of FHA regulations. This is the oldest
government insured loan program in existence, having begun in 1934. The Company
originates Title I loans and sells them into the secondary market and retains
the servicing. In early 1995, the Company was approved as one of a small number
of financial institutions to be able to sell Title I loans directly to the
Federal National Mortgage Association ("FNMA").
The Company also offers 125 Loan-to-Value ('LTV') loans. These loans allow
the borrower to receive up to 125% of their home value for debt consolidation,
home improvement, school tuition, or any worthwhile cash outlay. There is an
upper limit on these loans of $100,000. In 1997, the Bank sold these loans at a
premium to third-parties.
The Company retains a servicing spread on Title I and SBA loan sales that
creates servicing assets. The servicing spread is separated into two assets. A
servicing asset is recorded for the present value of the excess of the
contractual servicing spread over the expected cost of servicing the portfolio
for the expected life of the loans sold. An interest-only asset is recorded for
the present value of the servicing spread less the contractual servicing for the
estimated expected life of the loans. The Company uses industry prepayment
statistics and its own prepayment experience in estimating the expected life of
the loans. The present value asset is amortized as an offset to loan servicing
income over the estimated expected life of the loans.
The significant valuation assumptions are related to the anticipated
average lives of the loans sold, the anticipated prepayment speeds and the
anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flows, which
are calculated utilizing the weighted average lives of the loans,. Accordingly,
the overall effective discount rate utilized on the cash flows, net of expected
credit losses is approximatley 11%. The annual prepayment rate of the loans is a
function of full and partial prepayments and defaults.
49
The Company monitors actual prepayment experience on a monthly basis. When
actual experience differs materially from the original assumptions, the Company
makes a new estimate of the expected remaining life of the loans, and adjusts
the amortization of the present value asset.
The Company makes loans to borrowers in a number of different industries.
No single industry comprises 10% or more of the Company's loan portfolio.
Although the Company has a diversified loan portfolio, the ability of the
Company's customers to honor their loan agreements is dependent upon, among
other things, the general economy of the Company's market area.
Transactions in the allowance for loan losses for the years ended December
31 are summarized as follows:
1997 1996 1995
Balance, beginning of year . . . . . . . . $1,409,321 $1,462,939 $1,391,316
Provision for loan losses. . . . . . . . . 260,000 435,000 360,000
Loans charged off. . . . . . . . . . . . . (400,745) (510,494) (308,287)
Recoveries on loans previously charged off 17,276 21,876 19,910
----------- ----------- -----------
Balance, end of year . . . . . . . . . . . $1,285,852 $1,409,321 $1,462,939
=========== =========== ===========
The recorded investment in loans that are considered to be impaired under
SFAS No. 114 was as follows:
DECEMBER 31,
------------------------------
1997 1996 1995
Impaired loans without specific valuation allowances . . $1,547,168 $ 764,388 $1,531,318
Impaired loans with specific valuation allowances. . . . 1,250,964 1,178,435 1,432,783
Specific valuation allowance allocated to impaired loans (505,994) (432,853) (583,600)
----------- ----------- -----------
Impaired loans, net. . . . . . . . . . . . . . . . . . . $2,292,138 $1,509,970 $2,380,501
=========== =========== ===========
Average investment in impaired loans . . . . . . . . . . $1,901,054 $1,945,235 $1,805,251
=========== =========== ===========
Interest income recognized on impaired loans . . . . . . $ 287,309 $ 85,559 $ 66,919
=========== =========== ===========
It is generally the Company's policy to place loans on nonaccrual status
when they are 90 days past due. Thereafter, interest income is no longer
recognized and the full amount of all payments received, whether principal or
interest, is applied to the principal balance of the loan. As such, interest
income may be recognized on impaired loans to the extent they are not past due
by 90 days or more.
At December 31, 1997, loans on nonaccrual status totaled $1,259,107
compared to $618,095 and $1,036,782 at December 31, 1996, and 1995. Upon the
adoption of SFAS No. 114, the Company classified all loans on nonaccrual status
as impaired. Accordingly, the impaired loans disclosed above include all loans
that were on nonaccrual status as of December 31, 1997, 1996, and 1995.
