UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
445 Pine Avenue, Goleta, California 93117
(Address of principal executive offices) (Zip code)
(805) 692-5821
(Registrant's telephone number, including area code)
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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]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes [ ] No [X]
The aggregate market value of common stock, held by non-affiliates of the registrant as of June 30, 2006, was $59,309,102 based on a closing price of $15.65 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.
As of March 23, 2007, 5,846,868 shares of the registrant's common stock were outstanding.
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 2007 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, 2006.
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 11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk 38
ITEM 8. Consolidated Financial Statements and Supplementary Data 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 61
ITEM 9A. Controls and Procedures 61
ITEM 9B. Other Information 61
PART III
ITEM 10. Directors and Executive Officers 61
ITEM 11. Executive Compensation 61
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 61
ITEM 13. Certain Relationships and Related Transactions 61
ITEM 14. Principal Accountant Fees and Services 61
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 61
SIGNATURES 64
CERTIFICATIONS
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PART I
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"). 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 and deposit products. CWB also offers other financial services.
Relationship Banking - Relationship banking is conducted at the community level through five full-service branch offices on the Central Coast of California stretching from Santa Maria to Westlake Village. 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, home equity lines of credit 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 a preferred lender/servicer of loans guaranteed by the Small Business Administration ("SBA") since 1990. The Company originates SBA loans which are occasionally 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. 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 almost always 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.
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 lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $1.5 million for regular 504 loans, $2 million for those 504 loans that meet a public policy goal and $4 million for manufacturing entities.
CWB also offers 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. The SBA has designated CWB as a "Preferred Lender", such status being awarded on a national basis. As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation authority responsibility from the SBA.
Mortgage Lending - CWB has 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 - CWB has 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. 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.
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 complement 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 five branches located in Goleta, Ventura, Santa Maria, Santa Barbara and Westlake Village California, a loan production office currently exists in Roseville, California and an SBA loan production office in the San Francisco Bay area. The Company also maintains SBA loan production offices in the states of Colorado, Florida, Georgia, North Carolina, South Carolina, Tennessee, Oregon and Washington.
Competition may adversely affect the Company's performance. The financial services' 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, credit unions and specialty financial services 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 may 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 7Management's Discussion and Analysis of Financial Condition and Results of Operations - Supervision and Regulation."
EMPLOYEES
As of December 31, 2006, the Company had 154 full-time and 9 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.
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.
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. During 2006, the FRB raised the target federal funds rate from 4.25% to 5.25%, an increase of 1.00%. This target rate has remained at 5.25% since June 2006. Typically, rate increases enhance net interest income for asset-sensitive financial institutions.
RISK DUE TO ECONOMIC CONDITIONS IN THE REGIONS THE COMPANY SERVES
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.
FLUCTUATIONS IN INTEREST RATES MAY REDUCE PROFITABILITY
Changes in interest rates affect interest income, the primary component of the Company's gross revenue, as well as interest expense. The Company's earnings depend largely on the relationship between the cost of funds, primarily deposits and borrowings, and the yield on earning assets, primarily loans and investment securities. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by the monetary policies of the Federal Reserve Board, the international interest rate environment, as well as by economic, regulatory and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of nonperforming assets. Many of these factors are beyond the Company's control. Fluctuations in interest rates also affect the demand of customers for products and services. As interest rates change, the Company expects to periodically experience "gaps" in the interest rate sensitivities of its assets and liabilities. This means that either interest-bearing liabilities will be more sensitive to changes in market interest rates than interest-earning assets, or vice versa. In either event, changes in market interest rates may have a negative impact on the Company's earnings.
Changes in the level of interest rates also may negatively affect the Company's ability to originate loans, the value of these loans and the ability to realize gains from the sale of loans, all of which ultimately affect earnings. A decline in the market value of the Company's assets may limit its ability to borrow additional funds. As a result, the Company could be required to sell some of its loans and investments under adverse market conditions, under terms that are not favorable, in order to maintain liquidity. If those sales are made at prices lower than the amortized costs of the investments, losses may be incurred. See additional discussion on interest rate risk in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk."
COMPETITION WITH OTHER BANKING INSTITUTIONS COULD ADVERSELY AFFECT PROFITABILITY
The banking industry is highly competitive. The Company faces increased 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. Ultimately, competition can drive down the Company's interest margins and reduce profitability and make it more difficult to increase the size of the loan portfolio and deposit base.
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. 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. 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 $174 million, or 38.2%, 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-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. 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.
RESERVE FOR CREDIT LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on the Company's financial condition or results of operation. The Company maintains a reserve for credit losses to absorb estimated probable credit losses inherent in the loan and commitment portfolios as of the balance sheet date. In determining the level of the reserve for credit losses, management makes various assumptions and judgments about the loan portfolio. If management's assumptions are incorrect, the reserve for credit losses may not be sufficient to cover losses, which could adversely affect the Company's financial condition or 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.
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. 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.
AN INFORMATION SYSTEMS INTERRUPTION OR BREACH IN SECURITY MIGHT RESULT IN LOSS OF CUSTOMERS
The Company relies heavily on communications and information systems to conduct business. In addition, it relies on third parties to provide key components of information system infrastructure, including loan, deposit and general ledger processing, internet connections, and network access. Any disruption in service of these key components could adversely affect the Company's ability to deliver products and services to customers and otherwise to conduct operations. Furthermore, any security breach of information systems or data, whether managed by the Company or by third parties, could harm its reputation or cause a decrease in the number of its customers.
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.
Not applicable.
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 executive management, 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.
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.
None.
PART II
Market Information, Holders and Dividends
The Company's common stock is traded on the Nasdaq Global 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:
2006 Quarters 2005 Quarters
-------------------------------- --------------------------------
Fourth Third Second First Fourth Third Second First
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Stock Price Range:
High $ 15.99 $16.00 $ 16.00 $14.44 $ 14.40 $12.57 $ 13.50 $15.30
Low 15.00 15.17 14.05 13.85 12.25 12.20 12.00 11.00
Cash Dividends
Declared $ .06 $ .06 $ .06 $ .05 $ .05 $ .05 $ .05 $ .04
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As of March 22, 2007, the year to date high and low stock sales prices were $16.00 and $15.50, respectively. As of March 22, 2007, the last reported sale price per share for the Company's common stock was $15.75.
As of March 22, 2007, the Company had 363 stockholders of record of its common stock.
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 -CWBC - Limitations on Dividend Payments."
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2006:
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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 497,207 $7.86 833,851
---------------------------------- ------------------ ------------------- -------------------------------
Plans not approved by shareholders - N/A -
---------------------------------- ------------------ ------------------- -------------------------------
Total 497,207 7.86 833,851
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As of January 23, 2007, Community West Bancshares 1997 Stock Option Plan expired. Of the 833,851 options, 349,351 were associated with the 1997 expired plan leaving 484,500 options available for future grants under the Community West Bancshares 2006 Stock Option Plan.
STOCK PERFORMANCE GRAPH
The following graph presents the cumulative, five-year total return for the Company's Common Stock compared with the Nasdaq Total Return Index, a broad market index of stocks traded on the Nasdaq Composite Index and the SNL Securities Index of banks having under $500 million in total assets, which the Company believes is representative of peer issuers. The graph assumes an initial investment of $100 in each of the Company's Common Stock, the securities underlying the Nasdaq Total Return Index and the securities underlying the SNL Index for Banks on December 31, 2001, and that all dividends were reinvested. This graph shall not be deemed incorporated
by reference by any general statement incorporating by reference this report into any filing under the Securities Act or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
[GRAPHIC OMITTED]
------------------------------------------------------------------------------------- INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 ------------------------------------------------------------------------------------- Community West Bancshares 100.00 78.17 150.00 227.32 241.65 272.30 NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58 SNL <$500M Bank Index 100.00 128.07 186.94 215.79 228.47 240.01 |
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, 2006, 2005, 2004, 2003 and 2002, and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2006 2005 2004 2003 2002
--------- ---------- --------- ----------- ---------
INCOME STATEMENT: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 39,303 $ 29,778 $ 21,845 $ 20,383 $ 29,976
Interest expense 16,804 10,347 7,845 9,342 13,466
--------- ---------- --------- ----------- ---------
Net interest income 22,499 19,431 14,000 11,041 16,510
Provision for loan losses 489 566 418 1,669 4,899
--------- ---------- --------- ----------- ---------
Net interest income after provision for loan
losses 22,010 18,865 13,582 9,372 11,611
Non-interest income 5,972 7,310 10,462 10,675 11,398
Non-interest expenses 18,832 18,160 17,521 16,736 24,931
--------- ---------- --------- ----------- ---------
Income (loss) before income taxes 9,150 8,015 6,523 3,311 (1,922)
Provision (benefit) for income taxes 3,822 2,373 2,688 1,128 (652)
--------- ---------- --------- ----------- ---------
NET INCOME (LOSS) $ 5,328 $ 5,642 $ 3,835 $ 2,183 $ (1,270)
========= ========== ========= =========== =========
PER SHARE DATA:
Income (loss) per common share - Basic $ 0.92 $ 0.98 $ 0.67 $ 0.38 $ (0.22)
Weighted average shares used in income (loss)
per share calculation - Basic 5,785 5,744 5,718 5,694 5,690
Income (loss) per common share - Diluted $ .89 $ 0.95 $ 0.65 $ 0.38 $ (0.22)
Weighted average shares used in income (loss)
per share calculation - Diluted 6,001 5,931 5,867 5,758 5,690
Book value per share $ 8.05 $ 7.34 $ 6.56 $ 6.02 $ 5.64
BALANCE SHEET:
Net loans $451,572 $ 381,517 $290,506 $ 244,274 $245,856
Total assets 516,615 444,354 365,203 304,250 307,210
Total deposits 368,747 334,238 284,568 224,855 219,083
Total liabilities 469,795 402,119 327,634 269,919 275,123
Total stockholders' equity 46,820 42,235 37,569 34,331 32,087
OPERATING AND CAPITAL RATIOS:
Return on average equity 11.88% 14.16% 10.60% 6.65% (3.99)%
Return on average assets 1.12 1.43 1.15 0.73 (0.42)
Dividend payout ratio 24.97 19.39 17.91 - -
Equity to assets ratio 9.06 9.50 10.29 11.28 10.48
Tier 1 leverage ratio 9.21 9.80 10.41 11.15 10.48
Tier 1 risk-based capital ratio 10.57 11.21 12.51 14.05 12.66
Total risk-based capital ratio 11.45 12.26 13.76 15.31 13.92
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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 ("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 2006 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.
Net income of the Company was $5.3 million, or $0.92 per basic share, and $0.89 per diluted share, for 2006 compared to $5.6 million, or $0.98 per basic share, and $0.95 per diluted share, for 2005. Income before tax increased $1.1 million, or 14.2%, for fiscal year 2006 compared to 2005. This increase was primarily due to an increase of $3.1 million in net interest income as a result of the growth in interest-earning assets. The overall slight decline of $314,000 in net income for the comparative periods was due to an increase in the provision for income taxes of $1.4 million for 2006 over 2005. Net income for 2005 was positively impacted by the resolution of tax issues, which resulted in a $914,000 credit to the provision for income taxes. The Company's earnings performance was also impacted in 2006 by:
- net loan portfolio growth of $71.1 million, or 18.4%, primarily in manufactured housing, commercial real estate, commercial, and SBA loans which contributed to increased net interest income over the comparative periods despite a challenging interest rate environment. Net interest income was $22.5 million, $19.4 million and $14.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.
- despite a 100 basis point increase in the Federal Reserve Board's target federal funds rate from 4.25% to 5.25%, the combination of a flattening, and even inverted, yield curve and intense competition for both loans and deposits continued to compress interest margins, which resulted in a decline in net interest margin to 4.89% from 5.14%.
- continued efforts to control expenses while striving to improve service levels to customers, which resulted in improvement in the Company's efficiency ratio to 66.15% for 2006 from 67.91% and 71.62% for the years ended December 31, 2005 and 2004, respectively.
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 the year ended December 31, 2006 throughout the analysis sections of this report.
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.
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 two methodologies; a 12-month historical trend analysis and by delinquency information. The highest requirement of the two 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 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 Company has not created any new I/O strips since 2002.
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 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 recorded in current operations.
