UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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
incorporation or organization) Identification No.)
445 Pine Avenue, Goleta, California 93117
(Address of principal executive offices) (Zip code)
(805) 692-5821
(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes[ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes[ ] No [X]
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 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-K is not contained herein, 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicated by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act. Yes[ ] No [X]
As of March 23, 2006, 5,780,153 shares of the registrant's common stock were
outstanding. The aggregate market value of common stock, held by non-affiliates
of the registrant as of June 30, 2005, was $48,857,694 based on a closing price
of $12.20 for the common stock, as reported on the Nasdaq Stock Market. For
purposes of the foregoing computation, all executive officers, directors and 5
percent beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2006 Annual Meeting are incorporated by reference into Part III of this
Report. The proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year ended
December 31, 2005.
EXPLANATORY NOTE
We are filing this amendment No. 1 on Form 10-K/A solely to correct a
typographical error in the Report of Independent Registered Public Accounting
Firm and in the Consent of Independent Registered Public Accounting Firm. The
typographical error was the inadvertent omission of the signature of Ernst &
Young LLP on the Report of Independent Registered Public Accounting Firm
contained in Item 8. Financial Statements and Supplementary Data and the
omission of the signature of Ernst & Young LLP on the Consent of Independent
Registered Public Accounting Firm contained in Exhibit 23.1 of our original
Annual Report on Form 10-K filed on March 29, 2006 (Original Report). There are
no changes to the financial or supplemental information contained in Part II,
Item 8 or any other Parts of the original report. This Amendment relates solely
to the Report of Independent Registered Public Accounting Firm and Consent of
Independent Registered Accounting Firm.
This Amendment No. 1 to our Annual Report on Form 10-K as originally filed on
March 29, 2006 continues to speak as of the date of the Original Report, and we
have not updated the disclosures contained in this Amendment No. 1 to reflect
any events that occurred at a date subsequent to the filing of the Original
Report.
COMMUNITY WEST BANCSHARES
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Description of Business 3
ITEM 1A. Risk Factors 5
ITEM 1B. Unresolved Staff Comments 8
ITEM 2. Description of Property 8
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote of Security Holders 8
PART II
ITEM 5. Market for the Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchase of Equity Securities 9
ITEM 6. Selected Financial Data 10
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk 37
ITEM 8. Consolidated Financial Statements and Supplementary Data 37
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 60
ITEM 9A. Controls and Procedures 60
ITEM 9B. Other Information 60
PART III
ITEM 10. Directors and Executive Officers 60
ITEM 11. Executive Compensation 60
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters 60
ITEM 13. Certain Relationships and Related Transactions 60
ITEM 14. Principal Accountant Fees and Services 60
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 60
SIGNATURES 63
CERTIFICATIONS 64
- 2 -
PART I
ITEM 1. DESCRIPTION OF BUSINESS
------ -----------------------
Community West Bancshares ("CWBC") was incorporated in the State of California
on November 26, 1996, for the purpose of forming a bank holding company. On
December 31, 1997, CWBC acquired a 100% interest in Community West Bank,
National Association ("CWB" or "Bank") (formerly known as Goleta National Bank).
Effective that date, shareholders of CWB became shareholders of CWBC in a
one-for-one exchange. The acquisition was accounted at historical cost in a
manner similar to pooling-of-interests. CWBC and CWB are referred to herein as
"Company".
Community West Bancshares is a bank holding company. During the fiscal year,
CWB was the sole bank subsidiary of CWBC. CWBC provides management and
shareholder services to CWB.
CWB offers a range of commercial and retail financial services to professionals,
small to mid-sized businesses and individual households. These services include
various loan options as well as deposit products. CWB also offers other
financial services.
Relationship Banking - Relationship banking is conducted at the community level
through four full-service branch offices on the Central Coast of California.
In addition to the existing Goleta and Ventura branches, new full-service
branches were opened in Santa Maria in May 2005 and in downtown Santa Barbara in
October 2005. The primary customers are small to mid-sized businesses in these
communities and their owners and managers. CWB's goal is to provide the highest
quality service and the most diverse products to meet the varying needs of this
highly sought customer base.
CWB offers a range of commercial and retail financial services, including the
acceptance of demand, savings and time deposits, and the origination of
commercial, real estate, construction, home improvement and other installment
and term loans. Its customers are also provided with the choice of a range of
cash management services, remittance banking, merchant credit card processing,
courier service and online banking. In addition to the traditional financial
services offered, CWB offers internet banking, automated clearinghouse
origination, electronic data interchange and check imaging. CWB continues to
investigate products and services that it believes address the growing needs of
its customers and to analyze new markets for potential expansion opportunities.
One of CWB's key strengths and a fundamental difference that the Company
believes enables it to stand apart from the competition is the depth of
experience of personnel in commercial lending and business development. These
individuals develop business, structure and underwrite the credit and manage the
customer relationship. This provides a competitive advantage as CWB's
competitors for the most part, have a centralized lending function where
developing business, underwriting credit and managing the relationship is split
between multiple individuals.
Small Business Administration Lending - CWB has been an approved lender/servicer
of loans guaranteed by the Small Business Administration ("SBA") since 1990.
The Company originates SBA loans which are frequently sold into the secondary
market. The Company continues to service these loans after sale and is required
under the SBA programs to retain specified amounts. The two primary SBA loan
programs that CWB offers are the basic 7(a) Loan Guaranty and the Certified
Development Company ("CDC"), a Section 504 ("504") program. The 7(a) serves as
the SBA's primary business loan program to help qualified small businesses
obtain financing when they might not be eligible for business loans through
normal lending channels. Loan proceeds under this program can be used for most
business purposes including working capital, machinery and equipment, furniture
and fixtures, land and building (including purchase, renovation and new
construction), leasehold improvements and debt refinancing. Loan maturity is
generally up to 10 years for working capital and up to 25 years for fixed
assets. The 7(a) loan is approved and funded by a qualified lender, guaranteed
by the SBA and subject to applicable regulations. The SBA typically guarantees
75%, and up to 85%, of the loan amount, depending on the loan size.
Periodically, the Company may sell some of the guaranteed and unguaranteed
portion of select 7(a) program loans into the secondary market. The Company is
required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) loans.
The SBA 7(a) loans are all variable interest rate loans. The servicing spread
is a minimum of 1% on the majority of loans. Income recognized by the Company
on the sales of the guaranteed portion of these loans and the ongoing servicing
income received have in the past been significant revenue sources for the
Company.
CWB has been offering 504 loans since 1991, but was fairly inactive in this loan
product through 2002. Beginning in 2003, upon acquisition of a group of
experienced 504 lenders in the Sacramento area, CWB increased its 504 loan
origination volume. The 504 program is an economic development-financing
program providing long-term, low downpayment loans to expanding businesses.
Typically, a 504 project includes a loan secured from a private-sector lender
with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed
debenture) with a junior
- 3 -
lien covering up to 40% of the total cost, and a contribution of at least 10%
equity from the borrower. As of December 8, 2004, debenture limits were raised
to $1.5 million for regular 504 loans and $2 million for those 504 loans that
meet a public policy goal.
In 2001, CWB began offering Business & Industry ("B & I") loans. These loans are
similar to the SBA product, except they are guaranteed by the U.S. Department of
Agriculture. The guaranteed amount is generally 80%. B&I loans are made to
businesses in designated rural areas and are generally larger loans to larger
businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be
sold into the secondary market.
CWB also originates conventional and investor loans which are funded by our
secondary-market partners for which the Bank receives a premium.
CWB originates SBA loans in the states of California, Alabama, Colorado,
Florida, Georgia, North Carolina, Oregon, South Carolina, Tennessee and
Washington. Beginning in 1995, the SBA designated CWB as a "Preferred Lender."
As a Preferred Lender, CWB has been delegated the loan approval, closing and
most servicing and liquidation authority responsibility from the SBA. CWB
currently has SBA Preferred Lender status in the California districts of Los
Angeles, Fresno, Sacramento, San Francisco, San Diego and Santa Ana, as well as
the states of Alabama, Colorado, Florida, Georgia, North Carolina, South
Carolina and Tennessee. CWB also has Preferred Lender status in the cities of
Seattle and Spokane, Washington and Portland, Oregon. Due to CWB's Preferred
Lender status in so many states and districts, CWB has achieved competitive
advantage in this product and has been able to increase its loan volume in
recent years.
Mortgage Lending - In 1995, CWB established a Wholesale and Retail Mortgage Loan
Center. The Mortgage Loan Division originates residential real estate loans
primarily in the California counties of Santa Barbara, Ventura and San Luis
Obispo. Some retail loans not fitting CWB's wholesale lending criteria are
brokered to other lenders. After wholesale origination, the real estate loans
are sold into the secondary market.
Manufactured Housing - In 1998, CWB established a financing program for
manufactured housing to provide affordable home ownership to low to
moderate-income families that are purchasing or refinancing their manufactured
house. Initially, these loans were offered in CWB's primary lending areas of
Santa Barbara, Ventura and San Luis Obispo counties. Over the last two years,
the Company has expanded this program into Los Angeles, Orange, San Diego and
Sacramento counties. The manufactured homes are located in approved mobile home
parks primarily along the California coast in cities from San Diego to San Luis
Obispo counties. The parks must meet specific criteria and have amenities such
as clubhouses, pools, common areas and be maintained in good to excellent
condition. The manufactured housing loans are retained in CWB's loan portfolio.
As of December 31, 2005, CWB held $101.3 million of manufactured housing loans
in its portfolio.
COMPANY HISTORY
From December 1998 until August 2001, the Company owned a 100% interest in
Palomar Community Bank ("Palomar"). In August of 2001, the Company sold Palomar
Community Bank. From October 1997 to October 2002, the Company owned an
interest in ePacific.com (formerly known as Electronic Paycheck, LLC).
COMPETITION AND SERVICE AREA
The financial services industry is highly competitive with respect to both loans
and deposits. Overall, the industry is dominated by a relatively small number of
major banks with many offices operating over a wide geographic area. In the
markets where the Company's banking branches are present, several de novo banks
have increased competition. Some of the major commercial banks operating in the
Company's service areas offer types of services that are not offered directly by
the Company. Some of these services include leasing, trust and investment
services and international banking. The Company has taken several approaches to
minimize the impact of competitor's numerous branch offices and varied products.
First, the Company through CWB provides courier services to business clients,
thus discounting the need for multiple branches in one market. Second, through
strategic alliances and correspondents, the Company provides a full compliment
of competitive services. Finally, one of CWB's strategic initiatives is to
establish full-service branches or loan production offices in areas where there
is a high demand for its lending products. In addition to loans and deposit
services offered by CWB's four branches located in Goleta, Ventura, Santa Maria
and Santa Barbara, California, a loan production office currently exists in
Roseville, California. The Company also maintains SBA loan production offices in
the California areas of Atascadero, Roseville, San Francisco bay area, and San
Diego as well as the states of Colorado, Florida, Georgia, North Carolina, South
Carolina, Oregon and Washington.
Competition may adversely affect the Company's performance. The financial
service's business in the Company's markets is highly competitive and becoming
increasingly more so due to changing regulations, technology and strategic
consolidations amongst other financial service providers. Other banks and
specialty financial services
- 4 -
companies may have more capital than the Company and can offer trust services,
leasing and other financial products to the Company's customer base. When new
competitors seek to enter one of the Company's markets, or when existing market
participants seek to increase their market share, they sometimes undercut the
pricing or credit terms prevalent in that market. Increasing levels of
competition in the banking and financial services businesses may reduce our
market share or cause the prices to fall for which the Company can charge for
products and services.
GOVERNMENT POLICIES
The Company's operations are affected by various state and federal legislative
changes and by policies of various regulatory authorities, including those of
the states in which it operates and the U.S. government. These policies include,
for example, statutory maximum legal lending rates, domestic monetary policies
by the Board of Governors of the Federal Reserve System, U.S. fiscal policy,
U.S. Patriot Act and capital adequacy and liquidity constraints imposed by bank
regulatory agencies. Changes in these laws, regulations and policies greatly
affect our operations. See "Item 1A, Risk Factors - Curtailment of Government
Guaranteed Loan Programs Could Affect a Segment of the Company's Business" and
"Item 7, Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Supervision and Regulation."
EMPLOYEES
As of December 31, 2005, the Company had 137 full-time and 10 part-time
employees. 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 good.
ITEM 1A. RISK FACTORS
-------- ------------
Investing in our common stock involves various risks which are particular to our
company, our industry and our market area. Several risk factors regarding
investing in our common stock are discussed below. This listing should not be
considered as all-inclusive. If any of the following risks were to occur, we may
not be able to conduct our business as currently planned and our financial
condition or operating results could be negatively impacted. These matters could
cause the trading price of our common stock to decline in future periods. Such
risks and uncertainties include:
- changes in the interest rate environment affecting interest rate
margins and/or interest rate risk
- increased competitive pressure among financial services' companies
- the availability of sources of liquidity at a reasonable cost
- the regulation of the banking industry including legislative or
regulatory changes adversely affecting the business in which the
Company engages
- reduction in our earnings by losses on loans
- dependence on real estate
- operational risks
- deterioration in general economic conditions
- risks of natural disasters
- other risks and uncertainties that may be detailed herein
RISK DUE TO ECONOMIC CONDITIONS DUE TO CHANGES IN INTEREST RATES OR THE ECONOMY
IN THE AREAS WE SERVE
The Federal Reserve Board ("FRB") has continued its efforts to prevent/slow
inflation and to maintain a stable price environment as the economy enters the
fifth year of economic expansion. In 2005, the FRB raised the discount rate
eight times from 2.25% to 4.25%, an increase of 2.00%. Typically, these rate
increases enhance net interest income for asset-sensitive financial
institutions. At the same time, the flattening yield curve may compress net
interest margins. As inflation has remained largely in check and the housing
market has shown signs of slowing, most sectors of the economy have remained
strong. This continued strength in the economy during 2005, which has been
reflected in strong loan demand in the markets in which the Company operates,
may not continue in 2006.
While there is uncertainty regarding FRB's interest rate policy under a new FRB
chairman, the outlook for 2006 is generally optimistic. Supporting an overall
optimistic outlook in the economy is continued strength in consumer confidence,
provided by the rebuilding of the Gulf coast and a high level of liquidity in
the economy. This optimistic outlook is tempered by concerns related to the
real estate market and the federal budget deficit.
The Company serves three primary regions. The Tri-Counties region which
consists of San Luis Obispo, Santa Barbara and Ventura counties in the state of
California, the SBA Western Region where CWB originates SBA loans (California,
Colorado, Oregon and Washington) and the SBA Southeast Region (Alabama, Florida,
Georgia, North and South Carolina and Tennessee). A downturn in the National
economy or in any of the markets in the Company services may have a negative
impact on the Company's future earnings or stock price.
- 5 -
CHANGES IN THE REGULATORY ENVIRONMENT
The financial services industry is heavily regulated. The Company is subject to
federal and state regulation designed to protect the deposits of consumers, not
to benefit shareholders. These regulations include the following:
- the amount of capital the Company must maintain
- the types of activities in which it can engage
- the types and amounts of investments it can make
- the locations of its offices
- insurance of the Company's deposits and the premiums paid for this
insurance
- how much cash the Company must set aside as reserves for deposits
The regulations impose limitations on operations and may be changed at any time,
possibly causing future results to vary significantly from past results.
Government policy and regulation, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Supervision and Regulation."
BANK REGULATIONS COULD DISCOURAGE CHANGES IN THE COMPANY'S OWNERSHIP
Bank regulations could delay or discourage a potential acquirer who might have
been willing to pay a premium price to acquire a large block of common stock.
That possibility might decrease the value of the Company's common stock and the
price that a stockholder will receive if shares are sold in the future. Before
anyone can buy enough voting stock to exercise control over a bank holding
company like CWBC, bank regulators must approve the acquisition. A stockholder
must apply for regulatory approval to own 10 percent or more of the Company's
common stock, unless the stockholder can show that they will not actually exert
control over the Company. As a result, no single stockholder can own more than
25 percent of the Company's common stock without applying for regulatory
approval.
THE PRICE OF THE COMPANY'S COMMON STOCK MAY CHANGE RAPIDLY AND SIGNIFICANTLY
The market price of the Company's common stock could change rapidly and
significantly at any time. The market price of the Company's common stock has
fluctuated in recent years. Between January 1, 2004 and December 31, 2005, the
market price of its common stock ranged from a low of $8.15 per share to a high
of $15.30 per share. Fluctuations may occur, among other reasons, in response
to:
- short-term or long-term operating results
- perceived strength of the banking industry in general
- the Company's relatively low public float and thinly-traded stock
- perceived value of the Company's loan portfolio
- trends in the Company's nonperforming assets
- legislative/regulatory action or adverse publicity
- announcements by competitors
- economic changes and general market conditions
The trading price of the Company's common stock may continue to be subject to
wide fluctuations in response to the factors set forth above and other factors,
many of which are beyond the Company's control. The stock market can experience
extreme price and trading volume fluctuations that often are unrelated or
disproportionate to the operating performance of individual companies. The
Company believes that investors should consider the likelihood of these market
fluctuations before investing in the Company's common stock.
DEPENDENCE ON REAL ESTATE CONCENTRATED IN THE STATE OF CALIFORNIA
Approximately 42% of the loan portfolio of the Company is secured by various
forms of real estate, including residential and commercial real estate. A
decline in current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
loans. The real estate securing the Company's loan portfolio is concentrated in
California. If real estate values decline significantly, especially in
California, the change could harm the financial condition of the Company's
borrowers, the collateral for its loans will provide less security and the
Company would be more likely to suffer losses on defaulted loans.
CURTAILMENT OF GOVERNMENT GUARANTEED LOAN PROGRAMS COULD AFFECT A SEGMENT OF THE
COMPANY'S BUSINESS
A major segment of the Company's business consists of originating and
periodically selling government guaranteed loans, in particular those guaranteed
by the SBA. From time to time, the government agencies that guarantee these
loans reach their internal limits and cease to guarantee loans. In addition,
these agencies may change their rules for loans or Congress may adopt
legislation that would have the effect of discontinuing or changing the
programs. Non-
- 6 -
governmental programs could replace government programs for some borrowers, but
the terms might not be equally acceptable. Therefore, if these changes occur,
the volume of loans to small business, industrial and agricultural borrowers of
the types that now qualify for government guaranteed loans could decline. Also,
the profitability of these loans could decline. In late 2004, the SBA
eliminated the piggy-back program, in which a conventional real estate loan is
made and a SBA 7(a) guaranteed second trust deed is subordinate to the
conventional first trust deed. As the funding of the guaranteed portion of 7(a)
loans is a major portion of the Company's business, the long-term resolution to
the funding for the 7(a) loan program may have an unfavorable impact on the
Company's future performance and results of operations.
ENVIRONMENTAL LAWS COULD FORCE THE COMPANY TO PAY FOR ENVIRONMENTAL PROBLEMS
When a borrower defaults on a loan secured by real property, the Company
generally purchases the property in foreclosure or accepts a deed to the
property surrendered by the borrower. The Company may also take over the
management of commercial properties when owners have defaulted on loans. While
CWB has guidelines intended to exclude properties with an unreasonable risk of
contamination, hazardous substances may exist on some of the properties that it
owns, manages or occupies. The Company faces the risk that environmental laws
could force it to clean up the properties at the Company's expense. It may cost
much more to clean a property than the property is worth. The Company could
also be liable for pollution generated by a borrower's operations if the Company
took a role in managing those operations after default. Resale of contaminated
properties may also be difficult.
COMPETITION WITH OTHER BANKING INSTITUTIONS COULD ADVERSELY AFFECT
PROFITABILITY.
The banking industry is highly competitive. The Company faces competition not
only from other financial institutions within the markets it serves, but
deregulation has resulted in competition from companies not typically associated
with financial services as well as companies accessed through the internet. As
a community bank, the Company attempts to combat this increased competition by
developing and offering new products and increased quality of services.
FLUCTUATIONS IN INTEREST RATES MAY REDUCE PROFITABILITY.
Changes in interest rates may affect our level of interest income, the primary
component of our gross revenue, as well as the level of our interest expense.
Interest rate fluctuations are caused by many factors which, for the most part,
are not under our direct control. For example, national monetary policy plays a
significant role in the determination of interest rates. Additionally,
competitor pricing and the resulting negotiations that occur with our customers
also impact the rates we collect on loans and the rates we pay on deposits. As
interest rates change, we expect that we will periodically experience "gaps" in
the interest rate sensitivities of our assets and liabilities, meaning that
either our interest-bearing liabilities will be more sensitive to changes in
market interest rates than our interest-earning assets, or vice versa. In either
event, if market interest rates should move contrary to our position, this "gap"
may work against us, and our earnings may be negatively affected.
