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)
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
ITEM 1. DESCRIPTION OF BUSINESS
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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.
-3-
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.
-4-
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.
ITEM 1A. RISK FACTORS
--------- -------------
Investing in our common stock involves various risks which are particular to our
company, our industry and our market area. Several risk factors regarding
investing in our common stock are discussed below. This listing should not be
considered as all-inclusive. If any of the following risks were to occur, we may
not be able to conduct our business as currently planned and our financial
condition or operating results could be negatively impacted.
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
-5-
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
-6-
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.
-7-
ITEM 1B. UNRESOLVED STAFF COMMENTS
--------- ---------------------------
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTY
------- -------------------------
The Company owns the property on which the CWB full-service branch office is
located in Goleta, California.
All other property is leased by the Company, including the principal executive
office in Goleta. This facility houses the Company's corporate offices,
comprised of various departments, including 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.
ITEM 3. LEGAL PROCEEDINGS
-------- -------------------
The Company is involved in various litigation of a routine nature that is being
handled and defended in the ordinary course of the Company's business. In the
opinion of management, based in part on consultation with legal counsel, the
resolution of these litigation matters will not have a material impact on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------- ------------------------------------------------------------
None.
-8-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
------- --------------------------------------------------------------
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------
Market Information, Holders and Dividends
The Company's common stock is traded on the Nasdaq 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
------- ------ ------- ------ ------- ------ ------- ------
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
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:
------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------
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
-9-
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]
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INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
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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
-10-
ITEM 6. SELECTED FINANCIAL DATA
-------- -------------------------
The following selected financial data have been derived from the Company's
consolidated financial condition and results of operations, as of and for the
years ended December 31, 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
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion is designed to provide insight into management's
assessment of significant trends related to Community West Bancshares ("CWBC" or
"Company") and its wholly-owned subsidiary Community West Bank's ("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.
OVERVIEW OF EARNINGS PERFORMANCE
-----------------------------------
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.
CRITICAL ACCOUNTING POLICIES
------------------------------
The Company's accounting policies are more fully described in Note 1 of the
Consolidated Financial Statements. As disclosed in Note 1, the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates. The Company believes that the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results of
operations and require management's most difficult, subjective and complex
judgments.
PROVISION AND ALLOWANCE FOR LOAN LOSSES- The Company maintains a detailed,
systematic analysis and procedural discipline to determine the amount of the
allowance for loan losses ("ALL"). The ALL is based on estimates and is
intended to be adequate to provide for probable losses inherent in the loan
portfolio. This process involves deriving probable loss estimates that are
based on individual loan loss estimation, migration analysis/historical loss
rates and management's judgment.
-12-
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,
-13-
"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.
-14-
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
=========== ===========
-15-
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
======== ======== ======== ======== ======== =========
-16-
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%
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
========== ========== ===========
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)
========= ========= ==========
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.
-17-
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
========= ========= ==========
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%
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.
-18-
SCHEDULE OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
As of the dates indicated below, the following schedule shows the average
balances of the Company's assets, liabilities and stockholders' equity accounts
as a percentage of average total assets:
DECEMBER 31,
--------------------------------------------------------
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%
========= ====== ========= ======= ========= ======
-19-
INTEREST RATES AND DIFFERENTIALS
-----------------------------------
The following table illustrates average yields on interest-earning assets and
average rates on interest-bearing liabilities for the years indicated. These
average yields and rates are derived by dividing interest income by the average
balances of interest-earning assets and by dividing interest expense by the
average balances of interest-bearing liabilities for the years indicated.
Amounts outstanding are averages of daily balances during the period.
YEAR ENDED DECEMBER 31,
------------ ---------- ----------
INTEREST-EARNING ASSETS: 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%
-20-
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.
LOAN PORTFOLIO
----------------
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:
-21-
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%.
-22-
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
========= ========= ========= ========= =========
-23-
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%
-24-
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
=========== =========== =========== =========== ===========
-25-
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.