STOCK-BASED COMPENSATION - On January 1, 2006, the Company changed its accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123R,
"Share-Based Payment (Revised 2004) ("SFAS No. 123(R)"). Prior to January 1, 2006, employee compensation expense under stock option plans was reported only if options were granted below market price at grant date in accordance with the intrinsic value method of accounting. Because the exercise price of the Company's employee stock options always equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized on options granted. The Company adopted the provisions of SFAS No. 123R ("123R") on January 1, 2006. 123R eliminated the ability to account for stock-based compensation using the intrinsic value method and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant. The Company transitioned to the fair-value based accounting for stock-based compensation using a modified version of prospective application (MPA). Under MPA, as it is applicable to the Company, 123R applies to new awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that were outstanding as of January 1, 2006 is recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of 123R. The attribution of compensation cost for those earlier awards is based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not previously adopt the fair value accounting method for stock-based employee compensation.
The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. One such assumption, expected volatility, can have a significant impact on stock option valuation. In developing this assumption, the Company relies on historical volatility using both company specific and industry information. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value.
RECENT ACCOUNTING PRONOUNCEMENTS - In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156, "Accounting for Servicing of Financial Assets, an amendment of Statement No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and liabilities. SFAS No. 156 primarily requires companies to initially record separately recognized servicing rights at fair value, allows companies to choose between two measurement methods and provides additional disclosure requirements. SFAS No. 156 will be effective as of January 1, 2007 and the Company is currently assessing the impact that SFAS No. 156 may have on its financial statements.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet for the position to be recognized within the financial statements and provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions. The Company must adopt the interpretation by January 1, 2007. Management does not expect the adoption of this new interpretation will have a material impact on the Company's financial position, results of operations or cash flows.
In September 2006, FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 will be effective for fiscal years ending after November 15, 2007. The Company has not started to assess the impact of SFAS No. 157.
In October 2006, FASB issued Statement No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 amends SFAS Nos. 87, 88 and 123(R) with respect to the accounting for defined benefit pension and other postretirement plans. SFAS No. 158 primarily requires companies to (a) recognize in its statement of financial position an asset for the defined benefit postretirement plan's overfunded status or a liability for a plan's underfunded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year, and, (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The disclosure requirements of SFAS No. 158 will be effective for fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations will be effective for fiscal years ending after December 15, 2008. The adoption of SFAS No. 158 is not anticipated to have an impact on the Company's financial position or results of operations.
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 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 in dollars and percentages of certain items in the consolidated income statements as compared to the prior periods:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2006 vs. 2005 2005 vs. 2004
------------------------ ------------------------
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
----------- ----------- ----------- -----------
INTEREST INCOME (DOLLARS IN THOUSANDS)
Loans $ 8,910 31.5% $ 7,711 37.5%
Investment securities 302 23.7% 295 30.1%
Other 313 137.3% (73) (24.3)%
----------- ----------- ----------- -----------
Total interest income 9,525 32.0% 7,933 36.3%
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 5,524 71.7% 2,685 53.5%
Bonds payable and other borrowings 933 35.3% (183) (6.5)%
----------- ----------- ----------- -----------
Total interest expense 6,457 62.4% 2,502 31.9%
----------- ----------- ----------- -----------
NET INTEREST INCOME 3,068 15.8% 5,431 38.8%
Provision for loan losses (77) (13.6)% 148 35.4%
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,145 16.7% 5,283 38.9%
NON-INTEREST INCOME
Other loan fees (76) (2.6)% (870) (23.0)%
Gains from loan sales, net (1,000) (40.0)% (1,482) (37.2)%
Document processing fees, net (7) (0.9)% 6 0.7%
Loan servicing fees, net (316) (55.0)% (841) (59.4)%
Service charges 46 14.5% (63) (16.5)%
Other 15 7.9% 98 107.7%
----------- ----------- ----------- -----------
Total non-interest income (1,338) (18.3)% (3,152) (30.1)%
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 1,018 8.5% 142 1.2%
Occupancy and equipment expenses 15 0.8% 244 15.3%
Professional services (69) (6.8)% 82 8.7%
Depreciation (44) (8.1)% 11 2.1%
Other (248) (9.0)% 160 18.8%
----------- ----------- ----------- -----------
Total non-interest expenses 672 3.7% 639 3.6%
----------- ----------- ----------- -----------
Income before provision for income taxes 1,135 1,492
Provision for income taxes 1,449 (315)
----------- -----------
NET INCOME $ (314) $ 1,807
=========== ===========
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COMPARISON OF 2006 TO 2005
Net interest income increased by $3.1 million, or 15.8%, for 2006 compared to 2005. Total interest income increased by $9.5 million, or 32.0%, from $29.8 million in 2005 to $39.3 million in 2006. Of this increase, $6.8 million was due to interest-earning asset growth, primarily loans, and $2.7 million resulted from rate increases. Total interest expense increased by $6.5 million, or 62.4%, in 2006 compared to 2005. Interest expense on deposits increased $5.5 million while the interest expense on other borrowings increased $933,000. Of the increase in interest expense on deposits, $3.1 million was due to deposit growth, including broker deposits, and $2.4 million resulted from higher rates. The increase in interest expense is primarily due to increased competition for core deposits which resulted in higher deposit rates and increased use of wholesale funding sources to fund loan growth and will likely continue for the foreseeable future.
Interest income from loans increased primarily due to overall net growth in the loan portfolio. The manufactured housing, commercial real estate, commercial and SBA loan portfolios increased by $41.5 million, $27.5 million, $8.8 million and $2.7 million, respectively, during 2006. This loan growth contributed to increased interest income from manufactured housing of $3.4 million, or 44.6%, commercial real estate of $3.3 million, or 45.2%, commercial of $1.8 million, or 54.0%, and SBA of $1.3 million, or 21.2%, for 2006 compared to 2005. These increases to loan interest income were partially offset by a decrease in interest income from the securitized loan portfolio of $916,000, or 37.1%, for 2006 compared to 2005. The decreased interest income is primarily a result of the $4.8 million, or 32.0%, decline in the securitized loan portfolio balance during 2006. Interest income from investments and federal funds sold increased by $302,000 and $320,000, respectively for 2006 compared to 2005. Investment interest income increased primarily due to increased rates while interest income received from federal funds sold increased primarily due to increased volume. Interest income from interest earning deposits in other institutions declined slightly for 2006 compared to 2005.
While the overall increase in net interest income was driven by loan growth, net interest income related to rate change experienced a decline. This is reflected in the decline in margin by 25 basis points from 5.14% in 2005 to 4.89% in 2006. The decline was due to an increase in the cost of the Company's interest-bearing liabilities, which was driven by continual increases in the short-term interest rates from June 2004 through the first half of 2006, and the ensuing higher competitive deposit pricing environment. While the Federal Reserve has not raised the target federal funds rate since June of 2006, continuing intense competition for both loans and deposits may contribute to margin compression going forward.
COMPARISON OF 2005 TO 2004
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.
The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2006 VERSUS 2005 2005 VERSUS 2004
---------------------------- -----------------------------
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) $ (8) $ 13 $ (21) $ (151) $ 25 $ (176)
Federal funds sold 321 91 230 78 169 (91)
Investment securities 302 183 119 295 46 249
Loans, net 9,827 2,541 7,286 8,823 2,758 6,065
Securitized loans (917) (90) (827) (1,112) 300 (1,412)
-------- -------- -------- -------- -------- ---------
Total interest-earning assets 9,525 2,738 6,787 7,933 3,298 4,635
-------- -------- -------- -------- -------- ---------
Interest-bearing demand (447) 443 (890) 1,422 480 942
Savings 110 149 (39) 104 132 (28)
Time certificates of deposit 5,861 1,786 4,075 1,159 804 355
Bonds payable - - - (1,351) (392) (959)
Other borrowings 933 664 269 1,168 375 793
-------- -------- -------- -------- -------- ---------
Total interest-bearing liabilities 6,457 3,042 3,415 2,502 1,399 1,103
-------- -------- -------- -------- -------- ---------
Net interest income $ 3,068 $ (304) $ 3,372 $ 5,431 $ 1,899 $ 3,532
======== ======== ======== ======== ======== =========
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The following table presents the net interest income and net interest margin for the three years indicated:
YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005 2004
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest income $ 39,303 $ 29,778 $ 21,845
Interest expense 16,804 10,347 7,845
---------- ---------- ----------
Net interest income $ 22,499 $ 19,431 $ 14,000
========== ========== ==========
Net interest margin 4.89% 5.14% 4.41%
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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 2006 2005 2004
---------- ---------- -----------
(IN THOUSANDS)
Other loan fees $ 2,830 $ 2,906 $ 3,776
Gains from loan sales, net: 1,499 2,499 3,981
Document processing fees, net: 816 823 817
Loan servicing fees, net 259 575 1,416
Service charges 364 318 381
Other 204 189 91
---------- ---------- -----------
Total non-interest income $ 5,972 $ 7,310 $ 10,462
========== ========== ===========
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COMPARISON OF 2006 TO 2005
Total non-interest income for the Company declined by $1.3 million, or 18.3%, in 2006 compared to 2005. The decline is primarily due to the Company's continued plan to grow the Bank's SBA loan portfolio and sell fewer SBA loans which impacted gains from loan sales and loan servicing fees.
The following table summarizes this change:
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005 CHANGE
--------- --------- ----------
Gains from loan sales, net (IN THOUSANDS)
SBA $ 1,361 $ 2,190 $ (829)
Mortgage 138 309 (171)
--------- --------- ----------
Total $ 1,499 $ 2,499 $ (1,000)
========= ========= ==========
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Management's strategic shift gradually to sell fewer SBA loans and grow the portfolio, which began in 2004, combined with market declines in loan sale pricing during 2006, contributed to the comparative decrease in net gains from SBA loans sales of $829,000, or 37.8%, for 2006 compared to 2005. The Company sold $15.8 million in SBA 7(a) loans in 2006 compared to $22.2 million in 2005. This also impacted net loan servicing fees which decreased by $316,000, or 55.0%, in 2006 compared to 2005. Net gains from mortgage loan sales decreased by $171,000, or 55.3% in 2006 compared to 2005, primarily related to a decline in mortgage loan originations of $54.8 million or 55.8%, from $98.2 million in 2005 to $43.4 million in 2006. Total other loan and document processing fees decreased slightly from 2006 compared to 2005. This decline was partially offset by slight increases in total service charges and other non-interest income for 2006 compared to 2005.
COMPARISON OF 2005 TO 2004
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. 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 declined in 2005 compared to 2004, primarily related to decreased mortgage loan refinancing activity. The decline in mortgage loan activity also resulted in an $807,000 or 35.7%, decline in other mortgage loan fees for 2005 compared to 2004.
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 2006 2005 2004
--------- --------- ----------
(IN THOUSANDS)
Salaries and employee benefits $ 13,011 $ 11,993 $ 11,851
Occupancy and equipment expenses 1,855 1,840 1,596
Professional services 953 1,022 940
Depreciation 499 543 532
Other 2,514 2,762 2,602
--------- --------- ----------
Total non-interest expenses $ 18,832 $ 18,160 $ 17,521
========= ========= ==========
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COMPARISON OF 2006 TO 2005
Total non-interest expenses increased $672,000, or 3.7%, in 2006 compared to 2005. This increase was primarily due to an increase in salaries and employee benefits of $1.0 million, or 8.5%, in 2006 compared to 2005. The Company continued to grow in 2006 and opened a new full-service branch in Westlake Village, California. Also contributing to the increase were the additional months of expense for the two full-service-branches added in May and October 2005 and the recognition of $163,000 in stock option expense as a result of the 2006 adoption of FAS 123R. This increase was partially offset by decreases in other non-interest expenses, professional services and depreciation expense, which declined by $248,000, $69,000 and $44,000, respectively.
COMPARISON OF 2005 TO 2004
Non-interest expenses increased $639,000, or 3.6%, in 2005 compared to 2004. The Company opened two full-service branches in 2005. 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.
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)
2006 $474,465 3.97% 2.74% 0.50%
2005 $393,210 4.62% 3.05% 0.61%
2004 $333,230 5.26% 3.56% 0.64%
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INCOME TAXES
Income tax expense was $3.8 million in 2006, $2.4 million in 2005 and $2.7 million in 2004. The effective income tax rate was 41.8%, 29.6% and 41.2% for 2006, 2005 and 2004, respectively. The effective income tax rate for 2005 is generally 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 tax issues. See footnote 10, "Income Taxes", in the notes to the Consolidated Financial Statements.