Changes in the level of interest rates also may negatively affect our ability to
originate loans, the value of our assets and our ability to realize gains from
the sale of our assets, all of which ultimately affect our earnings. A decline
in the market value of our assets may limit our ability to borrow additional
funds. As a result, we could be required to sell some of our loans and
investments under adverse market conditions, upon terms that are not favorable
to us, in order to maintain our liquidity. If those sales are made at prices
lower than the amortized costs of the investments, we will incur losses. See
additional discussion on interest rate risk in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Interest Rate
Risk."
OPERATIONAL RISK
Operational risk represents the risk of loss resulting from the Company's
operations, including but not limited to, the risk of fraud by employees or
persons outside the Company, the execution of unauthorized transactions by
employees, transaction processing errors and breaches of internal control system
and compliance requirements. This risk of loss also includes the potential
legal actions that could arise as a result of an operational deficiency or as a
result of noncompliance with applicable regulatory standards, adverse business
decisions or their implementation and customer attrition due to potential
negative publicity.
Operational risk is inherent in all business activities and the management of
this risk is important to the achievement of the Company's objectives. In the
event of a breakdown in the internal control system, improper operation of
systems or improper employee actions, the Company could suffer financial loss,
face regulatory action and suffer damage to its reputation. The Company manages
operational risk through a risk management framework and its internal control
processes. The framework involves business units, corporate risk management
personnel and executive management. Under this framework, the business units
have direct and primary responsibility and accountability for identifying,
controlling and monitoring operational risk. Business unit managers maintain a
system of controls with the objective of providing proper transaction
authorization and execution, proper system
- 7 -
operations, safeguarding of assets from misuse or theft and ensuring the
reliability of financial and other data. Business unit managers ensure that the
controls are appropriate and are implemented as designed. Business continuation
and disaster recovery planning is also critical to effectively manage
operational risks. The Company's internal audit function (currently outsourced
to a third party) validates the system of internal controls through risk-based
regular and ongoing audit procedures and reports on the effectiveness of
internal controls to executive management and the Audit Committee of the Board.
While the Company believes that it has designed effective methods to minimize
operational risks, there is no absolute assurance that business disruption or
operational losses would not occur in the event of disaster.
DEPENDENCE ON TECHNOLOGY AND TECHNOLOGICAL IMPROVEMENTS.
The financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition, to better serve customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Many of our
competitors have substantially greater resources to invest in technological
improvements. The Company faces the risk of having to keep up with the rapid
changes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
--------- ---------------------------
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTY
-------- -------------------------
The Company owns the property on which the CWB full-service branch office is
located in Goleta, California.
All other property is leased by the Company, including the principal executive
office in Goleta. This facility houses the Company's corporate offices,
comprised of various departments, including electronic business services,
finance, human resources, information technology, loan operations, marketing,
the mortgage loan division, SBA administration, risk management and special
assets.
The Company continually evaluates the suitability and adequacy of the Company's
offices and has a program of relocating or remodeling them as necessary to
maintain efficient and attractive facilities. Management believes that its
existing facilities are adequate for its present purposes.
ITEM 3. LEGAL PROCEEDINGS
-------- ------------------
The Company is involved in various litigation of a routine nature that is being
handled and defended in the ordinary course of the Company's business. In the
opinion of management, based in part on consultation with legal counsel, the
resolution of these litigation matters will not have a material impact on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------- ------------------------------------------------------------
None.
- 8 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
------- ----------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------
Market Information, Holders and Dividends
The Company's common stock is traded on the Nasdaq Stock Market ("Nasdaq") under
the symbol CWBC. The following table sets forth the high and low sales prices
on a per share basis for the Company's common stock as reported by Nasdaq for
the period indicated:
2005 Quarters 2004 Quarters
------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First
------- ------ ------- ------ ------- ------ ------- ------
Stock Price Range:
High $ 14.40 $12.57 $ 13.50 $15.30 $ 13.47 $10.74 $ 9.75 $ 9.38
Low 12.25 12.20 12.00 11.00 10.55 8.15 8.23 8.19
Cash Dividends
Declared $ .05 $ .05 $ .05 $ .04 $ .04 $ .04 $ .04 $ -
As of March 23, 2006, the year to date high and low stock sales prices were
$14.44 and $13.85, respectively. As of March 23, 2006, the last reported sale
price per share for the Company's common stock was $14.25.
As of March 23, 2006, the Company had 382 stockholders of record of its common
stock.
The Company resumed declaring dividends to its shareholders in the second
quarter 2004. It is the Company's intention to declare and pay dividends
quarterly. The primary source of funds for dividends paid to shareholders is
dividends received from the subsidiary bank, CWB. CWB's ability to pay
dividends to the Company is limited by California law and federal banking law.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Supervision and Regulation of the Company - Limitations
on Dividend Payments." As of December 31, 2005, CWB had $10.0 million available
for dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2005:
----------------------------------------------------------------------------------------------------------------------
Number of
securities to be Number of securities
issued upon Weighted-average remaining available for future
exercise of exercise price of issuance under equity
outstanding outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a)
----------=============-------------------==========----------------==========-------------=======================----
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Plans approved by shareholders 539,162 $ 7.29 355,151
----------------------------------------------------------------------------------------------------------------------
Plans not approved by shareholders - N/A -
----------------------------------------------------------------------------------------------------------------------
Total 539,162 355,151
----------------------------------------------------------------------------------------------------------------------
- 9 -
ITEM 6. SELECTED FINANCIAL DATA
------- -------------------------
The following selected financial data have been derived from the Company's
consolidated financial condition and results of operations, as of and for the
years ended December 31, 2005, 2004, 2003, 2002 and 2001, and should be read in
conjunction with the consolidated financial statements and the related notes
included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
INCOME STATEMENT: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 29,778 $ 21,845 $ 20,383 $ 29,976 $ 40,794
Interest expense 10,347 7,845 9,342 13,466 20,338
--------- --------- --------- --------- ---------
Net interest income 19,431 14,000 11,041 16,510 20,456
Provision for loan losses 566 418 1,669 4,899 11,880
--------- --------- --------- --------- ---------
Net interest income after provision for loan 18,865 13,582 9,372 11,611 8,576
losses
Non-interest income 7,310 10,462 10,675 11,398 22,171
Non-interest expenses 18,160 17,521 16,736 24,931 32,006
--------- --------- --------- --------- ---------
Income (loss) before income taxes 8,015 6,523 3,311 (1,922) (1,259)
Provision (benefit) for income taxes 2,373 2,688 1,128 (652) (1,281)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 5,642 $ 3,835 $ 2,183 $ (1,270) $ 22
========= ========= ========= ========= =========
PER SHARE DATA:
Income (loss) per common share - Basic $ 0.98 $ 0.67 $ 0.38 $ (0.22) $ 0.00
Weighted average shares used in income (loss) 5,744 5,718 5,694 5,690 5,948
per share calculation - Basic
Income (loss) per common share - Diluted $ 0.95 $ 0.65 $ 0.38 $ (0.22) $ 0.00
Weighted average shares used in income (loss) 5,931 5,867 5,758 5,690 5,998
per share calculation - Diluted
Book value per share $ 7.34 $ 6.56 $ 6.02 $ 5.64 $ 5.86
BALANCE SHEET:
Net loans $381,517 $290,506 $244,274 $245,856 $260,955
Total assets 444,354 365,203 304,250 307,210 323,863
Total deposits 334,238 284,568 224,855 219,083 196,166
Total liabilities 402,119 327,634 269,919 275,123 290,506
Total stockholders' equity 42,235 37,569 34,331 32,087 33,357
OPERATING AND CAPITAL RATIOS:
Return on average equity 14.16% 10.60% 6.65% (3.99)% 0.07%
Return on average assets 1.43 1.15 0.73 (0.42) 0.01
Dividend payout ratio 19.39 17.91 - - -
Equity to assets ratio 9.50 10.29 11.28 10.48 10.30
Tier 1 leverage ratio 9.80 10.41 11.15 10.48 9.07
Tier 1 risk-based capital ratio 11.21 12.51 14.05 12.66 11.75
Total risk-based capital ratio 12.26 13.76 15.31 13.92 13.02
The income statement for 2001 includes 8.5 months of Palomar operating results.
- 10 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion is designed to provide insight into management's
assessment of significant trends related to Community West Bancshares ("CWBC" or
"Company") and its wholly-owned subsidiary Community West Bank's (formerly known
as Goleta National Bank) ("CWB" or "Bank") consolidated financial condition,
results of operations, liquidity, capital resources and interest rate risk.
Unless otherwise stated, "Company" refers to CWBC and CWB as a consolidated
entity. It should be read in conjunction with the consolidated financial
statements and notes thereto and the other financial information appearing
elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This 2005 Annual Report on Form 10-K contains statements that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those forward-looking statements include statements regarding the
intent, belief or current expectations of the Company and its management. Any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those projected in the forward-looking statements.
OVERVIEW OF EARNINGS PERFORMANCE
-----------------------------------
In 2005, the net income of the Company was $5.6 million, or $0.98, per basic
share and $0.95 per diluted share compared to $3.8 million, or $0.67, per basic
share and $0.65 per diluted share for 2004. This represents a $1.8 million
increase in net income over 2004. The primary reason for the increase is the
$5.4 million net interest margin improvement, as the Company increased its
volume of earning assets while also experiencing widening margins. This was
accomplished despite a challenging economic and interest rate environment in the
banking industry. The Company had a decrease in non-interest income, primarily
due to its discretionary decision to sell fewer SBA 7(a) loans. The other
predominant factor contributing to positive earnings is the control of
non-interest expenses, despite the 2005 asset growth. The Company's earnings
performance was also impacted in 2005 by:
- net loan portfolio growth of $91.0 million, or 31.3%, primarily in
commercial, commercial real estate, manufactured housing and SBA
loans;
- resolution of a potential tax issue which resulted in a reversal of a
reserve and positively impacted net income;
- continued prepayments of the securitized loans and the payoff of the
securitized bonds, impacting interest income, interest expense,
provision for loan losses and other non-interest expenses;
- 200 basis point increase in the Federal Reserve Board's target
overnight interest rate from 2.25% to 4.25%, positively impacting net
interest income, although, the yield curve flattening served to
compress margins;
- strategic decision to reduce SBA loan sales which negatively impacted
the related gains on loan sales, but will help grow the balance sheet
and enhance future interest income;
- fewer mortgage loan originations, which negatively impacted loan fees
and gain on loan sales.
The impact to the Company from these items, and others of both a positive and
negative nature, will be discussed in more detail as they pertain to the
Company's overall comparative performance for 2005 throughout the analysis
sections of this report.
CRITICAL ACCOUNTING POLICIES
------------------------------
The Company's accounting policies are more fully described in Note 1 of the
Consolidated Financial Statements. As disclosed in Note 1, the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates. The Company believes that the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results of
operations and require management's most difficult, subjective and complex
judgments.
PROVISION AND ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed,
systematic analysis and procedural discipline to determine the amount of the
allowance for loan losses ("ALL"). The ALL is based on estimates and is
intended to be adequate to provide for probable losses inherent in the loan
portfolio. This process involves deriving probable loss estimates that are
based on individual loan loss estimation, migration analysis/historical loss
rates and management's judgment.
- 11 -
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
The ALL calculation for the different major loan types is as follows:
- SBA - All loans are reviewed and classified loans are assigned a
specific allowance. Those not classified are assigned a pass rating. A
migration analysis and various portfolio specific factors are used to
calculate the required allowance on those pass loans.
- Relationship Banking - Includes commercial, commercial real estate and
consumer loans. Classified loans are assigned a specific allowance. A
migration analysis and various portfolio specific factors are used to
calculate the required allowance on the remaining pass loans.
- Manufactured Housing - An allowance is calculated on the basis of risk
rating, which is a combination of delinquency, value of collateral on
classified loans and perceived risk in the product line.
- Securitized Loans - The Company considers this a homogeneous portfolio
and calculates the allowance based on statistical information provided
by the servicer. Charge-off history is calculated based on three
methodologies; a 3-month and a 12-month historical trend and by
delinquency information. The highest allowance requirement of the
three methods is used.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The review of the adequacy of the allowance takes into consideration such
factors as concentrations of credit, changes in the growth, size and composition
of the loan portfolio, overall and individual 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. Additional factors considered include: geographic location of
borrowers, changes in the Company's product-specific credit policy and lending
staff experience. These estimates depend on the outcome of future events and,
therefore, contain inherent uncertainties.
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans. A provision for
loan losses is charged to expense. The allowance is charged for losses when
management believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a "loss"; portions of loans which are
deemed to be uncollectible; overdrafts which have been outstanding for more than
30 days; and, all other unsecured loans past due 120 or more days. Subsequent
recoveries, if any, are credited to the ALL.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are
recognized at fair market value as separate assets when loans are sold with
servicing retained. Servicing rights are amortized in proportion to, and over
the period of, estimated future net servicing income. Also, at the time of the
loan sale, it is the Company's policy to recognize the related gain on the loan
sale in accordance with generally accepted accounting principles ("GAAP"). The
Company uses industry prepayment statistics and its own prepayment experience in
estimating the expected life of the loans. Management periodically evaluates
servicing rights for impairment. Servicing rights are evaluated for impairment
based upon the fair value of the rights as compared to amortized cost on a
loan-by-loan basis. Fair value is determined using discounted future cash flows
calculated on a loan-by-loan basis and aggregated to the total asset level. The
initial servicing rights and resulting gain on sale are calculated based on the
difference between the best actual par and premium bids on an individual loan
basis. Additionally, on certain SBA loan sales that occurred prior to 2003, the
Company retained interest only strips ("I/O Strips"), which represent the
present value of excess net cash flows generated by the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors and (ii) contractual
servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the ALL.
Subsequent to foreclosure, management periodically performs a new valuation and
the asset is carried at the lower of carrying amount or fair value. Operating
expenses or income, and gains or losses on disposition of such properties, are
charged or credited to current operations.
- 12 -
STOCK-BASED COMPENSATION - Until the effective date of SFAS 123, January 1,
2006, GAAP permitted the Company to use either of two methodologies to account
for compensation cost in connection with employee stock options. The first
method required issuers to record compensation expense over the period the
options were expected to be outstanding prior to exercise, expiration or
cancellation. The amount of compensation expense to be recognized over this
term is the "fair value" of the options at the time of the grant as determined
by the Black-Scholes valuation model. Black-Scholes computed fair value of the
options based on the length of their term, the volatility of the stock price in
past periods and other factors. Under this method, the issuer recognized
compensation expense regardless of whether or not the employee eventually
exercised the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense was recognized. GAAP required that issuers electing the second method
present pro forma disclosure of net income (loss) and earnings per share as if
the first method had been elected. Under the terms of the Company's stock
option plan, full-time salaried employees may be granted qualified 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 market
value of the stock on the date of grant. Qualified options are generally
exercisable in cumulative 20% installments. All options expire no later than ten
years from the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION
-----------------------------------------------------
Statement of Financial Accounting Standards No. 123R - SFAS No. 123 (Revised
2004) ("SFAS No. 123R"), Share-Based Payment, is a revision of SFAS No. 123 and
supersedes APB Opinion No. 25 and its related implementation guidance. The
Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB No. 107"), which provides the Staff's views regarding interactions between
SFAS No. 123R and certain SEC rules and regulations and provides interpretations
of the valuation of share-based payments for public companies.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods: (1) A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on
the effective date. (2) A "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption.
This statement is effective for the beginning of the first annual reporting
period that begins after June 15, 2005 therefore, we will adopt the standard in
the first quarter of 2006 using the modified prospective method. As permitted
by SFAS No. 123, we currently account for share-based payments to employees
using the intrinsic value method prescribed in APB No. 25 and, as such,
generally recognize no compensation cost for employee stock options. The effect
on our results of operations of expensing stock options using the Black-Scholes
method is presented in the disclosure of pro forma net income and earnings per
share in the note, entitled "Stockholder's Equity". SFAS No. 123R also requires
the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The Company primarily earns income from the management of its financial assets
and liabilities and from charging fees for services it provides. The Company's
income from managing assets consists of the difference between the interest
income received from its loan portfolio and investments and the interest expense
paid on its funding sources, primarily interest paid on deposits. This
difference or spread is net interest income. The amount by which interest
income will exceed interest expense depends on the volume or balance of earning
assets compared to the volume or balance of interest-bearing deposits and
liabilities and the interest rate earned on those interest-earning assets
compared to the interest rate paid on those interest-bearing liabilities.
Net interest income, when expressed as a percentage of average total
interest-earning assets, is referred to as net interest margin on
interest-earning assets. The Company's net interest income is affected by the
change in the level and the mix of interest-earning assets and interest-bearing
liabilities, referred to as volume changes. The Company's
- 13 -
net yield on interest-earning assets is also affected by changes in the yields
earned on assets and rates paid on liabilities, referred to as rate changes.
Interest rates charged on the Company's loans are affected principally by the
demand for such loans, the supply of money available for lending purposes,
competitive factors and general economic conditions such as federal economic
policies, legislative tax policies and governmental budgetary matters. To
maintain its net interest margin, the Company must manage the relationship
between interest earned and paid. The following table sets forth, for the
period indicated, the increase or decrease of certain items in the consolidated
income statements of the Company as compared to the prior periods:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2005 VS. 2004 2004 VS. 2003
------------------------ ------------------------
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Loans $ 7,711 37.5% $ 907 4.6%
Investment securities 295 30.1% 490 100.2%
Other (73) (24.3)% 65 27.5%
----------- ----------- ----------- -----------
Total interest income 7,933 36.3% 1,462 7.2%
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,685 53.5% 395 8.5%
Bonds payable and other borrowings (183) (6.5)% (1,892) (40.1)%
----------- ----------- ----------- -----------
Total interest expense 2,502 31.9% (1,497) (16.0)%
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,431 38.8% 2,959 26.8%
Provision for loan losses 148 35.4% (1,251) (75.0)%
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION 5,283 38.9% 4,210 44.9%
FOR LOAN LOSSES
NON-INTEREST INCOME
Other loan fees (870) (23.0)% 853 29.2%
Gains from loan sales, net (1,482) (37.2)% (879) (18.1)%
Document processing fees, net 6 0.7% (120) (12.8)%
Loan servicing fees, net (841) (59.4)% 152 12.0%
Service charges (63) (16.5)% 5 1.3%
Other 98 107.7% (224) (71.1)%
----------- ----------- ----------- -----------
Total non-interest income (3,152) (30.1)% (213) (2.0)%
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 142 1.2% 435 3.8%
Occupancy and equipment expenses 244 15.3% (95) (5.6)%
Professional services 82 8.7% 304 47.8%
Depreciation 11 2.1% (49) (8.4)%
Loan servicing and collection 30 13.3% (213) (48.6)%
Other 130 5.5% 403 20.4%
----------- ----------- ----------- -----------
Total non-interest expenses 639 3.6% 785 4.7%
----------- ----------- ----------- -----------
Income before provision for income taxes 1,492 3,212
Provision for income taxes (315) 1,560
----------- -----------
NET INCOME $ 1,807 $ 1,652
=========== ===========
Total interest income increased by $7.9 million, or 36.3%, from $21.8 million in
2004 to $29.7 million in 2005. Of this increase, $4.6 million was due to
interest-earning asset growth, primarily loans, and $3.3 million resulted from
rate increases. Total interest expense increased by $2.5 million, or 31.9%, from
$7.8 million in 2004 to $10.3 million in 2005. Interest expense on deposits
increased $2.7 million while the interest expense on bonds and other borrowings
declined $183,000. Of the increase in interest expense on deposits, $1.3
million was due to deposit growth and $1.4 million resulted from higher rates.