50
Financial difficulties encountered by certain borrowers may cause the
Company to restructure the terms of their loans to facilitate loan payments. As
of December 31, 1997, 1996, and 1995, gross troubled debt restructured loans
totaled $2,375,000, $843,000 and $436,000. In accordance with the provisions of
SFAS No. 114, a troubled loan that is restructured subsequent to the adoption of
SFAS No. 114 would generally be considered impaired, while a loan restructured
prior to adoption would not be considered impaired if, at the date of
measurement, it was probable that the Company will collect all amounts due under
the restructured terms. Accordingly, the balance of impaired loans disclosed
above includes all troubled debt restructured loan that, as of December 31,
1997, 1996, and 1995, are considered impaired.
Interest foregone on nonaccrual loans and troubled debt restructurings
outstanding during the years ended December 31, 1997, 1996, and 1995 amounted to
approximately $190,000, $226,000 and $96,000.
4. TRANSACTIONS INVOLVING DIRECTORS AND EMPLOYEES
In the ordinary course of business, the Company has extended credit to
directors and employees of the Company. Such loans are subject to approval by
the Loan Committee and ratification by the Board of Directors, exclusive of the
borrowing director. The following is an analysis of the activity of all such
loans:
1997 1996 1995
Outstanding balance, beginning of year $2,253,822 $1,326,111 $2,007,151
Credit granted, including renewals . . 751,534 957,883 57,723
Repayments . . . . . . . . . . . . . . (796,236) (30,172) (738,763)
----------- ----------- -----------
Outstanding balance, end of year . . . $2,209,120 $2,253,822 $1,326,111
=========== =========== ===========
5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 was as follows:
1997 1996
Furniture, fixtures and equipment. . . . . . . $3,105,026 $2,368,402
Building & land. . . . . . . . . . . . . . . . 782,423 782,423
Leasehold improvements . . . . . . . . . . . . 757,566 648,845
Construction in progress . . . . . . . . . . . 65,657 39,786
---------- ----------
4,710,672 3,839,456
Less accumulated depreciation and amortization 1,985,207 1,432,619
---------- ----------
Premises and equipment, net. . . . . . . . . . $2,725,465 $2,406,837
========== ==========
51
6. DEPOSITS
At December 31, 1997, the scheduled maturities of time certificates of
deposits are as follows:
1998. . . . . . . . $37,945,985
1999. . . . . . . . 521,596
2000. . . . . . . . 47,329
2001. . . . . . . . 11,000
2002 and thereafter 3,106
-----------
$38,529,016
===========
7. INCOME TAXES
Significant components of the Company's net deferred tax account at
December 31, are as follows:
1997 1996
-------------- -----------------
FEDERAL STATE FEDERAL STATE
Deferred tax assets:
Provision for loan losses . . . . . . . . . . . $ 361,455 $ 113,033 $ 349,734 $ 105,430
State taxes . . . . . . . . . . . . . . . . . . 101,589 - 63,114 -
Depreciation. . . . . . . . . . . . . . . . . . - 2,914 - -
Deferred loan fees. . . . . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . . . 7,900 2,518 - -
---------- ---------- ---------- ----------
Total deferred tax assets . . . . . . . . . . . . 470,944 118,465 412,848 105,430
---------- ---------- ---------- ----------
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . . . (11,002) - (38,994) (3,617)
Section 481 -
deferred loan fees (109,995) (35,069) (65,349) (21,719)
Cash to accrual adjustment
Adjustment (12,295) (3,398) (24,591) (7,608)
Deferred loan fees. . . . . . . . . . . . . . . (237,427) (75,697) (135,018) (44,874)
Capitalized loan costs . . . . . . . . . . . . . (26,404) (8,418) (20,552) (6,831)
Prepaid expenses. . . . . . . . . . . . . . . . (75,331) (24,017) (75,699) (25,159)
---------- ---------- ---------- ----------
Total deferred tax
Liabilities (472,454) (146,599) (360,203) (109,808)
---------- ---------- ---------- ----------
Net deferred tax asset
(liability) $ (1,510) $ (28,134) $ 52,645 $ (4,378)
========== ========== ========== ==========
52
The provision for income taxes for the years ended 1997, 1996 and 1995
consists of the following:
1997 1996 1995
Current:
Federal. . . . . . . . $ 828,398 $456,370 $ 634,761