INVESTMENT PORTFOLIO
---------------------
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
=========== =========== ===========
-26-
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:
-27-
(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.
LIQUIDITY MANAGEMENT
---------------------
The Company has established policies as well as analytical tools to manage
liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer
demand for funds, such as high levels of deposit withdrawals or increased loan
demand, in a timely and cost effective manner. The most important factor in the
preservation of liquidity is maintaining public confidence that 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.
-28-
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.
DEPOSITS
--------
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%
======== ========= ======== ========= ======== =========
-29-
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.
CONTRACTUAL OBLIGATIONS
-----------------------
The Company has contractual obligations that include long-term debt, deposits,
operating leases and purchase obligations for service providers. The following
table is 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
======== ========= ========== ========== =======
-30-
SUPERVISION AND REGULATION
INTRODUCTION
------------
Banking is a complex, highly regulated industry. The primary goals of the
regulatory scheme are to maintain a safe and sound banking system, protect
depositors and the Federal Deposition Insurance Corporation's insurance fund,
and facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress and the states have created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the financial services industry. Consequently, the growth and
earnings performance of CWBC and CWB can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statues, regulations and the policies of various
governmental regulatory authorities, including the Board of Governors of the
Federal Reserve System, or the FRB, the Office of the Comptroller of the
Currency, or the OCC, and Federal Deposit Insurance Corporation, or the FDIC.
The system of supervision and regulation applicable to financial services
businesses governs most aspects of the business of CWBC and CWB, including: (i)
the scope of permissible business; (ii) investments; (iii) reserves that must be
maintained against deposits; (iv) capital levels that must be maintained; (v)
the nature and amount of collateral that may be taken to secure loans; (vi) the
establishment of new branches; (vii) mergers and consolidations with other
financial institutions; and (viii) the payment of dividends.
From time to time laws or regulations are enacted which have the effect of
increasing the cost of doing business, limiting or expanding the scope of
permissible activities, or changing the competitive balance between banks and
other financial and non-financial institutions. Proposals to change the laws
and regulations governing the operations of banks and bank holding companies are
frequently made in Congress and by various bank and other regulatory agencies.
Future changes in the laws, regulations or polices that impact CWBC and CWB
cannot necessarily be predicted, but they may have a material effect on the
business and earnings of CWBC and CWB.
CWBC
----
General. As a bank holding company, CWBC is registered under the Bank Holding
Company Act of 1956, as amended, (or "BHCA"), and is subject to regulation by
the FRB. According to FRB Policy, CWBC is expected to act as a source of
financial strength for CWB, to commit resources to support it in circumstances
where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to
periodic examination by the FRB. CWBC is also required to file periodic reports
of its operations and any additional information regarding its activities and
those of its subsidiaries as may be required by the FRB.
CWBC is also a bank holding company within the meaning of Section 3700 of the
California Financial Code. Consequently, CWBC and CWB are subject to
examination by, and may be required to file reports with, the Commissioner of
the California Department of Financial Institutions ("DFI"). Regulations have
not yet been proposed or adopted or steps otherwise taken to implement the DFI's
powers under this statute.
CWBC has a class of securities registered with the Securities Exchange
Commission ("SEC") under Section 12 of the Securities Exchange Act of 1934, as
amended, ("1934 Act") and has its common stock listed on the Nasdaq 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.
-31-
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
-32-
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;
-33-
- a range of enhanced penalties for fraud and other violations; and
- expanded disclosure and certification relating to an issuer's
disclosure controls and procedures and internal controls over
financial reporting.
As a result of the SOX, and its implementing regulations, CWBC has incurred
substantial cost to interpret and ensure compliance with the law and its
regulations including, without limitation, increased expenditures by CWBC in
auditors' fees, attorneys' fees, outside advisors fees, and increased errors and
omissions insurance premium costs. Effective September 29, 2005 the SEC
extended the compliance dates for non-accelerated filers such as CWBC with the
internal control over financial reporting requirements to July 15, 2007. CWBC
cannot be certain of the effect, if any, of the foregoing legislation on the
business of CWBC although increased costs of compliance are likely. Future
changes in the laws, regulation, or policies that impact CWBC cannot necessarily
be predicted and may have a material effect on the business and earnings of
CWBC.