The increase in interest income from loans was due to growth in the manufactured
housing, commercial real estate, commercial and SBA loan portfolios of $34.9
million, $31.6 million, $14.1 million and $14.8 million, respectively. This
loan portfolio growth contributed to increases in interest income on loans from
manufactured housing of $2.5 million, or 50.9%, commercial real estate of $2.4
million, or 49.3%, commercial of $1.3 million, or 68.5% and SBA of $2.0 million,
or 49.5%. A decline in the balance of the securitized loan portfolio of $8.6
million, or 36.7%,
- 14 -
partially offset these increases with a related decrease in interest income of
$1.1 million, or 31.0%, in 2005 compared to 2004. The decrease in the
securitized loan portfolio also indirectly accounted for a $1.4 million decline
in interest expense as the related bonds were paid down and, eventually, the
remainder was called. This decrease in interest expense was offset by increases
in interest paid on advances from FHLB of $1.4 million and an increase on
deposit related interest on $2.7 million. Interest income on investments and
federal funds sold increased $295,000 and $78,000, respectively, while there was
a decline on interest income on interest earning deposits and time certificates
of deposit of $151,000. The Company has relied on various wholesale funding
sources to fund loan growth and will likely continue to do so.
Total interest income increased $1.4 million, or 7.2%, from $20.4 million in
2003 to $21.8 million in 2004. Total interest expense decreased 16.0% from $9.3
million in 2003 to $7.8 million in 2004. The Company experienced a $907,000, or
4.6%, increase in interest income from loans in 2004 over 2003. The increase
resulted from the growth in loans primarily related to manufactured housing,
commercial real estate, commercial and SBA of $27.4 million, $14.3 million, $6.3
million and $4.6 million, respectively. This loan portfolio growth contributed
to increases in interest income on loans from manufactured housing of $1.7
million, or 51.6%, commercial real estate of $1.5 million, or 48.2%, commercial
of $600,000, or 43.7%, and SBA of $331,000, or 9.1%. A reduction in the
securitized loan portfolio balance of $13.9 million, or 37.2%, primarily due to
payments of loan balances, partially offset this increase in interest income
with a decrease in interest income of $2.5 million, or 41.3%, from 2003 compared
to 2004. Mortgage loan interest income also declined by $535,000, or 77%. The
decrease in the size of the securitized loan portfolio also indirectly accounted
for a $2.2 million decline in interest expense as the related bonds paid down by
$12.2 million. This decrease in interest expense from the bond pay down was
partially offset by increases in interest paid on deposits and other borrowings
of $395,000 and $304,000, respectively. Interest income on investments also
increased in 2004 over 2003 by $555,000, or 76.6%, due to increased activity in
investment securities.
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2005 VERSUS 2004 2004 VERSUS 2003
---------------------------- ----------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL ------------------- TOTAL --------------------
CHANGE RATE VOLUME CHANGE RATE VOLUME
-------- ------------------ -------- ------------------
(IN THOUSANDS)
Interest earning deposits in other financial
institutions (including time deposits) $ (151) $ 25 $ (176) $ 116 $ 3 $ 113
Federal funds sold 78 169 (91) (51) 35 (86)
Investment securities 295 46 249 490 58 432
Loans, net 8,823 2,758 6,065 3,428 (6) 3,434
Securitized loans (1,112) 300 (1,412) (2,521) 164 (2,685)
-------- -------- -------- -------- -------- --------
Total interest-earning assets 7,933 3,298 4,635 1,462 254 1,208
-------- -------- -------- -------- -------- --------
Interest-bearing demand 1,422 480 942 450 256 194
Savings 104 132 (28) 25 (6) 31
Time certificates of deposit 1,159 804 355 (80) (355) 275
Bonds payable (1,351) (392) (959) (2,196) 193 (2,389)
Other borrowings 1,168 375 793 304 35 269
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 2,502 1,399 1,103 (1,497) 123 (1,620)
-------- -------- -------- -------- -------- --------
Net interest income $ 5,431 $ 1,899 $ 3,532 $ 2,959 $ 131 $ 2,828
======== ======== ======== ======== ======== ========
The following table presents the net interest income and net interest margin for
the three years indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
2005 2004 2003
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Interest income $ 29,778 $ 21,845 $ 20,383
Interest expense 10,347 7,845 9,342
------------ ------------ ------------
Net interest income $ 19,431 $ 14,000 $ 11,041
============ ============ ============
Net interest margin 5.14% 4.41% 3.93%
- 15 -
NON-INTEREST INCOME
The following table summarizes the Company's non-interest income for the three
years indicated:
YEAR ENDED DECEMBER 31,
-------------------------
NON-INTEREST INCOME 2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Other loan fees $ 2,906 $ 3,776 $ 2,923
Gains from loan sales, net: 2,499 3,981 4,860
Document processing fees, net: 823 817 937
Loan servicing fees, net 575 1,416 1,264
Service charges 318 381 376
Other 189 91 315
------- ------- -------
Total non-interest income $ 7,310 $10,462 $10,675
======= ======= =======
Total non-interest income for the Company declined by $3.2 million, or 30.1%,
from 2004 to 2005. The majority of this decline is the result of the Company's
decision to retain more of the SBA loans it originates rather than sell them as
in previous periods.
The following table summarizes these changes:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 CHANGE
------- ------- --------
Gain from loan sales (IN THOUSANDS)
SBA $ 2,190 $ 3,481 $(1,291)
Mortgage 309 500 (191)
------- ------- --------
Total $ 2,499 $ 3,981 $(1,482)
======= ======= ========
Other loan fees
SBA $ 1,463 $ 1,526 $ (63)
Mortgage 1,443 2,250 (807)
------- ------- --------
Total $ 2,906 $ 3,776 $ (870)
======= ======= ========
Document processing fees, net
SBA $ 194 $ 182 $ 12
Mortgage 563 563 -
Other 66 72 (6)
------- ------- --------
Total $ 823 $ 817 $ 6
======= ======= ========
The Company sold $22.2 million of SBA loans in 2005 compared to $34.1 million in
2004, which contributed to a decline in gains from SBA loans sales of $1.3
million, or 37.1%, for 2005 compared to 2004. As the Company started by
discretion to reduce the volume of SBA loans sold in 2004, the decrease in SBA
loan sales in both years contributed to the $841,000, or 59.4%, decline in loan
servicing fees from 2004 to 2005. In addition, gains from mortgage loan sales
also experienced a decline in 2005 compared to 2004, primarily related to the
continued slowing in mortgage loan refinancing activity. The slower mortgage
activity also resulted in an $807,000 or 35.7%, decline in other mortgage loan
fees for 2005 compared to 2004.
Total non-interest income for the Company declined by 2.0%, from 2003 to 2004.
This decline was primarily due to the drop in total mortgage loan originations
of $114.9 million, or 35.5%, from $323.7 million in 2003 to $208.8 million in
2004 which resulted in declines of $662,000 in gains on loan sales, $680,000 in
other loan fees and $374,000 in document processing fees. Net gains on loan
sales for the SBA division also declined slightly due to management's decision
to sell less 7(a) guaranteed loans in 2004 than 2003. During 2004, the Company
increased activity in SBA 504 loan originations and referrals which resulted in
increases in other SBA loan fees and document processing fees.
- 16 -
NON-INTEREST EXPENSES
The following table summarizes the Company's non-interest expenses for the three
years indicated:
YEAR ENDED DECEMBER 31,
-------------------------
NON-INTEREST EXPENSES 2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits $11,993 $11,851 $11,416
Occupancy and equipment expenses 1,840 1,596 1,691
Professional services 1,022 940 636
Depreciation 543 532 581
Loan servicing and collection 255 225 438
Other 2,507 2,377 1,974
------- ------- -------
Total non-interest expenses $18,160 $17,521 $16,736
======= ======= =======
Non-interest expenses increased $639,000, or 3.6%, in 2005 compared to 2004. The
Company opened two new full-service branches in 2005 which were primarily
responsible for the $244,000, or 15.3%, increase in occupancy expenses and the
$142,000, or 1.2%, increase in salaries and employee benefits in 2005 compared
to 2004. The slight increase in other non-interest expenses included $399,000
in bond related costs as the result of the securitized bond call and payoff.
Non-interest expenses increased $785,000 in 2004 compared to 2003. Increases in
salaries and employee benefits, professional services and other expenses of
$435,000, $304,000 and $403,000, respectively, were partly offset by declines in
occupancy, depreciation and loan servicing and collection of $95,000, $49,000
and $213,000. The increase in "Other" included a $402,000 charge related to
sub-lease costs incurred in connection with a former lending relationship.
The following table compares the various elements of non-interest expenses as a
percentage of average assets:
TOTAL SALARIES AND OCCUPANCY AND
AVERAGE NON-INTEREST EMPLOYEE DEPRECIATION
YEAR ENDED DECEMBER 31, ASSETS EXPENSES BENEFITS EXPENSES
------------------------ -------- ------------- ------------- --------------
DOLLARS IN THOUSANDS)
2005 393,210 4.62% 3.05% 0.61%
2004 333,230 5.26% 3.56% 0.64%
2003 299,661 5.58% 3.81% 0.76%
INCOME TAXES
Income tax provision was $2.4 million in 2005, $2.7 million in 2004 and
$1.1million in 2003. The effective income tax rate was 29.6%, 41.2% and 34.1%
for 2005, 2004 and 2003, respectively. The effective income tax rate for 2005
is less than the effective income tax rate in other periods presented as a tax
reserve of $914,000, or $.16 per share (basic), related to the resolution of
potential tax issues as been reversed due to the resolution of the uncertainty.
See footnote 10, "Income Taxes", in the notes to the Consolidated Financial
Statements.
CAPITAL RESOURCES
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
rules as to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions and new regulations concerning
internal controls, accounting and operations.
The prompt corrective action regulations of FDICIA define specific capital
categories based on the institutions' capital ratios. The capital categories, in
declining order, are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". To be considered "well capitalized", an institution must have
a core capital ratio of at least 5% and a total risk-based capital ratio of at
least 10%. Additionally, FDICIA imposed in 1994 a new Tier I risk-based capital
ratio of at least 6% to be considered "well capitalized". Tier I risk-based
capital is, primarily, common stock and retained earnings, net of goodwill and
other intangible assets.
- 17 -
To be categorized as "adequately capitalized" or "well capitalized", CWB must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
and values as set forth in the tables below:
(DOLLARS IN THOUSANDS) RISK- ADJUSTED TOTAL TIER 1 TIER 1
TOTAL TIER 1 WEIGHTED AVERAGE CAPITAL CAPITAL LEVERAGE
CAPITAL CAPITAL ASSETS ASSETS RATIO RATIO RATIO
-------- -------- --------- --------- -------- -------- ---------
DECEMBER 31, 2005
CWBC (Consolidated) $ 46,031 $ 42,077 $ 375,487 $ 429,378 12.26% 11.21% 9.80%
CWB 42,501 38,577 375,474 425,768 11.32 10.27 9.06
DECEMBER 31, 2004
CWBC (Consolidated) $ 41,047 $ 37,315 $ 298,359 $ 358,623 13.76% 12.51% 10.41%
CWB 38,550 34,819 298,309 354,889 12.92 11.67 9.81
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
The Company does not anticipate any material changes in its capital resources.
CWBC has common equity only and does not have any off-balance sheet financing
arrangements. The Company has not repurchased any stock nor does it have any
immediate plans or programs to do so.
- 18 -
SCHEDULE OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
As of the dates indicated below, the following schedule shows the average
balances of the Company's assets, liabilities and stockholders' equity accounts
as a percentage of average total assets:
DECEMBER 31,
----------------------------------------------------------
2005 2004 2003
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 5,428 1.4% $ 5,364 1.6% $ 6,431 2.1%
Interest-earning deposits in other financial institutions 414 0.1% 6,919 2.1% 1,359 0.5%
Federal funds sold 5,923 1.5% 8,684 2.6% 15,462 5.1%
Time deposits in other financial institutions 643 0.2% 577 0.2% 1,542 0.5%
Investment securities available-for-sale 22,474 5.7% 21,220 6.4% 8,910 3.0%
Investment securities held-to-maturity 7,703 2.0% 3,493 1.0% 5,036 1.7%
Federal Reserve Bank & Federal Home Loan Bank stock 2,882 0.7% 1,902 0.6% 812 0.3%
Interest only strips, at fair value 2,261 0.6% 3,214 1.0% 4,054 1.3%
Loans held for sale, net 50,106 12.7% 44,037 13.2% 45,445 15.2%
Loans held for investment, net 265,799 67.6% 197,622 59.3% 147,351 49.2%
Securitized loans, net 18,241 4.6% 28,661 8.6% 50,173 16.7%
Servicing rights 3,118 0.8% 3,002 0.9% 2,062 0.7%
Other real estate owned, net 43 - 88 - 677 0.2%
Premises and equipment, net 2,011 0.5% 1,655 0.5% 1,805 0.6%
Other assets 6,164 1.6% 6,792 2.0% 8,542 2.9%
--------- ------- --------- ------- --------- -------
TOTAL ASSETS $393,210 100.0% $333,230 100.0% $299,661 100.0%
========= ======= ========= ======= ========= =======
LIABILITIES
Deposits:
Non-interest-bearing demand $ 34,758 8.8% $ 38,761 11.6% $ 34,400 11.5%
Interest-bearing demand 87,587 22.3% 50,785 15.2% 35,768 11.9%
Savings 16,479 4.2% 17,810 5.3% 15,480 5.2%
Time certificates of $100,000 or more 62,545 15.9% 31,851 9.6% 21,076 7.0%
Other time certificates 89,304 22.7% 109,456 32.9% 109,828 36.7%
--------- ------- --------- ------- --------- -------
Total deposits 290,673 73.9% 248,663 74.6% 216,552 72.3%
Other borrowings 46,285 11.8% 22,699 6.8% 6,518 2.2%
Bonds payable in connection with securitized loans 10,469 2.7% 19,676 5.9% 39,000 13.0%
Other liabilities 5,948 1.5% 5,992 1.8% 4,746 1.5%
--------- ------- --------- ------- --------- -------
Total liabilities 353,375 89.9% 297,030 89.1% 266,816 89.0%
--------- ------- --------- ------- --------- -------
STOCKHOLDERS' EQUITY
Common stock 30,127 7.6% 29,940 9.0% 29,812 10.0%
Retained earnings 9,783 2.5% 6,275 1.9% 3,037 1.0%
Accumulated other comprehensive (loss) (75) - (15) - (4) -
--------- ------- --------- ------- --------- -------
Total stockholders' equity 39,835 10.1% 36,200 10.9% 32,845 11.0%
--------- ------- --------- ------- --------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$393,210 100.0% $333,230 100.0% $299,661 100.0%
========= ======= ========= ======= ========= =======
- 19 -
INTEREST RATES AND DIFFERENTIALS
-----------------------------------
The following table illustrates average yields on interest-earning assets and
average rates on interest-bearing liabilities for the years indicated. These
average yields and rates are derived by dividing interest income by the average
balances of interest-earning assets and by dividing interest expense by the
average balances of interest-bearing liabilities for the years indicated.
Amounts outstanding are averages of daily balances during the period.
YEAR ENDED DECEMBER 31,
-------------------------------
INTEREST-EARNING ASSETS: 2005 2004 2003
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest earning deposits in other financial institutions:
Average outstanding $ 414 $ 6,919 $ 1,359
Interest income 11 170 31
Average yield 2.75% 2.46% 2.28%
Time deposits in other financial institutions:
Average outstanding 643 577 1,542
Interest income 21 13 36
Average yield 3.26% 2.25% 2.33%
Federal funds sold:
Average outstanding 5,923 8,684 15,462
Interest income 196 118 169
Average yield 3.31% 1.36% 1.09%
Investment securities:
Average outstanding 33,059 26,615 14,758
Interest income 1,274 979 489
Average yield 3.85% 3.68% 3.31%
Gross loans, excluding securitized:
Average outstanding 319,008 244,492 195,648
Interest income 25,804 16,982 13,554
Average yield 8.09% 6.95% 6.93%
Securitized loans:
Average outstanding 19,147 30,098 52,359
Interest income 2,472 3,583 6,104
Average yield 12.91% 11.91% 11.66%
Total interest-earning assets:
Average outstanding 378,194 317,385 281,128
Interest income 29,778 21,845 20,383
Average yield 7.87% 6.88% 7.25%
- 20 -
YEAR ENDED DECEMBER 31,
-------------------------------
INTEREST-BEARING LIABILITIES: 2005 2004 2003
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average outstanding $ 87,587 $ 50,785 $ 35,768
Interest expense 2,242 820 371
Average effective rate 2.56% 1.61% 1.04%
Savings deposits:
Average outstanding 16,479 17,810 15,480
Interest expense 344 241 215
Average effective rate 2.09% 1.35% 1.39%
Time certificates of deposit:
Average outstanding 151,849 141,308 130,904
Interest expense 5,115 3,955 4,035
Average effective rate 3.37% 2.80% 3.08%
Bonds payable:
Average outstanding 10,469 19,676 39,000
Interest expense 1,090 2,441 4,637
Average effective rate 10.42% 12.41% 11.89%
Other borrowings:
Average outstanding 46,285 22,699 6,518
Interest expense 1,556 388 84
Average effective rate 3.36% 1.71% 1.29%
Total interest-bearing liabilities:
Average outstanding 312,669 252,278 227,670
Interest expense 10,347 7,845 9,342
Average effective rate 3.31% 3.11% 4.10%
NET INTEREST INCOME 19,431 14,000 11,041
NET INTEREST SPREAD 4.56% 3.77% 3.15%
AVERAGE NET MARGIN 5.14% 4.41% 3.93%
Nonaccrual loans are included in the average balance of loans outstanding.
LOAN PORTFOLIO
---------------
The Company's largest categories of loans held in the portfolio are commercial
loans, real estate loans, SBA loans, manufactured housing loans and second
mortgage loans. Loans are carried at face amount, net of payments collected,
the allowance for loan losses, deferred loan fees/costs and discounts on loans
purchased. Interest on all loans is accrued daily, primarily on a simple
interest basis. It is the Company's policy to place a loan on nonaccrual status
when the loan is 90 days past due. Thereafter, previously recorded interest is
reversed and interest income is typically recognized on a cash basis.
The rates charged on variable rate loans are set at specific increments. These
increments vary in relation to the Company's published prime lending rate or
other appropriate indices. At December 31, 2005 and 2004, approximately 62% of
the Company's loan portfolio was comprised of variable interest rate loans.
Management monitors the maturity of loans and the sensitivity of loans to
changes in interest rates.
The following table sets forth, as of the dates indicated, the amount of gross
held for investment loans outstanding based on the remaining scheduled
repayments of principal, which could either be repriced or remain fixed until
maturity, classified by years until maturity:
- 21 -
DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
IN YEARS (IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
-------- --------- -------- --------- -------- ---------- -------- --------- -------- ---------
Less than One $ 19,797 $ 49,796 $ 3,877 $ 44,896 $ 2,382 $ 34,108 $ 2,604 $ 8,188 $ 10,346 $ 26,532
One to Five 39,081 50,708 12,922 29,567 4,128 13,645 3,615 16,224 3,975 6,195
Over Five 88,086 139,570 94,568 110,215 85,390 110,914 105,491 116,322 164,748 58,761
--------------------------------------------------------------------------------------------------------
Total $146,964 $ 240,074 $111,367 $ 184,678 $ 91,900 $ 158,667 $111,710 $ 140,734 $179,069 $ 91,488
========================================================================================================
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:
DECEMBER 31,
-----------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
LOAN LOAN LOAN LOAN LOAN
BALANCE BALANCE BALANCE BALANCE BALANCE
--------- --------- --------- --------- ---------
Commercial $ 44,957 $ 30,893 $ 24,592 $ 19,302 $ 26,411
Real estate 116,938 85,357 71,010 47,456 44,602
SBA 37,088 35,265 30,698 40,961 31,889
Manufactured housing 101,336 66,423 39,073 28,199 24,135
Other installment 11,355 8,645 5,770 7,047 4,088
Securitized 14,858 23,474 37,386 66,195 108,584
Held for sale 60,506 45,988 42,038 43,284 30,848
--------- --------- --------- --------- ---------
Gross Loans 387,038 296,045 250,567 252,444 270,557
Less:
Allowance for loan losses 3,954 3,894 4,675 5,950 8,275
Deferred fees/costs 181 (103) 69 (318) 222
Discount on SBA loans 1,386 1,748 1,549 956 1,105
--------- --------- --------- --------- ---------
Net Loans $381,517 $290,506 $244,274 $245,856 $260,955
========= ========= ========= ========= =========
Percentage to Gross Loans:
Commercial 11.6% 10.5% 9.8% 7.6% 9.8%
Real estate 30.2 28.8 28.3 18.8 16.5
SBA 9.6 11.9 12.3 16.3 11.8
Manufactured housing 26.2 22.5 15.6 11.2 8.9
Other installment 2.9 2.9 2.3 2.8 1.5
Securitized 3.9 7.9 14.9 26.2 40.1
Held for sale 15.6 15.5 16.8 17.1 11.4
--------- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
Commercial Loans
In addition to traditional term commercial loans made to business customers, CWB
grants revolving business lines of credit. Under the terms of the revolving
lines of credit, CWB grants a maximum loan amount, which remains available to
the business during the loan term. Generally, as part of the loan requirements,
the business agrees to maintain its primary banking relationship with CWB. CWB
does not extend material loans of this type in excess of two years.