State. . . . . . . . . 252,061 141,014 212,413
---------- -------- ----------
Total current. . . . . . 1,080,459 597,384 847,174
Deferred:
Federal. . . . . . . . 54,155 153,518 (103,797)
State . . . . . . . . 23,737 49,576 (13,377)
---------- -------- ----------
Total deferred . . . . . 77,892 203,094 (117,174)
---------- -------- ----------
Total income tax expense $1,158,351 $800,478 $ 730,000
========== ======== ==========
The reasons for the difference between income tax expense and the amount
computed by applying the federal statutory income tax rate to income before
income taxes are as follows:
1997 1996 1995
Tax expense at federal statutory rate. . . . . . . . . 35% 35% 35%
State franchise tax, net of federal income tax benefit 7 7 8
Other, net . . . . . . . . . . . . . . . . . . . . . . - - (1)
----- ----- -----
Actual tax expense . . . . . . . . . . . . . . . . . . 42% 42% 42%
===== ===== =====
8. STOCKHOLDERS' EQUITY
Common Stock
In 1996 and 1995, cash dividends of $.04 and $.03 per share, respectively,
were declared and paid. In 1995, the Company declared and issued a 10% stock
dividend.
In the first quarter of 1996, the shareholders of the Company approved a
two-for-one stock split effective for shareholders of record on February 18,
1996.
During the third quarter of 1996, the Company successfully completed a
secondary stock offering which resulted in the issuance of 472,653 warrants and
859,368 additional shares of common stock. Net proceeds of $2,788,048 were
realized on this offering after issuance costs of $219,740. Each warrant
entitles the holder to purchase two shares of common stock for $4.375 per share,
and expires on June 30, 1998. In conjunction with the secondary stock offering,
the Company listed its common stock on the NASDAQ National Market under the
symbol 'CWBC'.
Stock Options
Under the terms of the Company's stock option plan, full-time salaried
employees may be granted nonqualified stock options or incentive stock options,
and directors may be granted nonqualified stock options. Options may be granted
at a price not less than 100% of the fair market value of the stock on the date
of grant. Options are generally exercisable in cumulative 20% installments.
However, in certain circumstances, the vesting of these options may be adjusted,
as determined by the Board of Directors. All options expire no later than ten
years from the date of grant. As of December 31, 1997, all options are
outstanding at prices of $2.28 - $9.125 per share with 280,132 options
exercisable and 564,743 options available for future grant. Stock option
activity is as follows:
53
1997 1996 1995
Options outstanding, January 1, . 427,812 398,680 350,992
Granted . . . . . . . . . . . . . 20,000 93,740 58,000
Increase for stock dividend . . . - - 35,700
Canceled. . . . . . . . . . . . . (17,520) (17,440) (21,600)
Exercised . . . . . . . . . . . . (70,640) (47,168) (24,412)
-------- -------- --------
Options outstanding, December 31, 359,652 427,812 398,680
======== ======== ========
The estimated fair value of options granted ranged from $3.78 -
$5.11 per share in 1997, $2.34 - $3.05 per share in 1996 and was $2.00 per share
in 1995. The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share for the ended December 31, 1997, 1996, and 1995 would have been reduced to
the pro forma amounts indicated below:
Net income. . . . . . . . . . . . . . . . . . . 1997 1996 1995
As reported . . . . . . . . . . . . . . . . . . $1,588,940 $1,105,422 $1,007,828
Pro forma . . . . . . . . . . . . . . . . . . . 1,553,592 997,562 999,428
Net income per common share - Basic
As reported . . . . . . . . . . . . . . . . . . $ .53 $ .47 $ .50
Pro forma . . . . . . . . . . . . . . . . . . . $ .52 $ .42 $ .50
Net income per common share - assuming dilution
As reported . . . . . . . . . . . . . . . . . . $ .44 $ .44 $ .47
Pro forma . . . . . . . . . . . . . . . . . . . $ .43 $ .40 $ .47
The fair value of options granted under the Company's fixed stock option
plan during 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: 8.5% annual dividend yield, expected volatility of 53%, risk
free interest rate of 6.5%, and expected lives of 6 years.