CWB
---
General. CWB, as a national banking association which is a member of the
Federal Reserve System, is subject to regulation, supervision and regular
examination by the OCC, FDIC and the FRB. CWB's deposits are insured by the
FDIC up to the maximum extent provided by law. The regulations of these
agencies govern most aspects of CWB's business and establish a comprehensive
framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established
--------------------------------
minimum capital standards known as risk-based capital guidelines. These
guidelines are intended to provide a measure of capital that reflects the degree
of risk associated with a bank's operations. The risk-based capital guidelines
include both a definition of capital and a framework for calculating the amount
of capital that must be maintained against a bank's assets and off-balance sheet
items. The amount of capital required to be maintained is based upon the credit
risks associated with the various types of a bank's assets and off-balance sheet
items. A bank's assets and off-balance sheet items are classified under several
risk categories, with each category assigned a particular risk weighting from 0%
to 100%.
Adequately Well CWBC
=============== =============== ===============
Capitalized Capitalized CWB (consolidated)
=============== =============== =============== ===============
(greater than or equal to)
================================
Total risk-based capital 8.00% 10.00% % %
================================ =============== =============== = =
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
-34-
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
-35-
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
-36-
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.
-37-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------- ---------------------------------------------------------------
The Company's primary market risk is interest rate risk ("IRR"). To minimize
the volatility of net interest income at risk ("NII") and the impact on economic
value of equity ("EVE"), the Company manages its exposure to changes in interest
rates through asset and liability management activities within guidelines
established by the Board's ALCO. ALCO has the responsibility for approving and
ensuring compliance with asset/liability management policies, including IRR
exposure.
To mitigate the impact of changes in interest rates on the Company's
interest-earning assets and interest-bearing liabilities, the Company actively
manages the amounts and maturities. The Company generally retains short-term,
adjustable-rate assets as they have similar re-pricing characteristics as
funding sources. The Company sells substantially all of its mortgage products
and a portion of its SBA loan originations. While the Company has some assets
and liabilities in excess of five years, it has internal policy limits designed
to minimize risk should interest rates rise. Currently, the Company does not
use derivative instruments to help manage risk, but will consider such
instruments in the future if the perceived need should arise.
The Company uses software, combined with download detailed information from
various application programs, and assumptions regarding interest rates, lending
and deposit trends and other key factors to forecast/simulate the effects of
both higher and lower interest rates. The results detailed below indicate the
impact, in dollars and percentages, on NII and EVE of an increase in interest
rates of 200 basis points and a decline of 200 basis points compared to a flat
interest rate scenario.
----------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY 200 BP INCREASE 200 BP DECREASE
------------------ ------------------
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."
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------------------------
The Company's consolidated financial statements begin on page F-1.
-38-
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
F-1
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.
F-2
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.
F-3
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
------ ------- ---------- --------------- ---------------
(IN THOUSANDS)
BALANCES AT
DECEMBER 31, 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
====== ======= ========== =============== ===============
F-4
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.
F-5
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.
F-6
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.
F-7
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
F-8
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%
========== =========== ========== ==========
F-9
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.
F-10
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
========= =========
F-11
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.
F-12
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
Federal Home Loan Bank Advances
-----------------------------------
The Company has a blanket lien credit line with the Federal Home Loan Bank
("FHLB"). Advances are collateralized in the aggregate by CWB's eligible
mortgage loans and securities of the U.S Government and its agencies. The
outstanding advances at December 31, 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.
F-13
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.
