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, 2004
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0446957
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 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, 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes[_] No [X]
As of March 24, 2005, 5,745,014 shares of the registrant's common stock were
outstanding. The aggregate market value of common stock, held by non-affiliates
of the registrant as of March 24, 2005, was $50,092,258 based on a closing price
of $12.10 for the common stock, as reported on the Nasdaq Stock Market. For
purposes of the foregoing computation, all executive officers, directors and 5
percent beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2005 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, 2004.
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COMMUNITY WEST BANCSHARES
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Description of Business 3
ITEM 2. Description of Property 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to a Vote of Security Holders 5
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder Matters 6
ITEM 6. Selected Financial Data 7
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk 42
ITEM 8. Consolidated Financial Statements and Supplementary Data 42
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 65
ITEM 9A. Controls and Procedures 65
ITEM 9B. Other Information 65
PART III
ITEM 10. Directors and Executive Officers 65
ITEM 11. Executive Compensation 65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 65
ITEM 13. Certain Relationships and Related Transactions 65
ITEM 14. Principal Accountant Fees and Services 65
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 65
SIGNATURES 68
CERTIFICATIONS 69
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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") (formerly known as Goleta National Bank).
Effective that date, shareholders of CWB became shareholders of CWBC in a
one-for-one exchange. The acquisition was accounted at historical cost in a
manner similar to pooling-of-interests. CWBC and CWB are referred to herein as
"the Company."
Community West Bancshares is a bank holding company. During the fiscal year,
CWB was the sole bank subsidiary of CWBC. CWBC provides management and
shareholder services to CWB.
CWB offers a range of commercial and retail financial services to professionals,
small to mid-sized businesses and individual households. These services include
various loan options as well as deposit products. CWB also offers other
financial services.
Relationship Banking - Relationship banking is conducted at the community level
through two full-service branches, in Goleta and Ventura, California, with a
third scheduled to open in Santa Maria, California in April 2005. Until that
time, the Bank will continue to maintain a loan production office in Santa
Maria. The primary customers are small to mid-sized businesses in these
communities and their owners and managers. CWB's goal is to provide the highest
quality service and the most diverse products to meet the varying needs of this
highly sought customer base.
CWB offers a range of commercial and retail financial services, including the
acceptance of demand, savings and time deposits, and the origination of
commercial, real estate, construction, home improvement and other installment
and term loans. Its customers are also provided with the choice of a range of
cash management services, remittance banking, merchant credit card processing,
courier service and online banking. Through strategic alliances, customers have
access to other services such as equipment leasing programs and international
banking services.
In addition to the traditional financial services offered, CWB offers internet
banking, automated clearinghouse origination, electronic data interchange, and
check imaging.
One of CWB's key strengths and a fundamental difference that enables it to stand
apart from the competition is the depth of experience of personnel in combining
commercial lending and business development skills. These individuals develop
business, structure and underwrite the credit and manage the 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 up between multiple individuals.
The financial service's industry as a whole offers a broad range of products and
services. Few companies today can effectively offer all of them. Accordingly,
CWB continues to investigate products and services that it believes address the
needs of its customers and help it attain a competitive advantage over others in
the industry. The Company continues to analyze its local markets for potential
expansion opportunities.
Small Business Association Lending - CWB has been an approved lender/servicer of
loans guaranteed by the Small Business Association ("SBA") since 1990. The
Company originates SBA loans which are frequently sold into the secondary
market. The Company continues to service these loans after sale and is required
under the SBA programs to retain specified amounts. The two primary SBA loan
programs that CWB offers are the basic 7(a) Loan Guaranty and the Certified
Development Company ("CDC"), a Section 504 ("504") program. The 7(a) serves as
the SBA's primary business loan program to help qualified small businesses
obtain financing when they might not be eligible for business loans through
normal lending channels. Loan proceeds under this program can be used for most
business purposes including working capital, machinery and equipment, furniture
and fixtures, land and building (including purchase, renovation and new
construction), leasehold improvements and debt refinancing. Loan maturity is
generally up to 10 years for working capital and up to 25 years for fixed
assets. The 7(a) loan is approved and funded by a qualified lender, guaranteed
by the SBA and subject to applicable regulations. The SBA typically guarantees
75%, and up to 85% of the loan amount, depending on the loan size.
Periodically, the Company may sell some of the unguaranteed portion of select
7(a) program loans into the secondary market. The Company is required by the
SBA to retain a contractual minimum of 5% on all SBA 7(a) loans. The SBA 7(a)
loans are all variable interest rate loans. The servicing spread is a minimum
of 1% on all 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.
-3-
CWB has been offering 504 loans since 1991, but was fairly inactive in this loan
product through 2002. Beginning in 2003, upon acquisition of a group of
experienced 504 lenders in the Sacramento area, CWB increased its 504 loan
origination volume. The 504 program is an economic development-financing
program providing long-term, low down payment 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. The maximum SBA
debenture generally is $1 million for regular 504 loans and $1.3 million for
those 504 loans that meet a public policy goal. As of December 8, 2004, those
limits were raised to $1.5 million and $2 million, respectively.
In 2001, the CWB began offering Business & Industry ("B & I") loans. These
loans are similar to the SBA product, except they are guaranteed by the U.S.
Department of Agriculture. The guaranteed amount is generally 80%. B&I loans
are made to businesses in designated rural areas and are generally larger loans
to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they
can be sold into the secondary market.
CWB originates SBA loans in the states of California, Alabama, Colorado,
Florida, Georgia, North Carolina, Oregon, South Carolina, Tennessee and
Washington. Beginning in 1995, the SBA designated CWB as a "Preferred Lender."
As a Preferred Lender, CWB has been delegated the loan approval, closing and
most servicing and liquidation authority responsibility from the SBA. CWB
currently has SBA Preferred Lender status in the California districts of Los
Angeles, Fresno, Sacramento, San Francisco, San Diego and Santa Ana, as well as
the states of Alabama, Colorado, Florida, Georgia, North Carolina, South
Carolina and Tennessee. CWB also has Preferred Lender status in the cities of
Seattle and Spokane, Washington and Portland, Oregon. Due to CWB's Preferred
Lender status in so many states and districts, CWB has achieved competitive
advantage in this product and has been able to increase its loan volume in
recent years.
Mortgage Lending - In 1995, CWB established a Wholesale and Retail Mortgage Loan
Center. The Mortgage Loan Division originates residential real estate loans
primarily in the California counties of Santa Barbara, Ventura and San Luis
Obispo. Some retail loans not fitting CWB's wholesale lending criteria are
brokered to other lenders. After wholesale origination, the real estate loans
are sold into the secondary market.
In 1998, CWB established a financing program for manufactured housing to provide
affordable home ownership to low to moderate-income families that are purchasing
or refinancing their manufactured house generally in CWB's primary lending areas
of Santa Barbara, Ventura and San Luis Obispo counties. In the last year, the
Company has expanded this program into Los Angeles, Orange and San Diego
counties. The manufactured housing loans are retained in CWB's loan portfolio.
As of December 31, 2004, CWB held $66.4 million of manufactured housing loans in
its portfolio. CWB has not incurred any loan losses on this product.
COMPANY HISTORY
From December 1998 until August 2001, the Company owned a 100% interest in
Palomar Community Bank ("Palomar"). In August of 2001, the Company sold Palomar
Community Bank. From October 1997 to November 1999, the Company owned a 70%
interest in Electronic Paycheck, LLC. In November 1999, Electronic Paycheck,
LLC merged with ePacific.com Incorporated and the Company's interest was reduced
to 10%. In October 2002, the Company sold its remaining interest in
ePacific.com Incorporated.