54
9. COMMITMENTS AND CONTINGENCIES
The Company leases twelve office facilities under various operating lease
agreements with terms that expire at various dates between March 1998, and
November 2002, plus options to extend the lease terms for periods of up to six
years. The minimum lease commitments as of December 31, 1997, under all
operating lease agreements are as follows:
FOR THE YEAR ENDING DECEMBER 31,
1998. . . . . . . . . . . . . . $291,643
1999. . . . . . . . . . . . . . 199,994
2000. . . . . . . . . . . . . . 126,620
2001. . . . . . . . . . . . . . 110,273
2002 . . . . . . . . . . . . . . 97,443
--------
TOTAL. . . . . . . . . . . . . . $825,973
========
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$294,230, $219,587 and $283,219.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The Company's exposure to credit loss in the event of nonperformance by
the other party to commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. At December
31, 1997, the Company had commitments to extend credit of $20,361,000 and
obligations under standby letters of credit of $30,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. All guarantees
are short term and expire within one year.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment; and income-producing commercial
properties.
The Company has sold loans that are guaranteed or insured by government
agencies for which the Company retains all servicing rights and
responsibilities. The Company is required to perform certain monitoring
functions in connection with these loans to preserve the guarantee by the
government agency and prevent loss to the Company in the event of nonperformance
by the borrower. Management believes that the Company is in compliance with
these requirements. The outstanding balance of the sold portion of such loans
was approximately $78,000,000 at December 31, 1997.
The Company is involved in various litigation through the normal course of
business. In the opinion of management, based upon the advice of the Company's
legal counsel, the disposition of all pending litigation should not have a
material effect on the Company's financial position or results of operations.
55
10. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier I
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1997, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Company as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since that notification which
management believes have changed the Company's category.
The Company's actual capital amounts and ratios at December 31 are as
follows:
TO BE CATEGORIZED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES: PROVISIONS:
------------------- ----------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets). $12,357,179 17.20% $5,746,643 >= 8% $7,183,304 >=10%
Tier I Capital (to Risk Weighted Assets) 11,454,477 15.95% 2,873,321 >=4% 4,309,982 >=6%
Tier I Capital (to Average Assets) . . . . . . . 11,454,477 12.02% 3,812,315 >=4% 4,765,393 >=5%
TO BE CATEGORIZED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES: PROVISIONS:
------------------- ----------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets) 14.88% $5,057,001 >= 8% 6,321,251 >=10%
9,406,022
Tier I Capital (to Risk Weighted Assets) 8,608,032 13.61% 2,529,914 >=4% 3,794,871 >=6%
Tier I Capital (to Average Assets) . . . . . . . 8,608,032 11.33% 3,039,023 >=4% 3,798,778 >=5%
56
11. EMPLOYEE PROFIT SHARING PLAN
On September 1, 1995, the Company established a 401(k) plan for benefit of
its employees. Employees are eligible to participate in the plan if they were
employed by the Company on September 1, 1995, or after 6 months of consecutive
service. Employees may make contributions to the plan under the plan's 401(k)
component, and the Company may make contributions under the plan's profit
sharing component, subject to certain limitations. The Company's contributions
are determined by the Board of Directors and amounted to $112,592, $39,132, and
$15,315 in 1997, 1996, and 1995, respectively.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company disclose estimated fair values for its financial
instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
amounts.