Commercial Real Estate and Construction Loans
Commercial real estate loans are primarily made for the purpose of purchasing,
improving or constructing single-family residences, commercial or industrial
properties.
A substantial portion of the Company's real estate construction loans are first
and second trust deeds on the construction of owner-occupied single family
dwellings. The Company also makes real estate construction loans on
- 22 -
commercial properties. These consist of first and second trust deeds
collateralized by the related real property. Construction loans are generally
written with terms of six to eighteen months and usually do not exceed a loan to
appraised value of 80%.
Commercial and industrial real estate loans are secured by nonresidential
property. Office buildings or other commercial property primarily secure these
loans. Loan to appraised value ratios on nonresidential real estate loans are
generally restricted to 80% of appraised value of the underlying real property
if occupied by the owner or owner's business; otherwise, these loans are
generally restricted to 75% of appraised value of the underlying real property.
SBA Loans
The SBA loans consist of 7(a), 504, conventional, investor and Business and
Industry loans. The 7(a) loan proceeds are used for working capital, machinery
and equipment purchases, land and building purposes, leasehold improvements and
debt refinancing. The SBA guarantees up to 85% of the loan amount depending on
loan size. Under the SBA 7(a) loan program, the Company is required to retain a
minimum of 5% of the gross originated principal amount of each loan it
originates and sells into the secondary market
The 504 loans are made in conjunction with Certified Development Companies.
These loans are granted to purchase or construct real estate or acquire
machinery and equipment. The loan is structured with a conventional first trust
deed provided by a private lender and a second trust deed which is funded
through the sale of debentures. The predominant structure is terms of 10% down
payment, 50% conventional first loan and 40% debenture.
Conventional and investor loans are funded by our secondary-market partners and
the Bank receives a premium for these transactions.
B&I loans are guaranteed by the U.S. Department of Agriculture. The guaranteed
amount is generally 80%. B&I loans are similar to the 7(a) loans but are made
to businesses in designated rural areas. These loans can also be sold into the
secondary market.
Real Estate Loans
The mortgage loan division originates first and second mortgage loans secured by
trust deeds on one to four family homes. The loans are made to borrowers for
the purpose of purchasing a home or refinancing an existing home for purposes
such as interest rate reduction, home improvement, and debt consolidation.
These loans are underwritten to specific investor guidelines and are committed
for sale to that investor. A majority of these loans are sold servicing
released into the secondary market.
Manufactured Housing Loans
The mortgage loan division originates loans secured by manufactured homes
primarily located in mobile home parks along the Central Coast of California.
At December 31, 2005, the Bank had $101.3 million in its portfolio. The loans
are serviced internally and are generally fixed rate written for terms of 5 to
30 years with balloon payments ranging from 5 to 15 years.
Other Installment Loans
Installment loans consist of automobile, small home equity lines of credit and
general-purpose loans made to individuals. These loans are primarily fixed
rate.
Second Mortgage Loans
Prior to 2000, the Company originated and purchased second mortgage loans that
allowed borrowers to borrow up to 125% of their home's appraised value, when
combined with the balance of the first mortgage loan, up to a maximum loan of
$100,000. In 1998 and 1999, the Company transferred $81 million and $122
million, respectively, of these loans to two special purpose trusts. These loans
were both originated and purchased by the Company. The trusts then sold bonds
to third party investors that were secured by the transferred loans. In November
2005, the Company exercised its right to call the bonds and paid off the
remaining balance of $9.8 million. The special purpose trusts were dissolved
while the Company continues to have the loans serviced by a third party
("Servicer"), who receives a stated servicing fee. The securitized loans are
classified as held for investment.
- 23 -
Loan Commitments Outstanding
The Company's loan commitments outstanding at the dates indicated are summarized
below:
DECEMBER 31,
-------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial $22,327 $19,010 $13,867 $11,370 $ 7,450
Real estate 19,323 7,618 11,676 7,664 6,370
SBA 3,408 6,107 9,531 8,675 4,712
Installment loans 9,330 8,966 5,112 2,402 13,339
Standby letters of credit 1,499 403 522 380 438
------- ------- ------- ------- -------
Total commitments $55,887 $42,104 $40,708 $30,491 $32,309
======= ======= ======= ======= =======
The Company makes loans to borrowers in a number of different industries. Other
than Manufactured Housing, no single concentration comprises 10% or more of the
Company's loan portfolio. Commercial, commercial real estate loans and SBA
loans comprised over 10% of the Company's loan portfolio as of December 31,
2005, but consisted of diverse borrowers.
Allowance for Loan Losses
The following table summarizes the activity in the Company's allowance for loan
losses for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Average gross loans, held for investment,
including Securitized loans $288,049 $230,533 $202,563 $218,317 $267,402
Gross loans at end of year, held for
investment, including Securitized loans 324,965 248,412 206,912 208,522 237,989
Allowance for loan losses, beginning of
year $ 3,894 $ 4,676 $ 5,950 $ 8,275 $ 6,746
Loans charged off:
Commercial 228 185 445 1 614
Real estate 8 274 471 2,474 3,129
Installment - - 3 - -
Short-term consumer - - 902 3,162 2,478
Securitized 831 1,356 2,512 4,012 4,358
--------- --------- --------- --------- ---------
Total 1,067 1,815 4,333 9,649 10,580
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off
Commercial 20 31 88 71 40
Real estate 89 44 42 396 171
Short-term consumer - - 672 1,392 400
Securitized 452 540 588 566 378
--------- --------- --------- ---------
Total 561 615 1,390 2,425 990
--------- --------- --------- ---------
Net loans charged off 506 1,200 2,943 7,224 9,590
Provision for loan losses 566 418 1,669 4,899 11,881
Adjustments due to Palomar sale - - - - (762)
--------- --------- --------- --------- ---------
Allowance for loan losses, end of year $ 3,954 $ 3,894 $ 4,676 $ 5,950 $ 8,275
========= ========= ========= ========= =========
Ratios:
Net loan charge-offs to average loans 0.2% 0.5% 1.5% 3.3% 3.6%
Net loan charge-offs to loans at end of period 0.2% 0.5% 1.4% 3.5% 4.0%
Allowance for loan losses to loans held for
investment at end of period 1.4% 1.6% 2.3% 2.9% 3.5%
Net loan charge-offs to allowance for loan
losses at beginning of period 13.0% 25.7% 49.5% 87.3% 142.2%
Net loan charge-offs to provision for loan
losses 89.4% 287.1% 176.3% 147.5% 80.7%
- 24 -
The following table summarizes the allowance for loan losses:
DECEMBER 31,
---------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------- ------------------
(DOLLARS IN THOUSANDS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
BALANCE AT CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
END OF PERIOD TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
APPLICABLE TO: AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------------- ------- --------- ------- --------- ------- --------- -------- --------- ------- ---------
SBA $ 1,409 35.7% $ 1,388 35.7% $ 1,550 27.0% $ 1,874 26.6% $ 1,752 18.8%
Manufactured
housing 563 14.2% 465 11.9% 372 15.6% 272 11.2% 291 8.9%
Securitized 628 15.9% 1,109 28.5% 2,024 14.9% 2,571 26.2% 4,189 40.1%
All other loans 1,354 34.2% 932 23.9% 730 42.5% 1,233 36.0% 2,043 32.2%
---------------------------------------------------------------------------------------------------
TOTAL $ 3,954 100% $ 3,894 100% $ 4,676 100% $ 5,950 100% $ 8,275 100%
===================================================================================================
Total allowance for loan losses ("ALL") increased $60,000, or 1.5%, from
December 31, 2004 to December 31, 2005. The slight increase was primarily the
result of growth within the commercial, commercial real estate, construction,
and manufactured housing portfolios which was mostly offset by a decline in the
ALL for the securitized loan portfolio as a result of the continued decrease in
net charge-offs and outstanding loan balances.
Net loans charged-off were $506,000 in 2005, $1.2 million in 2004 and $2.9
million in 2003. The primary reason for the decline in net loan charge-offs in
2005 was the paydown in the securitized loan portfolio of $8.6 million, or
36.7%, from $23.5 million at year end 2004 to $14.9 million at year end 2005.
The Company recorded $566,000 as a provision for loan losses in 2005, $418,000
in 2004 and $1.7 million in 2003. The moderate increase in 2005 over 2004 is
due to loan growth in most categories offset by the continued paydown in the
securitized loan portfolio.
In management's opinion, the balance of the allowance for loan losses was
sufficient to absorb known and inherent probable losses in the loan portfolio as
of December31, 2005.
Nonaccrual, Past Due and Restructured Loans
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest under the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value and the probability of collecting scheduled principal
and interest payments. Loans that experience insignificant payment delays or
payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis. When determining the possibility of impairment, management
considers the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record and the amount of the shortfall in relation to the principal and interest
owed. For collateral-dependent loans, the Company uses the fair value of
collateral method to measure impairment. All other loans, except for
securitized, are measured for impairment based on the present value of future
cash flows. Impairment is measured on a loan-by-loan basis for all loans in the
portfolio except for the securitized loans, which are evaluated for impairment
on a collective basis.
The recorded investment in loans that are considered to be impaired is as
follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 77 $ 49 $ 235 $ 422 $ -
Impaired loans with specific valuation allowances 3,406 3,926 6,843 7,971 6,587
Specific valuation allowance related to impaired loans (473) (425) (640) (1,127) (1,669)
-------- -------- -------- -------- --------
Impaired loans, net $ 3,010 $ 3,550 $ 6,438 $ 7,266 $ 4,918
======== ======== ======== ======== ========
Average investment in impaired loans $ 3,716 $ 5,137 $ 6,584 $ 7,565 $ 5,047
======== ======== ======== ======== ========
- 25 -
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS)
Nonaccrual loans $ 6,797 $ 8,350 $ 7,174 $13,965 $11,413
SBA guaranteed portion of loans included above (4,332) (5,287) (4,106) (8,143) (7,825)
-------- -------- -------- -------- --------
Nonaccrual loans, net $ 2,465 $ 3,063 $ 3,068 $ 5,822 $ 3,588
======== ======== ======== ======== ========
Troubled debt restructured loans $ 75 $ 124 $ 193 $ 829 $ 1,093
Loans 30 through 90 days past due with interest accruing 1,792 1,804 3,907 5,122 2,607
Interest income recognized on impaired loans $ 141 $ 103 $ 277 $ 190 $ 1,443
Interest foregone on nonaccrual loans and troubled debt
restructured loans outstanding 253 208 216 1,263 1,146
-------- -------- -------- -------- --------
Gross interest income on impaired loans $ 394 $ 311 $ 493 $ 1,453 $ 2,589
======== ======== ======== ======== ========
The accrual of interest is discontinued when substantial doubt exists as to
collectibility of the loan; generally at the time the loan is 90 days
delinquent. Any unpaid but accrued interest is reversed at that time.
Thereafter, interest income is no longer recognized on the loan. As such,
interest income may be recognized on impaired loans to the extent they are not
past due by 90 days. Interest on nonaccrual loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all of the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured. All of the nonaccrual loans are impaired. Net non accrual loans
declined $598,000 from 2004 to 2005. Principal balances of non-accrual loans,
excluding $4.0 million in SBA guaranteed loans repurchased from investors
compared to $5.2 million in 2004, declined by $403,000 and the guarantee related
to these loans increased $195,000.
Total impaired loans decreased by $492,000, or 12.4%, in 2005, while the
specific valuation allowance for impaired loans increased $48,000 for a net
decrease of $540,000. The decline in impaired loans resulted from payments
against impaired loans of $551,000 and pay-offs of impaired loans of $258,000.
Additionally, $136,000 of impaired loans were charged off, $11,000 in balances
were upgraded and $111,000 of impaired loans were converted to OREO. Offsetting
these declines were the addition of newly impaired loans of $547,000 and an
increase in loans without a specific valuation allowance of $28,000.
Financial difficulties encountered by certain borrowers may cause the Company to
restructure the terms of their loan to facilitate loan repayment. A troubled
debt restructured loan ("TDR") would generally be considered impaired. The
balance of impaired loans disclosed above includes all TDRs that, as of December
31, 2005, 2004 and 2003, are considered impaired. Total TDRs decreased by
39.5%, or $49,000, from $124,000 to $75,000 as of December 31, 2004 and 2005,
respectively.
INVESTMENT PORTFOLIO
---------------------
The following table summarizes the carrying values of the Company's investment
securities for the years indicated:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Available-for-sale securities
-----------------------------
U.S. Government and agency $15,148 $15,221 $ 7,024
Other (1) 7,471 7,037 8,408
------- ------- -------
Total available-for-sale securities $22,619 $22,258 $15,432
======= ======= =======
- 26 -
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS
Held-to-maturity securities
---------------------------
U.S. Government and agency $ 200 $ 200 $ 200
Other (1) 8,477 5,894 4,836
------- ------- -------
Total held-to-maturity securities $ 8,677 $ 6,094 $ 5,036
======= ======= =======
At December 31, 2005, $200,000 at carrying value of held-to-maturity securities
were pledged as collateral to the U.S. Treasury for CWB's treasury, tax and loan
account and $31.1 million at carrying value were pledged to the Federal Home
Loan Bank, San Francisco, as collateral for current and future advances.
The following tables summarize the maturity periods and weighted average yields
of the Company's investment securities at December 31, 2005.
FIVE TO TEN
TOTAL AMOUNT LESS THAN ONE YEAR ONE TO FIVE YEARS YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
-----------------------------
U. S. Government
and agency $ 15,148 3.5% $ - - $ 15,148 3.5% $ - -
Other (1) 7,471 4.0% - - 7,471 4.0% - -
----------- ----------- ----------- -----------
Total AFS $ 22,619 3.7% $ - - $ 22,619 3.7% $ - -
=========== =========== =========== ===========
Held-to-maturity securities
---------------------------
U.S. Government
and agency $ 200 3.6% $ 200 3.6% $ - - $ - -
Other (1) 8,477 4.7% - - 5,453 4.3% 3,024 5.3%
----------- ----------- ----------- -----------
Total HTM $ 8,677 4.6% $ 200 3.6% $ 5,453 4.3% $ 3,024 5.3%
=========== =========== =========== ===========
(1) Consists of pass-through mortgage backed securities and collateralized mortgage obligations.
Mortgage-backed securities and collateralized mortgage obligations are
distributed in total based on average expected maturities.
Interest-Only Strips and Servicing Rights
As of December 31, 2005 and 2004, the Company held interest-only strips ("I/O")
in the amount of $1.9 million and $2.7 million, respectively. There have been
no new I/O's since 2002. These I/O's represent the present value of the right
to the estimated net cash flows generated by SBA loans sold. Net cash flows
consist of the difference between (a) interest at the stated rate paid by
borrowers and (b) the sum of (i) pass-through interest paid to third-party
investors and (ii) contractual servicing fees. The Company also held servicing
rights related to SBA loans sales of $2.8 million and $3.3 million at December
31, 2005 and 2004, respectively. For loans sold subsequent to March 31, 2002,
the initial servicing rights and resulting gain on sale were calculated based on
the difference between the best actual par and premium bids on an individual
loan basis. The servicing right balances are subsequently amortized over the
estimated life of the loans using industry prepayment statistics and the
Company's own experience. Quarterly, the servicing right and I/O strip assets
are analyzed for impairment. The I/O's are accounted for as investments in debt
securities classified as trading securities. Accordingly, the Company marks
them to fair value with the resulting increase or decrease recorded through
operations in the current period. At December 31, 2005 and 2004, all of the
servicing rights were related to SBA loan sales.
LIQUIDITY MANAGEMENT
---------------------
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The most important factor in the
preservation of liquidity is maintaining public confidence that
- 27 -
facilitates the retention and growth of core deposits. Ultimately, public
confidence is gained through profitable operations, sound credit quality and a
strong capital position. The Company's liquidity management is viewed from a
long-term and short-term perspective, as well as from an asset and liability
perspective. Management monitors liquidity through regular reviews of maturity
profiles, funding sources and loan and deposit forecasts to minimize funding
risk. The Company has asset/liability committees ("ALCO") at the Board and Bank
management level to review asset/liability management and liquidity issues. The
Company maintains strategic liquidity and contingency plans. Periodically, the
Company has used short-term time certificates from other financial institutions
to meet projected liquidity needs.
In 2004, CWB was approved for membership in the Federal Home Loan Bank ("FHLB").
The Company has a blanket lien credit line with the FHLB. Advances are
collateralized in the aggregate by CWB's eligible mortgage loans and securities
of the U.S Government and its agencies. The outstanding advances at December 31,
2005 include $38.5 million borrowed at variable rates which adjust to the
current LIBOR rate either monthly or quarterly and $25 million borrowed at fixed
rates. At December 31, 2005, CWB had pledged to FHLB, securities of $31.1
million at carrying value and loans of $62.8 million, and had $30 million
available for additional borrowing At December 31, 2004, CWB had $33.8 million
of loans and $14.1 million of securities pledged as collateral and outstanding
advances of $10.5 million.
The Company also maintains three federal funds purchased lines for a total
borrowing capacity of $18.5 million.
The Company, through the Bank, also has the ability as a member of the Federal
Reserve System, to borrow at the discount window up to 50% of what is pledged at
the Federal Reserve Bank. CWB qualifies for primary credit as it has been
deemed to be in sound financial condition. The rate on primary credit will be
50 basis points less than the secondary credit rate and will generally be
granted on a "no questions asked basis" at a rate that initially will be at 100
basis points above the Federal Open Market Committee's (FOMC) target federal
funds rate. As the rate is currently not attractive, it is unlikely it will be
used as a regular source of funding, but is noted as available as an alternative
funding source.
The Company has not experienced disintermediation and does not believe this is a
potentially probable occurrence. However, in a highly competitive marketplace,
CWB's core deposits (excluding certificates of deposit) declined by $30.1
million in 2005 and the Company has turned more to wholesale funding sources to
help fund loan growth. The liquidity ratio of the Company was 22% at December
31, 2005 compared to 27% at December 31, 2004. The Company's liquidity ratio
fluctuates in conjunction with loan funding demands. The liquidity ratio
consists of cash and due from banks, deposits in other financial institutions,
available for sale investments, federal funds sold and loans held for sale,
divided by total assets.
CWBC's routine funding requirements primarily consist of certain operating
expenses. Normally, CWBC obtains funding to meet its obligations from dividends
collected from its subsidiary and has the capability to issue debt securities.
Federal banking laws regulate the amount of dividends that may be paid by
banking subsidiaries without prior approval.
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks
include: lag, repricing, basis and prepayment risk.
- Lag Risk - lag risk results from the inherent timing difference
between the repricing of the Company's adjustable rate assets and
liabilities. For instance, certain loans tied to the prime rate index
may only reprice on a quarterly basis. However, at a community bank
such as CWB, when rates are rising, funding sources tend to reprice
more slowly than the loans. Therefore, for CWB, the effect of this
timing difference is generally favorable during a period of rising
interest rates and unfavorable during a period of declining interest
rates. This lag can produce some short-term volatility, particularly
in times of numerous prime rate changes.
- Repricing Risk - repricing risk is caused by the mismatch in the
maturities / repricing periods between interest-earning assets and
interest-bearing liabilities. If CWB was perfectly matched, the net
interest margin would expand during rising rate periods and contract
during falling rate periods. This is so since loans tend to reprice
more quickly than do funding sources. Typically, since CWB is somewhat
asset sensitive, this would also tend to expand the net interest
margin during times of interest rate increases.
- 28 -
- Basis Risk - item pricing tied to different indices may tend to react
differently, however, all CWB's variable products are priced off the
prime rate.
- Prepayment Risk - prepayment risk results from borrowers paying down /
off their loans prior to maturity. Prepayments on fixed-rate products
increase in falling interest rate environments and decrease in rising
interest rate environments. Since a majority of CWB's loan
originations are adjustable rate and set based on prime, and there is
little lag time on the reset, CWB does not experience significant
prepayments. However, CWB does have more prepayment risk on its
securitized and manufactured housing loans and its mortgage-backed
investment securities.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are
generally retained as they have similar repricing characteristics as our funding
sources. CWB sells mortgage products and a portion of its SBA loan
originations. While the Company has some interest rate exposure in excess of
five years, it has internal policy limits designed to minimize risk should
interest rates rise. Currently, the Company does not use derivative instruments
to help manage risk, but will consider such instruments in the future if the
perceived need should arise.