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,
--------------------------------------------------------
2006 2005 2004
----------------- ------------------ -----------------
AMOUNT % AMOUNT % AMOUNT %
--------- ------ --------- ------- --------- ------
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 5,264 1.1% $ 5,428 1.4% $ 5,364 1.6%
Time and interest-earning deposits in other financial
institutions 567 0.1% 1,057 0.3% 7,496 2.3%
Federal funds sold 10,661 2.3% 5,923 1.5% 8,684 2.6%
Investment securities available-for-sale 22,655 4.8% 22,474 5.7% 21,220 6.4%
Investment securities held-to-maturity 8,759 1.9% 7,703 2.0% 3,493 1.0%
Federal Reserve Bank & Federal Home Loan Bank stock 4,342 0.9% 2,882 0.7% 1,902 0.6%
Interest only strips, at fair value 1,597 0.3% 2,261 0.6% 3,214 1.0%
Loans held for sale, net 64,785 13.6% 50,106 12.7% 44,037 13.2%
Loans held for investment, net 332,315 70.0% 265,799 67.6% 197,622 59.3%
Securitized loans, net 11,913 2.5% 18,241 4.6% 28,661 8.6%
Servicing rights 2,410 0.5% 3,118 0.8% 3,002 0.9%
Other real estate owned, net 45 - 43 - 88 -
Premises and equipment, net 2,287 0.5% 2,011 0.5% 1,655 0.5%
Other assets 6,865 1.5% 6,164 1.6% 6,792 2.0%
--------- ------ --------- ------- --------- ------
TOTAL ASSETS $474,465 100.0% $393,210 100.0% $333,230 100.0%
========= ====== ========= ======= ========= ======
LIABILITIES
Deposits:
Non-interest-bearing demand $ 34,555 7.3% $ 34,758 8.8% $ 38,761 11.6%
Interest-bearing demand 58,569 12.3% 87,587 22.3% 50,785 15.2%
Savings 15,184 3.2% 16,479 4.2% 17,810 5.3%
Time certificates of $100,000 or more 138,897 29.2% 62,545 15.9% 31,851 9.6%
Other time certificates 102,604 21.7% 89,304 22.7% 109,456 32.9%
--------- ------ --------- ------- --------- ------
Total deposits 349,809 73.7% 290,673 73.9% 248,663 74.6%
Other borrowings 74,597 15.8% 46,285 11.8% 22,699 6.8%
Bonds payable in connection with securitized loans - - 10,469 2.7% 19,676 5.9%
Other liabilities 5,210 1.1% 5,948 1.5% 5,992 1.8%
--------- ------ --------- ------- --------- ------
Total liabilities 429,616 90.6% 353,375 89.9% 297,030 89.1%
--------- ------ --------- ------- --------- ------
STOCKHOLDERS' EQUITY
Common stock 34,588 7.3% 30,127 7.6% 29,940 9.0%
Retained earnings 14,523 3.1% 9,783 2.5% 6,275 1.9%
Accumulated other comprehensive (loss) (4,262) (1.0)% (75) - (15) -
--------- ------ --------- ------- --------- ------
Total stockholders' equity 44,849 9.4% 39,835 10.1% 36,200 10.9%
--------- ------ --------- ------- --------- ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $474,465 100.0% $393,210 100.0% $333,230 100.0%
========= ====== ========= ======= ========= ======
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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: 2006 2005 2004
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Time and interest earning deposits in other financial institutions:
Average outstanding $ 567 $ 1,057 $ 7,496
Interest income 25 32 183
Average yield 4.31% 3.03% 2.44%
Federal funds sold:
Average outstanding $ 10,661 $ 5,923 $ 8,684
Interest income 516 196 118
Average yield 4.84% 3.31% 1.36%
Investment securities:
Average outstanding $ 35,756 $ 33,059 $ 26,615
Interest income 1,576 1,274 979
Average yield 4.41% 3.85% 3.68%
Gross loans, excluding securitized:
Average outstanding $ 400,540 $ 319,008 $ 244,492
Interest income 35,631 25,804 16,982
Average yield 8.90% 8.09% 6.95%
Securitized loans:
Average outstanding $ 12,407 $ 19,147 $ 30,098
Interest income 1,555 2,472 3,583
Average yield 12.54% 12.91% 11.91%
Total interest-earning assets:
Average outstanding $ 459,931 $ 378,194 $ 317,385
Interest income 39,303 29,778 21,845
Average yield 8.55% 7.87% 6.88%
|
YEAR ENDED DECEMBER 31,
-------------------------------
INTEREST-BEARING LIABILITIES: 2006 2005 2004
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average outstanding $ 58,569 $ 87,587 $ 50,785
Interest expense 1,796 2,242 820
Average effective rate 3.07% 2.56% 1.61%
Savings deposits:
Average outstanding $ 15,184 $ 16,479 $ 17,810
Interest expense 455 344 241
Average effective rate 2.99% 2.09% 1.35%
Time certificates of deposit:
Average outstanding $ 241,502 $151,849 $141,308
Interest expense 10,974 5,115 3,955
Average effective rate 4.54% 3.37% 2.80%
Bonds payable:
Average outstanding - $ 10,469 $ 19,676
Interest expense - 1,090 2,441
Average effective rate - 10.42% 12.41%
Other borrowings:
Average outstanding $ 74,602 $ 46,285 $ 22,699
Interest expense 3,579 1,556 388
Average effective rate 4.80% 3.36% 1.71%
Total interest-bearing liabilities:
Average outstanding $ 389,857 $312,669 $252,278
Interest expense 16,804 10,347 7,845
Average effective rate 4.31% 3.31% 3.11%
NET INTEREST INCOME $ 22,499 $ 19,431 $ 14,000
NET INTEREST SPREAD 4.24% 4.56% 3.77%
AVERAGE NET MARGIN 4.89% 5.14% 4.41%
|
Nonaccrual loans are included in the average balance of loans outstanding.
The Company's largest categories of loans held in the portfolio are commercial, commercial real estate and construction, SBA, and manufactured housing loans. Loans are carried at face amount, net of payments collected, the allowance for loan loss and deferred loan fees/costs. 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, 2006 and 2005, approximately 60% and 62%, respectively, 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 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:
DECEMBER 31,
------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------- ------------------- ------------------- ------------------ -------------------
IN YEARS (IN THOUSANDS)
------------------------------------------------------------------------------------------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
-------- --------- -------- --------- -------- --------- ------- --------- -------- ---------
Less than One $ 16,442 $ 76,509 $ 19,797 $ 49,796 $ 3,877 $ 44,896 $ 2,382 $ 34,108 $ 2,604 $ 8,188
One to Five 65,083 50,931 39,081 50,708 12,922 29,567 4,128 13,645 3,615 16,224
Over Five 103,242 144,136 88,086 139,570 94,568 110,215 85,390 110,914 105,491 116,322
-------- --------- -------- --------- -------- --------- ------- --------- -------- ---------
Total $184,767 $ 271,576 $146,964 $ 240,074 $111,367 $ 184,678 $91,900 $ 158,667 $111,710 $ 140,734
======================================================================================================
|
DISTRIBUTION OF LOANS
The distribution of total loans by type of loan, as of the dates indicated, is shown in the following table:
DECEMBER 31,
-----------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
LOAN LOAN LOAN LOAN LOAN
BALANCE BALANCE BALANCE BALANCE BALANCE
--------- --------- --------- --------- ---------
Commercial $ 53,725 $ 44,957 $ 30,893 $ 24,592 $ 19,302
Real estate 135,902 116,938 85,357 71,010 47,456
SBA 29,712 37,088 35,265 30,698 40,961
Manufactured housing 142,804 101,336 66,423 39,073 28,199
Other installment 8,301 11,355 8,645 5,770 7,047
Securitized 10,104 14,858 23,474 37,386 66,195
Held for sale 75,795 60,506 45,988 42,038 43,284
--------- --------- --------- --------- ---------
Gross Loans 456,343 387,038 296,045 250,567 252,444
Less:
Allowance for loan losses 3,926 3,954 3,894 4,675 5,950
Deferred fees/costs 43 181 (103) 69 (318)
Discount on SBA loans 802 1,386 1,748 1,549 956
--------- --------- --------- --------- ---------
Net Loans $451,572 $381,517 $290,506 $244,274 $245,856
========= ========= ========= ========= =========
Percentage to Gross Loans:
Commercial 11.8% 11.6% 10.5% 9.8% 7.6%
Real estate 29.8 30.2 28.8 28.3 18.8
SBA 6.5 9.6 11.9 12.3 16.3
Manufactured housing 31.3 26.2 22.5 15.6 11.2
Other installment 1.8 2.9 2.9 2.3 2.8
Securitized 2.2 3.9 7.9 14.9 26.2
Held for sale 16.6 15.6 15.5 16.8 17.1
--------- --------- --------- --------- ---------
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 and construction loans are primarily made for the purpose of purchasing, improving or constructing single-family residences, commercial or industrial properties.
A substantial portion of CWB's real estate construction loans are first and second trust deeds on the construction of owner-occupied single family dwellings. CWB also makes real estate construction loans on 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 ("B&I"). 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 principal balance of each loan it 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 CWB 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 loans consist of first and second mortgage loans secured by trust deeds on one to four family homes. These loans are made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction, home improvement, or 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 located in mobile home parks along the California coast and in the Sacramento area. 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. The trusts then sold bonds to third party investors that were secured by the transferred loans. In November 2005, the Company paid off the bonds and the trusts were dissolved. 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.
LOAN COMMITMENTS OUTSTANDING
Total loan commitments outstanding at the dates indicated are summarized below:
DECEMBER 31,
-----------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial $ 24,431 $ 22,327 $ 19,010 $ 13,867 $ 11,370
Real estate 18,839 19,323 7,618 11,676 7,664
SBA 5,508 3,408 6,107 9,531 8,675
Installment loans 9,662 9,330 8,966 5,112 2,402
Standby letters of credit 847 1,499 403 522 380
--------- --------- --------- --------- ---------
Total commitments $ 59,287 $ 55,887 $ 42,104 $ 40,708 $ 30,491
========= ========= ========= ========= =========
|
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, construction and SBA loans comprised over 10% of the Company's loan portfolio as of December 31, 2006 and 2005, but consisted of diverse borrowers.
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Average gross loans, held for investment, $ 348,161 $ 288,049 $ 230,533 $ 202,563 $ 218,317
Gross loans at end of year, held for investment 379,703 324,965 248,412 206,912 208,522
Allowance for loan losses, beginning of year $ 3,954 $ 3,894 $ 4,676 $ 5,950 $ 8,275
Loans charged off:
Commercial 459 228 185 445 1
Real estate - 8 274 471 2,474
Installment - - - 3 -
Short-term consumer - - - 902 3,162
Securitized 341 831 1,356 2,512 4,012
------------ ------------ ------------ ------------ ------------
Total 800 1,067 1,815 4,333 9,649
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged off
Commercial 93 20 31 88 71
Real estate - 89 44 42 396
Short-term consumer - - - 672 1,392
Securitized 190 452 540 588 566
------------ ------------ ------------ ------------ ------------
Total 283 561 615 1,390 2,425
------------ ------------ ------------ ------------ ------------
Net loans charged off 517 506 1,200 2,943 7,224
Provision for loan losses 489 566 418 1,669 4,899
------------ ------------ ------------ ------------ ------------
Allowance for loan losses, end of year $ 3,926 $ 3,954 $ 3,894 $ 4,676 $ 5,950
============ ============ ============ ============ ============
Ratios:
Net loan charge-offs to average loans 0.1% 0.2% 0.5% 1.5% 3.3%
Net loan charge-offs to loans at end of period 0.1% 0.2% 0.5% 1.4% 3.5%
Allowance for loan losses to loans held for
investment at end of period 1.0% 1.2% 1.6% 2.3% 2.9%
Net loan charge-offs to allowance for loan
losses at beginning of period 13.1% 13.0% 25.7% 49.5% 87.3%
Net loan charge-offs to provision for loan
losses 105.7% 89.4% 287.1% 176.3% 147.5%
|
The following table summarizes the allowance for loan losses:
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------ ------------------ ------------------ ------------------ ------------------
(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 $ 1,365 22.6% $ 1,409 24.6% $ 1,388 24.6% $ 1,550 27.0% $ 1,874 26.6%
Manufactured
housing 786 31.3% 563 26.2% 465 22.5% 372 15.6% 272 11.2%
Securitized 351 2.2% 628 3.9% 1,109 7.9% 2,024 14.9% 2,571 26.2%
All other loans 1,424 43.9% 1,354 45.3% 932 45.0% 730 42.5% 1,233 36.0%
--------------------------------------------------------------------------------------------------
Total $ 3,926 100% $ 3,954 100% $ 3,894 100% $ 4,676 100% $ 5,950 100%
==================================================================================================
|
Total allowance for loan losses ("ALL") decreased slightly by $28,000 from December 31, 2005 to December 31, 2006. The decrease was primarily due to the net effect of a decrease in ALL for the securitized loans of $277,000 partially offset by an increase in allowance for the manufactured housing portfolio of $223,000 due to portfolio growth. Net loans charged-offs were $517,000 in 2006, $506,000 in 2005 and $1.2 million in 2004.