(in thousands) DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------- --------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE CARRYING AMOUNT ESTIMATED FAIR VALUE
Assets:
Cash and cash equivalents $ 12,103 $ 12,103 $ 12,791 $ 12,791
Time deposits in
other financial institutions 2,477 2,477 2,378 2,378
U.S. Treasury Notes 998 998 1,998 1,988
FRB Stock 251 251 156 156
Interest Only Strip 2,529 2,529 - -
Loans 71,165 73,382 57,400 58,952
Servicing Assets 664 664 2,234 2,234
Liabilities:
Deposits 80,252 80,661 70,606 70,602
The methods and assumptions used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate that value are
explained below:
Cash and cash equivalents and time deposits in other financial
institutions - The carrying amounts approximate fair values because of
short-term nature of these investments.
Investment securities - The fair value is based on quoted market
prices from security brokers or dealers if available. If a quoted market price
is not available, fair value is estimated using the quoted market price for
similar securities. It is not practicable to estimate the fair value of Federal
Reserve Company Stock.
Loans held for investment and for sale - Fair values are estimated for
portfolios of loans with similar financial characteristics, primarily fixed and
adjustable rate interest terms. The fair values of fixed rate mortgage loans are
based upon discounted cash flows utilizing the rate that the Company currently
offers as well as anticipated prepayment schedules. The fair values of
adjustable rate loans are also based upon discounted cash flows utilizing
discount rates that the Company currently offers, as well as anticipated
prepayment schedules. No adjustments have been made for changes in credit within
the loan portfolio. It is management's opinion that the allowance for estimated
loan losses pertaining to performing and nonperforming loans results in a fair
valuation of such loans. Fair values of commitments to extend credit are not
materially different than the amounts of deferred fees associated with such
commitments and reflected in the accompanying balance sheets.
57
Deposits - The fair values of deposits are estimated based upon the
type of deposit products. Demand accounts, which include savings and transaction
accounts, are presumed to have equal book and fair values, since the interest
rates paid on these accounts are based on prevailing market rates. The estimated
fair values of time deposits are determined by discounting the cash flows of
segments of deposits that have similar maturities and rates, utilizing a yield
curve that approximates the prevailing rates offered to depositors as of the
measurement date.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly effect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
13. QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data follows:
(All amounts in thousands except per share data)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
1997
Net interest income . . . . . . . . . . . . . $ 1,161 $1,340 $ 1,306 $ 1,292
Provision for loan losses . . . . . . . . . . 80 80 100 -
Net income. . . . . . . . . . . . . . . . . . 309 404 438 438
Net income per share - basic . . . . . . . . $ .10 $ .13 $ .15 $ .15
- diluted $ .09 $ .11 $ .12 $ .12
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
1996
Net interest income . . . . . . . . . . . . . $1,016 $1,082 $ 1,168 $ 1,121
Provision for loan losses . . . . . . . . . . 120 105 110 100
Net income. . . . . . . . . . . . . . . . . . 232 270 305 298
Net income per share - basic . . . . . . . . $ .10 $ .11 $ .13 $ .13
- diluted $ .09 $ .11 $ .12 $ .12
14. SUBSEQUENT EVENT
On January 22, 1998, the Company declared a two-for-one stock split for
shareholders of record on February 3, 1998, to be paid on February 27, 1998. All
share and per share amounts included in the accompanying financial statements
and related notes have been retroactively restated for the effect of this split.
58
15. COMMUNITY WEST BANCSHARES (PARENT COMPANY ONLY)
(dollars in thousands)
DECEMBER 31, 1997
ASSETS
Cash and equivalents. . . . . . . . . . . . $ 255
Investment in the Bank. . . . . . . . . . . 12,358
Other Assets. . . . . . . . . . . . . . . . 21
------------------
TOTAL ASSETS. . . . . . . . . . . . . . . $ 12,634
==================
LIABILITIES AND SHAREHOLDER EQUITY
Other Liabilities . . . . . . . . . . . . . $ 266
Common Stock. . . . . . . . . . . . . . . . 8,810
Retained Earnings . . . . . . . . . . . . . 3,558
------------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 12,634
==================
Community West Bancshares was created for the purposes of forming a bank holding
company. Prior to the acquisition of Goleta National Bank, which became
effective on December 31, 1997, the Company had minimal activity.