Loan sales - The Company's ability to originate, purchase and sell loans is also
significantly impacted by changes in interest rates. Increases in interest rates
may also reduce the amount of loan and commitment fees received by CWB. A
significant decline in interest rates could also decrease the size of CWB's
servicing portfolio and the related servicing income by increasing the level of
prepayments.
DEPOSITS
--------
The following table shows the Company's average deposits for each of the periods
indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2005 2004 2003
-------------------- ------------------- -------------------
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
--------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand $ 34,758 12.0% $ 38,760 15.6% $ 34,400 15.9%
Interest-bearing demand 87,587 30.1% 50,785 20.4% 35,768 16.5%
Savings 16,479 5.7% 17,810 7.2% 15,480 7.2%
TCD's of $100,000 or more 62,545 21.5% 31,851 12.8% 21,076 9.7%
Other TCD's 89,304 30.7% 109,457 44.0% 109,828 50.7%
--------- --------- -------- --------- -------- ---------
Total Deposits $290,673 100.0% $248,663 100.0% $216,552 100.0%
========= ========= ======== ========= ======== =========
The maturities of time certificates of deposit ("TCD's") were as follows:
DECEMBER 31,
--------------------------------------------------
2005 2004
------------------------ ------------------------
TCD'S OVER OTHER TCD'S OVER OTHER
$100,000 TCD'S $100,000 TCD'S
----------- ----------- ----------- -----------
(IN THOUSANDS)
Less than three months $ 14,968 $ 18,872 $ 8,002 $ 16,237
Over three months through six months 17,947 19,395 7,062 20,809
Over six months through twelve months 48,575 38,822 9,877 15,843
Over twelve months through five years 28,045 26,451 15,452 39,137
----------- ----------- ----------- -----------
Total $ 109,535 $ 103,540 $ 40,393 $ 92,026
=========== =========== =========== ===========
The deposits of the Company may fluctuate up and down with local and national
economic conditions. However, management does not believe that deposit levels
are significantly influenced by seasonal factors.
The Company manages its money desk and obtains brokered deposits in accordance
with its liquidity and strategic planning. Such deposits increased by $42.0
million during 2005 as the Company's general funding needs increased due to the
growth in the loan portfolio. The Company can use the money desk or obtain
broker deposits when
- 29 -
necessary in a short timeframe; however, these funds are more expensive as there
is substantial competition for these deposits.
CONTRACTUAL OBLIGATIONS
-----------------------
The Company has contractual obligations that include long-term debt, deposits,
operating leases and purchase obligations for service providers. The following
table is summary of those obligations at December 31, 2005:
OVER 5
TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
FHLB Borrowing $ 63,500 $ 4,000 $ 51,500 $ 8,000 $ -
Time certificates of deposits 213,075 158,578 40,467 14,030 -
Operating lease obligations 2,241 930 793 410 108
Purchase obligations for service providers 1,211 363 590 258 -
----------- ----------- ----------- ----------- -----------
Total $ 280,027 $ 163,871 $ 93,350 $ 22,698 $ 108
=========== =========== =========== =========== ===========
SUPERVISION AND REGULATION
INTRODUCTION
------------
Banking is a complex, highly regulated industry. The primary goals of the
regulatory scheme are to maintain a safe and sound banking system, protect
depositors and the Federal Deposition Insurance Corporation's insurance fund,
and facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress and the states have created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the financial services industry. Consequently, the growth and
earnings performance of CWBC and CWB can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statues, regulations and the policies of various
governmental regulatory authorities, including the Board of Governors of the
Federal Reserve System, or the FRB, the Office of the Comptroller of the
Currency, or the OCC, and Federal Deposit Insurance Corporation, or the FDIC.
The system of supervision and regulation applicable to financial services
businesses governs most aspects of the business of CWBC and CWB, including: (i)
the scope of permissible business; (ii) investments; (iii) reserves that must be
maintained against deposits; (iv) capital levels that must be maintained; (v)
the nature and amount of collateral that may be taken to secure loans; (vi) the
establishment of new branches; (vii) mergers and consolidations with other
financial institutions; and (viii) the payment of dividends.
From time to time laws or regulations are enacted which have the effect of
increasing the cost of doing business, limiting or expanding the scope of
permissible activities, or changing the competitive balance between banks and
other financial and non-financial institutions. Proposals to change the laws and
regulations governing the operations of banks and bank holding companies are
frequently made in Congress and by various bank and other regulatory agencies.
Future changes in the laws, regulations or polices that impact CWBC and CWB
cannot necessarily be predicted, but they may have a material effect on the
business and earnings of CWBC and CWB.
CWBC
----
General. As a bank holding company, CWBC is registered under the Bank Holding
Company Act of 1956, as amended, (or "BHCA"), and is subject to regulation by
the FRB. According to FRB Policy, CWBC is expected to act as a source of
financial strength for CWB, to commit resources to support it in circumstances
where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to
periodic examination by the FRB. CWBC is also required to file periodic reports
of its operations and any additional information regarding its activities and
those of its subsidiaries as may be required by the FRB.
CWBC is also a bank holding company within the meaning of Section 3700 of the
California Financial Code. Consequently, CWBC and CWB are subject to
examination by, and may be required to file reports with, the Commissioner of
the California Department of Financial Institutions ("DFI"). Regulations have
not yet been proposed or adopted or steps otherwise taken to implement the DFI's
powers under this statute.
CWBC has a class of securities registered with the Securities Exchange
Commission ("SEC") under Section 12 of the Securities Exchange Act of 1934, as
amended, ("1934 Act") and has its common stock listed on the Nasdaq National
Market. Consequently, CWBC is subject to supervision and regulation by the SEC
and compliance with Nasdaq listing requirements.
- 30 -
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct
from CWB. CWBC has the ability to raise capital on its own behalf or borrow
from external sources, CWBC may also obtain additional funds from dividends paid
by, and fees charged for services provided to, CWB. However, regulatory
constraints on CWB may restrict or totally preclude the payment of dividends by
CWB to CWBC.
Transactions With Affiliate. CWBC and any subsidiaries it may purchase or
organize are deemed to be affiliates of CWB within the meaning of Sections 23A
and 23B of the Federal Reserve Act, and the FRB's Regulation W. Under Sections
23A and 23B and Regulation W, loans by CWB to affiliates, investments by them in
affiliates' stock, and taking affiliates' stock as collateral for loans to any
borrower is limited to 10% of CWB's capital, in the case of any one affiliate,
and is limited to 20% of CWB's capital, in the case of all affiliates. In
addition, transactions between CWB and other affiliates 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 Federal Reserve Act. These
restrictions also prevent a bank holding CWBC and its other affiliates from
borrowing from a banking subsidiary of the bank holding CWBC unless the loans
are secured by marketable collateral of designated amounts. CWBC and CWB are
also subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
Limitations on Business and Investment Activities. Under the BHCA, a bank
holding company must obtain the FRB's approval before: (i) directly or
indirectly acquiring more than 5% ownership or control of any voting shares of
another bank or bank holding company; (ii) acquiring all or substantially all of
the assets of another bank; (iii) or merging or consolidating with another bank
holding company.
The FRB may allow a bank holding company to acquire banks located in any state
of the United States without regard to whether the acquisition is prohibited by
the law of the state in which the target bank is located. In approving
interstate acquisitions, however, the FRB must give effect to applicable state
laws limiting the aggregate amount of deposits that may be held by the acquiring
bank holding company and its insured depository institutions in the state in
which the target bank is located, provided that those limits do not discriminate
against out-of-state depository institutions or their holding companies, and
state laws which require that the target bank have been in existence for a
minimum period of time, not to exceed five years, before being acquired by an
out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own
subsidiaries engaged in certain businesses that the FRB has determined to be "so
closely related to banking as to be a proper incident thereto." CWBC, therefore,
is permitted to engage in a variety of banking-related businesses. Some of the
activities that the FRB has determined, pursuant to its Regulation Y, to be
related to banking are:
- making or acquiring loans or other extensions of credit for its own
account or for the account of others
- servicing loans and other extensions of credit;
- performing functions or activities that may be performed by a trust
company in the manner authorized by federal or state law under certain
circumstances;
- leasing personal and real property or acting as agent, broker, or
adviser in leasing such property in accordance with various
restrictions imposed by FRB regulations;
- acting as investment or financial advisor;
- providing management consulting advise under certain circumstances;
- providing support services, including courier services and printing
and selling MICR-encoded items;
- acting as a principal, agent or broker for insurance under certain
circumstances;
- making equity and debt investments in corporations or projects
designed primarily to promote community welfare or jobs for residents;
- providing financial, banking or economic data processing and data
transmission services;
- owning, controlling or operating a savings association under certain
circumstances;
- selling money orders, travelers' checks and U.S. Savings Bonds;
- providing securities brokerage services, related securities credit
activities pursuant to Regulation T and other incidental activities;
- 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
- 31 -
Additionally, qualifying bank holding companies making an appropriate election
to the FRB may engage in a full range of financial activities, including
insurance, securities and merchant banking. CWBC has not elected to qualify for
these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from
engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, for example, CWB 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:
- the customer must obtain or provide some additional credit, property
or services from or to CWB other than a loan, discount, deposit or
trust services:
- the customer must obtain or provide some additional credit, property
or service from or to CWBC or any subsidiaries; or
- the customer must not obtain some other credit, property or services
from competitors, except reasonable requirements to assure soundness
of credit extended
Capital Adequacy. Bank holding companies must maintain minimum levels of
capital under the FRB's risk-based capital adequacy guidelines. If capital
falls below minimum guideline levels, a bank holding company, among other
things, may be denied approval to acquire or establish additional banks or
non-bank businesses.
The FRB's risk-based capital adequacy guidelines, discussed in more detail below
in the section entitled "SUPERVISION AND REGULATON - CWB - Regulatory Capital
Guidelines," assign various risk percentages to different categories of assets
and capital is measured as a percentage of risk assets. Under the terms of the
guidelines, bank holding companies are expected to meet capital adequacy
guidelines based both on total risk assets and on total assets, without regard
to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will
be required if warranted by the particular circumstances or risk profiles of
individual organizations. For example, the FRB's capital guidelines contemplate
that additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Moreover, any
banking organization experiencing or anticipating significant growth or
expansion into new activities, particularly under the expanded powers under the
Gramm-Leach-Bliley Act, would be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500
allows CWBC to pay a dividend to its shareholders only to the extent that CWBC
has retained earnings and, after the dividend, CWBC's:
- assets (exclusive of goodwill and other intangible assets) would be
1.25 times its liabilities (exclusive of deferred taxes, deferred
income and other deferred credits); and
- current assets would be at least equal to current liabilities.
Additionally, the FRB's policy regarding dividends provides that a bank holding
CWBC should not pay cash dividends exceeding its net income or which can only be
funded in ways that weaken the bank holding company's financial health, such as
by borrowing. The FRB also possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations.
The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002, or the SOX,
became effective on July 30, 2002, and represents the most far reaching
corporate and accounting reform legislation since the enactment of the
Securities Act of 1933 and the Exchange Act of 1934. The SOX is intended to
provide a permanent framework that improves the quality of independent audits
and accounting services, improves the quality of financial reporting,
strengthens the independence of accounting firms and increases the
responsibility of management for corporate disclosures and financial statements.
It is intended that by addressing these weaknesses, public companies will be
able to avoid the problems encountered by several companies in 2001-2002.
The Sox's provisions are significant to all companies that have a class of
securities registered under Section 12 of the Exchange Act, or are otherwise
reporting to the SEC (or the appropriate federal banking agency) pursuant to
Section 15(d) of the Exchange Act, including CWBC (collectively, "public
companies"). In addition to SEC rulemaking to implement the SOX, The Nasdaq
National Market has adopted corporate governance rules intended to allow
shareholders to more easily and effectively monitor the performance of companies
and directors. The
- 32 -
principal provisions of the SOX, many of which have been interpreted through
regulations released in 2003, provide for and include, among other things:
- the creation of an independent accounting oversight board;
- auditor independence provisions that restrict non-audit services that
accountants may provide to their audit clients;
- additional corporate governance and responsibility measures, including
the requirement that the chief executive officer and chief financial
officer of a public company certify financial statements;
- the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
- an increase in the oversight of, and enhancement of certain
requirements relating to, audit committees of public companies and how
they interact with CWBC's independent auditors;
- requirements that audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees
from the issuer;
- requirements that companies disclose whether at least one member of
the audit committee is a "financial expert' (as such term is defined
by the SEC) and if not discussed, why the audit committee does not
have a financial expert;
- expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
- a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions on
non-preferential terms and in compliance with other bank regulatory
requirements;
- disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
- a range of enhanced penalties for fraud and other violations; and
- expanded disclosure and certification relating to an issuer's
disclosure controls and procedures and internal controls over
financial reporting.
As a result of the SOX, and its implementing regulations, CWBC has incurred
substantial cost to interpret and ensure compliance with the law and its
regulations including, without limitation, increased expenditures by CWBC in
auditors' fees, attorneys' fees, outside advisors fees, and increased errors and
omissions insurance premium costs. Effective September 29, 2005 the SEC extended
the compliance dates for non-accelerated filers such as CWBC with the internal
control over financial reporting requirements to July 15, 2007. CWBC cannot be
certain of the effect, if any, of the foregoing legislation on the business of
CWBC although increased costs of compliance are likely. Future changes in the
laws, regulation, or policies that impact CWBC cannot necessarily be predicted
and may have a material effect on the business and earnings of CWBC.
CWB
---
General. CWB, as a national banking association which is a member of the
Federal Reserve System, is subject to regulation, supervision and regular
examination by the OCC, FDIC and the FRB. CWB's deposits are insured by the
FDIC up to the maximum extent provided by law. The regulations of these
agencies govern most aspects of CWB's business and establish a comprehensive
framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established
--------------------------------
minimum capital standards known as risk-based capital guidelines. These
guidelines are intended to provide a measure of capital that reflects the degree
of risk associated with a bank's operations. The risk-based capital guidelines
include both a definition of capital and a framework for calculating the amount
of capital that must be maintained against a bank's assets and off-balance sheet
items. The amount of capital required to be maintained is based upon the credit
risks associated with the various types of a bank's assets and off-balance sheet
items. A bank's assets and off-balance sheet items are classified under several
risk categories, with each category assigned a particular risk weighting from 0%
to 100%.
Adequately Well CWBC
============ ==== ====
Capitalized Capitalized CWB (consolidated)
============ ============ ========= ==============
(greater than or equal to)
==========================
Total risk-based capital 8.00% 10.00% 11.32% 12.26%
================================ ============ ============ ========= ==============
Tier 1 risk-based capital ratio 4.00% 6.00% 10.27% 11.21%
================================ ============ ============ ========= ==============
Tier 1 leverage capital ratio 4.00% 5.00% 9.06% 9.80%
================================ ============ ============ ========= ==============
- 33 -
As of December 31, 2005, management believes that CWBC's capital levels met all
minimum regulatory requirements and that CWB was considered "well capitalized"
under the regulatory framework for prompt corrective action.
Prompt Corrective Action. The federal banking agencies possess broad powers to
take prompt corrective action to resolve the problems of insured banks. Each
federal banking agency has issued regulations defining five capital categories:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulations, a
bank shall be deemed to be:
- "well capitalized" if it has a total risk-based capital ratio of 10%
or more, has a Tier 1 risk-based capital ratio of 6% or more, has a
leverage capital ratio of 5% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any
capital measure;
- "adequately capitalized" if it has a total risk-based capital ratio of
8% or more, a Tier 1 risk-based capital ratio of 4% or more and a
leverage capital ratio of 4% or more (3% under certain circumstances)
and does not meet the definition of "well capitalized";
- "undercapitalized" if it has a total risk-based capital ratio that is
less than 8%, a Tier 1 risk-based capital ratio that is less than 4%,
or a leverage capital ratio that is less than 4% (3% under certain
circumstances)
- "significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital ratio that is
less than 3% or a leverage capital ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%
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. Banks classified as "undercapitalized" 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%. Restrictions
for these banks include the appointment of a receiver or conservator. All of
the federal banking agencies have promulgated substantially similar regulations
to implement this system of prompt corrective action
A bank, based upon its capital levels, that is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" may be treated as though it were
in the next lower capital category if the appropriate federal banking agency,
after notice and opportunity for a hearing, determines that an unsafe or unsound
condition, or an unsafe or unsound practice, warrants such treatment. At each
successive lower capital category, an insured bank is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital ratios actually
warrant such treatment.
In addition to measures taken under the prompt corrective action provisions,
insured banks may be subject to potential enforcement actions by the federal
banking agencies for unsafe or unsound practices in conducting their businesses
or for violations of any law, rule, regulation or any condition imposed in
writing by the agency or any written agreement with the agency. Enforcement
actions may include the imposition of a conservator or receiver, the issuance of
a cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits (in the case of a depository institution), the imposition
of civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties. The enforcement of
such actions through injunctions or restraining orders may be based upon a
judicial determination that the agency would be harmed if such equitable relief
was not granted.
The OCC, as the primary regulator for national banks, also has a broad range of
enforcement measures, from cease and desist powers and the imposition of
monetary penalties to the ability to take possession of a bank, including
causing its liquidation.
Federal Deposit Insurance. The FDIC has implemented a risk-based assessment
system in which the deposit insurance premium relates to the probability that
the deposit insurance fund will incur a loss. Under the current risk-based
assessment system adopted by the FDIC, banks are categorized into one of three
capital categories, ("well capitalized", "adequately capitalized" and
"undercapitalized"). Assignment of a bank into a particular capital category is
based on supervisory evaluations by its primary federal regulator.
CWB is currently risk rated a 1A, which results in CWB being categorized, group
A. Because of the FDIC's favorable loss experience and a healthy reserve ratio
in the Bank Insurance Fund, well-capitalized and well-managed
- 34 -
banks have in recent years paid minimal premiums for FDIC Insurance. The
current deposit insurance system will remain in effect until the effective date
of final regulations implementing the FDI Reform Act (discussed below).
On February 8, 2006, President Bush signed into law The Federal Deposit
Insurance Reform Act of 2005 (the "FDI Reform Act"). The FDI Reform Act
represents the most significant reform in the deposit insurance system in
decades. The FDI Reform Act will (i) merge the BIF and the Savings Association
Insurance Fund (or SAIF) (the new combined fund will be called the Deposit
Insurance Fund or DIF), (ii) index the $100,000 insurance level to reflect
inflation (the first adjustment for inflation will be effective January 1, 2011
and thereafter adjustments will occur every 5 years), (iii) increase deposit
insurance coverage for retirement accounts to $250,000, which will also be
subject to the every five years adjustment process, (iv) offer credits to banks
that historically have capitalized the FDIC which can be used to offset premiums
otherwise due (this addresses the fact that institutions that have grown rapidly
have not had to pay deposit premiums), (v) impose a cap on the level of the
deposit insurance fund and provide for dividends when the fund grows beyond a
specified threshold, (vi) adopt the historical basis concept for distributing
the aforementioned one-time credit and dividends (each bank's historical basis
will be determined by a formula that involves looking back to the institution's
assessment base in 1996 and adding premiums paid since that time) and (vii)
authorize revisions to the current risk-based system for assessing premiums.
The deadline for merging the BIF and the SAIF into the DIF is July 1, 2006.
Final rules for the remaining provisions are scheduled to become effective by no
later than November 5, 2006.
While the FDI Reform Act assumes continuation of the FDIC's current system for
calculating an institution's assessment based on (i) the probability the
institution will cause the insurance fund to incur a loss, (ii) the likely
amount of any such loss, and (iii) the revenue needs of the insurance fund, the
amount of future premiums and assessment rates that CWB will have pay into the
DIF will depend on the final regulations to be adopted by the FDIC. While
Management cannot make final determination of the impact of the FDI Reform Act
until the implementing regulations are finalized, Management currently believes
that the implementation of the FDI Reform Act will not have a material effect on
the business and earnings of CWBC and CWB.
Money Laundering and Currency Controls. Various federal statutory and
regulatory provisions are designed to enhance record-keeping and reporting of
currency and foreign transactions. Pursuant to the Bank Secrecy Act, financial
institutions must report high levels of currency transactions or face the
imposition of civil monetary penalties for reporting violations. The Money
Laundering Control Act imposes sanctions, including revocation of federal
deposit insurance, for institutions convicted of money laundering.