The Company recorded $489,000 as a provision for loan losses in 2006, $566,000 in 2005 and $418,000 in 2004. The decline is primarily due to the continued decrease in the balance of 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 December 31, 2006.
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,
---------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 63 $ 77 $ 49 $ 235 $ 422
Impaired loans with specific valuation allowances 5,145 3,406 3,926 6,843 7,971
Specific valuation allowance related to impaired loans (641) (473) (425) (640) (1,127)
----------- ----------- ----------- ----------- -----------
Impaired loans, net $ 4,567 $ 3,010 $ 3,550 $ 6,438 $ 7,266
=========== =========== =========== =========== ===========
Average investment in impaired loans $ 4,074 $ 3,716 $ 5,137 $ 6,584 $ 7,565
=========== =========== =========== =========== ===========
|
The following schedule reflects recorded investment at the dates indicated in
certain types of loans:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(IN THOUSANDS)
Nonaccrual loans $ 7,417 $ 6,797 $ 8,350 $ 7,174 $13,965
SBA guaranteed portion of loans included above (4,256) (4,332) (5,287) (4,106) (8,143)
-------- -------- -------- -------- --------
Nonaccrual loans, net $ 3,161 $ 2,465 $ 3,063 $ 3,068 $ 5,822
======== ======== ======== ======== ========
Troubled debt restructured loans $ 68 $ 75 $ 124 $ 193 $ 829
Loans 30 through 90 days past due with interest accruing 2,463 1,792 1,804 3,907 5,122
Interest income recognized on impaired loans $ 242 $ 141 $ 103 $ 277 $ 190
Interest foregone on nonaccrual loans and troubled debt
restructured loans outstanding 488 253 208 216 1,263
-------- -------- -------- -------- --------
Gross interest income on impaired loans $ 730 $ 394 $ 311 $ 493 $ 1,453
======== ======== ======== ======== ========
|
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. 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. Total net nonaccrual loans increased by $696,000, or 28.2%, from 2005 to 2006.
Total net impaired loans increased by $1.6 million, or 51.7%, as of December 31, 2006 compared to December 31, 2005. This net increase included additions of $2.8 million, impaired loans transferred to OREO of $472,000, charge-offs of $290,000 and payments received from borrowers.
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, 2006, 2005 and 2004, are considered impaired. Total TDRs decreased slightly from $75,000 as of December 31, 2005 to $68,000 as of December 31, 2006.
The following table summarizes the carrying values of the Company's investment securities for the years indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Available-for-sale securities (IN THOUSANDS)
------------------------------
U.S. Government and agency $ 13,184 $ 15,148 $ 15,221
Other (1) 8,913 7,471 7,037
----------- ----------- -----------
Total $ 22,097 $ 22,619 $ 22,258
=========== =========== ===========
|
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Held-to-maturity securities (IN THOUSANDS)
----------------------------
U.S. Government and agency $ 200 $ 200 $ 200
Other (1) 10,335 8,477 5,894
----------- ----------- -----------
Total $ 10,535 $ 8,677 $ 6,094
=========== =========== ===========
|
At December 31, 2006, $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 $32.4 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, 2006.
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 $ 13,184 4.2% $ 1,987 4.50% $ 11,197 4.1% $ - -
Other (1) 8,913 4.4% - - 8,913 4.4% - -
----------- ----------- ----------- -----------
Total $ 22,097 4.3% $ 1,987 4.50% $ 20,110 4.2% $ - -
=========== =========== =========== ===========
Held-to-maturity securities
------------------------------
U.S. Government
And agency $ 200 3.6% $ 200 3.6% $ - - $ - -
Other (1) 10,335 4.7% - - 6,062 4.3% 4,273 5.4%
----------- ----------- ----------- -----------
Total $ 10,535 4.7% $ 200 3.6% $ 6,062 4.3% $ 4,273 5.4%
=========== =========== =========== ===========
|
(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, 2006 and 2005, the Company held interest-only strips ("I/O") in the amount of $1.3 million and $1.9 million, respectively. There have been no additions to the 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 loan sales of $2.0 million and $2.8 million at December 31, 2006 and 2005, respectively. 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, 2006 and 2005, all of the servicing rights were related to SBA loan sales.
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.
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, 2006
CWBC (Consolidated) $ 50,692 $ 46,766 $ 442,571 $ 507,718 11.45% 10.57% 9.21%
CWB 46,842 42,916 442,624 503,800 10.58 9.70 8.52
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
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.
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 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.
CWB has a 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, 2006 include $44.5 million borrowed at variable rates which adjust to the current LIBOR rate either monthly or quarterly and $50.5 million borrowed at fixed rates. At December 31, 2006, CWB had pledged to FHLB, securities of $32.4 million at carrying value and loans of $160.2 million, and had $19 million available for additional borrowing. At December 31, 2005, CWB had $62.8 million of loans and $31.1 million of securities pledged as collateral and outstanding advances of $63.5 million.
CWB 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.
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 $23.6 million in 2006 and the Company utilized more wholesale funding sources to help fund loan growth. The liquidity ratio of the Company was 21% at December 31, 2006 compared to 22% at December 31, 2005. 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.
- 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.
The following table shows the Company's average deposits for each of the periods indicated below:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2006 2005 2004
------------------- ------------------- -------------------
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand $ 34,555 9.9% $ 34,758 12.0% $ 38,760 15.6%
Interest-bearing demand 58,569 16.7% 87,587 30.1% 50,785 20.4%
Savings 15,184 4.3% 16,479 5.7% 17,810 7.2%
TCD's of $100,000 or more 138,897 39.7% 62,545 21.5% 31,851 12.8%
Other TCD's 102,604 29.4% 89,304 30.7% 109,457 44.0%
-------- --------- -------- --------- -------- ---------
Total Deposits $349,809 100.0% $290,673 100.0% $248,663 100.0%
======== ========= ======== ========= ======== =========
|
The maturities of time certificates of deposit ("TCD's") were as follows:
DECEMBER 31,
--------------------------------------------------
2006 2005
------------------------ ------------------------
TCD'S OVER OTHER TCD'S OVER OTHER
$100,000 TCD'S $100,000 TCD'S
----------- ----------- ----------- -----------
(IN THOUSANDS)
Less than three months $ 46,037 $ 31,347 $ 14,968 $ 18,872
Over three months through six months 35,161 21,497 17,947 19,395
Over six months through twelve months 44,666 28,516 48,575 38,822
Over twelve months through five years 48,802 15,191 28,045 26,451
----------- ----------- ----------- -----------
Total $ 174,666 $ 96,551 $ 109,535 $ 103,540
=========== =========== =========== ===========
|
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 $33.6 million during 2006 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 necessary in a short timeframe; however, these funds are more expensive as there is substantial competition for these deposits.
The Company has contractual obligations that include long-term debt, deposits, operating leases and purchase obligations for service providers. The following table is a summary of those obligations at December 31, 2006:
OVER 5
TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
-------- --------- ---------- ---------- -------
(IN THOUSANDS)
FHLB Borrowing $ 95,000 $ 34,000 $ 53,000 $ 8,000 $ -
Time certificates of deposits 271,217 207,223 60,261 3,733 -
Operating lease obligations 4,172 1,004 1,592 1,451 125
Purchase obligations for service providers 1,597 574 876 147 -
-------- --------- ---------- ---------- -------
Total $371,986 $ 242,801 $ 115,729 $ 13,331 $ 125
======== ========= ========== ========== =======
|
SUPERVISION AND REGULATION
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.
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 Global Market. Consequently, CWBC is subject to supervision and regulation by the SEC and compliance with Nasdaq listing requirements.
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
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
Global Market has adopted corporate governance rules intended to allow
shareholders to more easily and effectively monitor the performance of companies
and directors. The 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.
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.
Adequately Well CWBC
=============== =============== ===============
Capitalized Capitalized CWB (consolidated)
=============== =============== =============== ===============
(greater than or equal to)
================================
Total risk-based capital 8.00% 10.00% % %
================================ =============== =============== = =
Tier 1 risk-based capital ratio 4.00% 6.00% % %
================================ =============== =============== = =
Tier 1 leverage capital ratio 4.00% 5.00% % %
================================ =============== =============== = =
|
As of December 31, 2006, 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.
FDIC INSURANCE AND INSURANCE ASSESSMENTS. Banks and thrifts have historically paid varying amounts of premiums for federal deposit insurance depending upon a risk-based system which evaluated the institution's regulatory and capital adequacy ratings. The FDIC operated two separate insurance funds, the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF").
As a result of the Federal Deposit Insurance Reform Act of 2005 (the "FDI Reform Act") and regulations adopted by the FDIC effective as of November 2, 2006: (i) the BIF and the SAIF have been merged into the Deposit Insurance Fund (the "DIF"); (ii) the $100,000 insurance level has been indexed to reflect inflation (the first adjustment for inflation will be effective January 1, 2011 and thereafter adjustments will occur every 5 years); (iii) deposit insurance coverage for retirement accounts has been increased to $250,000, and will also be subject to adjustment every five years; (iv) banks that historically have capitalized the BIF are entitled to a one-time credit which can be used to off-set premiums otherwise due (this addresses the fact that institutions that have grown rapidly have not had to pay deposit premiums); (v) a cap on the level of the DIF has been imposed and dividends will be paid when the DIF grows beyond a specified threshold; and (vi) the previous risk-based system for assessing premiums has been revised.
Prior to January 1, 2007, the FDIC utilized a risk-based assessment system to set semi-annual insurance premium assessments which categorized banks into risk categories based on two criteria, (1) three capital levels and (2) three supervisory ratings, creating a nine-cell matrix for risk-based assessments. The new assessment system consolidates the previous nine risk categories into four and names them Risk Categories I, II, III and IV. The four new categories will continue to be defined based upon supervisory and capital evaluations. In practice, the subgroup evaluations will generally be based on an institution's composite CAMELS rating assigned to it by the institution's federal supervisor at the end of its examination. The CAMELS rating system is based upon an evaluation of the five critical elements of an institution's operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution's performance. The consolidation creates four new Risk Categories as shown in following table:
--------------------------------------------------------
SUPERVISORY SUBGROUP
----------------------------
CAPITAL GROUP A B C
--------------------------------------------------------
1. WELL CAPITALIZED I III
--------------------------------------------------------
2. ADEQUATELY CAPITALIZED II
--------------------------------------------------------
3. UNDERCAPITALIZED III IV
--------------------------------------------------------
|
Within Risk Category I, the new assessment system combines supervisory ratings with other risk measures to differentiate risk. For most institutions, the new assessment system combines CAMELS component ratings with financial ratios to determine an institution's assessment rate. For large institutions that have long-term debt issuer
ratings, the new assessment system differentiates risk by combining CAMELS component ratings with those ratings. For large institutions within Risk Category I, initial assessment rate determinations may be modified within limits upon review of additional relevant information. The new assessment system assess those within Risk Category I that pose the least risk a minimum assessment rate and those that pose the greatest risk a maximum assessment rate that is two basis points higher. An institution that poses an intermediate risk within Risk Category I will be charged a rate between the minimum and maximum that will vary incrementally by institution.
Effective January 1, 2007, the actual assessment rates under this new assessment system are summarized below, expressed in terms of cents per $100 in insured deposits:
-------------------------------------------------
RISK CATEGORY
-------------------------------------------------
I*
------------------ II III IV
MINIMUM MAXIMUM
-------------------------------------------------
5 7 10 28 43
-------------------------------------------------
|
* Rates for institutions that do no pay the minimum or maximum rate vary between these rates.
The FDIC may terminate its insurance of deposits if it finds that the Bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
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 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, 2006.
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.
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
------------------ ------------------
2006 2005 2006 2005
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Anticipated impact over the next twelve months:
Net interest income (NII) $ 1,495 $ 1,869 $(1,542) $(1,933)
6.5% 9.4% (6.7%) (9.7%)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Economic value of equity (EVE) $(6,573) $(1,916) $ 5,656 $ 239
(13.3%) (3.7%) 11.4% .5%
----------------------------------------------------------------------------------------
|
For further discussion of interest rate risk, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk."
The Company's consolidated financial statements begin on page F-1.