******
59
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------
YEAR FIRST
APPOINTED PRINCIPAL OCCUPATION
DIRECTOR DURING THE
NAME AND TITLE AGE OR OFFICER PAST FIVE YEARS
-------------- --- ---------- ---------------
Michael A. Alexander. . . . . . . . . 67 Re-elected Chief Executive Officer of
Chairman of the Board 1992 Utilicom Corp. since 1994.
Prior to that time, Director
of Programs of Delco
Electronics.
Mounir R. Ashamalla . . . . . . . . . 60 1989 Oral-Maxillo-Facial
Director Surgeon
Robert H. Bartlein. . . . . . . . . . 50 1989 President of Bartlein
Director and Vice Chairman Group, Inc. and President
of the Board of Bartlein & Company,
Inc.
Jean W. Blois . . . . . . . . . . . . 70 1989 Independent consultant.
Director
John D. Illgen. . . . . . . . . . . . 53 1989 President and Chairman of
Director Illgen Simulation
Technologies, Inc.
John D. Markel. . . . . . . . . . . . 54 1989 Private investor
Director
Michel Nellis . . . . . . . . . . . . 51 1989 Partner with Nellis
Director Associates.
William R. Peeples. . . . . . . . . . 54 1989 Private investor.
Director
C. Randy Shaffer. . . . . . . . . . . 51 1992 Executive Vice President
Director and Executive Vice President and Chief Financial Officer
of the Company.
James R. Sims, Jr.. . . . . . . . . . 62 1989 Realtor.
Director
Llewellyn W. Stone. . . . . . . . . . 55 1989 President and Chief
President, Chief Executive Executive Officer of the
Officer and Director Company.
None of the directors or executive officers were selected pursuant to any
arrangement or understanding other than with the directors and executive
officers of the Bank acting within their capacities as such. There are no
family relationships between any of the directors and executive officers ot the
Bank.
60
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
The persons serving as excutive officers of the Bank received during 1997, and
will receive in 1998, cash compensation in their capacities as excutive officers
of the Bank .
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation
-------------------------------- --------------------------------------
Awards Payouts
(a). . . . . . . . . . . . . . . . . . (b) (c) (d) (e) (f) (g) (h) (i)
All
Other Restricted Op- LTIP Other
Name and Annual Stock tions/ PayOuts Compen-
Principal Compen- Award(s) SARs sation
Position . . . . . . . . . . . . . . . Year Salary Bonus sation
($) ($) ($) ($) ($) ($)
Llewellyn W. Stone . . . . . . . . . . 1997 179,250 51,000 - - - - -
President and Chief Executive Officer. 1996 127,123 51,000 - - - - -
1995 124,600 51,000 - - - - 636
C. Randy Shaffer . . . . . . . . . . . 1997 118,605 30,000 - - - - -
Executive Vice . . . . . . . . . . . . 1996 90,973 30,000 - - - - -
President. . . . . . . . . . . . . . . 1995 87,744 25,000 - - - - 1,867
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
---------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUE
(a) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-end (#) Year-End ($)
Exercisable/ Exercisable/
Name Shares Acquired on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ------------------- ------------------------------- ----------------- ---------------- -----------------
Llewellyn W. Stone. N/A N/A Options Only Options Only
79,000/- $ 496,460/-
C. Randy Shaffer. . 43,000 $ 138,620 Options Only Options Only
-/- -/-
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------------
The following table sets forth, as of February 27, 1998, the number and
percentage of shares of the Company's Common Stock beneficially owned, directly
or indirectly, by each of the Company's directors, named officers and principal
shareholders , and by the directors and named officers of the Company as a
group. The shares "beneficially owned " are determined under Securities and
Exchange Commission Rules, and do not necessarily indicate ownership for any
other purpose, In general, beneficial ownership includes shares over which the
director, named officer or principal shareholder has sole or shared voting or
investment power and shares which such person has the right to acquire within 60
days of February 27, 1998. Unless otherwise indicated, the persons listed below
have sole voting and investment powers of the shares beneficially owned.