COMPETITION AND SERVICE AREA
The financial services industry is highly competitive with respect to both loans
and deposits. Overall, the industry is dominated by a relatively small number
of major banks with many offices operating over a wide geographic area. In the
markets where the Company's banking branches are present, several de novo banks
have increased competition. Some of the major commercial banks operating in the
Company's service areas offer types of services that are not offered directly by
the Company. Some of these services include leasing, trust and investment
services and international banking. The Company has taken several approaches to
minimize the impact of competitor's numerous branch offices and varied products.
First, the Company through CWB provides courier services to business clients,
thus discounting the need for multiple branches in one market. Second, through
strategic alliances and correspondents, the Company provides a full compliment
of competitive services. Finally, one of CWB's strategic initiatives is to
establish loan production offices in areas where there is a high demand for its
lending products. In addition to loans and deposit services offered by the
CWB's two branches located in Goleta and Ventura, California, a loan production
office currently exists in the city of Santa Maria, California. The Company
also maintains SBA loan production offices in the California areas of Roseville,
San Francisco bay area, Los Angeles and San Diego as well as the states of
Colorado, Florida, Georgia, North Carolina, South Carolina and Washington.
-4-
Competition may adversely affect the Company's performance. The financial
service's business in the Company's markets is highly competitive and becoming
increasingly more so due to changing regulations, technology and strategic
consolidations amongst other financial service providers. Other banks and
specialty financial services companies may have more capital than the Company
and can offer trust services, leasing and other financial products to the
Company's customer base. When new competitors seek to enter one of the
Company's markets, or when existing market participants seek to increase their
market share, they sometimes undercut the pricing or credit terms prevalent in
that market. Increasing levels of competition in the banking and financial
services businesses may reduce our market share or cause the prices to fall for
which the Company can charge for products and services.
GOVERNMENT POLICIES
The Company's operations are affected by various state and federal legislative
changes and by policies of various regulatory authorities, including those of
the states in which it operates and the U.S. government. These policies
include, for example, statutory maximum legal lending rates, domestic monetary
policies by the Board of Governors of the Federal Reserve System, U.S. fiscal
policy, U.S. Patriot Act and capital adequacy and liquidity constraints imposed
by bank regulatory agencies. Changes in these laws, regulations and policies
greatly affect our operations. See"Item 7, Management's Discussion and Analysis
of Financial Conditions and Results of Operations - Supervision and Regulation."
EMPLOYEES
As of December 31, 2004, the Company had 130 full-time and 10 part-time
employees. The Company's employees are not represented by a union or covered by
a collective bargaining agreement. Management of the Company believes that, in
general, its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
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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 compliance, data processing,
electronic business services, finance, human resources, loan operations, SBA
administration, special assets and the mortgage loan division.
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
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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.
-5-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
- ------ -----------------------------------------------------------------
MATTERS
-------
Market Information, Holders and Dividends
The Company's common stock is traded on the Nasdaq Stock Market ("Nasdaq") under
the symbol CWBC. The following table sets forth the high and low sales prices
on a per share basis for the Company's common stock as reported by Nasdaq for
the period indicated:
2004 Quarters 2003 Quarters
-------------------------------- --------------------------------
Fourth Third Second First Fourth Third Second First
------- ------ ------- ------ ------- ------ ------- ------
Stock Price Range:
High $ 13.47 $10.74 $ 9.75 $ 9.38 $ 9.25 $ 7.34 $ 6.50 $ 5.45
Low 10.55 8.15 8.23 8.19 6.85 5.90 5.00 4.58
Cash Dividends
Declared $ .04 $ .04 $ .04 $ - $ - $ - $ - $ -
As of March 24, 2005, the year to date high and low stock sales prices were
$15.30 and $11.00, respectively. As of March 24, 2005, the last reported sale
price per share for the Company's common stock was $12.10.
As of March 24, 2005, the Company had 403 stockholders of record of its common
stock.
Cash dividends of $686,000 ($0.12 per share) were paid in 2004. The Company
resumed declaring dividends to its shareholders in the second quarter of 2004.
It is the Company's intention to declare and pay dividends quarterly. The
primary source of funds for dividends paid to shareholders is dividends received
from the subsidiary bank, CWB. CWB's ability to pay dividends to the Company is
limited by California law and federal banking law. As of December 31, 2004, CWB
had $4.2 million available for dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of
December 31, 2004:
- ------------------------------------------------------------------------------------------------------------
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 543,307 $ 6.77 372,451
- ------------------------------------------------------------------------------------------------------------
Plans not approved by shareholders - N/A -
- ------------------------------------------------------------------------------------------------------------
Total 543,307 372,451
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-6-
ITEM 6. SELECTED FINANCIAL DATA
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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, 2004, 2003, 2002, 2001 and 2000, and should be read in
conjunction with the consolidated financial statements and the related notes
included elsewhere in this report.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 21,845 $ 20,383 $ 29,976 $ 40,794 $ 51,864
Interest expense 7,845 9,342 13,466 20,338 26,337
----------- ----------- ----------- ----------- -----------
Net interest income 14,000 11,041 16,510 20,456 25,527
Provision for loan losses 418 1,669 4,899 11,880 6,794
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan 13,582 9,372 11,611 8,576 18,733
losses
Non-interest income 10,462 10,675 11,398 22,171 16,481
Non-interest expenses 17,521 16,736 24,931 32,006 29,978
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 6,523 3,311 (1,922) (1,259) 5,236
Provision (benefit) for income taxes 2,688 1,128 (652) (1,281) 2,539
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 3,835 $ 2,183 $ (1,270) $ 22 $ 2,697
========== =========== ============ =========== ===========
PER SHARE DATA:
Income (loss) per common share - Basic $ 0.67 $ 0.38 $ (0.22) $ 0.00 $ 0.44
Weighted average shares used in income (loss)
per share calculation - Basic 5,717,813 5,693,807 5,690,224 5,947,658 6,017,216
Income (loss) per common share - Diluted $ 0.65 $ 0.38 $ (0.22) $ 0.00 $ 0.43
Weighted average shares used in income (loss)
per share calculation - Diluted 5,867,236 5,758,200 5,690,224 5,998,003 6,233,245
Book value per share $ 6.56 $ 6.02 $ 5.64 $ 5.86 $ 5.90
BALANCE SHEET:
Net loans $ 290,506 $ 244,274 $ 245,856 $ 260,955 $ 329,265
Total assets 365,203 304,250 307,210 323,863 405,255
Total deposits 284,568 224,855 219,083 196,166 228,720
Total liabilities 327,634 269,919 275,123 290,506 369,221
Total stockholders' equity 37,569 34,331 32,087 33,357 36,035
OPERATING AND CAPITAL RATIOS:
Return on average equity 10.60% 6.65% (3.99)% 0.07% 7.35%
Return on average assets 1.15% 0.73% (0.42)% 0.01% 0.61%
Dividend payout ratio 17.91% - - - -
Equity to assets ratio 10.29% 11.28% 10.48% 10.30% 8.89%
Tier 1 leverage ratio 10.41% 11.15% 10.48% 9.07% 7.25%
Tier 1 risk-based capital ratio 12.51% 14.05% 12.66% 11.75% 9.11%
Total risk-based capital ratio 13.76% 15.31% 13.92% 13.02% 11.04%
Selected data for the year ended December 31, 2000 include Palomar. The income
statement for 2001 includes 8.5 months of Palomar operating results.