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, 2006 and 2005, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP Los Angeles, CA March 16, 2007 |
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
2006 2005
--------- ---------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and due from banks $ 4,190 $ 4,830
Federal funds sold 7,153 8,902
--------- ---------
Cash and cash equivalents 11,343 13,732
Time deposits in other financial institutions 536 532
Investment securities available-for-sale, at fair value; amortized cost of
$22,340 December 31, 2006 and $22,833 December 31, 2005 22,097 22,619
Investment securities held-to-maturity, at amortized cost; fair value of
$10,437 at December 31, 2006 and $8,619 at December 31, 2005 10,535 8,677
Federal Home Loan Bank stock, at cost 4,465 2,985
Federal Reserve Bank stock, at cost 812 812
Interest only strips, at fair value 1,314 1,888
Loans:
Held for sale, at lower of cost or fair value 75,795 60,506
Held for investment, net of allowance for loan losses of $3,926 at December 31,
2006 and $3,954 at December 31, 2005 375,777 321,011
--------- ---------
Total loans 451,572 381,517
Servicing rights 1,968 2,845
Other real estate owned, net 356 7
Premises and equipment, net 2,802 2,146
Other assets 8,815 6,594
--------- ---------
TOTAL ASSETS $516,615 $444,354
========= =========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 33,033 $ 34,251
Interest-bearing demand 49,975 70,453
Savings 14,522 16,459
Time certificates of $100,000 or more 174,666 109,535
Other time certificates 96,551 103,540
--------- ---------
Total deposits 368,747 334,238
Federal Home Loan Bank advances 95,000 63,500
Other liabilities 6,048 4,381
--------- ---------
Total liabilities 469,795 402,119
--------- ---------
Commitments and contingencies-See Note 15
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 5,814,568 shares issued and
outstanding at December 31, 2006 and 5,751,313 at December 31, 2005 30,794 30,190
Retained earnings 16,169 12,171
Accumulated other comprehensive loss (143) (126)
--------- ---------
Total stockholders' equity 46,820 42,235
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $516,615 $444,354
========= =========
|
See accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
INTEREST INCOME
Loans $37,186 $28,276 $20,565
Investment securities 1,576 1,274 979
Other 541 228 301
------- ------- -------
Total interest income 39,303 29,778 21,845
------- ------- -------
INTEREST EXPENSE
Deposits 13,225 7,701 5,016
Bonds payable and other borrowings 3,579 2,646 2,829
------- ------- -------
Total interest expense 16,804 10,347 7,845
------- ------- -------
NET INTEREST INCOME 22,499 19,431 14,000
Provision for loan losses 489 566 418
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,010 18,865 13,582
NON-INTEREST INCOME
Other loan fees 2,830 2,906 3,776
Gains from loan sales, net 1,499 2,499 3,981
Document processing fees, net 816 823 817
Loan servicing fees, net 259 575 1,416
Service charges 364 318 381
Other 204 189 91
------- ------- -------
Total non-interest income 5,972 7,310 10,462
------- ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 13,011 11,993 11,851
Occupancy and equipment expenses 1,855 1,840 1,596
Professional services 953 1,022 940
Depreciation 499 543 532
Other 2,514 2,762 2,602
------- ------- -------
Total non-interest expenses 18,832 18,160 17,521
------- ------- -------
Income before provision for income taxes 9,150 8,015 6,523
Provision for income taxes 3,822 2,373 2,688
------- ------- -------
NET INCOME $ 5,328 $ 5,642 $ 3,835
======= ======= =======
INCOME PER SHARE - BASIC $ 0.92 $ 0.98 $ 0.67
INCOME PER SHARE - DILUTED $ 0.89 $ 0.95 $ 0.65
Basic weighted average number of common shares outstanding 5,785 5,744 5,718
Diluted weighted average number of common shares outstanding 6,001 5,931 5,867
|
See accompanying notes.
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, 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
Exercise of stock options 64 387 387
Stock option expense 163 163
Tax benefit from stock options 54 54
Comprehensive income:
Net income 5,328 5,328
Change in unrealized loss on
securities available-for-sale, net (17) (17)
---------------
Comprehensive income 5,311
Cash dividends paid
($0.23 per share) (1,330) (1,330)
------ ------- ---------- --------------- ---------------
BALANCES AT
DECEMBER 31, 2006 5,815 $30,794 $ 16,169 $ (143) $ 46,820
====== ======= ========== =============== ===============
|
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2006 2005 2004
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,328 $ 5,642 $ 3,835
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 489 566 418
Depreciation and amortization 499 746 1,270
Deferred income taxes (177) (220) (278)
Stock-based compensation 163 - -
Net amortization of discounts and premiums for investment securities (5) 12 19
Gains on:
Sale of other real estate owned 19 49 (2)
Sale of loans held for sale (1,499) (2,499) (3,981)
Loan originated for sale and principal collections, net 369 306 3,198
Changes in:
Fair value of interest only strips, net of accretion 574 827 833
Servicing rights, net of amortization 877 413 (759)
Other assets (2,193) (862) 1,562
Other liabilities 1,881 (360) 1,059
--------- --------- ---------
Net cash provided by operating activities 6,325 4,620 7,174
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (3,953) (4,545) (3,179)
Purchase of available-for-sale securities (3,976) (2,113) (10,232)
Purchase of Federal Home Loan Bank stock (1,319) (1,712) (1,200)
Federal Home Loan Bank stock dividend (161) (73) -
Principal pay downs and maturities of available-for-sale securities 4,474 1,763 3,413
Principal pay downs and maturities of held-to-maturity securities 2,096 1,939 2,095
Loan originations and principal collections, net (69,886) (89,647) (45,956)
Proceeds from sale of other real estate owned 104 194 529
Net (increase) decrease in time deposits in other financial institutions (4) 115 145
Purchase of premises and equipment, net (1,155) (926) (663)
--------- --------- ---------
Net cash used in investing activities (73,780) (95,005) (55,048)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 387 119 146
Cash dividends paid on common stock (1,330) (1,092) (686)
Net (decrease) increase in demand deposits and savings accounts (23,633) (30,986) 56,058
Net increase in time certificates of deposit 58,142 80,656 3,655
Proceeds from securities sold under agreements to repurchase - - 13,672
Repayments of securities sold under agreements to repurchase - (13,672) (14,394)
Proceeds from Federal Home Loan Bank advances 41,500 56,500 14,000
Repayment of Federal Home Loan Bank advances (10,000) (3,500) (3,500)
Repayments of bonds payable in connection with securitized loans - (14,113) (12,928)
--------- --------- ---------
Net cash provided by financing activities 65,066 73,912 56,023
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,389) (16,473) 8,149
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,732 30,205 22,056
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,343 $ 13,732 $ 30,205
========= ========= =========
|
See accompanying notes.
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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 2004 and 2005 financial statements have been reclassified to be comparable with classifications in 2006.
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, 2006 and 2005, 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, 2006 and 2005, 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 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 Company has not created any new I/O strips since 2002.
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.
LOANS HELD FOR CITYPLACESALE - 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, 2006, 2005 and 2004.
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, 2006 and 2005.
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 two methodologies; a 12-month historical trend analysis and by delinquency information. The highest requirement of the two 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.
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 recorded in 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 3 - 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 - On January 1, 2006, the Company changed its accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Share-Based Payment (Revised 2004) ("SFAS No. 123(R)"). See Note 8 - Stock-Based Compensation for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS - In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156, "Accounting for Servicing of Financial Assets, an amendment of Statement No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and liabilities. SFAS No. 156 primarily requires companies to initially record separately recognized servicing rights at fair value, allows companies to choose between two measurement methods and provides additional disclosure requirements. SFAS No. 156 will be effective as of January 1, 2007 and the Company is currently assessing the impact that SFAS No. 156 may have on its financial statements.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet for the position to be recognized within the financial statements and provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions. The Company must adopt the interpretation by January 1, 2007. Management does not expect the adoption of this new interpretation will have a material impact on the Company's financial position, results of operations or cash flows.
In September 2006, FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 will be effective for fiscal years ending after November 15, 2007. The Company has not started to assess the impact of SFAS No. 157.
In October 2006, FASB issued Statement No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 amends SFAS Nos. 87, 88 and 123(R) with respect to the accounting for defined benefit pension and other postretirement plans. SFAS No. 158 primarily requires companies to (a) recognize in its statement of financial position an asset for the defined benefit postretirement plan's overfunded status or a liability for a plan's underfunded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its
funded status as of the end of the employer's fiscal year, and, (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The disclosure requirements of SFAS No. 158 will be effective for fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations will be effective for fiscal years ending after December 15, 2008. The adoption of SFAS No. 158 is not anticipated to have a material impact on the Company's financial position or results of operations.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is as follows:
DECEMBER 31, 2006
----------------- (IN THOUSANDS)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
Available-for-sale securities COST GAINS LOSSES VALUE
------------------------------------ ---------- ----------- ------------ -------
U.S. Government and agency $ 13,320 $ - $ (136) $13,184
Other securities (1) 9,020 - (107) 8,913
---------- ----------- ------------ -------
Total available-for-sale securities $ 22,340 $ - $ (243) $22,097
========== =========== ============ =======
Held-to-maturity securities
------------------------------------
U.S. Government and agency $ 200 $ - $ (4) $ 196
Other securities (1) 10,335 - (94) 10,241
---------- ----------- ------------ -------
Total held-to-maturity securities $ 10,535 $ - $ (98) $10,437
========== =========== ============ =======
|
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 (1) 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 (1) 8,477 - (54) 8,423
---------- ----------- ------------ -------
Total held-to-maturity securities $ 8,677 $ - $ (58) $ 8,619
========== =========== ============ =======
|
(1) Consists of pass-through mortgage backed securities and collateralized mortgage obligations.
At December 31, 2006, $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 $32,432,000 at carrying value was pledged to the Federal Home Loan Bank, San Francisco, as collateral for current and future advances.
The maturity periods and weighted average yields of investment securities at December 31, 2006 are as follows:
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 $ 13,184 4.2% $ 1,987 4.50% $ 11,197 4.1% $ - -
Other (1) 8,913 4.4% - - 8,913 4.4% - -
---------- ----------- ---------- -----------
Total AFS $ 22,097 4.3% $ 1,987 4.50% $ 20,110 4.2% $ - -
========== =========== ========== ===========
Held-to-maturity s securities
-----------------------------
U.S. Government
and agency $ 200 3.6% $ 200 3.6% $ - - $ - -
Other (1) 10,335 4.7% - - 6,062 4.3% 4,273 5.4%
---------- ----------- ---------- ----------
Total HTM $ 10,535 4.7% $ 200 3.6% $ 6,062 4.3% $ 4,273 5.4%
========== =========== ========== ==========
|
The following tables show all securities that are in an unrealized loss position and temporarily impaired as of:
DECEMBER 31, 2006 LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL
----------------------- ---------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------- ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
Available-for-sale securities
------------------------------------
U.S. Government and agency $ - $ - $ 13,184 $ 136 $ 13,184 $ 136
Other securities 1,203 15 4,493 102 5,696 117
---------- ----------- ---------- ----------- ---------- -----------
Total $ 1,203 $ 15 $ 17,677 $ 238 $ 18,880 $ 253
========== =========== ========== =========== ========== ===========
Held-to-maturity securities
------------------------------------
U.S. Government and agency $ - $ - $ 196 $ 4 $ 196 $ 4
Other securities 2,602 25 5,357 88 7,959 113
---------- ----------- ---------- ----------- ---------- -----------
Total $ 2,602 $ 25 $ 5,553 $ 92 $ 8,155 $ 117
========== =========== ========== =========== ========== ===========
|
DECEMBER 31, 2005 LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL
----------------------- ---------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------- ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
Available-for-sale securities
------------------------------------
U.S. Government and agency $ - $ - $ 15,148 $ 172 $ 15,148 $ 172
Other securities 3,078 21 2,865 27 5,943 48
---------- ----------- ---------- ----------- ---------- -----------
Total $ 3,078 $ 21 $ 18,013 $ 199 $ 21,091 $ 220
========== =========== ========== =========== ========== ===========
Held-to-maturity securities
------------------------------------
U.S. Government and agency $ - $ - $ 196 $ 4 $ 196 $ 4
Other securities 8,210 57 - - 8,210 57
---------- ----------- ---------- ----------- ---------- -----------
Total $ 8,210 $ 57 $ 196 $ 4 $ 8,406 $ 61
========== =========== ========== =========== ========== ===========
|
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company will receive full value for the securities. Furthermore, as of December 31, 2006 and 2005, also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2006 and 2005, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company's consolidated statements of income.