Management is not aware of any arrangements which may, at a subsequent date,
result in a change of control of the Company.
Beneficial Amount and Nature Percent
Owner of Beneficial Ownership of Class(1)
Michael A. Alexander. . . . . . . . . . . . . . . . . . 74,370(2) 2.3%
Mounir R. Ashamalla . . . . . . . . . . . . . . . . . . 74,856(3) 2.3%
Robert H. Bartlein. . . . . . . . . . . . . . . . . . . 86,472(4) 2.7%
Jean W. Blois . . . . . . . . . . . . . . . . . . . . . 51,068(5) 1.6%
John D. Illgen. . . . . . . . . . . . . . . . . . . . . 42,080(6) 1.3%
John D. Markel. . . . . . . . . . . . . . . . . . . . . 314,664(7) 9.5%
Michel Nellis . . . . . . . . . . . . . . . . . . . . . 40,952(8) 1.3%
William R. Peeples. . . . . . . . . . . . . . . . . . . 309,588(9) 9.7%
C. Randy Shaffer. . . . . . . . . . . . . . . . . . . . 44,230(10) 1.4%
James R. Sims, Jr.. . . . . . . . . . . . . . . . . . . 17,400(11) .6%
Llewellyn W. Stone. . . . . . . . . . . . . . . . . . . 85,424(12) 2.7%
All Directors and Named Officers as a Group (11 in all)
1,141,104(1) 32.4%
======================== ===========
(1) Includes shares subject to options held by each director and named officer and the
directors and named officers as a group that are exercisable within 60 days of February 27,
1998. These are treated as issued and outstanding for the purpose of computing the percentage
of each director and the directors and named officers as a group but not for the purpose of
computing the percentage of class of any other person.
(2) Mr. Alexander has shared voting and investment powers as to 39,632 of these shares, has
9,460 shares acquirable by exercise of stock options, and has 13,538 shares acquirable by
exercise of stock warrants.
(3) Dr. Ashamalla has 10,164 shares acquirable by exercise of stock options and has 12,986
shares acquirable by exercise of stock warrants.
(4) Mr. Bartlein has 23,804 shares acquirable by exercise of stock options and has 13,822
shares acquirable by exercise of stock warrants.
(5) Ms. Blois has 24,244 shares acquirable by exercise of stock options.
(6) Mr. Illgen has 15,444 shares acquirable by exercise of stock options and has 5,574
shares acquirable by exercise of stock warrants.
(7) Mr. Markel has shared voting and investment powers as to 27,720 of these shares, has
15,840 shares acquirable by exercise of stock options and has 120,652 shares acquirable by
exercise of stock warrants.
(8) Ms. Nellis has shared voting and investment powers as to 7,246 of these shares, has
15,444 shares acquirable by exercise of stock options and has 1,990 shares acquirable by
exercise of stock warrants.
(9) Mr. Peeples has 2,860 shares acquirable by exercise of stock options and has 28,000
shares acquirable by exercise of stock warrants.
(10) Mr. Shaffer has shared and voting investment powers as 1,300 of these shares.
(11) Mr. Sims has 9,152 shares acquirable by exercise of stock options and 464 shares
acquirable by exercise of stock warrants.
(12) Mr. Stone has shared voting and investment powers as to 1,584 of these shares and has
24,000 shares acquirable by exercise of stock options.