-7-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion is designed to provide insight into management's
assessment of significant trends related to Community West Bancshares ("CWBC" or
"Company") and its wholly-owned subsidiary Community West Bank's (formerly known
as Goleta National Bank) ("CWB") 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 2004 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. Such risks and uncertainties
include:
- changes in the interest rate environment affecting interest rate
margins and/or interest rate risk
- reduction in our earnings by losses on loans
- deterioration in general economic conditions
- the regulation of the banking industry
- dependence on real estate
- risks of natural disasters
- increased competitive pressure among financial services companies
- operational risks
- legislative or regulatory changes adversely affecting the
business in which the Company engages
- the availability of sources of liquidity at a reasonable cost
- other risks and uncertainties that may be detailed herein
OVERVIEW OF EARNINGS PERFORMANCE
- -----------------------------------
In 2004, the net income of the Company was $3.8 million, or $0.67, per basic and
$0.65 per diluted share. This represents a $1.7 million increase in net income
over 2003. The significant factors impacting net income for 2004 compared to
2003 were:
- net loan portfolio growth of $46.2 million, or 18.9%, primarily
in commercial, commercial real estate, manufactured housing and SBA
loans;
- stabilization of delinquencies and continued prepayments of the
securitized loans and related bonds impacting interest income,
interest expense and provision for loan losses;
- a 125 basis point increase in the Federal Reserve Board's target
interest rate from 1.0% to 2.25%, positively impacting net interest
income;
- reduction in mortgage refinancings, that negatively impacted loan
fees and gain on loan sales.
The impact to the Company from these items, and others of both a positive and
negative nature, will be discussed in more detail as they pertain to the
Company's performance for 2004 throughout the analysis sections of this report.
2003 earnings were $2.2 million compared to a net loss of $1.3 million for 2002.
That increase was due to CWB exit in 2002 from higher risk lending products
combined with increased prepayment of the securitized loan portfolio and
increased expense control.
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.
-8-
PROVISION AND ALLOWANCE FOR LOAN LOSSES - The Company maintains a detailed,
systematic analysis and procedural discipline to determine the amount of the
allowance for loan losses ("ALL"). The ALL is based on estimates and is
intended to be adequate to provide for probable losses inherent in the loan
portfolio. This process involves deriving probable loss estimates that are
based on individual loan loss estimation, migration analysis/historical loss
rates and management's judgment.
The Company employs several methodologies for estimating probable losses.
Methodologies are determined based on a number of factors, including type of
asset, risk rating, concentrations, collateral value and the input of the
Special Assets group, functioning as a workout unit.
The ALL calculation for the different major loan types is as follows:
- SBA - All loans are reviewed and classified loans are assigned a
specific allowance. Those not classified are assigned a pass rating. A
migration analysis and various portfolio specific factors are used to
calculate the required allowance on those pass loans.
- Relationship Banking - Includes commercial, commercial real
estate and consumer loans. Classified loans are assigned a specific
allowance. A migration analysis and various portfolio specific factors
are used to calculate the required allowance on the remaining pass
loans.
- Manufactured Housing - An allowance is calculated on the basis of
risk rating, which is a combination of delinquency, value of
collateral on classified loans and perceived risk in the product line.
- Securitized Loans - The Company considers this a homogeneous
portfolio and calculates the allowance based on statistical
information provided by the servicer. Charge-off history is calculated
based on three methodologies; a 3-month and a 12-month historical
trend and by delinquency information. The highest requirement of the
three methods is used.
The Company calculates the required ALL on a monthly basis. Any difference
between estimated and actual observed losses from the prior month are reflected
in the current period required ALL calculation and adjusted as deemed necessary.
The review of the adequacy of the allowance takes into consideration such
factors as concentrations of credit, changes in the growth, size and composition
of the loan portfolio, overall and individual portfolio quality, review of
specific problem loans, collateral, guarantees and economic conditions that may
affect the borrowers' ability to pay and 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. Also, at the time of the loan sale, it
is the Company's policy to recognize the related gain on the loan sale in
accordance with GAAP. The Company uses industry prepayment statistics and its
own prepayment experience in estimating the expected life of the loans.
Management periodically evaluates servicing rights for impairment. Servicing
rights are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost on a loan-by-loan basis. Fair value is determined
using discounted future cash flows calculated on a loan-by-loan basis and
aggregated to the total asset level. Impairment to the asset is recorded if the
aggregate fair value calculation drops below the net book value of the asset.
The initial servicing rights and resulting gain on sale are calculated based on
the difference between the best actual par and premium bids on an individual
loan basis. Additionally, on certain SBA loan sales that occurred prior to
2003, the Company retained interest only strips ("I/O Strips"), which represent
the present value of excess net cash flows generated by the difference between
(a) interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors and (ii) contractual
servicing fees. The I/O strips are classified as trading securities.
Accordingly, the Company records the I/O strips at fair value with the resulting
increase or decrease in fair value being recorded through operations in the
current period. Quarterly, the Company verifies the reasonableness of its
valuation estimates by comparison to the results of an independent third party
valuation analysis.
-9-
SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the
Company transferred $122 million and $81 million in loans to special purpose
trusts ("Trusts"). The transfers have been accounted for as secured borrowings
and, accordingly, the mortgage loans and related bonds issued are included in
the Company's consolidated balance sheets. Such loans are accounted for in the
same manner as loans held to maturity. Deferred debt issuance costs and bond
discount related to the bonds are amortized on a method that approximates the
level yield method over the estimated life of the bonds.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate
acquired through foreclosure on the collateral property and is recorded at fair
value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value of the OREO is charged-off against the ALL.
Subsequent to foreclosure, management periodically performs a new valuation and
the asset is carried at the lower of carrying amount or fair value. Operating
expenses or income, and gains or losses on disposition of such properties, are
charged or credited to current operations.
STOCK-BASED COMPENSATION - GAAP permits the Company to use either of two
methodologies to account for compensation cost in connection with employee stock
options. The first method requires issuers to record compensation expense over
the period the options are expected to be outstanding prior to exercise,
expiration or cancellation. The amount of compensation expense to be recognized
over this term is the "fair value" of the options at the time of the grant as
determined by the Black-Scholes valuation model. Black-Scholes computes fair
value of the options based on the length of their term, the volatility of the
stock price in past periods and other factors. Under this method, the issuer
recognizes compensation expense regardless of whether or not the employee
eventually exercises the options.
Under the second methodology, if options are granted at an exercise price equal
to the market value of the stock at the time of the grant, no compensation
expense is recognized. The Company believes that this method better reflects
the motivation for its issuance of stock options, as they are intended as
incentives for future performance rather than compensation for past performance.
GAAP requires that issuers electing the second method must present pro forma
disclosure of net income (loss) and earnings per share as if the first method
had been elected. See "Recent Accounting Pronouncement" below.
Under the terms of the Company's stock option plan, full-time salaried employees
may be granted qualified stock options or incentive stock options and directors
may be granted nonqualified stock options. Options may be granted at a price not
less than 100% of the market value of the stock on the date of grant. Qualified
options are generally exercisable in cumulative 20% installments. All options
expire no later than ten years from the date of grant.
RECENT ACCOUNTING PRONOUNCEMENT - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. Statement 123(R) must be
adopted no later than July 1, 2005. Early adoption will be permitted in periods
in which financial statements have not yet been issued. The Company expects to
adopt Statement 123(R) as of July 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of
two methods: 1) A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date. 2) A "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. The Company
plans to adopt Statement 123 using the modified-prospective method.
As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have an
insignificant impact on our result of operations and our overall financial
position. The precise impact of adoption of Statement 123(R) will depend on
levels of share-based payments granted in the future. Had we adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the
impact of Statement 123 as described in the disclosure of pro forma net income
and earnings per share in Note 9 to our consolidated financial statements.