3. LOAN SALES AND SERVICING
SBA LOAN SALES - The Company occasionally sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis. 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, typically 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. 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, the servicing and I/O strips are analyzed for impairment.
The Company also periodically sells certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.
As of December 31, 2006 and December 31, 2005, the Company had approximately $73.6 million and $58.1 million, respectively, in SBA loans held for sale.
The following is a summary of activity in I/O Strips:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Balance, beginning of year $ 1,888 $ 2,715 $ 3,548
Valuation adjustment, net (574) (827) (833)
------------ ------------ ------------
Balance, end of year $ 1,314 $ 1,888 $ 2,715
============ ============ ============
|
The following is a summary of activity in Servicing Rights:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Balance, beginning of year $ 2,845 $ 3,258 $ 2,499
Additions through loan sales 158 524 1,259
Amortization (1,035) (937) (500)
------------ ------------ ------------
Balance, end of year $ 1,968 $ 2,845 $ 3,258
============ ============ ============
|
MORTGAGE LOAN SALES - From time to time, the Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers. In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor. This forward sale agreement requires delivery of the loan on a "best efforts" basis but does not obligate the Company to deliver if the mortgage loan does not fund.
The mortgage rate lock agreement and the forward sale agreement qualify as derivatives under SFAS No. 133, as amended. The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates. These derivative financial instruments are recorded at fair value if material. Although the Company does not attempt to qualify these transactions for the special hedge accounting afforded by SFAS No. 133, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge. At December 31, 2006 and December 31, 2005, the Company had $4.7 million and $8.1 million, respectively, in outstanding mortgage loan rate lock and forward sale commitments, the impact of which was not material to the Company's financial position or results of operations.
4. LOANS HELD FOR INVESTMENT
The composition of the Company's loans held for investment portfolio is as follows:
DECEMBER 31,
--------------------
2006 2005
--------- ---------
(IN THOUSANDS)
Commercial $ 53,725 $ 44,957
Real estate 135,902 116,938
SBA 29,712 37,088
Manufactured housing 142,804 101,336
Securitized 9,950 14,590
Other installment 8,301 11,355
--------- ---------
380,394 326,264
Less:
Allowance for loan losses 3,926 3,954
Deferred fees, net of costs 17 137
Purchased premiums (128) (224)
Discount on unguaranteed portion of SBA loans 802 1,386
--------- ---------
Loans held for investment, net $375,777 $321,011
========= =========
|
An analysis of the allowance for credit losses on loans held for investment is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Balance, beginning of year $ 3,954 $ 3,894 $ 4,676
Loans charged off (800) (1,068) (1,815)
Recoveries on loans previously charged off 283 562 615
------------ ------------ ------------
Net charge-offs (517) (506) (1,200)
Provision for loan losses 489 566 418
------------ ------------ ------------
Balance, end of year $ 3,926 $ 3,954 $ 3,894
============ ============ ============
|
As of December 31, 2006, the Company also had a $117,000 reserve for credit losses on undisbursed loans.
The recorded investment in loans that are considered to be impaired is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 63 $ 77 $ 49
Impaired loans with specific valuation allowances 5,145 3,406 3,926
Specific valuation allowance related to impaired loans (641) (473) (425)
------------ ------------ ------------
Impaired loans, net $ 4,567 $ 3,010 $ 3,550
============ ============ ============
Average investment in impaired loans $ 4,074 $ 3,716 $ 5,137
============ ============ ============
|
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Nonaccrual loans $ 7,417 $ 6,797 $ 8,350
SBA guaranteed portion of loans included above (4,256) (4,332) (5,287)
------------ ------------ ------------
Nonaccrual loans, net $ 3,161 $ 2,465 $ 3,063
============ ============ ============
Troubled debt restructured loans $ 68 $ 75 $ 124
Loans 30 through 90 days past due with interest accruing $ 2,463 $ 1,792 $ 1,804
Interest income recognized on impaired loans $ 242 $ 141 $ 103
Interest foregone on nonaccrual loans and troubled debt restructured
loans outstanding 488 253 208
------------ ------------ ------------
Gross interest income on impaired loans $ 730 $ 394 $ 311
============ ============ ============
|
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, construction and SBA loans comprised over 10% of the Company's loan portfolio as of December 31, 2006 and 2005, but consisted of diverse borrowers.
5. PREMISES AND EQUIPMENT
DECEMBER 31,
------------------
2006 2005
-------- --------
(IN THOUSANDS)
Furniture, fixtures and equipment $ 7,864 $ 7,045
Building and land 993 927
Leasehold improvements 1,424 1,219
Construction in progress 51 8
-------- --------
10,332 9,199
Less: accumulated depreciation and amortization (7,530) (7,053)
-------- --------
Premises and equipment, net $ 2,802 $ 2,146
======== ========
|
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, 2006 under all operating lease agreements are as follows:
(IN THOUSANDS)
2007 $ 1,004
2008 804
2009 788
2010 767
2011 684
Thereafter 125
---------------
Total $ 4,172
===============
|
Rent expense for the years ended December 31, 2006, 2005 and 2004, included in occupancy expense was $928,000, $820,000 and $724,000, respectively.
6. DEPOSITS
At December 31, 2006, the maturities of time certificates of deposits are as
follows:
(IN THOUSANDS)
2007 $ 207,223
2008 47,239
2009 13,022
2010 1,725
2011 2,008
---------------
Total $ 271,217
===============
|
7. BORROWINGS
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, 2006 include $44.5 million borrowed at variable rates which adjust to the current LIBOR rate either monthly or quarterly. At December 31, 2006, CWB had pledged to FHLB, securities of $32.4 million at carrying value and loans of $160.2 million, and had $19 million available for additional borrowing. At December 31, 2005, the CWB had $62.8 million of loans and $31.1 million of securities pledged as collateral and outstanding advances of $63.5 million.
Information related to advances from FHLB:
DECEMBER 31, 2006
--------------------------------------------------
FIXED VARIABLE
------------------- --------------------
INTEREST INTEREST
TOTAL AMOUNT RATES AMOUNT RATES
------- ------- ---------- ------- -----------
(DOLLARS IN THOUSANDS)
Due within one year $34,000 $ 3,000 3.28% $31,000 5.30%-5.32%
After one year but within three years 53,000 39,500 4.02-5.32 13,500 5.30-5.34
After three years but within five years 8,000 8,000 4.28-4.85 - -
------- ------- -------
Total $95,000 $50,500 $44,500
======= ======= =======
|
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 $63,500 $25,000 $38,500
======= ======= =======
|
Financial information pertaining to advances from FHLB:
2006 2005
----------- -----------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of the year 4.98% 4.14%
Weighted average interest rate during the year 4.80% 3.48%
Average balance of advances from FHLB $ 74,603 $ 42,081
Maximum amount outstanding at any month end 95,000 63,500
|
The total interest expense on advances from FHLB was $3,579,000 for 2006 and $1,464,000 for 2005.
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, 2006 and 2005.
8. STOCK-BASED COMPENSATION
Prior to January 1, 2006, employee compensation expense under stock option plans was reported only if options were granted below market price at grant date in accordance with the intrinsic value method of accounting. Because the exercise price of the Company's employee stock options always equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized on options granted. As stated in Note 1 - Significant Accounting Policies, the Company adopted the provisions of SFAS No. 123R ("123R") on January 1, 2006. 123R eliminated the ability to account for stock-based compensation using the intrinsic value method and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant. The Company transitioned to the fair-value based accounting for stock-based compensation using a modified version of prospective application (MPA). Under MPA, as it is applicable to the Company, 123R applies to new awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that were outstanding as of January 1, 2006 is recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of 123R. The attribution of compensation cost for those earlier awards is based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not previously adopt the fair value accounting method for stock-based employee compensation.
The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. One such assumption, expected volatility, can have a significant impact on stock option valuation. In developing this assumption, the Company relied on historical volatility using both company specific and industry information. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee
stock options granted but are not considered by the model. Accordingly, management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value.
As a result of applying the provisions of 123R for the year ended December 31, 2006, the Company recognized stock-based compensation expense of $163,000.
For the year ended December 31, 2006, 30,500 stock options were granted at a weighted-average fair value of $5.53 per share. Stock-based compensation, net of forfeitures, is recognized ratably over the requisite service period for all awards. As of December 31, 2006, estimated future stock-based compensation expense related to unvested stock options totaled $435,000. The weighted-average period over which this unrecognized expense is expected to be recognized is 1.67 years.
The following pro forma information presents the net income and earnings per share for the years ended December 31, 2005 and 2004 as if the fair value method of 123R had been used to measure compensation cost for stock-based compensation plans. For purposes of these pro forma disclosures, the estimated fair value of stock options and non-vested stock awards is amortized to expense over the related vesting periods.
YEAR ENDED DECEMBER 31,
----------------------------------------
2005 2004
------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Income:
As reported $ 5,642 $ 3,835
Pro forma 5,537 3,664
Income per share - basic
As reported .98 .67
Pro forma .96 .64
Income per share - diluted
As reported .95 .65
Pro forma .93 .62
|
The fair value of each stock option grant under the Company's stock option plan during 2006, 2005 and 2004 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Annual dividend yield 1.6% 1.6% 1.7%
Expected volatility 31.7% 33.8% 35.7%
Risk free interest rate 4.7% 4.2% 4.2%
Expected life (in years) 6.8 6.8 6.8
|
9. STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005 2004
---------- ---------- ----------
(IN THOUSANDS)
Basic weighted average shares outstanding 5,785 5,744 5,718
Dilutive effect of stock options 216 187 149
---------- ---------- ----------
Diluted weighted average shares outstanding 6,001 5,931 5,867
========== ========== ==========
|
As of December 31, 2006, the Company had two stock options plans, the Community West Bancshares 1997 Stock Option Plan and the Community West Bancshares 2006 Stock Option Plan. The 1997 plan expired on January 23, 2007. As of December 31, 2006, 833,851 options were available for future grant. Of the total options available for future grant, 349,351 are associated with the 1997 plan and 484,500 with the 2006 plan. As of December 31, 2006, options were outstanding at prices ranging from $3.63 to $15.99 per share with 315,787 options fully vested. As of December 31, 2005, options were outstanding at prices ranging from $3.63 to $14.25 per share with 317,062 options vested and 351,151 options available
for future grant. The average life of the outstanding options was approximately 6.8 years as of December 31, 2006.
Stock option activity is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2006 2005 2004
WEIGHTED WEIGHTED WEIGHTED
2006 AVERAGE 2005 AVERAGE 2004 AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total options as of January 1, 543 $ 7.27 547 $ 6.75 467 $ 6.02
Granted 30 15.58 38 13.30 151 9.10
Canceled (13) 9.41 (21) 6.64 (48) 7.22
Exercised (63) 6.11 (21) 5.55 (23) 6.31
------- --------- ------- --------- ------- ---------
Total options at December 31, 497 $ 7.86 543 $ 7.27 547 $ 6.75
======= ========= ======= ========= ======= =========
Total vested options as of December 31, 316 $ 6.90 317 $ 6.61 278 $ 6.37
======= ========= ======= ========= ======= =========
|
Additional information of stock option activity is presented in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2006 2005 2004
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Intrinsic value of options exercised $ 559 $ 153 $ 73
Cash received from the exercise of options 387 119 146
Weighted-average grant-date fair value of options 5.53 4.60 3.50
|
A summary of the change in unvested stock option shares during the year is as follows:
WEIGHTED-
AVERAGE
NUMBER OF GRANT-DATE
UNVESTED STOCK OPTION SHARES OPTION SHARES FAIR VALUE
-------------------------------------------------- -------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Unvested stock options at January 1, 2006 226 $ 3.20
Granted 30 5.53
Vested (66) 3.01
Forfeited (9) 4.26
-------------- ------------
Total unvested stock options at December 31, 2006 181 $ 3.61
============== ============
|
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal $ 3,021 $ 1,815 $ 2,423
State 978 778 543
------------ ------------ ------------
3,999 2,593 2,966
Deferred:
Federal (214) (308) (441)
State 37 88 163
------------ ------------ ------------
(177) (220) (278)
------------ ------------ ------------
Total provision for income taxes $ 3,822 $ 2,373 $ 2,688
============ ============ ============
|
The federal income tax provision differs from the applicable statutory rate as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of federal benefit 7.2% 7.2% 7.2%
Other 0.6% (0.2)% 2.0%
Reserve change - (11.4)% (2.0)%
----------- ----------- -----------
41.8% 29.6% 41.2%
=========== =========== ===========
|
Significant components of the Company's net deferred taxes as of December 31 are as follows:
2006 2005
------------ ------------
Deferred tax assets: (IN THOUSANDS)
Depreciation $ 363 $ 370
Other 660 830
------------ ------------
1,023 1,200
------------ ------------
Deferred tax liabilities:
Deferred loan fees (635) (952)
Allowance for loan losses (651) (734)
Deferred loan costs (53) (92)
Other (288) (203)
------------ ------------
(1,627) (1,981)
------------ ------------
Net deferred taxes $ (604) $ (781)
============ ============
|
The effective income tax rate for 2005 is less than the effective income tax rate in other periods presented due to a tax benefit of $914,000, or $.16 per share (basic), related to the resolution of tax issues.