The International Money Laundering Abatement and Financial Anti-Terrorism Act of
2001 ("IMLAFATA"), a part of the USA Patriot Act, authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks and other financial institutions to
enhance recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern. Among its other
provisions, IMLAFATA requires each financial institution to: (i) establish an
anti-money laundering program; (ii) establish due diligence policies, procedures
and controls with respect to its private banking accounts and correspondent
banking accounts involving individuals and certain foreign banks; and (iii)
avoid establishing, maintaining, administering, or managing correspondent
accounts in the Untied States for, or on behalf of, a foreign bank that does not
have a physical presence in any country. In addition, IMLAFATA contains a
provision encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to individuals,
entities and organizations engaged in, or reasonably suspected of engaging in,
terrorist acts or money laundering activities.
The Treasury Department's adopted final regulations implementing IMLAFATA
mandate that federally-insured banks and other financial institutions establish
customer identification programs designed to verify the identity of persons
opening new accounts, maintain the records used for verification, and to
determine whether the person appears on any list of known or suspected
terrorists or terrorist organizations.
Community Reinvestment Act. The CRA 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
- 35 -
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."
CWB had a CRA rating of "Satisfactory" as of its most recent regulatory
examination.
Environmental Regulation. Federal, state and local laws and regulations
regarding the discharge of harmful materials into the environment may have an
impact on CWB. Since CWB is not involved in any business that manufactures,
uses or transports chemicals, waste, pollutants or toxins that might have a
material adverse effect on the environment, CWB's primary exposure to
environmental laws is through its lending activities and through properties or
businesses CWB may own, lease or acquire. Based on a general survey of CWB's
loan portfolio, conversations with local appraisers and the type of lending
currently and historically done by CWB, management is not aware of any potential
liability for hazardous waste contamination that would be reasonably likely to
have a material adverse effect on CWBC as of December 31, 2005.
Safeguarding of Customer Information and Privacy. The FRB and other bank
regulatory agencies have adopted guidelines for safeguarding confidential,
personal customer information. These guidelines require financial institutions
to create, implement and maintain a comprehensive written information security
program designed to ensure the security and confidentiality of customer
information, protect against any anticipated threats or hazard to the security
or integrity of such information and protect against unauthorized access to or
use of such information that could result in substantial harm or inconvenience
to any customer. CWB has adopted a customer information security program to
comply with such requirements.
Financial institutions are also required to implement policies and procedures
regarding the disclosure of nonpublic personal information about consumers to
non-affiliated third parties. In general, financial institutions must provide
explanations to consumers on policies and procedures regarding the disclosure of
such nonpublic personal information, and, except as otherwise required by law,
prohibits disclosing such information except as provided in CWB's policies and
procedures. CWB has implemented privacy policies addressing these restrictions
which are distributed regularly to all existing and new customers of CWB.
USA Patriot Act. On October 26, 2001, the President signed into law
comprehensive anti-terrorism legislation, the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001, known as the Patriot Act. The USA Patriot Act ("Patriot Act") was
designed to deny terrorists and others the ability to obtain access to the
United States financial system, and has significant implications for financial
institutions and other businesses involved in the transfer of money. The
Patriot Act, as implemented by various federal regulatory agencies, requires
financial institutions, including CWB, to implement new policies and procedures
or amend existing policies and procedures with respect to, among other matters,
anti-money laundering, compliance, suspicious activity and currency transaction
reporting and due diligence on customers. The Patriot Act and its underlying
regulations also permit information sharing for counter-terrorist purposes
between federal law enforcement agencies and financial institutions, as well as
among financial institutions, subject to certain conditions, and require the
FRB, the OCC and other federal banking agencies to evaluate the effectiveness of
an applicant in combating money laundering activities when considering
applications filed under Section 3 of the BHCA or the Bank Merger Act. CWB has
augmented its systems and procedures to accomplish this. CWB believes that the
ongoing cost of compliance with the Patriot Act is not likely to be material to
CWB.
Other Aspects of Banking Law. CWB is also subject to federal statutory and
regulatory provisions covering, among other things, security procedures, insider
and affiliated party transactions, management interlocks, electronic funds
transfers, funds availability, and truth-in-savings. There are also a variety
of federal statutes which regulate acquisitions of control and the formation of
bank holding companies.
REGULATORY MATTERS
From October 2002 until October 2003, CWB was operating under a Consent Order
with the OCC. In addition, from March 2000 until November 2003, CWBC was
operating under a Memorandum of Understanding with the FRB. Prior to
termination of agreements, both CWB and CWBC were precluded from certain
activities.
- 36 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------- ---------------------------------------------------------
The Company's primary market risk is interest rate risk ("IRR"). To minimize
the volatility of net interest income at risk ("NII") and the impact on economic
value of equity ("EVE"), the Company manages its exposure to changes in interest
rates through asset and liability management activities within guidelines
established by the Board's ALCO. ALCO has the responsibility for approving and
ensuring compliance with asset/liability management policies, including IRR
exposure.
To mitigate the impact of changes in interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the Company actively
manages the amounts and maturities. The Company generally retains short-term,
adjustable-rate assets as they have similar re-pricing characteristics as
funding sources. The Company sells substantially all of its mortgage products
and a portion of its SBA loan originations. While the Company has some assets
and liabilities in excess of five years, it has internal policy limits designed
to minimize risk should interest rates rise. Currently, the Company does not
use derivative instruments to help manage risk, but will consider such
instruments in the future if the perceived need should arise.
The Company uses software, combined with download detailed information from
various application programs, and assumptions regarding interest rates, lending
and deposit trends and other key factors to forecast/simulate the effects of
both higher and lower interest rates. The results detailed below indicate the
impact, in dollars and percentages, on NII and EVE of an increase in interest
rates of 200 basis points and a decline of 200 basis points compared to a flat
interest rate scenario.
------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY 200 BP INCREASE 200 BP DECREASE
---------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Anticipated impact over the next twelve months:
Net interest income (NII) $ 1,869 $ 1,230 $ (1,933) $ (1,237)
9.4% 8.2% (9.7%) (8.3%)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Economic value of equity (EVE) $ (1,916) $ (749) $ 239 $ 241
(3.7%) (1.6%) .5% 0.5%
------------------------------------------------------------------------------------------------
For further discussion of interest rate risk, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk."
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------- ----------------------------------------------------------
The Company's consolidated financial statements begin on page F-1.
- 37 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Community West Bancshares
We have audited the accompanying consolidated balance sheets of Community West
Bancshares (the Company) as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community West
Bancshares at December 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst and Young LLP
-----------------------
Los Angeles, California
March 17, 2006
F - 1
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2005 2004
---------- ----------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and due from banks $ 4,830 $ 8,769
Interest-earning deposits in other financial institutions - 9,700
Federal funds sold 8,902 11,736
---------- ----------
Cash and cash equivalents 13,732 30,205
Time deposits in other financial institutions 532 647
Investment securities available-for-sale, at fair value; amortized cost of
$22,833 at December 31, 2005 and $22,380 at December 31, 2004 22,619 22,258
Investment securities held-to-maturity, at amortized cost; fair value of
$8,619 at December 31, 2005 and $6,122 at December 31, 2004 8,677 6,094
Federal Home Loan Bank stock, at cost 2,985 1,200
Federal Reserve Bank stock, at cost 812 812
Interest only strips, at fair value 1,888 2,715
Loans:
Held for sale, at lower of cost or fair value 60,506 45,988
Held for investment, net of allowance for loan losses of $3,326 at December 31,
2005 and $2,785 at December 31, 2004 306,781 222,153
Securitized loans, net of allowance for loan losses of $628 at December 31, 2005 and
$1,109 at December 31, 2004 14,230 22,365
---------- ----------
Total loans 381,517 290,506
Servicing rights 2,845 3,258
Other real estate owned, net 7 13
Premises and equipment, net 2,146 1,763
Other assets 6,594 5,732
---------- ----------
TOTAL ASSETS $ 444,354 $ 365,203
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 34,251 $ 44,384
Interest-bearing demand 70,453 92,395
Savings 16,459 15,370
Time certificates of $100,000 or more 109,535 40,393
Other time certificates 103,540 92,026
---------- ----------
Total deposits 334,238 284,568
Securities sold under agreements to repurchase - 13,672
Federal Home Loan Bank advances 63,500 10,500
Bonds payable in connection with securitized loans - 13,910
Other liabilities 4,381 4,984
---------- ----------
Total liabilities 402,119 327,634
---------- ----------
Commitments and contingencies-See Note 15
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,751,313 shares issued and
outstanding at December 31, 2005 and 5,729,869 at December 31, 2004 30,190 30,020
Retained earnings 12,171 7,621
Accumulated other comprehensive loss (126) (72)
---------- ----------
Total stockholders' equity 42,235 37,569
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,354 $ 365,203
========== ==========
See accompanying notes.
F - 2
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
INTEREST INCOME
Loans $28,276 $20,565 $19,658
Investment securities 1,274 979 489
Other 228 301 236
------- ------- -------
Total interest income 29,778 21,845 20,383
------- ------- -------
INTEREST EXPENSE
Deposits 7,701 5,016 4,621
Bonds payable and other borrowings 2,646 2,829 4,721
------- ------- -------
Total interest expense 10,347 7,845 9,342
------- ------- -------
NET INTEREST INCOME 19,431 14,000 11,041
Provision for loan losses 566 418 1,669
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,865 13,582 9,372
NON-INTEREST INCOME
Other loan fees 2,906 3,776 2,923
Gains from loan sales, net 2,499 3,981 4,860
Document processing fees, net 823 817 937
Loan servicing fees, net 575 1,416 1,264
Service charges 318 381 376
Other 189 91 315
------- ------- -------
Total non-interest income 7,310 10,462 10,675
------- ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 11,993 11,851 11,416
Occupancy and equipment expenses 1,840 1,596 1,691
Professional services 1,022 940 636
Depreciation 543 532 581
Loan servicing and collection 255 225 438
Other 2,507 2,377 1,974
------- ------- -------
Total non-interest expenses 18,160 17,521 16,736
------- ------- -------
Income before provision for income taxes 8,015 6,523 3,311
Provision for income taxes 2,373 2,688 1,128
------- ------- -------
NET INCOME $ 5,642 $ 3,835 $ 2,183
======= ======= =======
INCOME PER SHARE - BASIC $ 0.98 $ 0.67 $ 0.38
INCOME PER SHARE - DILUTED $ 0.95 $ 0.65 $ 0.38
Basic weighted average number of common shares outstanding 5,744 5,718 5,694
Diluted weighted average number of common shares outstanding 5,931 5,867 5,258
See accompanying notes.
F - 3
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
------------- -------------- --------------- --------------- ---------------
(IN THOUSANDS)
BALANCES AT
DECEMBER 31, 2002 5,690 $ 29,798 $ 2,289 $ - $ 32,087
Exercise of stock options 17 76 - - 76
Comprehensive income:
Net income 2,183 - 2,183
Change in unrealized loss on
securities available-for-sale, net (15) (15)
---------------
Comprehensive income 2,168
------------- -------------- --------------- --------------- ---------------
BALANCES AT
DECEMBER 31, 2003 5,707 29,874 4,472 (15) 34,331
Exercise of stock options 23 146 - - 146
Comprehensive income:
Net income 3,835 - 3,835
Change in unrealized loss on
securities available-for-sale, net (57) (57)
---------------
Comprehensive income 3,778
Cash dividends paid
($0.12 per share) (686) (686)
------------- -------------- --------------- --------------- ---------------
BALANCES AT
DECEMBER 31, 2004 5,730 30,020 7,621 (72) 37,569
Exercise of stock options 21 119 119
Tax benefit from stock options 40 40
Comprehensive income:
Net income 5,642 5,642
Change in unrealized loss on
securities available-for-sale, net (54) (54)
---------------
Comprehensive income 5,588
Cash dividends paid
($0.19 per share) (1,092) (1,092)
Other 11 11
------------- -------------- --------------- --------------- ---------------
BALANCES AT
DECEMBER 31, 2005 5,751 $ 30,190 $ 12,171 $ (126) $ 42,235
============= ============== =============== =============== ===============
See accompanying notes.
F - 4
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,642 $ 3,835 $ 2,183
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 566 418 1,669
Provision for losses on real estate owned - 1 25
Deferred income taxes (220) (278) 474
Depreciation and amortization 746 1,270 1,589
Net amortization of discounts and premiums on securities 12 19 189
Gains on:
Sale of other real estate owned 49 (2) (79)
Sale of loans held for sale (1,610) (3,981) (4,401)
Changes in:
Fair value of interest only strips, net of accretion 827 833 1,000
Servicing rights, net of amortization 413 (759) (602)
Other assets (862) 1,562 4,068
Other liabilities (360) 1,058 (1,062)
--------- --------- ---------
Net cash provided by operating activities 5,203 3,976 5,053
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (4,545) (3,179) (7,337)
Purchase of available-for-sale securities (2,113) (10,232) (24,197)
Purchase of Federal Home Loan Bank stock (1,712) (1,200) -
Federal Home Loan Bank stock dividend (73) - -
Principal paydowns and maturities of available-for-sale securities 1,763 3,413 8,670
Principal paydowns and maturities of held-to-maturity securities 1,939 2,095 8,219
Loan originations and principal collections, net (90,230) (42,758) 2,744
Proceeds from sale of other real estate owned 194 529 1,718
Net decrease in time deposits in other financial institutions 115 145 1,485
Purchase of premises and equipment, net of sales (926) (663) (254)
--------- --------- ---------
Net cash (used in) investing activities (95,588) (51,850) (8,952)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 119 146 76
Cash dividends paid to shareholders (1,092) (686) -
Net (decrease) increase in demand deposits and savings accounts (30,986) 56,058 9,847
Net increase (decrease) in time certificates of deposit 80,656 3,655 (4,075)
Proceeds from securities sold under agreements to repurchase - 13,672 20,041
Repayments of securities sold under agreements to repurchase (13,672) (14,394) (5,647)
Proceeds from Federal Home Loan Bank advances 56,500 14,000 -
Repayment of Federal Home Loan Bank advances (3,500) (3,500) -
Repayments of bonds payable in connection with securitized loans (14,113) (12,928) (25,381)
--------- --------- ---------
Net cash provided by (used in) financing activities 73,912 56,023 (5,139)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,473) 8,149 (9,038)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 30,205 22,056 31,094
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,732 $ 30,205 $ 22,056
========= ========= =========
See accompanying notes.
F - 5
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Community West Bancshares, a California
Corporation ("Company or CWBC"), and its wholly-owned subsidiary, Community West
Bank National Association ("CWB") are in accordance with accounting principles
generally accepted in the United States ("GAAP") and general practices within
the financial services industry. All material intercompany transactions and
accounts have been eliminated. The following are descriptions of the most
significant of those policies:
NATURE OF OPERATIONS - The Company's primary operations are related to
commercial banking and financial services through CWB which include the
acceptance of deposits and the lending and investing of money. The Company also
engages in electronic banking services. The Company's customers consist of
small to mid-sized businesses, including Small Business Administration
borrowers, as well as individuals.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities as well as disclosures of contingent assets and
liabilities at the date of the financial statements. These estimates and
assumptions also affect the reported amounts of revenues and expenses during the
reporting period. Although management believes these estimates to be reasonably
accurate, actual results may differ.
Certain amounts in the 2003 and 2004 financial statements have been reclassified
to be comparable with classifications in 2005.
BUSINESS SEGMENTS - Reportable business segments are determined using the
"management approach" and are intended to present reportable segments consistent
with how the chief operating decision maker organizes segments within the
company for making operating decisions and assessing performance. As of
December 31, 2005 and 2004, the Company had only one reportable business
segment.
RESERVE REQUIREMENTS - All depository institutions are required by law to
maintain reserves on transaction accounts and non-personal time deposits in the
form of cash balances at the Federal Reserve Bank ("FRB"). These reserve
requirements can be offset by cash balances held at CWB. At December 31, 2005
and 2004, CWB's cash balance was sufficient to offset the FRB requirement.
INVESTMENT SECURITIES - The Company currently holds securities classified as
both available-for-sale ("AFS") and held-to-maturity ("HTM"). Securities
classified as HTM are accounted for at amortized cost as the Company has the
positive intent and ability to hold them to maturity. Securities not classified
as HTM are considered AFS and are carried at fair value with unrealized gains or
losses reported as a separate component of accumulated other comprehensive
income (loss), net of any applicable income taxes. Realized gains or losses on
the sale of AFS securities, if any, are determined on a specific identification
basis. Purchase premiums and discounts are recognized in interest income using
the effective interest method over the terms of the related securities, or to
earlier call dates, if appropriate. Declines in the fair value of AFS or HTM
securities below their cost that are deemed to be other than temporary, if any,
are reflected in earnings as realized losses. There is no recognition of
unrealized gains or losses for HTM securities.
INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain
SBA loans can be sold into the secondary market. Servicing rights are
recognized at fair market value as separate assets when loans are sold with
servicing retained. Servicing rights are amortized in proportion to, and over
the period of, estimated future net servicing income. The Company uses industry
prepayment statistics and its own prepayment experience in estimating the
expected life of the loans. Management periodically evaluates servicing rights
for impairment. Servicing rights are evaluated for impairment based upon the
fair value of the rights as compared to amortized cost on a loan-by-loan basis.
Fair value is determined using discounted future cash flows calculated on a
loan-by-loan basis and aggregated to the total asset level. The initial
servicing rights and resulting gain on sale are calculated based on the
difference between the best actual par and premium bids on an individual loan
basis. Additionally, on certain SBA loan sales that occurred prior to 2003, the
Company retained interest only strips ("I/O Strips"), which represent the
present value of excess net cash flows generated by the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors and (ii) contractual
servicing fees.
The I/O strips are classified as trading securities. Accordingly, the Company
records the I/O strips at fair value with the resulting increase or decrease in
fair value being recorded through operations in the current period. Quarterly,
F - 6
the Company verifies the reasonableness of its valuation estimates by comparison
to the results of an independent third party valuation analysis.
LOANS HELD FOR SALE - Loans which are originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value
determined on an aggregate basis. Valuation adjustments, if any, are recognized
through a valuation allowance by charges to lower of cost or market provision.
Loans held for sale are primarily comprised of SBA loans and residential first
and second mortgage loans. The Company did not incur a lower of cost or market
valuation provision in the years ended December 31, 2005, 2004 and 2003.
LOANS HELD FOR INVESTMENT - Loans are recognized at the principal amount
outstanding, net of unearned income, loan participations and amounts charged
off. Unearned income includes deferred loan origination fees reduced by loan
origination costs. Unearned income on loans is amortized to interest income
over the life of the related loan using the level yield method.
INTEREST INCOME ON LOANS - Interest on loans is accrued daily on a
simple-interest basis. The accrual of interest is discontinued when substantial
doubt exists as to collectibility of the loan, generally at the time the loan is
90 days delinquent, unless the credit is well secured and in process of
collection. Any unpaid but accrued interest is reversed at that time.
Thereafter, interest income is no longer recognized on the loan. Interest on
non-accrual loans is accounted for on the cash-basis or cost-recovery method,
until qualifying for return to accrual. Loans are returned to accrual status
when all of the principal and interest amounts contractually due are brought
current and future payments are reasonably assured. Impaired loans are
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. All of
the Company's nonaccrual loans were also classified as impaired at December 31,
2005 and 2004.
REPURCHASE AGREEMENTS - Securities sold under repurchase agreements are treated
as collateralized financing transactions and carried at the amount at which the
securities will be subsequently repurchased.
SECURITIZED LOANS AND BOND DEFERRED COSTS - Purchased loan premiums, deferred
debt issuance costs and bond discount related to the loan and bonds are
amortized on a method that approximates the level yield method over the
estimated life of the loans and bonds, respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed,
systematic analysis and procedural discipline to determine the amount of the
allowance for loan losses ("ALL"). The ALL is based on estimates and is
intended to be adequate to provide for probable losses inherent in the loan
portfolio. This process involves deriving probable loss estimates that are
based on individual loan loss estimation, migration analysis/historical loss
rates and management's judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
The ALL calculation for the different major loan types is as follows:
- SBA - All loans are reviewed and classified loans are assigned a
specific allowance. Those not classified are assigned a pass rating. A
migration analysis and various portfolio specific factors are used to
calculate the required allowance on those pass loans.