Statement 123(R)
-10-
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things, when employees exercise
stock options) there were no operating cash flows recognized in prior periods
for such excess tax deductions.
EXTERNAL FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
- ---------------------------------------------------------------------
Economic Conditions
Nationally, the banking industry and the Company have been affected by the
continued growth in the economy and the actions of the Federal Reserve Board to
manage inflationary pressures through measured increases to the Federal discount
rate. From June 2004 to December 2004, the Federal Reserve Board raised the
discount rate five times from 1.0% to 2.25%, a rate increase of 1.25%. While
inflation remains largely in check, these increases have served to enhance net
interest margin for many asset-sensitive financial institutions. Recent reports
by the Federal Reserve Board also suggest modestly higher commercial and
industrial lending tempered by slower residential mortgage lending.
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,
Washington, Oregon and Colorado) and the SBA Southeast Region (Georgia, Florida,
Tennessee, Alabama, North Carolina and South Carolina). The forecast for the
Tri-Counties area is generally positive for the coming years, as is the overall
outlook for California and the nation as a whole. In many sections of the
country, consumer spending and tourism are on the rise and manufacturing
activity has strengthened. In the Southeast, consumer loan demand remained
strong while commercial demand improved marginally while remaining at low
levels.
Regulatory Considerations
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 significant 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 could 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. Regardless, no stockholder can own more than 25
percent of the Company's common stock without applying for regulatory approval.
The Price of the Company's Common Stock May Change Rapidly and Significantly
The market price of the Company's common stock could change rapidly and
significantly at any time. The market price of the Company's common stock has
fluctuated in recent years. Between January 1, 2003 and December 31, 2004, the
market price of its common stock ranged from a low of $4.58 per share to a high
of $13.47 per share. Fluctuations may occur, among other reasons, in response
to:
- short-term or long-term operating results
- legislative/regulatory action or adverse publicity
- perceived value of the Company's loan portfolio
-11-
- trends in the Company's nonperforming assets
- announcements by competitors
- economic changes
- general market conditions
- perceived strength of the banking industry in general
- the Company's relatively low float and thinly-traded stock
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
Approximately 45% of the loan portfolio of the Company is secured by various
forms of real estate, including residential and commercial real estate. A
decline in current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
loans. The real estate securing the Company's loan portfolio is concentrated in
California. If real estate values decline significantly, especially in
California, the change could harm the financial condition of the Company's
borrowers, the collateral for its loans will provide less security and the
Company would be more likely to suffer losses on defaulted loans.
Curtailment of Government Guaranteed Loan Programs Could Affect a Segment of the
Company's Business
A major segment of the Company's business consists of originating and 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. In late 2004, the SBA eliminated the piggy-back
program, in which a conventional real estate loan is made and a SBA 7(a)
guaranteed second trust deed is subordinate to the conventional first trust
deed. As the funding and sale of the guaranteed portion of 7(a) loans is a
significant portion of the Company's business, the long-term resolution to the
funding for the 7(a) loan program may have an unfavorable impact on the
Company's future performance and results of operations.
Environmental Laws Could Force the Company to Pay for Environmental Problems
When a borrower defaults on a loan secured by real property, the Company
generally purchases the property in foreclosure or accepts a deed to the
property surrendered by the borrower. The Company may also take over the
management of commercial properties when owners have defaulted on loans. While
CWB has guidelines intended to exclude properties with an unreasonable risk of
contamination, hazardous substances may exist on some of the properties that it
owns, manages or occupies. The Company faces the risk that environmental laws
could force it to clean up the properties at the Company's expense. It may cost
much more to clean a property than the property is worth. The Company could
also be liable for pollution generated by a borrower's operations if the Company
took a role in managing those operations after default. Resale of contaminated
properties may also be difficult.
Competition
The banking industry is highly competitive. The Company faces competition not
only from other financial institutions within the markets it serves, but
deregulation has resulted in competition from companies not typically associated
with financial services as well as companies accessed through the internet. As
a community bank, the Company attempts to combat this increased competition by
developing and offering new products and increased quality of services.
EARNINGS PERFORMANCE
- ---------------------
In 2004, the net income of the Company was $3.8 million, or $0.67, per basic
share and $0.65 per diluted share compared to $2.2 million, or $0.38, per basic
and diluted share for 2003. Return on average assets and average equity both
increased to 1.15% and 10.6%, respectively, for 2004, compared with 0.73% and
6.65%, respectively, for 2003. Interest income increased by $1.5 million
primarily due to the Company's loan growth, while interest expense declined by
$1.5 million for the comparable period.
-12-
In addition, the Company's provision for loan losses decreased by $1.3 million
from $1.7 million for 2003 to $418,000 for 2004 resulting in an increase in net
interest income after provision for loan losses of 44.9%, or $4.2 million, to
$13.6 million for the year ended December 31, 2004 from $9.4 million for 2003.
The Company's net income increased $3.5 million from 2002 to 2003. The increase
primarily resulted from cost control efforts and changes to business lines as
well as a reduction in the provision for loan losses.
Changes in Interest Income and Interest Expense
Net interest income is the difference between the interest and fees earned on
loans and investments and the interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest expense
depends on the volume or balance of earning assets compared to the volume or
balance of interest-bearing deposits and liabilities and the interest rate
earned on those interest-earning assets compared to the interest rate paid on
those interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate
of interest earned on assets and the average rate of interest that is paid on
liabilities used to fund those assets. To maintain its net interest margin, the
Company must manage the relationship between interest earned and paid. The
following table sets forth, for the period indicated, the increase or decrease
of certain items in the consolidated income statements of the Company as
compared to the prior periods:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 VS. 2003 2003 VS. 2002
------------------------- ------------------------
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
----------- ------------ ----------- -----------
INTEREST INCOME (DOLLARS IN THOUSANDS)
Loans $ 907 4.6% $ (9,648) (32.9)%
Investment securities 490 100.2% 287 142.1%
Other 65 27.5% (232) (49.6)%
----------- ------------ ----------- -----------
Total interest income 1,462 7.2% (9,593) (32.0)%
----------- ------------ ----------- -----------
INTEREST EXPENSE
Deposits 395 8.5% (924) (16.7)%
Bonds payable and other borrowings (1,892) (40.1)% (3,200) (40.4)%
----------- ------------ ----------- -----------
Total interest expense (1,497) (16.0)% (4,124) (30.6)%
----------- ------------ ----------- -----------
NET INTEREST INCOME 2,959 26.8% (5,469) (33.1)%
Provision for loan losses (1,251) (75.0)% (3,230) (65.9)%
----------- ------------ ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,210 44.9% (2,239) (19.3)%
NON-INTEREST INCOME
Gains from loan sales, net (879) (18.1)% 72 1.5%
Other loan fees 853 29.2% (465) (13.7)%
Loan servicing fees, net 152 12.0% 183 16.9%
Document processing fees, net (120) (12.8)% (467) (33.3)%
Service charges 5 1.3% (64) (14.5)%
Other (224) (71.1)% 18 6.1%
----------- ------------ ----------- -----------
Total non-interest income (213) (2.0)% (723) (6.3)%
----------- ------------ ----------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 435 3.8% (2,180) (16.0)%
Occupancy and equipment expenses (95) (5.6)% (428) (20.2)%
Professional services 304 47.8% (939) (59.6)%
Depreciation (49) (8.4)% (190) (24.6)%
Loan servicing and collection (213) (48.6)% (434) (49.8)%
Impairment of I/O strips and servicing rights - - (1,788) (100.0)%
Lower of cost or market provision on loans held for sale - - (1,381) (100.0)%
Other 403 20.4% (855) (30.2)%
----------- ------------ ----------- -----------
Total non-interest expenses 785 4.7% (8,195) (32.9)%
----------- ------------ ----------- -----------
Income before provision for income taxes 3,212 5,233
Provision for income taxes 1,560 1,780
----------- -----------
NET INCOME $ 1,652 $ 3,453
=========== ===========
-13-
Total interest income increased 7.2% from $20.4 million in 2003 to $21.8 million
in 2004. Total interest expense decreased 16.0% from $9.3 million in 2003 to
$7.8 million in 2004. The Company experienced a $907,000, or 4.6%, increase in
interest income from loans in 2004 over 2003. The increase resulted from the
growth in loans primarily related to manufactured housing, commercial real
estate, commercial and SBA of $27.4 million, $14.3 million, $6.3 million and
$4.6 million, respectively. This loan growth contributed to increases in
interest income on loans from manufactured housing of $1.7 million, or 51.6%,
commercial real estate of $1.5 million, or 48.2%, commercial of $600,000, or
43.7%, and SBA of $331,000, or 9.1%. Reduction in the securitized loan
portfolio of $13.9 million, or 37.2%, primarily due to payments of loan
balances, partially offset this increase in interest income with a decrease in
interest income of $2.5 million, or 41.3%, from 2003 compared to 2004. Mortgage
loan interest income also declined by $535,000, or 77%. The decrease in the
securitized loan portfolio also indirectly accounted for a $2.2 million decline
in interest expense as the related bonds paid down by $12.2 million. This
decrease in interest expense was partially offset by increases in interest paid
on deposits and other borrowings of $395,000 and $304,000, respectively.