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,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(IN THOUSANDS)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 15,485 $ 9,373 $ 6,600
Cash paid for income taxes 4,260 3,512 2,497
Supplemental Disclosure of Noncash Investing Activity:
Transfers to other real estate owned 472 263 89
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 $169,000, $147,000 and $137,000, in 2006, 2005 and 2004, 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,
----------------------------------------------
2006 2005
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------- ----------------------
(IN THOUSANDS)
Assets:
Cash and cash equivalents $ 11,343 $ 11,343 $ 13,732 $ 13,732
Time deposits in other financial institutions 536 536 532 532
Federal Reserve and Federal Home Loan Bank stock 5,277 5,277 3,797 3,797
Investment securities 32,632 32,534 31,296 31,238
Interest-only strips 1,314 1,314 1,888 1,962
Net loans 451,572 451,265 381,517 384,704
Servicing rights 1,968 1,968 2,845 2,853
Liabilities:
Deposits (other than time deposits) 97,530 97,530 121,163 121,163
Time deposits 271,217 270,571 213,075 212,025
Federal Home Loan Bank advances 95,000 94,748 63,500 63,264
|
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.
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, 2006 and 2005. 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 Company's and CWB's actual capital amounts and ratios as of December 31, 2006 and 2005 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, 2006
------------------------
CWBC (Consolidated) $ 50,692 $ 46,766 $ 442,571 $ 507,718 11.45% 10.57% 9.21%
CWB 46,842 42,916 442,624 503,800 10.58 9.70 8.52
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
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
|
As of December 31, 2006 and 2005, 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
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, 2006 and 2005, the Company had commitments to extend credit of approximately $59.3 million and $55.9 million, respectively, including obligations to extend standby letters of credit of approximately $847,000 and $1.5 million, 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.
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 $112.8 million and $148.2 million at December 31, 2006 and 2005, 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 purchaser, any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or early default on such mortgage loans.
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. In connection with the agreement, the Company purchased a life insurance policy as an investment. The cash surrender value of the policy was $771,000 and $752,000 at December 31, 2006 and 2005, 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 2006 and 2005, the Company paid $50,000 to the former officer/director under the terms of this agreement. The accrued executive salary continuation liability was $427,000 and $451,000 at December 31, 2006 and 2005, 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 $196,000 and $192,000 at December 31, 2006 and 2005, respectively.
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 2006 2005
-------------- ------------ ------------
Assets (IN THOUSANDS)
Cash and equivalents $ 3,599 $ 3,555
Investment in subsidiary 43,112 38,861
Other assets 384 9
------------ ------------
Total assets $ 47,095 $ 42,425
============ ============
Liabilities and stockholders' equity
Other liabilities $ 132 $ 64
Common stock 30,794 30,190
Retained earnings 16,169 12,171
------------ ------------
Total stockholders equity 46,963 42,361
------------ ------------
Total liabilities and stockholders' equity $ 47,095 $ 42,425
============ ============
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YEAR ENDED DECEMBER 31,
----------------------------------------
INCOME STATEMENTS 2006 2005 2004
----------------- ------------ ------------ ------------
(IN THOUSANDS)
Total income $ 10 $ 82 $ 12
Total expense 346 220 188
Equity in undistributed subsidiaries: Net income from subsidiaries 5,581 4,809 3,933
------------ ------------ ------------
Income before income tax provision 5,245 4,671 3,757
Income tax (benefit) (83) (971) (78)
------------ ------------ ------------
Net income $ 5,328 $ 5,642 $ 3,835
============ ============ ============
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YEAR ENDED DECEMBER 31,
----------------------------------------
STATEMENTS OF CASH FLOWS 2006 2005 2004
------------------------ ------------ ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 5,328 $ 5,642 $ 3,835
Adjustments to reconcile net income to cash used in operating activities:
Equity in undistributed (income) from subsidiaries (5,581) (4,809) (3,933)
Stock-based compensation 163 - -
Net change in other liabilities 123 (818) (270)
Net change in other assets (376) 198 321
------------ ------------ ------------
Net cash provided by (used in) operating activities (343) 213 (47)
Cash flows from investing activities:
Net decrease in time deposits in other financial institutions - 99 198
Net dividends from and investments in subsidiaries 1,330 1,092 686
------------ ------------ ------------
Net cash provided by investing activities 1,330 1,191 884
Cash flows from financing activities:
Proceeds from issuance of common stock 387 170 146
Cash dividend payments to shareholders (1,330) (1,092) (686)
------------ ------------ ------------
Net cash (used in) provided by financing activities (943) (922) (540)
Net increase in cash and cash equivalents 44 482 297
Cash and cash equivalents at beginning of year 3,555 3,073 2,776
------------ ------------ ------------
Cash and cash equivalents, at end of year $ 3,599 $ 3,555 $ 3,073
============ ============ ============
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16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Income statement results on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 2006
-------------------------------------------
Q4 Q3 Q2 Q1 TOTALS
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest income $10,601 $10,276 $ 9,377 $ 9,049 $39,303
Interest expense 4,891 4,489 3,908 3,516 16,804
------- ------- ------- ------- -------
Net interest income 5,710 5,787 5,469 5,533 22,499
Provision for loan losses 152 12 144 181 489
------- ------- ------- ------- -------
Net interest income after provision for
loan losses 5,558 5,775 5,325 5,352 22,010
------- ------- ------- ------- -------
Non-interest income 1,613 1,453 1,579 1,327 5,972
Non-interest expenses 4,941 4,694 4,687 4,510 18,832
-------------------------------------------
Income before income taxes 2,230 2,534 2,217 2,169 9,150
Provision for income taxes 941 1,043 928 910 3,822
------- ------- ------- ------- -------
NET INCOME $ 1,289 $ 1,491 $ 1,289 $ 1,259 $ 5,328
======= ======= ======= ======= =======
Earnings per share - basic $ 0.22 $ 0.26 $ 0.22 $ 0.22 $ 0.92
Earnings per share - diluted 0.21 0.25 0.21 0.21 0.89
Cash dividends per common share $ 0.06 $ 0.06 $ 0.06 $ 0.05 $ 0.23
Weighted average shares:
Basic 5,805 5,787 5,781 5,767 5,785
Diluted 6,018 6,008 6,000 5,976 6,001
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YEAR ENDED DECEMBER 31, 2005
--------------------------------------------
Q4 Q3 Q2 Q1 TOTALS
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER 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 (benefit) 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
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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, 2006. 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, 2006, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
PART III
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.
Information concerning executive compensation is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors" contained in the Proxy Statement.
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.
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.
Information concerning principal accountant fees and services is incorporated herein by reference from the section entitled "Independent Auditors" contained in the Proxy Statement.
PART IV
(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, 2006 and 2005 F-2 Consolidated Income Statements for each of the three years in the period ended December 31, 2006 F-3 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2006 F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2006 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)
10.7 Consulting Agreement between the Goleta National Bank and
Llewellyn Stone (6)
10.9 Indemnification Agreement between the Company and Lynda Nahra,
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dated December 20, 2001 (6)
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)
10.20 Employment and Confidentiality Agreement, Goleta National Bank,
between the Company and Lynda J. Nahra dated April 23, 2003 (9)
10.21 Assistant Secretary's Certificate of Adoption of Amendment No. 1
|
to Community West Bancshares 1997 Stock Option Plan (10)
10.22 Community West Bancshares 2006 Stock Option Plan (11)
10.23 Community West Bancshares 2006 Stock Option Plan form of Stock Option Agreement (11)
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.
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(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.
(11) Incorporated by reference from Registrant's Definitive Proxy Statement (File No 000-23575) filed with the commission on April 13, 2006.
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: March 22, 2007 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 March 22, 2007 ------------------------- Chairman of the Board William R. Peeples /s/ Charles G. Baltuskonis Executive Vice President and March 22, 2007 -------------------------- Chief Financial Officer Charles G. Baltuskonis /s/ Robert H. Bartlein Director March 22, 2007 ---------------------- Robert H. Bartlein /s/ Jean W. Blois Director March 22, 2007 -------------------- Jean W. Blois /s/ John D. Illgen Director and Secretary March 22, 2007 ------------------- of the Board John D. Illgen /s/ Lynda J. Nahra Director, President and March 22, 2007 ------------------ Chief Executive Officer Lynda J. Nahra /s/ James R. Sims Jr. Director March 22, 2007 ----------------------- James R. Sims Jr. /s/ Kirk B. Stovesand Director March 22, 2007 ----------------------- Kirk B. Stovesand /s/ C. Richard Whiston Director March 22, 2007 ----------------------- C Richard Whiston |
EXHIBIT 10.22
COMMUNITY PLACEWEST BANCSHARES
2006 STOCK OPTION PLAN
Adopted by the Board of Directors on March 23, 2006
The purpose of the Community West Bancshares 2006 Stock Option Plan ("2006 Plan") is to strengthen Community West Bancshares ("Company") and those banks and corporations which are or hereafter become subsidiary corporations ("Subsidiary" or "Subsidiaries") by providing additional means of attracting and retaining competent managerial personnel and by providing to participating Directors, officers and key employees added incentive for high levels of performance and for unusual efforts to increase the earnings of the Company and any Subsidiaries. The 2006 Plan seeks to accomplish these purposes and achieve these results by providing a means whereby such Directors, officers and key employees may purchase shares of the Common Stock of the Company pursuant to Stock Options granted in accordance with this Plan.
Stock Options granted pursuant to this Plan are intended to be Incentive Stock Options or Non-Qualified Stock Options, as shall be determined and designated by the Stock Option Committee upon the grant of each Stock Option hereunder.
For the purposes of this Plan, the following terms shall have the following meanings:
3. Administration
the Stock Option Committee on matters referred to in this Section 3 shall be final and conclusive so long as the same are not inconsistent with the terms of this Plan.
Subject to adjustments as provided in Section 15 hereof, the maximum number of shares of Common Stock which may be issued upon exercise of all Stock Options granted under this Plan is limited to Five Hundred Thousand (500,000) in the aggregate. If any Stock Option shall be canceled, surrendered or expire for any reason without having been exercised in full, the unpurchased Option Shares represented thereby shall again be available for grants of Stock Options under this Plan.
Only Eligible Participants shall be eligible to receive grants of Stock Options under this Plan.
6. Grants of Stock Options
Agreement pertaining to the time of exercise of a Stock Option, or part thereof, or any other provision of this Plan, upon adoption by the requisite holders of the outstanding shares of Common Stock of any plan of dissolution, liquidation, reorganization, merger, consolidation or sale of all or substantially all of the assets of the Company to another corporation which would, upon consummation, result in termination of a Stock Option in accordance with Section 16 hereof, all Stock Options previously granted shall become immediately exercisable, whether or not vested under the Plan or Stock Option Agreement, as to all unexercised Option Shares for such period of time as may be determined by the Stock Option Committee, but in any event not less than thirty (30) days, on the condition that the terminating event described in Section 16 hereof is consummated. If such terminating event is not consummated or if the surviving entity (successor entity) assumes such obligation or gives appropriate substitution thereof, Stock Options granted pursuant to the Plan shall be exercisable in accordance with the terms of their respective Stock Option Agreements.
Each Stock Option shall, by its terms, be non- transferable by the Optionee other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee.
Nothing contained in this Plan (or in any Stock Option Agreement) shall obligate the Company or any Subsidiary to employ or continue to employ or remain affiliated with any Optionee or any Eligible Participant for any period of time or interfere in any way with the right of the Company or a Subsidiary to reduce or increase the Optionee's or Eligible Participant's compensation.
Except as provided in Section 12 hereof, if, for any reason other than disability or death, an Optionee ceases to be employed by or affiliated with the Company or a Subsidiary, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their grant, or ninety (90) days after the Optionee ceases to be so affiliated, whichever is earlier. During such period after cessation of affiliation, such Stock Options shall be exercisable only as to those increments, if any, which had become exercisable as of the date on which such Optionee ceased to be affiliated with the Company or the Subsidiary, and any Stock Options or increments which had not become exercisable as of such date shall expire automatically on such date.