62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------
Some of the directors and executive officers of the Company, members of their
immediate families, and the companies with which they are associated are
customers of the Bank, and have banking transactions with the Bank in the
ordinary course of the Bank's business, and the Bank expects to continue to have
such banking transactions with such persons in the future. In management's
opinion, all loans and commitments to lend included in such transactions have
been made in the ordinary course of the Bank's business, have been made on
substantially the same terms, including interest rates and collateral as those
prevailing at the Bank at the time for comparable transactions with other
persons of similar credit worthiness and, in the opinion of the management of
the Company, have not involved more than the normal risk of collectibility or
presented any other unfavorable features. The maximum aggregate amount of all
such loans during the period January 1, 1997 to December 31, 1997 was
approximately $2,200,000, which represented approximately 18% of the Company's
total equity as of that date.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) The following financial statements of Community West Bancshares are
filed as part of this Annual Report.
Report of Independent Accountants 40
Balance Sheets as of December 31, 1997 and 1996 41
Statements of Operations for the three years ended
December 31, 1997 42
Statements of Shareholders' Equity for the three years ended
December 31, 1997 43
Statements of Cash Flows for the three years ended
December 31, 1997 44
Notes to Consolidated Financial Statements 45
(a)(2)
Fianancial statement schedues other than those listed above have been omitted
because they are either not required, not applicable or the information is
otherwise included.
(a)(3) Exhibits
(2) Plan of Reorganization (1)
(3)(i) Articles of Incorporation
(3)(ii) By-laws
(4)(i) Common Stock Certificate (2)
(4)(ii) Warrant Certificate (2)
(10)(i) 1997 Stock Option Plan and Form of Stock Option Agreement (1)
(10)(ii) Employment Contract between Goleta National Bank and Llewellyn
Stone, President & CEO
(10)(iii) Salary Continuation Agreement between Goleta National Bank and
Llewellyn Stone, President & CEO
(10)(iv) Lease Agreements between Goleta National Bank and Santa Barbara
Commercial Properties (3)
(10)(v) Lease Agreement between Goleta National Bank and GRC, International
(3)
(10)(vi) Lease Agreement between Goleta National Bank and Festival
Professional Park (3)
(10)(vii) Employee Profit Sharing Plan (3)
(21) Subsidiaries of the Registrant
(23) Consent of Deloitte & Touche
(27) Financial Data Schedule
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 filed with the Commission on 12-31-97 and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Amendment to Registration
Statement on Form 8-A filed with the Commission on 3-12-98 and
incorporated herein by reference.
(3) The Registrant has submitted a request to the Commission for a
continuing hardship exemption persuant to Rule 202 of Regulation S-T
with respect to this exhibit. If the request is granted, a paper copy of the
exhibit shall be filed with the Commission. If the request is not granted, the
exhibit shall be filed as part of an amendment to the Report on form 10-K.
(b) There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1997.
64
SIGNATURES 1
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1998.
COMMUNITY WEST BANCSHARES
(Registrant)
By /S/ Llewellyn W. Stone
-------------------------
Llewellyn W. Stone
President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/S/ Chairman of the Board March 26, 1998
- --------------------
Michael A. Alexander
/S/Mounir R. Ashamalla Director March 26, 1998
- --------------------
Mounir R. Ashamalla
/S/Robert H. Bartlein Director and Vice Chairman of the Board March 26, 1998
- --------------------
Robert H. Bartlein
/S/Jean W. Blois Director March 26, 1998
- --------------------
Jean W. Blois
/S/John D. Illgen Director March 26, 1998
- --------------------
John D. Illgen
/S/John D. Markel Director March 26, 1998
- --------------------
John D. Markel
/S/Michel Nellis Director and Secretary March 26, 1998
- --------------------
Michel Nellis
/S/William R. Peeples Director March 26, 1998
- --------------------
William R. Peeples
Director,Executive Vice President and Chief March 26, 1998
Financial Officer (Principal Financial and
/S/C. Randy Shaffer Accounting Officer)
- --------------------
C. Randy Shaffer
/S/James R. Sims Jr. Director March 26, 1998
- --------------------
James R. Sims Jr.
Director, President and Chief Executive Officer March 26, 1998
/S/Llewellyn W. Stone (Principal Executive Officer)
- --------------------
Llewellyn W. Stone
65