Interest income on investments also increased in 2004 over 2003 by $555,000, or
76.6%, due to increased activity in investment securities.
Total interest income decreased 32.0% from $30 million in 2002 to $20.4 million
in 2003. Total interest expense decreased 30.6% from $13.5 million in 2002 to
$9.3 million in 2003. The Company experienced a $9.6 million, or 32.9%, decline
in interest income from loans in 2003 over 2002. This decline was primarily the
result of the exit from certain business lines. Also contributing to the
decrease in loan interest income was a reduction of $3.8 million, or 38%, in
interest income received on the securitized loan portfolio. The decrease in
loan interest from the securitized portfolio is a result of the $28.8 million
net decrease in the portfolio during 2003. This 43.5% decrease in the
securitized loan portfolio also indirectly accounted for 80% of the $4.1 million
decline in interest expense as the related bonds paid down by $24.4 million, or
48.3%.
The following table sets forth the changes in interest income and expense
attributable to changes in rate and volume:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2004 VERSUS 2003 2003 VERSUS 2002
--------------------------- ---------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL ---------------- TOTAL ------------------
CHANGE RATE VOLUME CHANGE RATE VOLUME
-------- ------ -------- -------- -------- --------
(IN THOUSANDS)
Interest earning deposits in other financial $ 116 $ 3 $ 113 $ (37) $ (14) $ (23)
institutions (including time deposits)
Federal funds sold (51) 35 (86) (195) (132) (63)
Investment securities 490 58 432 287 (29) 316
Loans, net 3,428 (6) 3,434 (5,856) (7,044) 1,188
Securitized loans (2,521) 164 (2,685) (3,792) 299 (4,091)
-------- ------ -------- -------- -------- --------
Total interest-earning assets 1,462 254 1,208 (9,593) (6,920) (2,673)
-------- ------ -------- -------- -------- --------
Interest-bearing demand 450 256 194 (229) (255) 26
Savings 25 (6) 31 (89) (106) 17
Time certificates of deposit (80) (355) 275 (606) (679) 73
Bonds payable (2,196) 193 (2,389) (3,284) 301 (3,585)
Other borrowings 304 35 269 84 - 84
-------- ------ -------- -------- -------- --------
Total interest-bearing liabilities (1,497) 123 (1,620) (4,124) (739) (3,385)
-------- ------ -------- -------- -------- --------
Net interest income $ 2,959 $ 131 $ 2,828 $(5,469) $(6,181) $ 712
======== ====== ======== ======== ======== ========
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 liabilities, primarily interest paid on deposits. This difference
or spread is net interest income. 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.
The following table presents the net interest income and net interest margin for
the three years indicated:
-14-
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest income $21,845 $20,383 $29,976
Interest expense 7,845 9,342 13,466
-------- -------- --------
Net interest income $14,000 $11,041 $16,510
======== ======== ========
Net interest margin 4.41% 3.93% 5.87%
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 2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Gains from loan sales, net: $ 3,981 $ 4,860 $ 4,788
Other loan fees 3,776 2,923 3,388
Loan servicing fees, net 1,416 1,264 1,081
Document processing fees, net: 817 937 1,404
Service charges 381 376 440
Other 91 315 297
------- ------- -------
Total non-interest income $10,462 $10,675 $11,398
======= ======= =======
Total non-interest income for the Company declined by $213,000, or 2%, from 2003
to 2004. This decline was primarily due to the drop in total mortgage loan
originations of $114.9 million or 35.5%, from $323.7 million in 2003 to $208.8
million in 2004 which resulted in declines of $662,000 in gains on loan sales,
$680,000 in other loan fees and $374,000 in document processing fees. Net gains
on loan sales for the SBA division also declined slightly by $217,000, or 5.9%,
due to management's decision to sell less 7(a) guaranteed loans in 2004 than
2003. It is the Company's intention to continue to decrease the pace of 7(a)
loan sales in the future to help grow the SBA loan portfolio. During the year
the Company increased activity in SBA 504 loan originations and referrals which
resulted in increases in other SBA loan fees and document processing fees of
$1.5 million and $182,000, respectively. Other non-interest income decreased in
2004 compared to 2003 primarily due to the change in the sales of OREO
properties for the two periods.
The following table summarizes these changes:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 CHANGE
------ ------ --------
(IN THOUSANDS)
Gains from loan sales, net
SBA $3,481 $3,698 $ (217)
Mortgage 500 1,162 (662)
------ ------ --------
Total $3,981 $4,860 $ (879)
====== ====== ========
Other loan fees
SBA $1,522 $ - $ 1,522
Mortgage 2,243 2,923 (680)
Other 4 - 4
------ ------ --------
Total $3,776 $2,923 $ 846
====== ====== ========
Document processing fees, net
SBA $ 182 $ - $ 182
Mortgage 563 937 (374)
Other 72 - 72
------ ------ --------
Total $ 817 $ 937 $ (120)
====== ====== ========
Other
Gain on sale of OREO $ 4 $ 157 $ (153)
Gain on sale of assets 1 33 (32)
Other 86 125 (39)
------ ------ --------
Total $ 91 $ 315 $ (224)
====== ====== ========
-15-
Total non-interest income for the Company declined by $723,000, or 6.3%, from
2002 to 2003. Despite the increased refinance activity experienced in the
mortgage industry during 2003, the mortgage division experienced a decline in
total loan originations from 2002 to 2003 of $44.2 million, or 12.6%. The exit
from HLTV in 2002 was responsible for $1.9 million of the decline in
non-interest income from 2002 to 2003. This decline was partially offset by an
increase in gains on loans sales for the mortgage and SBA divisions in 2003 over
2002 and a small increase in document processing fees for the mortgage division
in 2003. During 2003, the Company also received higher premiums on SBA loan
sales. The mortgage division activity slowed down in the 2003 fourth quarter.