- Relationship Banking - Includes commercial, commercial real estate and
consumer loans. Classified loans are assigned a specific allowance. A
migration analysis and various portfolio specific factors are used to
calculate the required allowance on the remaining pass loans.
- Manufactured Housing - An allowance is calculated on the basis of risk
rating, which is a combination of delinquency, value of collateral on
classified loans and perceived risk in the product line.
- Securitized Loans - The Company considers this a homogeneous portfolio
and calculates the allowance based on statistical information provided
by the servicer. Charge-off history is calculated based on three
methodologies; a 3-month and a 12-month historical trend and by
delinquency information. The highest requirement of the three methods
is used.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The review of the adequacy of the allowance takes into consideration such
factors as concentrations of credit, changes in the growth, size and composition
of the loan portfolio, overall and individual 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. Additional factors considered include: geographic location of
borrowers, changes in the Company's product-specific credit policy and lending
staff experience. These estimates depend on the outcome of future events and,
therefore, contain inherent uncertainties.
F - 7
The Company's ALL is maintained at a level believed adequate by management to
absorb known and inherent probable losses on existing loans. A provision for
loan losses is charged to expense. The allowance is charged for losses when
management believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a "loss"; portions of loans which are
deemed to be uncollectible; overdrafts which have been outstanding for more than
30 days; and, all other unsecured loans past due 120 or more days. Subsequent
recoveries, if any, are credited to the ALL.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the
allowance for loan losses. Subsequent to foreclosure, management periodically
performs a new valuation and the asset is carried at the lower of carrying
amount or fair value. Operating expenses or income, and gains or losses on
disposition of such properties, are charged to current operations.
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. Leasehold
improvements are amortized over the terms of the leases or the estimated useful
lives of the improvements, whichever is shorter. Generally, the estimated
useful lives of other items of premises and equipment are as follows:
Building and improvements 31.5 years
Furniture and equipment 5 - 10 years
Electronic equipment and software 2 - 5 years
INCOME TAXES - The Company uses the accrual method of accounting for financial
reporting purposes as well as for tax reporting. Due to tax regulations,
certain items of income and expense are recognized in different periods for tax
return purposes than for financial statement reporting. These items represent
"temporary differences." Deferred income taxes are recognized for the tax
effect of temporary differences between the tax basis of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. A valuation allowance is established for
deferred tax assets if, based on weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets may not be
realized.
INCOME PER SHARE - Basic income per share is computed based on the weighted
average number of shares outstanding during each year divided into net income.
Diluted income per share is computed based on the weighted average number of
shares outstanding during each year plus the dilutive effect, if any, of
outstanding options divided into net income.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and cash
equivalents include cash, due from banks, interest-earning deposits in other
financial institutions and federal funds sold. Federal funds sold are one-day
transactions with CWB's funds being returned the following business day.
STOCK-BASED COMPENSATION - Until the effective date of SFAS 123, January 1,
2006, GAAP permitted the Company to use either of two methodologies to account
for compensation cost in connection with employee stock options. The first
method required issuers to record compensation expense over the period the
options were expected to be outstanding prior to exercise, expiration or
cancellation. The amount of compensation expense to be recognized over this
term was the "fair value" of the options at the time of the grant as determined
by the Black-Scholes valuation model. Black-Scholes computes fair value of the
options based on the length of their term, the volatility of the stock price in
past periods and other factors. Under this method, the issuer recognized
compensation expense regardless of whether or not the employee eventually
exercises the options.
Under the second methodology, if options were granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense was recognized. GAAP required that issuers electing the second method
present pro forma disclosures of net income (loss) and earnings per share as if
the first method had been elected. Under the terms of the Company's stock
option plan, full-time salaried employees may be granted qualified 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 market
value of the stock on the date of grant. Qualified options are generally
exercisable in cumulative 20% installments. All options expire no later than ten
years from the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS - SFAS No. 123 (Revised 2004) ("SFAS No.
123R"), Share-Based Payment, is a revision of SFAS No. 123 and supersedes APB
Opinion No. 25 and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service
F - 8
in exchange for the award. On March 29, 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB No. 107"), which provides the Staff's views regarding
interactions between SFAS No. 123R and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public
companies.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods: (1) A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on
the effective date, or (2) a "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption.
The Company will adopt the standard in the first quarter 2006 using the modified
prospective method. As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using the intrinsic value method
prescribed in APB No. 25 and, as such, recognizes no compensation cost for
employee stock options. The effect on the Company's results of operations of
expensing stock options using the Black-Scholes method is presented in the
disclosure of pro forma net income and earnings per share in the note, entitled
"Stockholder's Equity". This requirement will reduce net operating cash flows
and increase net financing cash flows in periods after adoption. The pro forma
statements estimate the approximate impact to the Company of the adoption of
this statement.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is as
follows:
DECEMBER 31, 2005 (IN THOUSANDS)
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
Available-for-sale securities COST GAINS LOSSES VALUE
----------------------------- ----------- ----------- ------------ -----------
U.S. Government and agency $ 15,320 $ - $ (172) $ 15,148
Other securities 7,513 - (42) 7,471
----------- ----------- ------------ -----------
Total available-for-sale securities $ 22,833 $ - $ (214) $ 22,619
=========== =========== ============ ===========
Held-to-maturity securities
---------------------------
U.S. Government and agency $ 200 $ - $ (4) $ 196
Other securities 8,477 - (54) 8,423
----------- ----------- ------------ -----------
Total held-to-maturity securities $ 8,677 $ - $ (58) $ 8,619
=========== =========== ============ ===========
DECEMBER 31, 2004 (IN THOUSANDS)
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
Available-for-sale securities COST GAINS LOSSES VALUE
----------------------------- ----------- ----------- ------------ -----------
U.S. Government and agency $ 15,311 $ - $ (90) $ 15,221
Other securities 7,069 - (32) 7,037
----------- ----------- ------------ -----------
Total available-for-sale securities $ 22,380 $ - $ (122) $ 22,258
=========== =========== ============ ===========
Held-to-maturity securities
---------------------------
U.S. Government and agency $ 200 $ - $ (1) $ 199
Other securities 5,894 29 - 5,923
----------- ----------- ------------ -----------
Total held-to-maturity securities $ 6,094 $ 29 $ (1) $ 6,122
=========== =========== ============ ===========
At December 31, 2005, $200,000 at carrying value of the above securities was
pledged as collateral to the United States Treasury for CWB's treasury, tax and
loan account and $31,096,000 at carrying value was pledged to the Federal Home
Loan Bank, San Francisco, as collateral for current and future advances.
3. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company periodically sells the guaranteed portion of
selected SBA loans into the secondary market, on a servicing-retained basis, in
exchange for a combination of a cash premium and servicing rights. A
F - 9
portion of the proceeds is recognized as servicing fee income as it occurs and
the remainder is capitalized as excess servicing and is included in the gain on
sale calculation. The Company retains the unguaranteed portion of these loans
and services the loans as required under the SBA programs to retain specified
yield amounts. The SBA program stipulates that the Company retains a minimum of
5% of the loan balance, which is unguaranteed. The percentage of each
unguaranteed loan in excess of 5% may be periodically sold to a third party for
a cash premium. The Company records servicing liabilities for the unguaranteed
loans sold calculated based on the present value of the estimated future
servicing costs associated with each loan. A portion of this cost is included
as a reduction to the premium collected on the loan sale, and the remainder is
accrued and recognized as a reduction of servicing expense as it occurs. The
balance of all servicing rights and obligations is subsequently amortized over
the estimated life of the loans using an estimated prepayment rate of 25-30%.
Quarterly, both the servicing rights and I/O strips are analyzed for impairment.
The Company also periodically sells SBA loans originated under the 504 loan
program into the secondary market, on a servicing-released basis, in exchange
for a cash premium.
As of December 31, 2005 and December 31, 2004, the Company had approximately
$58.1 million and $43.6 million, respectively, in SBA loans held for sale.
MORTGAGE LOAN SALES - In the normal course of business, the Company enters into
mortgage loan rate lock commitments with potential borrowers. Simultaneously,
the Company enters into a "best efforts" forward sale commitment to sell the
locked loans to a third party investor. Since the two commitments directly
offset and create a perfect hedge, there is no interest rate risk to the
Company; therefore, there is no material net income statement effect. At
December 31, 2005 and 2004, the Company had $8.1 million and $6.2 million,
repectively, in outstanding mortgage loan commitments.
The following is a summary of activity in I/O Strips:
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------- ------- --------
(IN THOUSANDS)
Balance, beginning of year $2,715 $3,548 $ 4,548
Valuation adjustment, net (827) (833) (1,000)
------- ------- --------
Balance, end of year $1,888 $2,715 $ 3,548
======= ======= ========
The following is a summary of activity in Servicing Rights:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Balance, beginning of year $3,258 $2,499 $1,897
Additions through loan sales 524 1,259 1,116
Amortization (937) (500) (514)
------- ------- -------
Balance, end of year $2,845 $3,258 $2,499
======= ======= =======
F - 10
4. LOANS HELD FOR INVESTMENT
The composition of the Company's loans held for investment portfolio, excluding
securitized loans is as follows:
DECEMBER 31,
-------------------------
2005 2004
----------- ------------
(IN THOUSANDS)
Commercial $ 44,957 $ 30,893
Real estate 116,938 85,357
SBA 37,088 35,265
Manufactured housing 101,336 66,423
Other installment 11,355 8,645
----------- ------------
311,674 226,583
Less:
Allowance for loan losses 3,326 2,785
Deferred fees, net of costs 181 (103)
Discount on unguaranteed portion of SBA loans 1,386 1,748
----------- ------------
Loans held for investment, net $ 306,781 $ 222,153
=========== ============
An analysis of the allowance for loan losses for loans held for investment is as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
Balance, beginning of year $ 2,785 $ 2,652 $ 3,379
Loans charged off (236) (459) (1,822)
Recoveries on loans previously charged off 109 75 802
-------- -------- --------
Net charge-offs (127) (384) (1,020)
Provision for loan losses 668 517 293
-------- -------- --------
Balance, end of year $ 3,326 $ 2,785 $ 2,652
======== ======== ========
The recorded investment in loans that are considered to be impaired is as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 77 $ 49 $ 235
Impaired loans with specific valuation allowances 3,406 3,926 6,843
Specific valuation allowance related to impaired loans (473) (425) (640)
-------- -------- --------
Impaired loans, net $ 3,010 $ 3,550 $ 6,438
======== ======== ========
Average investment in impaired loans $ 3,716 $ 5,137 $ 6,584
======== ======== ========
F - 11
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
Nonaccrual loans $ 6,797 $ 8,350 $ 7,174
SBA guaranteed portion of loans included above (4,332) (5,287) (4,106)
-------- -------- --------
Nonaccrual loans, net $ 2,465 $ 3,063 $ 3,068
======== ======== ========
Troubled debt restructured loans $ 75 $ 124 $ 193
Loans 30 through 90 days past due with interest accruing $ 1,792 $ 1,804 $ 3,907
Interest income recognized on impaired loans $ 141 $ 103 $ 277
Interest foregone on nonaccrual loans and troubled debt restructured
loans outstanding 253 208 216
-------- -------- --------
Gross interest income on impaired loans $ 394 $ 311 $ 493
======== ======== ========
The Company makes loans to borrowers in a number of different industries. Other
than Manufactured Housing, no single concentration comprises 10% or more of the
Company's loan portfolio. Commercial, commercial real estate loans and SBA
loans comprised over 10% of the Company's loan portfolio as of December 31,
2005, but consisted of diverse borrowers.
5. SECURITIZED LOANS
Prior to 2000, the Company originated and purchased second mortgage loans that
allowed borrowers to borrow up to 125% of their home's appraised value, when
combined with the balance of the first mortgage loan, up to a maximum loan of
$100,000. In 1998 and 1999, the Company transferred $81 million and $122
million, respectively, of these loans to two special purpose trusts. These loans
were both originated and purchased by the Company. The trusts then sold bonds
to third party investors that were secured by the transferred loans. In November
2005, the Company exercised its right to call the bonds and paid off the
remaining balance of $9.8 million. The special purpose trusts were dissolved
while the Company continues to have the loans serviced by a third party
("Servicer"), who receives a stated servicing fee.
At December 31, 2005 and 2004, respectively, securitized loans are net of an
allowance for loan losses as set forth below, and include purchase premiums and
deferred fees/costs of $268,000 and $469,000, respectively. An analysis of the
allowance for loan losses for securitized loans is as follows:
YEAR END DECEMBER 31,
----------------------------
2005 2004 2003
-------- ------------------
(IN THOUSANDS)
Balance, beginning of year $ 1,109 $ 2,024 $ 2,571
Loans charged off (831) (1,356) (2,511)
Recoveries on loans previously charged off 452 540 588
-------- -------- --------
Net charge-offs (379) (816) (1,923)
Provision for loan losses (102) (99) 1,376
-------- -------- --------
Balance, end of year $ 628 $ 1,109 $ 2,024
======== ======== ========
F - 12
6. PREMISES AND EQUIPMENT
DECEMBER 31,
--------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Furniture, fixtures and equipment $ 7,045 $ 6,698
Building and land 927 896
Leasehold improvements 1,219 757
Construction in progress 8 29
------------ ------------
9,199 8,380
Less: accumulated depreciation and amortization (7,053) (6,617)
------------ ------------
Premises and equipment, net $ 2,146 $ 1,763
============ ============
The Company leases office facilities under various operating lease agreements
with terms that expire at various dates between January 2006 and December 2011,
plus options to extend certain lease terms for periods of up to ten years.
The minimum lease commitments as of December 31, 2005 under all operating lease
agreements are as follows:
(IN THOUSANDS)
2006 $ 930
2007 533
2008 260
2009 224
2010 186
Thereafter 108
----------------
Total $ 2,241
================
Rent expense for the years ended December 31, 2005, 2004 and 2003, included in
occupancy expense was $820,000, $724,000 and $680,000, respectively.
7. DEPOSITS
At December 31, 2005, the maturities of time certificates of deposits are as
follows:
(IN THOUSANDS)
2006 $ 158,579
2007 34,938
2008 5,528
2009 12,155
2010 1,875
----------------
Total $ 213,075
================
8. BORROWINGS
Federal Home Loan Bank Advances
-------------------------------
The Company has a blanket lien credit line with the Federal Home Loan Bank
("FHLB"). Advances are collateralized in the aggregate by CWB's eligible
mortgage loans and securities of the U.S Government and its agencies. The
outstanding advances at December 31, 2005 include $38.5 million borrowed at
variable rates which adjust to the current LIBOR rate either monthly or
quarterly. At December 31, 2005, CWB had pledged to FHLB, securities of $31.1
million at carrying value and loans of $62.8 million, and had $30 million
available for additional borrowing. At December 31, 2004, the CWB had $33.8
million of loans and $14.1 million of securities pledged as collateral and
outstanding advances of $10.5 million.
F - 13
Information related to advances from FHLB:
DECEMBER 31, 2005
--------------------------------------------------------
FIXED VARIABLE
---------------------- ---------------------
INTEREST INTEREST
TOTAL AMOUNT RATES AMOUNT RATES
--------- --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
--------- ---------------------------------------------
Due within one year $ 4,000 $ 4,000 2.59%-2.88% $ - -%
After one year but within three years 51,500 13,000 3.28-4.68 38,500 3.70-4.44
After three years but within five years 8,000 8,000 4.28-4.85 - -
--------- --------- ---------
Total advances from FHLB $ 63,500 $ 25,000 $ 38,500
========= ========= =========
DECEMBER 31, 2004
-------------------------------------------------
FIXED VARIABLE
------------------- ------------------
INTEREST INTEREST
TOTAL AMOUNT RATES AMOUNT RATES
------- ------- ---------- ------- ---------
(DOLLARS IN THOUSANDS)
-------- ---------------------------------------
Due within one year $ - $ - -% $ - -%
After one year but within three years 3,500 3,500 1.77-2.75 - -
After three years but within five years 7,000 7,000 2.59-3.28 - -
------- ------- ------- ---------
Total advances from FHLB $10,500 $10,500 $ -
======= ======= =======
Financial information pertaining to advances
from FHLB: 2005 2004
------------ ------------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of the year 4.14% 2.71%
Weighted average interest rate during the year 3.48% 2.09%
Average balance of advances from FHLB $ 42,081 $ 5,419
Maximum amount outstanding at any month end 63,500 10,500
The total interest expense on advances from FHLB was $1,464,000 for 2005 and
$113,000 for 2004.
Repurchase Agreements
----------------------
Prior to 2005, the Company had entered into a financing arrangement with a third
party by which a portion of its government-guaranteed securities were pledged as
collateral for short-term borrowings. During 2005, these borrowings matured and
were paid off. As of December 31, 2004, securities with a carrying value of
$14.0 million were pledged as collateral for short-term borrowings and the
Company had $13.7 million of outstanding repurchase agreements, with interest
rates of 1.40% to 2.35%.
Bonds Payable
--------------
In the fourth quarter 2005, the Company exercised its right to call the
remaining bonds and paid off the balance of $9.8 million. As of December 31,
2004, bonds payable were $179,000 for Series 1998-1 and $14.3 million for Series
1999-1. The total bonds payable of $14.5 million was reduced by issuance and
discount costs of $601,000 for a net of $13.9 million at December 31, 2004. The
bonds were collateralized by securitized loans with an outstanding principal
balance of $6.6 million and $16.4 million for Series 1998-1 and Series 1999-1,
respectively at December 31, 2004. There was no cross collateralization between
the bond issues.
Financial data pertaining to bonds payable were as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- -------- --------
(DOLLARS IN THOUSANDS)
Weighted average coupon interest rate, end of year - 8.27% 8.26%
Annual weighted average interest rate 10.42% 12.41% 11.89%
Average balance of bonds payable, net $10,469 $19,676 $39,000
Maximum amount of bonds payable, net, at any month end $13,382 $24,706 $50,473
F - 14
Federal Funds Purchased
-------------------------
The Company maintains three federal funds purchased lines with a total borrowing
capacity of $18.5 million. There was no amount outstanding as of December 31,
2005.
9. STOCKHOLDERS' EQUITY
Common Stock
-------------
Earnings per share-Calculation of Weighted Average Shares Outstanding
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Basic weighted average shares outstanding 5,744 5,718 5,694
Dilutive effect of stock options 187 149 64
------- ------- -------
Diluted weighted average shares outstanding 5,931 5,867 5,758
======== ======= =======
Stock Option Plans
--------------------
As of December 31, 2005, options were outstanding at prices ranging from $3.63
to $14.25 per share with 314,662 options exercisable and 355,151 options
available for future grant. As of December 31, 2004, options were outstanding at
prices ranging from $3.00 to $12.50 per share with 276,467 options exercisable
and 372,451 options available for future grant. As of December 31, 2005, the
average life of the outstanding options was approximately 6.8 years.
Stock option activity is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2005 2004 2003
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
2005 EXERCISE 2004 EXERCISE 2003 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- -------- ---------
Options outstanding, January 1, 543,307 $ 6.77 463,207 $ 6.04 350,852 $ 6.30
Granted 38,500 13.30 151,500 9.10 198,000 5.51
Canceled (21,200) 6.64 (48,300) 7.22 (69,100) 6.22
Exercised (21,445) 5.55 (23,100) 6.31 (16,545) 4.63
-------- --------- -------- --------- -------- ---------
Options outstanding, December 31, 539,162 $ 7.29 543,307 $ 6.77 463,207 $ 6.04
======== ========= ======== ========= ======== =========
Options exercisable, December 31, 314,662 $ 6.63 276,467 $ 6.39 256,327 $ 6.53
======== ========= ======== ========= ======== =========
The fair value of each stock option grant under the Company's stock option plan
during 2005, 2004 and 2003 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- -------- --------
Annual dividend yield 1.6% 1.7% 0.0%
Expected volatility 33.8% 35.7% 32.4%
Risk free interest rate 4.2% 4.2% 3.9%
Expected life (in years) 6.8 6.8 7.3
The grant date estimated fair value of options was $4.60 per share in 2005,
$2.91 per share in 2004 and $2.83 per share in 2003. 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 income per share for the years ended
December 31, 2005, 2004 and 2003 would have been adjusted to the pro forma
amounts indicated below:
F - 15
YEAR ENDED DECEMBER 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Income:
As reported $ 5,642 $ 3,835 $ 2,183
Pro forma 5,537 3,664 1,975
Income per common share - basic
As reported 0.98 0.67 0.38
Pro forma 0.96 0.64 0.35
Income per common share - diluted
As reported 0.95 0.65 0.38
Pro forma 0.93 0.62 0.34
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Current:
Federal $1,815 $2,423 $ 647
State 778 543 7
------- ------- -------
2,593 2,966 654
Deferred:
Federal (308) (441) 712
State 88 163 (238)
------- ------- -------
(220) (278) 474
------- ------- -------
Total provision for income taxes $2,373 $2,688 $1,128
======= ======= =======
The federal income tax provision differs from the applicable statutory rate as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
------- ------ ------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of federal benefit 7.2% 7.2% 7.0%
Other (0.2)% 2.0% 0.1%
Reserve change (11.4)% (2.0)% (7.0)%
------- ------ ------
29.6% 41.2% 34.1%
======= ====== ======
Significant components of the Company's net deferred taxes as of December 31 are
as follows:
2005 2004
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Depreciation $ 370 $ 453
Deferred loan costs - 202
Other 830 100
-------- --------
1,200 755
-------- --------
Deferred tax liabilities:
Deferred loan fees (952) (1,256)
Allowance for loan losses (734) (189)
Deferred loan costs (92) (161)
Other (203) (150)
-------- --------
(1,981) (1,756)
-------- --------
Net deferred taxes $ (781) $(1,001)
======== ========
The effective income tax rate for 2005 is less than the effective income tax
rate in other periods presented as a tax reserve of $914,000, or $.16 per share
(basic), related to the resolution of potential tax issues has been reversed due
to the resolution of the uncertainty.