Federal Funds Purchased
-------------------------
The Company maintains three federal funds purchased lines with a total borrowing
capacity of $18.5 million. There was no amount outstanding as of December 31,
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
F-14
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
Common Stock
-------------
Earnings per share-Calculation of Weighted Average Shares Outstanding
----------------------------------------------------------------------------
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
========== ========== ==========
Stock Option Plans
--------------------
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
F-15
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
============ ============ ============
F-16
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.
F-17
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
F-18
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
Commitments
-----------
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The Company's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. As of December 31, 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
F-19
may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. All guarantees are
short-term and expire within one year.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment and income-producing commercial properties.
Loans Sold
-----------
The Company has sold loans that are guaranteed or insured by government agencies
for which the Company retains all servicing rights and responsibilities. The
Company is required to perform certain monitoring functions in connection with
these loans to preserve the guarantee by the government agency and prevent loss
to the Company in the event of nonperformance by the borrower. Management
believes that the Company is in compliance with these requirements. The
outstanding balance of the sold portion of such loans was approximately $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.
Executive Salary Continuation
-------------------------------
The Company has an agreement with a former officer/director, which provides for
a monthly cash payment to the officer or beneficiaries in the event of death,
disability or retirement, beginning in December 2003 and extending for a period
of fifteen years. 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.
Litigation
----------
The Company is involved in litigation of a routine nature that is handled and
defended in the ordinary course of the Company's business. In the opinion of
management, based in part on consultation with legal counsel, the resolution of
these other litigation matters will not have a material impact on the Company's
financial position or results of operations.
F-20
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
============ ============
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
============ ============ ============
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
============ ============ ============
F-21
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
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
F-22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------- -------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None
ITEM 9A. CONTROLS AND PROCEDURES
-------- -------------------------
Under the supervision and with the participation of the Company's management,
the Chief Executive Officer and the Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 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.
ITEM 9B. OTHER INFORMATION
--------- ------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
--------- ------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------------------------
The information concerning the directors and executive officers of the Company
is incorporated herein by reference from the section entitled "Proposal 1 -
Election of Directors" contained in the definitive proxy statement ("Proxy
Statement") of the Company to be filed pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year.
The Company has adopted a code of ethics that applies to all its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. A copy of the code of
ethics is available on the Company's website at www.communitywest.com.
ITEM 11. EXECUTIVE COMPENSATION
--------- -----------------------
Information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1 - Election of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-------- ------------------------------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
Information concerning security ownership of certain beneficial owners and
management and related shareholder matters is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners,
Directors and Executive Officers" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------- --------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Proposal 1 -
Election of Directors" contained in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------- ------------------------------------------
Information concerning principal accountant fees and services is incorporated
herein by reference from the section entitled "Independent Auditors" contained
in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------- ---------------------------------------
(a)(1) The following consolidated financial statements of Community West
Bancshares are filed as part of this Annual Report.
61
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,
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
62
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed with the Commission on December 31,
1997.
(2) Incorporated by reference from the Registrant's Amendment to
Registration Statement on Form 8-A filed with the Commission on
March 12, 1998.
(3) Incorporated by reference from the Registrant's Annual
Report on Form 10-K filed with the Commission on March 26, 1998.
(4) Filed as an exhibit to the Registrant's Form 8-K filed with
the Commission on December 5, 2000.
(5) Incorporated by reference from the Registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 2001
filed by the Registrant with the Commission on November 16, 2001.
(6) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 filed by
the Registrant with the Commission on April 16, 2002.
(7) Incorporated by reference from the Registrant's Form 8-K
filed with the Commission on November 4, 2002.
(8) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002 filed
with the Commission on March 31, 2003.
(9) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003 filed
with the Commission on March 29, 2004.
(10) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 (File No 333-129898) filed with the
Commission on November 22, 2005.
(11) Incorporated by reference from Registrant's Definitive Proxy
Statement (File No 000-23575) filed with the commission on April
13, 2006.
63
SIGNATURES
----------
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY WEST BANCSHARES
(Registrant)
Date: 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
64