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 2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits $11,851 $11,416 $13,596
Occupancy and equipment expenses 1,596 1,691 2,119
Professional services 940 636 1,575
Depreciation 532 581 771
Loan servicing and collection 225 438 872
Impairment of SBA interest only strips and servicing assets - - 1,788
Lower of cost or market provision on loans held for sale - - 1,381
Other 2,377 1,974 2,829
------- ------- -------
Total non-interest expenses $17,521 $16,736 $24,931
======= ======= =======
Non-interest expenses increased $785,000 in 2004 compared to 2003. Increases in
salaries and employee benefits, professional services and other expenses of
$435,000, $304,000 and $403,000, respectively, were partly offset by declines in
occupancy, depreciation and loan servicing and collection of $95,000, $49,000
and $213,000. The increase in salaries and employee benefits was primarily due
to increased cost of living and decreased availability of qualified resources.
The increase in professional fees was primarily due to increases in accounting
and audit fees, legal fees and other consulting services of $112,000, $94,000
and $91,000, respectively. The increase in other expense was primarily due to a
$402,000 charge relating to sub-lease costs incurred in connection with a former
lending relationship.
Non-interest expense declined $8.2 million, or 33%, from 2002 to 2003.
Financial asset write-downs of $3.2 million in 2002 as well as changes in
business lines contributed to the difference between 2002 and 2003, as did the
Company's continuing efforts to control expenses. 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)
2004 $333,230 5.26% 3.56% 0.64%
2003 $299,661 5.58% 3.81% 0.76%
2002 $301,962 8.25% 4.50% 0.95%
INCOME TAXES
Income tax provision (benefit) was $2,688,000 in 2004, $1,128,000 in 2003, and
$(652,000) in 2002. The effective income tax (benefit) rate was 41.2%, 34.1%,
and (33.9%) for 2004, 2003 and 2002, respectively. See footnote 10, "Income
Taxes", in the notes to the Consolidated Financial Statements.
CAPITAL RESOURCES
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains
rules as to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions and new regulations concerning
internal controls, accounting and operations.
-16-
The prompt corrective action regulations of FDICIA define specific capital
categories based on the institutions' capital ratios. The capital categories,
in declining order, are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". To be considered "well capitalized", an institution must
have a core capital ratio of at least 5% and a total risk-based capital ratio of
at least 10%. Additionally, FDICIA imposed in 1994 a new Tier I risk-based
capital ratio of at least 6% to be considered "well capitalized". Tier I
risk-based capital is, primarily, common stock and retained earnings, net of
goodwill and other intangible assets.
To be categorized as "adequately capitalized" or "well capitalized", CWB must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
and values as set forth in the tables below:
(DOLLARS IN THOUSANDS) RISK- ADJUSTED TOTAL TIER 1 TIER 1
TOTAL TIER 1 WEIGHTED AVERAGE CAPITAL CAPITAL LEVERAGE
CAPITAL CAPITAL ASSETS ASSETS RATIO RATIO RATIO
-------- --------- --------- -------- -------- -------- ---------
DECEMBER 31, 2004
CWBC (Consolidated) $ 41,047 $ 37,315 $ 298,359 $358,623 13.76% 12.51% 10.41%
CWB 38,550 34,819 298,309 354,889 12.92 11.67 9.81
DECEMBER 31, 2003
CWBC (Consolidated) 37,150 34,096 242,730 305,666 15.31% 14.05% 11.15%
CWB 34,695 31,648 242,170 301,024 14.33 13.07 10.51
Well capitalized ratios 10.00 6.00 5.00
Minimum capital ratios 8.00 4.00 4.00
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 reissued any treasury stock nor does it have
any immediate plans or programs to do so.
-17-
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,
------------------------------------------------------
2004 2003 2002
----------------- ----------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
--------- ------ --------- ------ -------- ------
ASSETS (DOLLARS IN THOUSANDS)
Cash and due from banks $ 5,364 1.6% $ 6,431 2.1% $ 6,684 2.2%
Interest-earning deposits in other financial institutions 6,919 2.1% 1,359 0.5% - -
Federal funds sold 8,684 2.6% 15,462 5.1% 22,903 7.6%
Time deposits in other financial institutions 577 .2% 1,542 0.5% 3,929 1.3%
Federal Reserve Bank & Federal Home Loan Bank stock 1,902 .6% 812 0.3% 780 0.3%
Investment securities available-for-sale 21,220 6.4% 8,910 3.0% - -
Investment securities held-to-maturity 3,493 1.0% 5,036 1.7% 4,264 1.4%
Interest only strips, at fair value 3,214 1.0% 4,054 1.3% 6,104 2.0%
Loans held for sale, net 44,037 13.2% 45,445 15.2% 27,699 9.2%
Loans held for investment, net 197,622 59.3% 147,351 49.2% 132,061 43.7%
Securitized loans, net 28,661 8.6% 50,173 16.7% 83,876 27.8%
Servicing rights 3,002 0.9% 2,062 0.7% 2,213 0.7%
Other real estate owned, net 88 - 677 0.2% 554 0.2%
Premises and equipment, net 1,655 0.5% 1,805 0.6% 2,338 0.8%
Other assets 6,792 2.0% 8,542 2.9% 8,557 2.8%
--------- ------ --------- ------ -------- ------
TOTAL ASSETS $333,230 100.0% $299,661 100.0% $301,962 100.0%
========= ====== ========= ====== ======== ======
LIABILITIES
Deposits:
Non-interest-bearing demand $ 38,761 11.6% $ 34,400 11.5% $ 31,388 10.4%
Interest-bearing demand 50,785 15.2% 35,768 11.9% 27,439 9.1%
Savings 17,810 5.3% 15,480 5.2% 13,270 4.4%
Time certificates of $100,000 or more 31,851 9.6% 21,076 7.0% 42,970 14.2%
Other time certificates 109,456 32.9% 109,828 36.7% 85,137 28.2%
--------- ------ --------- ------ -------- ------
Total deposits 248,663 74.6% 216,552 72.3% 200,204 66.3%
Other borrowings 22,699 6.8% 6,518 2.2% - -
Bonds payable in connection with securitized loans 19,676 5.9% 39,000 13.0% 69,251 22.9%
Other liabilities 5,992 1.8% 4,746 1.5% 689 0.2%
--------- ------ --------- ------ -------- ------
Total liabilities 297,030 89.1% 266,816 89.0% 270,144 89.4%
--------- ------ --------- ------ -------- ------
STOCKHOLDERS' EQUITY
Common stock 29,940 9.0% 29,812 10.0% 29,797 9.9%
Retained earnings 6,275 1.9% 3,037 1.0% 2,021 0.7%
Accumulated other comprehensive (loss) (15) - (4) - - -
--------- ------ --------- ------ -------- ------
Total stockholders' equity 36,200 10.9% 32,845 11.0% 31,818 10.6%
--------- ------ --------- ------ -------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $333,230 100.0% $299,661 100.0% $301,962 100.0%
========= ====== ========= ====== ======== ======
-18-
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: 2004 2003 2002
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest earning deposits in other financial institutions:
Average outstanding $ 6,919 $ 1,359 $ -
Interest income 170 31 -
Average yield 2.46% 2.28% -
Time deposits in other financial institutions:
Average outstanding 577 1,542 3,929
Interest income 13 36 104
Average yield 2.25% 2.33% 2.65%
Federal funds sold:
Average outstanding 8,684 15,462 22,903
Interest income 118 169 364
Average yield 1.36% 1.09% 1.59%
Investment securities:
Average outstanding 26,615 14,758 5,044
Interest income 979 489 202
Average yield 3.68% 3.31% 4.00%
Gross loans, excluding securitized:
Average outstanding 244,492 195,648 164,301
Interest income 16,982 13,554 19,410
Average yield 6.95% 6.93% 11.81%
Securitized loans:
Average outstanding 30,098 52,359 85,134
Interest income 3,583 6,104 9,896
Average yield 11.91% 11.66% 11.62%
Total interest-earning assets:
Average outstanding 317,385 281,128 281,311
Interest income 21,845 20,383 29,976
Average yield 6.88% 7.25% 10.66%
-19-
YEAR ENDED DECEMBER 31,
-------------------------------
INTEREST-BEARING LIABILITIES: 2004 2003 2002
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-bearing demand deposits:
Average outstanding $ 50,785 $ 35,768 $ 27,438
Interest expense 820 371 600
Average effective rate 1.61% 1.04% 2.19%
Savings deposits:
Average outstanding 17,810 15,480 13,270
Interest expense 241 215 304
Average effective rate 1.35% 1.39% 2.29%
Time certificates of deposit:
Average outstanding 141,308 130,904 128,107
Interest expense 3,955 4,035 4,641
Average effective rate 2.80% 3.08% 3.62%
Bonds payable:
Average outstanding 19,676 39,000 69,251
Interest expense 2,441 4,637 7,921
Average effective rate 12.41% 11.89% 11.44%
Other borrowings:
Average outstanding 22,699 6,518 -
Interest expense 388 84 22
Average effective rate 1.71% 1.29% -
Total interest-bearing liabilities:
Average outstanding 252,278 227,670 238,088
Interest expense 7,845 9,342 13,466
Average effective rate 3.11% 4.10% 5.66%
NET INTEREST INCOME 14,000 11,041 16,510
NET INTEREST SPREAD 3.77% 3.15% 5.00%
AVERAGE NET MARGIN 4.41% 3.93% 5.87%
Nonaccrual loans are included in the average balance of loans outstanding.