If the Stock Option Agreement so provides and if an Optionee's employment by or affiliation with the Company or a Subsidiary is terminated for cause, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their grant, or thirty (30) days after termination for cause, whichever is earlier; provided, however, that the Stock Option Committee may, in its sole discretion, within thirty (30) days of such termination, reinstate such Stock Options by giving written notice of such reinstatement to the Optionee. In the event of such reinstatement, the Optionee may exercise the Stock Options only to such extent, for such time, and upon such terms and conditions as if the Optionee had ceased to be employed by or affiliated with the Company or a Subsidiary upon the date of such termination for a reason other than cause, disability or death. Termination for cause shall include, but shall not be limited to, termination for malfeasance or gross misfeasance in the performance of duties or conviction of illegal activity in connection therewith and, in any event, the determination of the Stock Option Committee with respect thereto shall be final and conclusive.
If an Optionee dies while employed by or affiliated with the Company or a Subsidiary, or during the ninety-day period referred to in Section 11 hereof, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their grant, or one (1) year after the date of such
death, whichever is earlier. After such death, but before such expiration, subject to the terms and provisions of the Plan and the related Stock Option Agreements, the person or persons to whom such Optionee's rights under the Stock Options shall have passed by will or by the applicable laws of descent and distribution, or the executor or administrator of the Optionee's estate, shall have the right to exercise such Stock Options to the extent that increments, if any, had become exercisable as of the date on which the Optionee died.
If an Optionee is disabled while employed by or affiliated with the Company or a Subsidiary or during the ninety (90) day period referred to in Section 11 hereof, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their grant, or one (1) year after the date such disability occurred, whichever is earlier. After such disability occurs, but before such expiration, the Optionee or the guardian or conservator of the Optionee's estate, as duly appointed by a court of competent jurisdiction, shall have the right to exercise such Stock Options to the extent that increments, if any, had become exercisable as of the date on which the Optionee became disabled or ceased to be employed by or affiliated with the Company or a Subsidiary as a result of the disability. An Optionee shall be deemed to be "disabled" if it shall appear to the Stock Option Committee, upon written certification delivered to the Company of a qualified licensed physician, that the Optionee has become permanently and totally unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in the Optionee's death, or which has lasted or can be expected to last for a continuous period of not less than 12 months.
If the outstanding shares of Common Stock of the Company are increased,
decreased or changed into or exchanged for a different number or kind of shares
or securities of the Company, through a reorganization, merger,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation, or otherwise, without consideration to the Company, an
appropriate and proportionate adjustment shall be made in the number and kind of
shares as to which Stock Options may be granted. A corresponding adjustment
changing the number or kind of Option Shares and the exercise prices per share
allocated to unexercised Stock Options, or portions thereof, which shall have
been granted prior to any such change, shall likewise be made. Such adjustments
shall be made without change in the total price applicable to the unexercised
portion of the Stock Option, but with a corresponding adjustment in the price
for each Option Share subject to the Stock Option. Adjustments under this
Section shall be made by the Stock Option Committee, whose determination as to
what adjustments shall be made, and the extent thereof, shall be final and
conclusive. No fractional shares of stock shall be issued or made available
under the Plan on account of such adjustments, and fractional share interests
shall be disregarded, except that they may be accumulated.
Upon consummation of a plan of dissolution or liquidation of the Company, or upon consummation of a plan of reorganization, merger or consolidation of the Company with one or more corporations, as a result of which the Company is not the surviving entity, or upon the sale of all or substantially all the assets of the Company to another corporation, the Plan shall automatically terminate and all Stock Options theretofore granted shall be terminated, unless provision is made in connection with such transaction for assumption of Stock Options theretofore granted (in which case such Stock Options shall be converted into Stock Options for a like number and kind for shares of the surviving entity), or substitution for such Stock Options with new stock options covering stock of a successor employer corporation, or a parent or subsidiary corporation thereof, solely at the discretion of such successor corporation, or parent or subsidiary corporation, with appropriate adjustments as to number and kind of shares and prices.
The Board of Directors of the Company may at any time and from time to time suspend, amend, or terminate the Plan and may, with the consent of an Optionee, make such modifications of the terms and conditions of that Optionee's Stock Option as it shall deem advisable; provided that, except as permitted under the provisions of Section 15 hereof, no amendment or modification may be adopted without the Company having first obtained the
approval of the holders of a majority of the Company's outstanding shares of Common Stock present, or represented, and entitled to vote at a duly held meeting of shareholders of the Company, or by written consent, if the amendment or modification would:
(a) materially increase the number of securities which may be issued under the Plan;
(b) materially modify the requirements as to eligibility for participation in the Plan;
(c) increase or decrease the exercise price of any Stock Option granted under the Plan;
(d) increase the maximum term of Stock Options provided for herein;
(e) permit Stock Options to be granted to any person who is not an Eligible Participant; or
(f) change any provision of the Plan which would affect the qualification as an Incentive Stock Option under the internal revenue laws then applicable of any Stock Option granted as an Incentive Stock Option under the Plan.
No Stock Option may be granted during any suspension of the Plan or after termination of the Plan. Amendment, suspension, or termination of the Plan shall not (except as otherwise provided in Section 15 hereof), without the consent of the Optionee, alter or impair any rights or obligations under any Stock Option theretofore granted.
No Eligible Participant, Optionee or other person shall have any claim or right to be granted a Stock Option under this Plan, and neither this Plan nor any action taken hereunder shall be deemed to give or be construed as giving any Eligible Participant, Optionee or other person any right to be retained in the employ of the Company or any Subsidiary. Without limiting the generality of the foregoing, no person shall have any rights as a result of his or her classification as an Eligible Participant or Optionee, such classifications being made solely to describe, define and limit those persons who are eligible for consideration for privileges under the Plan.
No Optionee shall be entitled to the privileges of stock ownership as to any Option Shares not actually issued and delivered. No Option Shares may be purchased upon the exercise of a Stock Option unless and until all then applicable requirements of all regulatory agencies having jurisdiction and all applicable requirements of the securities exchanges upon which securities of the Company are listed (if any) shall have been fully complied with. The Optionee shall, not more than five (5) days after each sale or other disposition of shares of Common Stock acquired pursuant to the exercise of Stock Options, give the Company notice in writing of such sale or other disposition.
The Plan shall be deemed adopted as of March 23, 2006, but the Plan shall only be effective if (and immediately as of the date that) the Plan is approved by the holders of at least a majority of the Company's outstanding shares of Common Stock represented and voting at a meeting of shareholders.
Unless previously terminated as aforesaid, the Plan shall terminate on March 23, 2016. No Stock Options shall be granted under the Plan thereafter, but such termination shall not affect any Stock Option theretofore granted.
Each Stock Option granted under the Plan shall be evidenced by a written Stock Option Agreement executed by the Company and the Optionee, and shall contain each of the provisions and agreements herein specifically required to be contained therein, and such other terms and conditions as are deemed desirable by the Stock Option Committee and are not inconsistent with this Plan.
Each Stock Option and all rights and obligations thereunder shall expire on
such date as the Stock Option Committee may determine, but not later than ten
(10) years from the date such Stock Option is granted, and shall be subject to
earlier termination as provided elsewhere in this Plan.
In addition to such other rights of indemnification which they may have as directors of the Company or as members of the Stock Option Committee, the members of the Stock Option Committee, and each of them, shall be indemnified by the Company for and against all costs, judgments, penalties and reasonable expenses, including reasonable attorneys' fees, actually and appropriately incurred by them in connection with all actions, suits and proceedings, and in connection with appeals thereof, to which they or any of them may be a party by reason of any act or omission of any member of the Stock Option Committee under or in connection with the Plan or any Stock Option granted thereunder; provided, however, that a member of the Stock Option Committee shall not be entitled to any indemnification whatsoever pursuant to this Section for or as a result of any act or omission of such member which was not taken in good faith and which constituted willful misconduct or gross negligence by such member; provided further, that any amounts paid by any member of the Stock Option Committee in settlement of an action, suit or proceeding for which indemnification may be sought pursuant to this Section shall be first approved in writing by independent legal counsel selected by the Company; and, provided further, that within thirty (30) days after institution of an action, suit or proceeding against any member with respect to which such member is entitled to indemnification hereunder, such member shall, in writing, offer the Company the opportunity, at its own expense, to handle (including settle) and conduct the defense thereof. The provisions of this Section shall apply to the estate, executor and administrator of each member of the Stock Option Committee.
All notices and demands of any kind which the Stock Option Committee, any Optionee, Eligible Participant, or other person may be required or desires to give under the terms of this Plan shall be in writing and shall be delivered in hand to the person or persons to whom addressed (in the case of the Stock Option Committee, with the Chief Executive Officer of the Company), by leaving a copy of such notice or demand at the address of such person or persons as may be reflected in the records of the Company, or by mailing a copy thereof, properly addressed as above, by certified or registered mail, postage prepaid, with return receipt requested. Delivery by mail shall be deemed made upon receipt by the notifying party of the return receipt request acknowledging receipt of the notice or demand.
All obligations of the Company arising under or as a result of this Plan or Stock Options granted hereunder shall constitute the general unsecured obligations of the Company, and not of the Board of Directors of the Company, any member thereof, the Stock Option Committee, any member thereof, any officer of the Company, or any other person or any Subsidiary, and none of the foregoing, except the Company, shall be liable for any debt, obligation, cost or expense hereunder.
The Stock Option Committee, in its sole and absolute discretion, is entitled to determine who, if anyone, is an Eligible Participant under this Plan, and which, if any, Eligible Participant shall receive any grant of a Stock Option. No oral or written agreement by any person on behalf of the Company relating to this Plan or any Stock Option granted hereunder is authorized, and such may not bind the Company or the Stock Option Committee to grant any Stock Option to any person.
If any provision of this Plan as applied to any person or to any circumstance shall be adjudged by a court of competent jurisdiction to be void, invalid, or unenforceable, the same shall in no way affect any other provision hereof, the application of any such provision in any other circumstances, or the validity or enforceability hereof.
Where the context or construction requires, all words applied in the plural herein shall be deemed to have been used in the singular and vice versa, and the masculine gender shall include the feminine and the neuter and vice versa.
The headings of the several sections herein are inserted solely for convenience of reference and are not intended to form a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.
This Plan shall be binding upon the respective successors, assigns, heirs, executors, administrators, guardians and personal representatives of the Company and Optionees.
This Plan shall be governed by and construed in accordance with the laws of the State of California.
In the event of any conflict between the terms and provisions of this Plan, and any other document, agreement or instrument, including, without meaning any limitation, any Stock Option Agreement, the terms and provisions of this Plan shall control.
Exhibit 21
COMMUNITY WEST BANK, NATIONAL ASSOCIATION
(FKA GOLETA NATIONAL BANK)
(A Nationally Chartered Bank)
100% wholly owned subsidiary
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-43531 and 333-136099) of Community West Bancshares our report dated March 16, 2007, with respect to the consolidated financial statements of Community West Bancshares included in this Annual Report on Form 10-K for the year ended December 31, 2006.
/s/ Ernst & Young LLP --------------------- Los Angeles, California March 23, 2007 |
Exhibit 31.1
CERTIFICATION
I, Lynda J. Nahra, President and Chief Executive Officer of Community West Bancshares, a StateplaceCalifornia corporation, certify that:
1. I have reviewed the annual report on Form 10-K of Community West Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting: and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Lynda J. Nahra
------------------
Lynda J. Nahra
President and Chief Executive Officer
March 22, 2007
|
Exhibit 31.2
CERTIFICATION
I, Charles G. Baltuskonis, Executive Vice President and Chief Financial Officer of Community West Bancshares, a StateplaceCalifornia corporation, certify that:
1. I have reviewed the annual report on Form 10-K of Community West Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting: and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Charles G. Baltuskonis
--------------------------
Charles G. Baltuskonis
Executive Vice President and
Chief Financial Officer
March 22, 2007
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K for the year ended December 31, 2005 ("Report") by Community West Bancshares ("Registrant"), each of the undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of and for the periods presented in the Report.
/s/ Lynda J. Nahra
---------------
Lynda J. Nahra
President and Chief Executive Officer
/s/ Charles G. Baltuskonis
-----------------------
Charles G. Baltuskonis
Executive Vice President and
Chief Financial Officer
March 22, 2007
|
A signed original of this written statement required by Section 906 has been provided to Community