F - 16
11. SUPPLEMENTAL DISCLOSURE TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
Listed below are the supplemental disclosures to the Consolidated Statement of
Cash Flows:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 9,373 $ 6,600 $ 9,006
Cash paid for income taxes 3,512 2,497 947
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 263 89 1,570
Transfers from loans held for sale to loans held for investment - - -
12. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) plan for the benefit of its employees.
Employees are eligible to participate in the plan after three months of
consecutive service. Employees may make contributions to the plan and the
Company may make discretionary profit sharing contributions, subject to certain
limitations. The Company's contributions were determined by the Board of
Directors and amounted to $147,000, $137,000 and $129,000, in 2005, 2004 and
2003, respectively.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments 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 value
amounts.
The following table represents the estimated fair values:
DECEMBER 31,
----------------------------------------------
2005 2004
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------- ----------------------
(IN THOUSANDS)
Assets:
Cash and cash equivalents $ 13,732 $ 13,732 $ 30,205 $ 30,205
Time deposits in other financial institutions 532 532 647 647
Federal Reserve and Federal Home Loan Bank stock 3,797 3,797 2,012 2,012
Investment securities 31,296 31,238 28,352 28,380
Interest-only strips 1,888 1,962 2,715 2,715
Net loans 381,517 384,704 290,506 291,483
Servicing rights 2,845 2,853 3,258 3,260
Liabilities:
Deposits (other than time deposits) 121,163 121,163 152,149 152,149
Time deposits 213,075 212,025 132,419 132,186
Securities sold under agreements to repurchase - - 13,672 13,642
Federal Home Loan Bank advances 63,500 63,264 10,500 10,429
Bonds payable - - 13,910 14,154
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 - The carrying amounts approximate fair value because
of the short-term nature of these instruments.
Time deposits in other financial institutions - The carrying amounts approximate
fair value because of the relative short-term nature of these instruments.
F - 17
Federal Reserve Stock - The carrying value approximates the fair value because
the stock can be sold back to the Federal Reserve at any time.
Federal Home Loan Bank Stock - The carrying value approximates the fair value
because the stock can be sold back to the Federal Home Loan Bank at any time.
Investment securities - The fair value is based on quoted market prices from
security brokers or dealers.
Interest Only Strips - Fair value is determined using discounted future cash
flows calculated on a loan-by-loan basis, using market discount and prepayment
rates and aggregated to the total asset level.
Loans - For most loan categories, the fair value is estimated using discounted
cash flows utilizing a discount rate approximating that which the Company is
currently offering for each type of loan and taking into consideration
historical prepayment speeds. Certain adjustable loans that reprice on a
frequent basis are valued at book value.
Servicing rights - Fair value is determined using discounted future cash flows
calculated on a loan-by-loan basis, using market discount and prepayment rates
and aggregated to the total asset level.
Deposits - The amount payable at demand at report date is used to estimate the
fair value of demand and savings deposits. The estimated fair values of
fixed-rate time deposits are determined by discounting the cash flows of
segments of deposits that have similar maturities and rates, utilizing a
discount rate that approximates the prevailing rates offered to depositors as of
the measurement date.
Securities sold under agreements to repurchase - The fair value is estimated
using discounted cash flow analysis based on rates for similar types of
borrowing arrangements.
FHLB Advances - The fair value is estimated using discounted cash flow analysis
based on rates for similar types of borrowing arrangements.
Bonds Payable - The fair value is estimated using discounted cash flow analysis
based on rates for similar types of borrowing arrangements.
Commitments to Extend Credit, Commercial and Standby Letters of Credit - Due to
the proximity of the pricing of these commitments to the period end, the fair
values of commitments are immaterial to the financial statements.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2005 and 2004. Although management
is not aware of any factors that would significantly affect 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.
14. REGULATORY MATTERS
The Company (on a consolidated basis) and CWB are 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 and CWB's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and CWB must meet specific capital guidelines that involve
quantitative measures of the Company's and CWB's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company's and CWB's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
rules as to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions and new regulations concerning
internal controls, accounting and operations. The prompt corrective action
regulations of FDICIA define specific capital categories based on the
institutions' capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". To be considered "well
capitalized", an institution must have a core capital ratio of at least 5% and a
total risk-based capital ratio of at least 10%. Additionally, FDICIA imposes
Tier I risk-based capital ratio of at least 6% to be considered "well
capitalized". Tier I risk-based capital is, primarily, common stock and
retained earnings, net of goodwill and other intangible assets.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). The
F - 18
Company's and CWB's actual capital amounts and ratios as of December 31, 2005
and 2004 are also presented in the table below:
RISK- ADJUSTED TOTAL TIER 1 TIER 1
(DOLLARS IN TOTAL TIER 1 WEIGHTED AVERAGE CAPITAL CAPITAL LEVERAGE
THOUSANDS) CAPITAL CAPITAL ASSETS ASSETS RATIO RATIO RATIO
-------- -------- --------- --------- -------- -------- ---------
DECEMBER 31, 2005
-----------------
CWBC (Consolidated) $ 46,031 $ 42,077 $ 375,487 $ 429,378 12.26% 11.21% 9.80%
CWB 42,501 38,577 375,474 425,768 11.32 10.27 9.06
DECEMBER 31, 2004
-----------------
CWBC (Consolidated) $ 41,047 $ 37,315 $ 298,359 $ 358,623 13.76% 12.51% 10.41%
CWB 38,550 34,819 298,309 354,889 12.92 11.67 9.81
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
As of December 31, 2005 and 2004, management believed that CWB met all
applicable capital adequacy requirements and is correctly categorized as "well
capitalized" under the regulatory framework for prompt corrective action.
15. COMMITMENTS AND CONTINGENCIES
Commitments
-----------
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk 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. As of December 31, 2005 and 2004, the Company had commitments to
extend credit of approximately $55.9 million and $42.1 million, respectively,
including obligations to extend standby letters of credit of approximately $1.5
million and $403,000, respectively.
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.
Loans Sold
-----------
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 $148.2
million and $167.1 million at December 31, 2005 and 2004, respectively.
The Company retains a certain level of risk relating to the servicing activities
and retained interest in sold SBA loans. In addition, during the period of time
that the loans are held for sale, the Company is subject to various business
risks associated with the lending business, including borrower default,
foreclosure and the risk that a rapid increase in interest rates would result in
a decline of the value of loans held for sale to potential purchasers. In
connection with its loan sales, the Company enters agreements which generally
require the Company to repurchase or substitute loans in the event of a breach
of a representation or warranty made by the Company to the loan
F - 19
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or early default on such mortgage loans.
Executive Salary Continuation
-------------------------------
The Company has an agreement with a former officer/director, which provides for
a monthly cash payment to the officer or beneficiaries in the event of death,
disability or retirement, beginning in December 2003 and extending for a period
of fifteen years. The Company purchased a life insurance policy as an
investment. The cash surrender value of the policy was $752,000 and $714,000
at December 31, 2005 and 2004, respectively, and is included in other assets.
The present value of the Company's liability under the agreement was calculated
using a discount rate of 6% and is included in accrued interest payable and
other liabilities in the accompanying consolidated balance sheets. In 2005, the
Company paid $50,000 to the former officer/director under the terms of this
agreement. The accrued executive salary continuation liability was $451,000 and
$473,000 at December 31, 2005 and 2004, respectively.
The Company also has certain Key Man life insurance policies related to a former
officer/director. The combined cash surrender value of the policies was
$192,000 and $183,000 at December 31, 2005 and 2004, respectively.
Litigation
----------
The Company is involved in litigation of a routine nature that is handled and
defended in the ordinary course of the Company's business. In the opinion of
management, based in part on consultation with legal counsel, the resolution of
these other litigation matters will not have a material impact on the Company's
financial position or results of operations.
16. COMMUNITY WEST BANCSHARES FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
DECEMBER 31,
-------------------
BALANCE SHEETS 2005 2004
-------------- --------- --------
Assets (IN THOUSANDS)
Cash and equivalents $ 3,555 $ 3,073
Time deposits in financial institutions - 99
Investment in subsidiary 38,861 35,144
Loans, net of allowance for loan losses of $11,000 in 2005 and $17,000 in 2004 9 207
--------- --------
Total assets $ 42,425 $ 38,523
========= ========
Liabilities and stockholders' equity
Other liabilities $ 64 $ 882
Common stock 30,190 30,020
Retained earnings 12,171 7,621
--------- --------
Total stockholders equity 42,361 37,641
--------- --------
Total liabilities and stockholders' equity $ 42,425 $ 38,523
========= ========
YEAR ENDED DECEMBER 31,
-------------------------
INCOME STATEMENTS 2005 2004 2003
----------------- -------- -------- --------
(IN THOUSANDS)
Total income $ 82 $ 12 $ 17
Total expense 220 188 198
Equity in undistributed subsidiaries: Net income from subsidiaries 4,809 3,933 2,303
-------- -------- --------
Income before income tax provision 4,671 3,757 2,122
Income tax provision (benefit) (971) (78) (61)
-------- -------- --------
Net income $ 5,642 $ 3,835 $ 2,183
======== ======== ========
F - 20
YEAR ENDED DECEMBER 31,
-------- -------- --------
STATEMENTS OF CASH FLOWS 2005 2004 2003
------------------------ -------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 5,642 $ 3,835 $ 2,183
Adjustments to reconcile net income to cash used in operating
activities:
Equity in undistributed (income) from subsidiaries (4,809) (3,933) (2,303)
Net change in other liabilities (818) (270) (33)
Net change in other assets 198 321 (3)
-------- -------- --------
Net cash provided by (used in) operating activities 213 (47) (156)
Cash flows from investing activities:
Net decrease in time deposits in other financial institutions 99 198 891
Net dividends from and investments in subsidiaries 1,092 686 -
-------- -------- --------
Net cash provided by investing activities 1,191 884 891
Cash flows from financing activities:
Proceeds from issuance of common stock 170 146 76
Cash dividend payments to shareholders (1,092) (686) -
-------- -------- --------
Net cash (used in) provided by financing activities (922) (540) 76
Net increase in cash and cash equivalents 482 297 811
Cash and cash equivalents at beginning of year 3,073 2,776 1,965
-------- -------- --------
Cash and cash equivalents, at end of year $ 3,555 $ 3,073 $ 2,776
======== ======== ========
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Income statement results on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 2005
----------------------------------------
Q4 Q3 Q2 Q1 TOTALS
------ ------- ------ ------ -------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest income $8,682 $7,651 $7,117 $6,328 $29,778
Interest expense 3,090 2,786 2,411 2,060 10,347
------ ------- ------ ------ -------
Net interest income 5,592 4,865 4,706 4,268 19,431
Provision for loan losses 171 (39) 264 170 566
------ ------- ------ ------ -------
Net interest income after provision for
loan losses 5,421 4,904 4,442 4,098 18,865
Non-interest income 1,628 1,996 1,861 1,825 7,310
Non-interest expenses 4,698 4,799 4,406 4,257 18,160
------ ------- ------ ------ -------
Income before income taxes 2,351 2,101 1,897 1,666 8,015
Provision for income taxes 957 (50) 778 688 2,373
------ ------- ------ ------ -------
NET INCOME $1,394 $2,151 $1,119 $ 978 $ 5,642
====== ======= ====== ====== =======
Earnings per share - basic $ 0.24 $ 0.37 $ 0.19 $ 0.17 $ 0.98
Earnings per share - diluted 0.23 0.36 0.19 0.16 0.95
Cash dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.04 $ 0.19
Weighted average shares:
Basic 5,746 5,745 5,745 5,741 5,744
Diluted 5,946 5,931 5,945 5,955 5,931
F - 21
YEAR ENDED DECEMBER 31, 2004
----------------------------------------
Q4 Q3 Q2 Q1 TOTALS
------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $5,728 $5,711 $5,245 $5,161 $21,845
Interest expense 2,007 1,954 1,945 1,939 7,845
------ ------ ------- ------ -------
Net interest income 3,721 3,757 3,300 3,222 14,000
Provision for loan losses 167 186 (30) 95 418
------ ------ ------- ------ -------
Net interest income after provision for
loan losses 3,554 3,571 3,330 3,127 13,582
Non-interest income 2,433 2,157 3,438 2,434 10,462
Non-interest expenses 4,359 4,086 5,000 4,076 17,521
------ ------ ------- ------ -------
Income before income taxes 1,628 1,642 1,768 1,485 6,523
Provision for income taxes 674 675 728 611 2,688
------ ------ ------- ------ -------
NET INCOME $ 954 $ 967 $1,040 $ 874 $ 3,835
====== ====== ======= ====== =======
Earnings per share - basic $ 0.17 $ 0.17 $ 0.18 $ 0.15 $ 0.67
Earnings per share - diluted 0.16 0.16 0.18 0.15 0.65
Cash dividends per common share $ 0.04 $ 0.04 $ 0.04 $ - $ 0.12
Weighted average shares:
Basic 5,730 5,720 5,714 5,707 5,718
Diluted 5,929 5,869 5,835 5,834 5,867
F - 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None
ITEM 9A. CONTROLS AND PROCEDURES
-------- -------------------------
Under the supervision and with the participation of the Company's management,
the Chief Executive Officer and the Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2005. Based on and as of the time of such
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiary) required to be included in the Company's reports that
it files with or submits to the Securities and Exchange Commission under the
Securities Exchange Act of 1934. There have been no changes in the Company's
internal control over financial reporting that occurred during the Company's
year ended December 31, 2005, that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
-------- ------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------- -------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------------------------
The information concerning the directors and executive officers of the Company
is incorporated herein by reference from the section entitled "Proposal 1 -
Election of Directors" contained in the definitive proxy statement ("Proxy
Statement") of the Company to be filed pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year.
The Company has adopted a code of ethics that applies to all its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. A copy of the code of
ethics is available on the Company's website at www.communitywest.com.
ITEM 11. EXECUTIVE COMPENSATION
-------- -----------------------
Information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1 - Election of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-------- ----------------------------------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
Information concerning security ownership of certain beneficial owners and
management and related shareholder matters is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners,
Directors and Executive Officers" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- --------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Proposal 1 -
Election of Directors" contained in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------- ------------------------------------------
Information concerning principal accountant fees and services is incorporated
herein by reference from the section entitled "Independent Auditors" contained
in the Proxy Statement.
60
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------- ------------------------------------------
(a)(1) The following consolidated financial statements of Community West
Bancshares are filed as part of this Annual Report.
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2
Consolidated Income Statements for each of the three years
in the period ended December 31, 2005 F-3
Consolidated Statements of Stockholders' Equity for each
of the three years ended in the period ended December 31, 2005 F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2005 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedules
Financial statement schedules other than those listed above have been omitted
because they are either not applicable or the information is otherwise included.
(a)(3) Exhibits. The following is a list of exhibits filed as a part of this
report.
2.1 Plan of reorganization (1)
2.2 Definitive Agreement to sell Palomar (4)
3.1 Articles of Incorporation (3)
3.2 Bylaws (3)
4.1 Common Stock Certificate (2)
10.1 1997 Stock Option Plan and Form of Stock Option Agreement (1)
10.3 Salary Continuation Agreement between Goleta National Bank and
Llewellyn Stone, President and CEO (3)
10.4 Agreement between the Company's subsidiary, Goleta National Bank, and
ACE Cash Express Inc (5)
10.6 Memorandum of Understanding between the Company and the Federal
Reserve Bank of San Francisco, dated February 22, 2001 (6)
10.7 Consulting Agreement between the Goleta National Bank and Llewellyn
Stone (6)
10.9 Indemnification Agreement between the Company and Lynda Nahra, dated
December 20, 2001 (6)
10.13 Consent Order between Goleta National Bank and the Comptroller of the
Currency of the United States, dated October 28, 2002 (7)
10.14 Stipulation and Consent to the Issuance of a Consent Order by the
Office of the Comptroller of the Currency, dated October 28, 2002 (7)
10.15 Amendment Number 3 to Master Loan Agency Agreement between Goleta
National Bank and Ace Cash Express, Inc., dated as of November 1, 2002
(7)
10.16 Amendment Number 1 to Collection Servicing Agreement between Goleta
National Bank and Ace Cash Express, Inc., dated as of November 1, 2002
(7)
10.17 Indemnification Agreement between the Company and Charles G.
Baltuskonis, dated March 18, 2003 (8)
10.18 Letter issued by the Comptroller of the Currency and Order Terminating
the Consent Order, dated October 21, 2003 (9)
10.19 Letter dated November 6, 2003 from the Federal Reserve Bank of San
Francisco rescinding the Memorandum of Understanding, dated February
2001 (9)
10.20 Employment and Confidentiality Agreement, Goleta National Bank,
between the Company and Lynda J. Nahra dated April 23, 2003 (9)
61
10.21 Assistant Secretary's Certificate of Adoption of Amendment No. 1 to
Community West Bancshares 1997 Stock Option Plan (10)
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
31.1 Certification of the Chief Executive Officer
31.2 Certification of the Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350
------------------------------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed with the Commission on December 31,
1997.
(2) Incorporated by reference from the Registrant's Amendment to
Registration Statement on Form 8-A filed with the Commission on
March 12, 1998.
(3) Incorporated by reference from the Registrant's Annual
Report on Form 10-K filed with the Commission on March 26, 1998.
(4) Filed as an exhibit to the Registrant's Form 8-K filed with
the Commission on December 5, 2000.
(5) Incorporated by reference from the Registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 2001
filed by the Registrant with the Commission on November 16, 2001.
(6) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 filed by
the Registrant with the Commission on April 16, 2002.
(7) Incorporated by reference from the Registrant's Form 8-K
filed with the Commission on November 4, 2002.
(8) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002 filed
with the Commission on March 31, 2003.
(9) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003 filed
with the Commission on March 29, 2004.
(10) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 (File No 333-129898) filed with the
Commission on November 22, 2005.
62
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
COMMUNITY WEST BANCSHARES
(Registrant)
Date: June 22, 2006 By:/s/ William R.Peeples
----------------------
William R. Peeples
Chairman of the Board
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/ William R. Peeples Director and June 22, 2006
-------------------------- Chairman of the Board
William R. Peeples
/s/ Charles G. Baltuskonis Executive Vice President and June 22, 2006
-------------------------- Chief Financial Officer
Charles G. Baltuskonis
/s/ Robert H. Bartlein Director June 22, 2006
--------------------------
Robert H. Bartlein
/s/ Jean W. Blois Director June 22, 2006
--------------------------
Jean W. Blois
/s/ John D. Illgen Director and Secretary June 22, 2006
-------------------------- of the Board
John D. Illgen
/s/ Lynda J. Nahra Director, President and June 22, 2006
-------------------------- Chief Executive Officer
Lynda J. Nahra
/s/ James R. Sims Jr. Director June 22, 2006
--------------------------
James R. Sims Jr.
/s/ Kirk B. Stovesand Director June 22, 2006
--------------------------
Kirk B. Stovesand
/s/ C. Richard Whiston Director June 22, 2006
--------------------------
C Richard Whiston
63