LOAN PORTFOLIO
- ---------------
The Company's largest categories of loans held in the portfolio are commercial
loans, real estate loans, SBA loans, installment loans (including manufactured
housing) and second mortgage loans. Loans are carried at face amount, net of
payments collected, the allowance for loan losses, deferred loan fees/costs and
discounts on loans purchased. Interest on all loans is accrued daily, primarily
on a simple interest basis. It is the Company's policy to place a loan on
nonaccrual status when the loan is 90 days past due. Thereafter, previously
recorded interest is reversed and interest income is typically recognized on a
cash basis.
The rates charged on variable rate loans are set at specific increments. These
increments vary in relation to the Company's published prime lending rate or
other appropriate indices. At December 31, 2004, approximately 62% of the
Company's loan portfolio was comprised of variable interest rate loans. At
December 31, 2003 and 2002, variable rate loans comprised approximately 63% and
56%, respectively, of the Company's loan portfolio. 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:
-20-
DECEMBER 31,
------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------------------------------------
IN YEARS (IN THOUSANDS)
------------------------------------------------------------------------------------------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
-------- --------- ------- --------- -------- --------- -------- --------- -------- ---------
Less than One $ 3,877 $ 44,896 $ 2,382 $ 34,108 $ 2,604 $ 8,188 $ 10,346 $ 26,532 $ 1,058 $ 100,717
One to Five 12,922 29,567 4,128 13,576 3,615 16,224 3,975 6,195 8,250 5,403
Over Five (1) 94,567 108,571 85,390 109,366 105,491 116,322 164,748 58,761 219,213 642
------------------------------------------------------------------------------------------------------
Total $111,366 $ 183,034 $91,900 $ 157,050 $111,710 $ 140,734 $179,069 $ 91,488 $228,521 $ 106,762
======================================================================================================
(1) Approximately $23.5 million of the fixed rate loans at December 31, 2004 are
in the Company's securitized loan portfolio, which was originally funded by
bonds payable, approximately $13.9 million balance of which remains outstanding
at December 31, 2004.
Distribution of Loans
The distribution of the Company's total loans by type of loan, as of the dates
indicated, is shown in the following table:
DECEMBER 31,
------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
LOAN BALANCE LOAN BALANCE LOAN BALANCE LOAN BALANCE LOAN BALANCE
-------------- -------------- -------------- -------------- --------------
Commercial $ 30,893 $ 24,592 $ 19,302 $ 26,411 $ 36,188
Real estate 85,357 71,010 47,456 44,602 55,083
SBA 35,265 30,698 40,961 31,889 30,888
Manufactured housing 66,423 39,073 28,199 24,135 16,892
Other installment 8,645 5,770 7,047 4,088 6,006
Securitized 23,474 37,386 66,195 108,584 153,031
Held for sale 45,988 42,038 43,284 30,848 37,195
-------------- -------------- -------------- -------------- --------------
Gross Loans 296,045 250,567 252,444 270,557 335,283
Less:
Allowance for loan losses 3,894 4,675 5,950 8,275 6,746
Deferred fees/costs (103) 69 (318) 222 (2,710)
Discount on SBA loans 1,748 1,549 956 1,105 1,982
-------------- -------------- -------------- -------------- --------------
Net Loans $ 290,506 $ 244,274 $ 245,856 $ 260,955 $ 329,265
============== ============= =============== ============== ==============
Percentage to Gross Loans:
Commercial 10.5% 9.8% 7.6% 9.8% 10.8%
Real estate 28.8% 28.3% 18.8% 16.5% 16.4%
SBA 11.9% 12.3% 16.3% 11.8% 9.2%
Manufactured housing 22.5% 15.6% 11.2% 8.9% 5.0%
Other installment 2.9% 2.3% 2.8% 1.5% 1.8%
Securitized 7.9% 14.9% 26.2% 40.1% 45.7%
Held for sale 15.5% 16.8% 17.1% 11.4% 11.1%
-------------- -------------- -------------- -------------- --------------
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 loans are primarily made for the purpose of purchasing,
improving or constructing single-family residences, commercial or industrial
properties.
-21-
A substantial portion of the Company's real estate construction loans are first
and second trust deeds on the construction of owner-occupied single family
dwellings. The Company also makes real estate construction loans on commercial
properties. These consist of first and second trust deeds collateralized by the
related real property. Construction loans are generally written with terms of
six to eighteen months and usually do not exceed a loan to appraised value of
80%.
Commercial and industrial real estate loans are secured by nonresidential
property. Office buildings or other commercial property primarily secure these
loans. Loan to appraised value ratios on nonresidential real estate loans are
generally restricted to 80% of appraised value of the underlying real property
if occupied by the owner or owner's business; otherwise, these loans are
generally restricted to 75% of appraised value of the underlying real property.
SBA Loans
The SBA loans consist of 7(a), 504 and B&I loans. The 7(a) loan proceeds are
used for working capital, machinery and equipment purchases, land and building
purposes, leasehold improvements and debt refinancing. The SBA guarantees up to
85% of the loan amount depending on loan size. Under the SBA 7(a) loan program,
the Company is required to retain a minimum of 5% of the gross originated
principal amount of each loan it originates and sells into the secondary market
The 504 loans are made in conjunction with Certified Development Companies.
These loans are granted to purchase or construct real estate or acquire
machinery and equipment. The loan is structured with a conventional first trust
deed provided by a private lender and a second trust deed which is funded
through the sale of debentures. The predominant structure is terms of 10% down
payment, 50% conventional first loan and 40% debenture.
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 Loan
The mortgage loan division originates first and second mortgage loans secured by
trust deeds on one to four family homes. The loans are made to borrowers for
the purpose of purchasing a home or refinancing an existing home for purposes
such as interest rate reduction, home improvement, and debt consolidation.
These loans are underwritten to specific investor guidelines and are committed
for sale to that investor. A majority of these loans are sold servicing
released into the secondary market.
Manufactured Housing Loans
The mortgage loan division originates loans secured by manufactured homes
primarily located in mobile home parks along the Central Coast of California.
At December 31, 2004, the Bank had $66.4 million in its portfolio. The loans
are serviced internally and are generally fixed rate written for terms of 10 to
30 years with balloon payments ranging from 10 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
The Company originated second mortgage loans with loan to value ratios as high
as 125%. In 1998 and 1999, the Company transferred $81 million and $122 million
of these loans, respectively, to the Trusts. The Trusts then sold bonds to
third party investors, which were secured by the transferred loans. The bonds
are held in a trust independent of the Company, the trustee of which oversees
the distribution to the bondholders. The mortgage loans are serviced by a third
party ("Servicer"), who receives a stated servicing fee. There is an insurance
policy on the subordinate bonds that guarantees the payment of the bonds.
As part of the securitization agreements, the Company received an option to
repurchase the bonds when the aggregate principal balance of the mortgage loans
sold declined to 10% or less of the original balance of mortgage loans
securitized. Because the Company has a call option to reacquire the loans
transferred and did not retain the servicing rights, the Company was deemed to
not have surrendered effective control over the loans transferred. Therefore,
the securitizations are accounted for as secured borrowings with a pledge of
collateral. Accordingly, the
-22-
Company consolidates the Trusts and the financial statements of the Company
include the loans transferred and the related bonds issued. The securitized
loans are classified as held for investment.
Loan Commitments Outstanding
The Company's loan commitments outstanding at the dates indicated are summarized
below:
DECEMBER 31,
-------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial $19,010 $13,867 $11,370 $ 7,450 $ 9,776
Real estate 7,618 11,676 7,664 6,370 8,323
SBA 6,107 9,531 8,675 4,712 4,545
Installment loans 8,966 5,112 2,402 13,339 2,260
Standby letters of credit 403 522 380 438 913
------- ------- ------- ------- -------
Total commitments $42,104 $40,708 $30,491 $32,309 $25,817
======= ======= ======= ======= =======
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. At December 31, 2004, Manufactured Housing comprised
22.5% of the Company's loan portfolio. Commercial real estate loans and SBA
loans comprised over 10% of the Company's loan portfolio as of December 31, 2003
and 2004, but consisted of diverse borrowers. Although the Company does not
have significant concentrations in its loan portfolio, the ability of the
Company's customers to honor their loan agreements is dependent upon, among
other things, the general economy of the Company's market areas.
-23-
Allowance for Loan Losses
The following table summarizes the activity in the Company's allowance for loan
losses for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Average gross loans, held for investment, $230,533 $202,563 $218,317 $267,402 $297,574
including Securitized loans
Gross loans at end of year, held for 248,412 206,912 208,522 237,989 302,476
investment, including Securitized loans
Allowance for loan losses, beginning of year $ 4,676 $ 5,950 $ 8,275 $ 6,746 $ 5,529
Loans charged off:
Commercial 185 445 1 614 410
Real estate 274 471 2,474 3,129 1,216
Installment - 3 - - 446
Short-term consumer - 902 3,162 2,478 2
Securitized 1,356 2,512 4,012 4,358 3,674
--------- --------- --------- --------- ---------
Total 1,815 4,333 9,649 10,580 5,748
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off
Commercial 31 88 71 40 154
Real estate 44 42 396 171 17
Short-term consumer - 672 1,392 400 -
Securitized 540 588 566 378 1
--------- --------- --------- --------- ---------
Total 615 1,390 2,425 990 171
--------- --------- --------- --------- ---------
Net loans charged off 1,200 2,943 7,224 9,590 5,577
Provision for loan losses 418 1,669 4,899 11,881 6,794
Adjustments due to Palomar purchase/sale - - - (762) -
--------- --------- --------- --------- ---------
Allowance for loan losses, end of year $ 3,894 $ 4,676 $ 5,950 $ 8,275 $ 6,746
========= ========= ========= ========= =========
Ratios:
Net loan charge-offs to average loans 0.5% 1.5% 3.3% 3.6% 1.9%
Net loan charge-offs to loans at end of period 0.5% 1.4% 3.5% 4.0% 1.8%
Allowance for loan losses to loans held for investment at end of period 1.6% 2.3% 2.9% 3.5% 2.2%
Net loan charge-offs to allowance for loan losses at beginning of period 25.7% 49.5% 87.3% 142.2% 100.9%
Net loan charge-offs to provision for loan losses 287.1% 176.3% 147.5% 80.7% 82.1%
The following table summarizes the allowance for loan losses:
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(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 $ 1,388 35.7% $ 1,550 27.0% $ 1,874 26.6% $ 1,752 18.8% $ * 12.5%
Manufactured housing 465 11.9% 372 15.6% 272 11.2% 291 8.9% * 5.0%
Securitized 1,109 28.5% 2,024 14.9% 2,571 26.2% 4,189 40.1% 4,042 45.6%
All other loans 932 23.9% 730 42.5% 1,233 36.0% 2,043 32.2% 2,704 36.9%
--------------------------------------------------------------------------------------------------
TOTAL $ 3,894 100% $ 4,676 100% $ 5,950 100% $ 8,275 100% $ 6,746 100%
==================================================================================================
* The detailed information for 2000 is not readily available.
-24-
Total allowance for loan losses ("ALL") decreased $782,000, or 16.7%, from $4.7
million at December 31, 2003 to $3.9 million at December 31, 2004. The majority
of the decline in the allowance related to a decrease of $915,000 in the
allowance for securitized loans. The securitized loan loss allowance changed
primarily due to the significant principal balance payments in 2004 of $13.9
million, or 37.2%, and a 57.6% decrease in net charge-offs from 2003 compared to
2004. This decrease in allowance was partially offset by increases in the
allowance for other loans due to loan growth.
Loans charged-off, net of recoveries, were $1.2 million in 2004, $2.9 million in
2003 and $7.2 million in 2002. The primary reason for the decline in net
charge-offs in 2004 was the significant paydown in the securitized loan
portfolio. The Company has also experienced continued increases in the SBA
portfolio credit quality. Management believes its continued strong underwriting
standards have influenced the decline in problem loans in the SBA portfolio.
In management's opinion, the balance of the allowance for loan losses was
sufficient to absorb known and inherent probable losses in the loan portfolio as
of December31, 2004.
The Company recorded $418,000 as a provision for loan losses in 2004, $1.7
million in 2003 and $4.9 million in 2002. The primary reasons for the decrease
in provision expense are the pay-down in the securitized loan portfolio and the
Company's change in portfolio mix to perceived less risky loans.
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,
----------------------------------------------
2004 2003 2002 2001 2000
------- ------- -------- -------- --------
(IN THOUSANDS)
Impaired loans without specific valuation allowances $ 49 $ 235 $ 422 $ - $ 565
Impaired loans with specific valuation allowances 3,926 6,843 7,971 6,587 3,531
Specific valuation allowance related to impaired loans (425) (640) (1,127) (1,669) (1,207)
------- ------- -------- -------- --------
Impaired loans, net $3,550 $6,438 $ 7,266 $ 4,918 $ 2,889
======= ======= ======== ======== ========
Average investment in impaired loans $5,137 $6,584 $ 7,565 $ 5,047 $ 4,677
======= ======= ======== ======== ========
The following schedule reflects recorded investment at the dates indicated in
certain types of loans: