**UNITED STATES**

 

**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 
| **(Mark One)**                                         |
|--------------------------------------------------------|
| **ý**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |   |
|                                                   |
| **For the quarterly period ended  September 30, 2003** |
|                                                   |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |   |
|                                                   |
| **For the transition period from**                     |
|                                                   |
| **Commission  File Number: 333-14288**                 |

 

 

**CALWEST BANCORP**

 

| **CALIFORNIA**                                                                          |   | **NO.  56-2380639**                |
|-----------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation)                                         |   | (IRS Employer  Identification No.) |
|                                                                                    |
| **22342  Avenida Empresa, Rancho Santa Margarita, California 92688**                    |
| (Address of principal  executive offices)      (Zip Code) |
|                                                                                    |
| Registrant’s telephone  number, including area code:  **(949) 766-3000**      |
|                                                                                    |
| **SOUTH  COUNTY BANK, N.A.**                                                            |
| (Former name or former  address, if changed since last report)                          |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(c) of the Securities Exchange Act of1934 during the preceding 12 months (of shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yesý   No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS

 

On September 30, 2003, there were 1,082,720 shares of CalWest BancorpCommon Stock outstanding.

 

 

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**CalWest Bancorp**

**September 30, 2003**

 

**INDEX**

 
| PART I - FINANCIAL  INFORMATION                                                                                             |
|-----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                        |
| Item 1  - Financial Statements                                                                                              |
| Condensed  Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                                          |
| Condensed  Consolidated Statement of Income for the Three Months and Nine Months Ended  September 30, 2003 and 2002         |
| Condensed  Consolidated Statements of Changes in Shareholders’ Equity from January 1,  2002 through September 30, 2003 |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2003 and 2002                     |
| Notes to  Consolidated Financial Statements.                                                                                |
| Item 2  - Management’s Discussion and Analysis of Financial Condition and Results of  Operations                       |
| Item 3  – Controls and Procedures                                                                                      |
|                                                                                                                        |
| PART II - OTHER INFORMATION                                                                                                 |
|                                                                                                                        |
| Item 1 - Legal Proceedings                                                                                                  |
| Item 2 - Changes in  Securities                                                                                             |
| Item 3 -  Defaults upon Senior Securities                                                                                   |
| Item  4 - Submission of Matters to a Vote of Security Holders                                                               |
| Item 5 - Other Information                                                                                                  |
| Item 6 -  Exhibits and Reports on Form 8-K                                                                                  |
| Signatures                                                                                                                  |

 

2

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**Item 1****.   FinancialStatements**

 

**CalWest Bancorp**

**Condensed Consolidated Balance Sheets**

**(Unaudited - Dollar Amounts in Thousands)**

** **
|                                                                                                                             |   | **September  30,  2003** |    | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                             |   |                     |    |                    |   |
| Cash and Due From Bank                                                                                                           |   | $                        | 7,030   |                    | $      | 6,576 |   |
| Federal Funds Sold                                                                                                               |   | 22,435                   |    | 6,335                   |   |
| TOTAL CASH AND EQUIVALENTS                                                                                                       |   | 29,465                   |    | 12,911                  |   |
|                                                                                                                             |   |                     |    |                    |   |
| Interest Bearing Deposits in other Banks                                                                                         |   | 1,198                    |    | 4,885                   |   |
|                                                                                                                             |   |                     |    |                    |   |
| Investment Securities, net                                                                                                       |   | 12,489                   |    | 13,430                  |   |
|                                                                                                                             |   |                     |    |                    |   |
| Loans Held for Sale                                                                                                              |   | 5,024                    |    | 11,868                  |   |
|                                                                                                                             |   |                     |    |                    |   |
| Loans                                                                                                                            |   | 61,925                   |    | 44,990                  |   |
| Allowance for Loan Losses                                                                                                        |   | (616                     | )       | (511                    | )      |
|                                                                                                                             |   |                     |    |                    |   |
| NET LOANS                                                                                                                        |   |                     | 61,309  |                    | 44,479 |   |
|                                                                                                                             |   |                     |    |                    |   |
| Premises and Equipment, net                                                                                                      |   | 400                      |    | 413                     |   |
| Accrued Interest and Other Assets                                                                                                |   | 2,035                    |    | 1,812                   |   |
|                                                                                                                             |   |                     |    |                    |   |
| TOTAL ASSETS                                                                                                                     |   | $                        | 111,920 |                    | $      | 89,798 |   |
|                                                                                                                             |   |                     |    |                    |   |
| Noninterest-Bearing Deposits                                                                                                     |   | $                        | 39,124  |                    | $      | 24,631 |   |
| Interest-Bearing Deposits                                                                                                        |   | 60,405                   |    | 56,229                  |   |
|                                                                                                                             |   |                     |    |                    |   |
| TOTAL DEPOSITS                                                                                                                   |   |                     | 99,529  |                    | 80,860 |   |
|                                                                                                                             |   |                     |    |                    |   |
| Other Borrowings                                                                                                                 |   | 312                      |    | 229                     |   |
| Company Obligated Mandatorily Redeemable Preferred Securities of  Subsidiary Trust Holding Solely Junior Subordinated Debentures |   | 3,093                    |    | —                  |   |
| Accrued Interest and Other Liabilities                                                                                           |   | 253                      |    | 446                     |   |
|                                                                                                                             |   |                     |    |                    |   |
| TOTAL LIABILITIES                                                                                                                |   |                     | 103,187 |                    | 81,535 |   |
|                                                                                                                             |   |                     |    |                    |   |
| Common Shares - $5 Par Value                                                                                                     |   | 5,414                    |    | 5,414                   |   |
| Surplus                                                                                                                          |   | 4,092                    |    | 4,092                   |   |
| Accumulated Deficit                                                                                                              |   | (772                     | )       | (1,242                  | )      |
| Accumulated Other Comprehensive Income                                                                                           |   | (1                       | )       | (1                      | )      |
|                                                                                                                             |   |                     |    |                    |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                  |   |                     | 8,733   |                    | 8,263  |   |
|                                                                                                                             |   |                     |    |                    |   |
| TOTAL LIABILITIES AND EQUITY                                                                                                     |   | $                        | 111,920 |                    | $      | 89,798 |   |

 

3

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**CalWest Bancorp**

**Condensed Consolidated Statements of Income**

**(Unaudited - Dollar Amounts in Thousands, Except Per ShareData)**

 
|                                                 |   | **For the  three Months Ended  September 30,** |   | **For the  Nine Months Ended  September 30,** |   |
|------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                 |   | **2003**                                       |   | **2002**                                      |   | **2003** |   | **2002** |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Interest Income                                      |   | $                                              | 1,261  |                                          | $      | 1,153 |   | $ | 3,562 |   | $ | 2,911 |   |
| Interest Expense                                     |   | 244                                            |   | 332                                           |   | 832 |   | 944 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Net Interest Income                                  |   |                                           | 1,017  |                                          | 821    |   | 2,730 |   | 1,967 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Provision for Loan Losses                            |   | 55                                             |   | 95                                            |   | 163 |   | 143 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Net Interest Income after  Provision for Loan Losses |   |                                           | 962    |                                          | 726    |   | 2,567 |   | 1,824 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Noninterest Income                                   |   | 447                                            |   | 452                                           |   | 1,458 |   | 1,283 |   |
| Noninterest Expense                                  |   | 1,252                                          |   | 887                                           |   | 3,504 |   | 2,568 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Income before Taxes                                  |   |                                           | 157    |                                          | 291    |   | 521 |   | 539 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Income Taxes                                         |   | 50                                             |   | (48                                           | )      | 50 |   | (114 | ) |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Net Income                                           |   |                                           | $      | 107                                           |   | $ | 339 |   | $ | 471 |   | $ | 653 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Per Share Data:                                      |   |                                           |   |                                          |   |   |   |   |   |
| Net Income - Basic                                   |   | $                                              | .10    |                                          | $      | .48 |   | $ | .44 |   | $ | .92 |   |
| Net Income - Diluted                                 |   | $                                              | .10    |                                          | $      | .48 |   | $ | .43 |   | $ | .92 |   |

 

4

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**CalWest Bancorp**

**Condensed Consolidated Statements of Changes in Shareholders’Equity**

**(Unaudited - Dollar Amounts in Thousands)**

 
|                               |   | **Common  Stock** |   | **Surplus  Amount** |   | **Comprehensive  Income** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total** |   |
|------------------------------------|--------|-------------------|--------|---------------------|--------|---------------------------|--------|--------------------------|--------|-----------------------------------------------|--------|-----------|--------|
|                               |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| **Balance at  January 1, 2002**    |   | $                 | 3,153  |                | $      | 3,074                     |   |                     |   | $                                             | (2,240 | )         | $      | (1 | ) | $ | 3,986 |   |
|                               |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| Issuance of Common Shares          |   | 2,261             |   | 1,018               |   |                      |   |                     |   |                                          |   | 3,279     |   |
| Net of Expenses of $338            |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| **Comprehensive  Income**          |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| Net Income                         |   |              |   |                |   | $                         | 997    |                     | 997    |                                          |   |      | 997    |   |
| **Comprehensive  Income**          |   |              |   |                |   | $                         | 997    |                     |   |                                          |   |      |   |   |
|                               |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| **Balance at  December 31, 2002**  |   | 5,414             |   | 4,092               |   |                      |   | (1,243                   | )      | (1                                            | )      | 8,262     |   |
|                               |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| **Comprehensive  Income**          |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| Unrealized Loss on Securities      |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| Available for Sale                 |   |              |   |                |   | $                         | — |                     |   |                                          | — |      | — |   |
| Net Income                         |   |              |   |                |   | 471                       |   | 471                      |   |                                          |   | 471       |   |
| **Comprehensive  Income**          |   |              |   |                |   | $                         | 471    |                     |   |                                          |   |      |   |   |
|                               |   |              |   |                |   |                      |   |                     |   |                                          |   |      |   |
| **Balance at  September 30, 2003** |   | $                 | 5,414  |                | $      | 4,092                     |   |                     |   | $                                             | (772   | )         | $      | (1 | ) | $ | 8,733 |   |

 

5

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**CalWest Bancorp**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited - Dollar Amounts in Thousands)**

 
|                                                       |   | **For the  Nine Months Ended  September 30,** |    |
|------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                       |   | **2003**                                      |    | **2002** |   |
|                                                       |   |                                          |    |   |   |
| OPERATING  ACTIVITIES                                      |   |                                          |    |   |   |
| Net Income                                                 |   | $                                             | 471     |   | $ | 653 |   |
| Adjustments to  Reconcile Net Income to                    |   |                                          |    |   |   |
| Net Cash  Provided (Used) by Operating Activities:         |   |                                          |    |   |   |
| Depreciation and  Amortization                             |   | 171                                           |    | 176 |   |
| Origination of  Loans Held for Sale                        |   | (90,126                                       | )       | (84,960 | ) |
| Provision for  Loan Losses                                 |   | 163                                           |    | 143 |   |
| Proceeds from  Loan Sales                                  |   | 96,970                                        |    | 82,845 |   |
| Gain on Sale of  Loans                                     |   | (1,075                                        | )       | (860 | ) |
| Other Items                                                |   | 746                                           |    | 516 |   |
| NET CASH PROVIDED (USED)  BY  OPERATING ACTIVITIES         |   |                                          | 7,320   |   | (1,487 | ) |
|                                                       |   |                                          |    |   |   |
| INVESTING  ACTIVITIES                                      |   |                                          |    |   |   |
| Net Increase of  Federal Reserve Bank and other Stock      |   | (93                                           | )       | (152 | ) |
| Purchases of  Held-to-Maturity Securities                  |   | (76,914                                       | )       | (24,046 | ) |
| Purchases of  Available-For-Sale Securities                |   | —                                        |    | (3,997 | ) |
| Proceeds from  Maturities of Held-to-Maturity Securities   |   | 81,557                                        |    | 22,781 |   |
| Proceeds from  Maturities of Available-for-Sale Securities |   | 18                                            |    | 6,517 |   |
| Net Increase in  Loans                                     |   | (16,935                                       | )       | (8,649 | ) |
| Purchase of  Premises and Equipment                        |   | (154                                          | )       | (81 | ) |
|                                                       |   |                                          |    |   |   |
| NET CASH USED  BY INVESTING ACTIVITIES                     |   |                                          | (12,521 | ) | (7,627 | ) |
|                                                       |   |                                          |    |   |   |
| FINANCING  ACTIVITIES                                      |   |                                          |    |   |   |
| Net Increase in  Non-Interest Bearing Deposits             |   | 14,493                                        |    | 14,322 |   |
| Net Increase in  Interest Bearing Deposits                 |   | 4,176                                         |    | 1,312 |   |
| Net Increase in  Other Borrowings                          |   | 3,176                                         |    | 349 |   |
| Repayment of  Capitalized Lease Obligation                 |   | (90                                           | )       | (82 | ) |
| Proceeds from  Issuance of Subordinated Debt               |   | —                                        |    | 114 |   |
| Proceeds from  Issuance of Common Stock                    |   | —                                        |    | 3,279 |   |
|                                                       |   |                                          |    |   |   |
| NET CASH PROVIDED  BY FINANCING ACTIVITIES                 |   |                                          | 21,755  |   | 19,294 |   |
|                                                       |   |                                          |    |   |   |
| INCREASE IN CASH  AND CASH EQUIVALENTS                     |   |                                          | 16,554  |   | 10,180 |   |
| Cash and Cash  Equivalents at Beginning of Period          |   | 12,911                                        |    | 6,783 |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF PERIOD            |   | $                                             | 29,465  |   | $ | 16,963 |   |

 

6

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**CalWest Bancorp**

**Notes to Consolidated Financial Statements**

 

**Note 1 -Basis of Presentation and Management Representation**

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles.  This information should be read inconjunction with the Company’s 2002 Form 10-KSB.

 

The consolidated financial statements include CalWest Bancorp and itswholly owned subsidiary, South County Bank, N.A. (collectively, the“Company”).  South County Bank wasstarted in October 1999, and CalWest Bancorp became effective as a bank holdingcompany as of August 1, 2003.  Thefinancial statement presented for 2003 include consolidated numbers for bothCalWest Bancorp and South County Bank, whereas the financial statementspresented for 2002 include South County Bank only.

 

Prior to August 1, 2003, the effective date for the bank holdingcompany formation, the Bank filed certain reports pursuant to Section 13 of theSecurities Exchange Act of 1934 with the Office of the Comptroller of theCurrency.  Information herein should beread in conjunction with the Bank’s 2002 Form 10-KSB as filed with theComptroller of the Currency.  Subsequent to August 1, 2003, the Bank’s obligation to file such reportshas been suspended and the Company now files such reports with the Securitiesand Exchange Commission.

 

Operating results for interim periods are not necessarily indicative ofoperating results for an entire fiscal year. In the opinion of management, the unaudited financial information forthe nine months period ended September 30, 2003, and 2002 reflect alladjustments, consisting only of normal recurring accruals and provisions,necessary for a fair presentation thereof.

 

**Note 2 - Earnings Per Share**

 

Effective October 21, 1999, the Bank adopted Statement of FinancialAccounting Standards No. 128, “Earnings per Share.”  Accordingly, basic earnings per share are computed by dividingincome available to common shareholders by the weighted average number ofcommon shares outstanding during each period. The computation of diluted earnings per share also considers the numberof shares issuable upon the assumed exercise of outstanding common stockoptions and the number of shares issuable upon the assumed conversion of theconvertible preferred stock. These items were anti-dilutive for the periodsreported and therefore a dilutive earnings per shares is reported as the sameas basic earnings per share.

 

**Note 3 –Stock-Based Compensation**

 

SFAS No. 123, *“Accounting forStock-Based Compensation,”* encourages, but does not require,companies to record compensation cost for stock based employee compensationplans at fair value.  The Companyaccounts for stock-based compensation using the intrinsic value method prescribedin Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock

 

7

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Issued to Employees,” and related Interpretations.  Accordingly, compensation cost for stockoptions will be measured as the excess, if any, of the quoted market price ofthe Company’s stock at the date of the grant over the amount an employee mustpay to acquire the stock.  All of theCompany’s stock option grants included exercise prices equal to the Company’scurrent market price per share; accordingly, no compensation expense wasreported using the intrinsic value method of APB Opinion No. 25.

 

Had compensation cost for the Company’s stock option plans beendetermined based on the fair value at the grant date for awards under thoseplans consistent with the method of SFAS No. 123, the Company’s net income andincome per share would have been reduced to the pro forma amounts indicatedbelow (dollar amounts in thousands, except per share data):

 
|                                                                                            |   | **FOR THE 3 MONTHS  ENDED****September  30,** |   | **FOR THE 6 MONTHS  ENDED****September  30,** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                            |   | **2003**                                      |   | **2002**                                      |   | **2003** |   | **2002** |   |
| Net Income                                                                                      |   | $                                             | 107    |                                          | $      | 339 |   | $ | 471 |   | $ | 653 |   |
| As Reported                                                                                     |   |                                          |   |                                          |   |   |   |   |   |
| Stock-Based Compensation using Intrinsic Value Method                                           |   | —                                        |   | —                                        |   | — |   | — |   |
| Stock-Based Compensation that would have been reported using the Fair  Value Method as SFAS 123 |   | (18                                           | )      | (18                                           | )      | (54 | ) | (54 | ) |
| Pro Forma                                                                                       |   | $                                             | 89     |                                          | $      | 321 |   | $ | 417 |   | $ | 599 |   |
|                                                                                            |   |                                          |   |                                          |   |   |   |   |   |
| Basic Income Per Share                                                                          |   |                                          |   |                                          |   |   |   |   |   |
| As Reported                                                                                     |   | $                                             | 0.10   |                                          | $      | 0.48 |   | $ | 0.44 |   | $ | 0.92 |   |
| Pro Forma                                                                                       |   | $                                             | 0.08   |                                          | $      | 0.45 |   | $ | 0.39 |   | $ | 0.84 |   |
|                                                                                            |   |                                          |   |                                          |   |   |   |   |   |
| Diluted Income                                                                                  |   |                                          |   |                                          |   |   |   |   |   |
| As Reported                                                                                     |   | $                                             | 0.10   |                                          | $      | 0.48 |   | $ | 0.43 |   | $ | 0.92 |   |
| Pro Forma                                                                                       |   | $                                             | 0.08   |                                          | $      | 0.45 |   | $ | 0.38 |   | $ | 0.84 |   |

 

In March 2003, the Financial Accounting Standards Board (“FASB”)announced that it would be adding to its agenda a project on stock-basedcompensation disclosure.  On April 22,2003, in connection with that project, the FASB announced that it would in factrequire that stock options be expensed. The project will address the accounting for and disclosure ofstock-based compensation, including the proper methodology for expensing stockoptions.  The results of this projectare expected to be released in an Exposure Draft later this year and to beeffective in 2004.

 

8

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**Item 2****.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

This Form 10-QSB contains various forward-looking statements andincludes assumptions concerning the Company’s beliefs, plans, objectives,goals, expectations, anticipations, estimates, intentions, operations, futureresults, and prospects, including statements that include the words may, could,should, would, believe, expect, will, shall, anticipate, estimate, intend, planor similar expressions.  Theseforward-looking statements are based upon current expectations and are subjectto risk and uncertainties.  Inconnection with the safe harbor provisions of the Private Securities LitigationReform Act of 1995, the Company provides the following cautionary statementidentifying important factors (some of which are beyond the Company ‘scontrol), which could cause the actual results, or events to differ materiallyfrom those set forth in or implied by the forward-looking statements andrelated assumptions.

 

Such factors include the following: (i) risk and cost resulting from the opening of a new office or officesand adding employees; (ii) the effect of changing regional and nationaleconomic conditions, especially as they affect the income and cash flow ofbusiness and consumer borrowers, their ability to repay loans, and their needfor borrowed funds; (iii) the effects of trade, monetary and fiscal policiesand laws, including interest rate policies of the Board of Governors of theFederal Reserve System; (iv) significant changes in interest rates andprepayment speeds; (v) inflation, stock and bond market, and monetaryfluctuations; (vi) credit risks of commercial, SBA, real estate, consumer, andother lending activities, including risks related to changes in the values ofreal estate and other security for loans; (vii) changes in federal and statebanking and financial services laws and regulations; (viii) the presence in theCompany’s market area of competitors with greater financial resources than theCompany; (ix) the timely development of competitive new products and servicesby the Company and the acceptance of those products and services by customersand regulators (when required); (x) the secure and effective implementation ofnew technology (including Internet services) for both the delivery of servicesand internal operations; (xi) the willingness of customers to substitutecompetitors’ products and services for those of the Company and vice versa;(xii) changes in consumer and business spending and savings habits; (xiii)unanticipated regulatory or judicial proceedings; and (xiv) other externaldevelopments which could materially impact the Company ‘s operational andfinancial performance.

 

**Basis ofPresentation**

 

DISCUSSION RELATING TO FINANCIAL RESULTS AND INFORMNATION AS OF, ANDFOR, THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 IS CONSOLIDATEDINFORMATION FOR THE COMPANY AND THE BANK. PRIOR PERIODS INCLUDE ONLY THE BANK.

 

**IncomeSummary**

 

For the nine months ended September 30, 2003, the Company reported anet income of $471,000, or $0.43 diluted income per share. This represents adecrease in net income over the same period during 2002 when the Bank had a netincome of $653,000, or $0.92 diluted income per share as of September 30, 2002.For the three months ended September 30, 2003, the Company reported net incomeof $107,000 or $0.10 diluted income per share. This represents a decrease innet

 

9

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income over the same period during 2002 when the Bank had a net incomeof $339,000, or $0.48 diluted income per share.  The decrease in earnings was due to an increase in noninterestexpense as a result of steps taken such as increased staffing to support 50 percentgrowth in total assets from September 30, 2002 and 25 percent growth sinceDecember 31, 2002.  Also, during thethird quarter 2003, CalWest Bancorp was formed as a Bank Holding Company ofSouth County Bank that resulted in startup expenses of $51,000approximately.  Also, in the third quarter,South County Bank started recording income tax expenses since the tax benefitsfrom loss carry forward had been exhausted. The decrease in earning per share was also due to 1,082,720 sharesoutstanding as of September 30, 2003, compared to 709,783 weighted averageshares outstanding as of September 30, 2002.  The annualized return on average assets was 0.48% for the nine months of2003.  Annualized return on averageshareholders’ equity for the nine months of 2003 was 5.49%.

 

**NetInterest Income**

 

Net interest income is the amount by which the interest andamortization of fees generated from loans and other earning assets exceed thecost of funding those assets, usually deposit account interest expense.  Net interest income depends on thedifference (the “interest rate spread”) between gross interest and fees earnedon the loans and investment portfolios and the interest rates paid on depositsand borrowings.  Net interest marginratio is a percentage of Net Interest Income divided by total earning assets,which primarily includes loans and investments. Net Interest Income for thequarter ended September 30, 2003 was $1.0 million compared to $821,000 to thesame period during 2002.  Net interestincome was $2.7 million for the nine months ended September 30, 2003 comparedto $1.9 million for the nine months ended September 30, 2002.

 

The following table sets forth the components of net interest income,average earning assets and net interest margin:

 
|                   |   | **Three  Months EndedSeptember 30,** |    | **Nine  Months EndedSeptember 30,** |   | **Year EndedDecember 31,** |   |
|------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|----------------------------|--------|
|                   |   | **2003**                             |    | **2002**                            |   | **2003**                   |   | **2002** |   | **2002** |   |
|                   |   |                                 |    |                                |   |                       |   |   |   |   |   |
| Interest Income        |   | $                                    | 1,261   |                                | $      | 1,153                      |   | $ | 3,562 |   | $ | 2,911 |   | $ | 3,989 |   |
| Interest Expense       |   | 244                                  |    | 332                                 |   | 832                        |   | 944 |   | 1,317 |   |
|                   |   |                                 |    |                                |   |                       |   |   |   |   |   |
| Net Interest Income    |   | $                                    | 1,017   |                                | $      | 821                        |   | $ | 2,730 |   | $ | 1,967 |   | $ | 2,672 |   |
|                   |   |                                 |    |                                |   |                       |   |   |   |   |   |
| Average Earning Assets |   | $                                    | 102,306 |                                | $      | 66,057                     |   | $ | 96,979 |   | $ | 56,494 |   | $ | 62,887 |   |
| Net Interest Margin    |   | 3.98                                 | %       | 4.97                                | %      | 3.75                       | %      | 4.64 | % | 4.25 | % |

 

The increase in net interest income in 2003 was primarily the result ofgrowth in interest earning assets. During the nine months of 2003, loan growth was not significant enoughto fully offset the impact of the declining loan and investment portfolioyields, consequently interest yields on earning assets declined.  The interest expense for the nine monthsended September 30, 2003 was $832,000 compared to $944,000 for the same periodin 2002.  The interest expense decreasedeven though the interest bearing liabilities increased to $60.4 million as ofSeptember 30, 2003 from $56.2 million as of December 31, 2002. Therefore, thedeclining yield on the earning assets

 

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with a smaller decrease in cost of interest bearing liabilities causedthe net interest margin to decrease by 89 basis points from the same period in2002.

 

**Provisionfor Loan Losses**

 

During the first, second and third quarter of 2003 the Bank contributed$43,000, $65,000, and $55,000, respectively, to the allowance for loan losses.Total provision for loan loss in the nine months of 2003 was $163,000 comparedto $143,000 for the same period in 2002. Management believes that theallowance, which stands at 1.00% of total loans (excluding loansAvailable-for-sale) at September 30, 2003, is adequate to cover future losses.

 

Changes in the allowance for loan losses for the periods endedSeptember 30, 2003 and September 30, 2002 are as follows (dollar amounts inthousands):
|                                       |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                       |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Allowance, Beginning of Period             |   | $                                      | 597    |                                  | $      | 418 |   | $ | 511 |   | $ | 396 |   |
| Provision for Loan Losses                  |   | 55                                     |   | 95                                    |   | 163 |   | 143 |   |
| Loans Charged Off – net of Recoveries |   | (36                                    | )      | (22                                   | )      | (58 | ) | (48 | ) |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Allowance, End of Period                   |   | $                                      | 616    |                                  | $      | 491 |   | $ | 616 |   | $ | 491 |   |

 

**NonInterest Income**

 

Non Interest Income represents deposit account service charges andother types of non-loan related fee income. Non-interest income for the third quarter 2003 was $447,000 compared to$452,000 for the same period in 2002. Non-interest income for the nine months ended September 30, 2003 totaled$1.5 million compared to $1.3 for the same period in 2002. The increase isprimarily from the gain on sale of loans, which were $1.1 million as ofSeptember 30, 2003 compared to $860,000 as of September 30, 2002.

 

|                                |   | **September 30,** |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | **2003**          |   | **2002** |   |
|                                |   |              |   |   |   |
| Service Charges on Deposit Accounts |   | $                 | 226    |   | $ | 192 |   |
| Gain on sales of loans              |   | 1,075             |   | 860 |   |
| Mortgage loan documentation fees    |   | 79                |   | 193 |   |
| Other non-interest income           |   | 78                |   | 38 |   |
| Total                               |   | $                 | 1,458  |   | $ | 1,283 |   |

 

**NonInterest Expense**

 

Non Interest Expenses represent salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Non-interest expenses for the third quarter of2003 were $1.3 million compared to $887,000 for the same period in 2002.  Non-interest expense for the nine monthsended September 30, 2003 totaled $3.5 million compared to $2.6 million for thesame period in 2002.   The increase innon-interest expense was

 

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due to the increase in personnel and premise expenses resulting fromgrowth in the bank’s assets and the formation of Bank Holding Company. Also,during 2003, the Bank opened a loan production office in Irvine, California, togenerate commercial loans in North Orange County area.  The Bank hired two SBA employees to handlethe increase in SBA loan volume after receiving a preferred lending status bythe SBA office in Orange County.  Overall,50 percent growth in total assets as of September 30, 2003, compared toSeptember 30, 2002, caused the increase in operating expenses for this year.

 

The following table is a summary of operating expenses as of September30, 2003, and 2002: (In thousands of dollars).

 
|                                       |   | **September 30,** |   |
|--------------------------------------------|--------|-------------------|--------|
|                                       |   | **2003**          |   | **2002** |   |
|                                       |   |              |   |   |   |
| Advertising and Marketing Expenses         |   | $                 | 76     |   | $ | 30 |   |
| Bank Holding Company Expenses              |   | 51                |   | — |   |
| Data Processing Expenses                   |   | 200               |   | 144 |   |
| Director’s Fees                       |   | 68                |   | 51 |   |
| Legal Fees                                 |   | 100               |   | 29 |   |
| Postage Expenses                           |   | 54                |   | 41 |   |
| Premise and Fixed assets expense           |   | 520               |   | 479 |   |
| Printing, Stationary and Supplies Expenses |   | 76                |   | 62 |   |
| Salaries and Employee Benefits expense     |   | 1,637             |   | 1,252 |   |
| Other Miscellaneous Expenses               |   | 722               |   | 480 |   |
| Total                                      |   | $                 | 3,504  |   | $ | 2,568 |   |

 

**IncomeTaxes**

 

As of September 30, 2003, the Company recorded tax expense of $50,000compared to an $114,000 tax benefit for the same period September 30, 2002.

 

**BalanceSheet Analysis**

 

Total assets at September 30, 2003 totaled $111.9 million, an increasefrom $89.8 million at December 31, 2002. Compared to total assets of $74.5 million at September 30, 2002, theBank has increased assets by $37.4 million or 50.2%.

 

**LoanPortfolio**

 

The following table sets forth the components of total net loansoutstanding in each category at the date indicated (dollar amounts inthousands):

 

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|                             |   | **September  30,** |   |
|----------------------------------|--------|--------------------|--------|
| **Loans**                        |   | **2003**           |   | **2002** |   |
| Commercial                       |   | $                  | 36,628 |   | $ | 24,058 |   |
| Real Estate - Construction       |   | 5,630              |   | 4,057 |   |
| Real Estate - Other              |   | 16,616             |   | 6,600 |   |
| Real Estate - Available for Sale |   | 5,024              |   | 12,116 |   |
| Consumer                         |   | 3,051              |   | 3,733 |   |
| Total Loans                      |   | $                  | 66,949 |   | $ | 50,564 |   |

 

**AssetQuality**

 

The following table sets forth the components of non-performing assetsand related ratios: (dollar amounts in thousands):

 
|                                                          |   | **September  30,** |   | **December  31,  2002** |   |
|---------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                          |   | **2003**           |   | **2002**                |   |   |
|                                                          |   |               |   |                    |   |   |   |
| Loans 90 day past due and still accruing                      |   | $                  | — |                    | $      | — |   | $ | — |   |
| Loans on nonaccrual                                           |   | 558                |   | 123                     |   | 23 |   |
| Nonperforming Loans                                           |   | 558                |   | 123                     |   | 23 |   |
| Other real estate owned                                       |   | —             |   | —                  |   | — |   |
| Nonperforming Assets                                          |   | $                  | 558    |                    | $      | 123 |   | $ | 23 |   |
|                                                          |   |               |   |                    |   |   |   |
| Nonperforming loans as a percent of total loans               |   | 0.83               | %      | 0.24                    | %      | 0.04 | % |
| Allowance for loan losses as a percent of nonperforming loans |   | 110.39             | %      | 399.19                  | %      | 2221.74 | % |
| Nonperforming assets as a percent of total assets             |   | 0.50               | %      | 0.17                    | %      | 0.03 | % |

 

Non-performing loans as a percent of total loans increased to 0.83% atSeptember 30, 2003 from 0.24% as of September 30, 2002.  As a percent of total assets, non-performingloans were 0.50% at September 30, 2003, compared to 0.17% at the same period2002.  As of September 30, 2003, fourloans were on non-accrual status compared to two loans for the same period in2002.

 

**Trust Preferred Securities**

 

During the third quarter of 2003, the Company participated in a 30 yearsPooled Trust Preferred Securities transaction at a floating rate of 3 monthLIBOR plus 2.95% for $3.0 million. Under generally accepted accounting policies, the securities arereported as liabilities of the Company and interest payments are reported asinterest expense. The Company transferred $2.2 million of the proceeds to theBank as Tier 1 capital. The securities, which mature in 2033, are callable atpar after five years and pay cash distributions at a per annum rate and resetquarterly.  The Company has the right todefer the payment of interest on the securities.   However, if such deferral rights is exercised, the Company wouldbe restricted during such deferral period from paying any dividends on its commonstock.

 

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**Capital**

 

Total shareholders’ equity at September 30, 2003 totaled $8.7 millioncompared to $8.3 million as of December 31, 2002.

 

The Bank maintains capital ratios above the Federal regulatoryguidelines for a “well-capitalized” bank. The ratios are as follows:

 
|                                     |   |        |   | **ACTUAL  RATIOS**       |   |
|------------------------------------------|--------|-------------|--------|--------------------------|--------|
|                                     |   | **Ratio *** |   | **September  30,  2003** |   | **December  31,  2002** |   |
|                                     |   |        |   |                     |   |   |   |
| Tier 1 Capital (to Average Assets)       |   | 5.00        | %      | 10.09                    | %      | 9.80 | % |
| Tier 1 Capital (to Risk Weighted Assets) |   | 6.00        | %      | 14.24                    | %      | 13.20 | % |
| Total Captial (to Risk Weighted Assets)  |   | 10.00       | %      | 15.18                    | %      | 14.20 | % |

 

The Bank Holding Company “CalWest Bancorp” is subject to similarrequirements administered by its primary regulator, the Federal ReserveBoard.  For capital adequacy purposes,CalWest Bancorp must maintain total capital to risk-weighted assets and Tier 1capital to risk-weighted assets of 8.0% and 4.0%, respectively.  It’s total capital to risk-weighted assetsand Tier 1 capital to risk-weighted assets was 15.97% and 15.05% at September30, 2003.

 

**Liquidity**

 

Management is not aware of any future capital expenditures or othersignificant demands on commitments that would severely impair liquidity.

 

**OffBalance Sheet Transactions**

 

The Bank in its ordinary course of business has commitments to disburseloan proceeds both under revolving and non-revolving arrangements.  As of September 30, 2003 the total of thesecommitments approximated $19.1 million compared to $18.0 million as of December31, 2002 and $12.8 million as of September 30, 2002.

 

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**Item 3****.****           Controls and Procedures**

 

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of its management, including the Company’s Chief Executiveofficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant toSecurities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective to provide reasonable assurances that informationrequired to be disclosed in the reports the Company files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

There was no change in the Company’s internal controlsover financial reporting during the quarter ended September 30, 2003 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

In designing and evaluatingdisclosure controls and procedures, the Company’s management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable, not absolute, assurances of achieving the desiredcontrol objectives and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

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**PART II****– OTHERINFORMATION**

 

Item 1 - Legal Proceedings

 

Due to the nature of the banking business, the Bank isat times party to various legal actions; all such actions are of a routinenature and arise in the normal course of business.

 

Item 2 - Changes in Securities

 

None

 

Item 3 - Defaults upon Senior Securities

 

None

 

Item 4 - Submission of Matters to a Vote of SecurityHolders

 

On July 24, 2003, the Bank held its annual meeting ofshareholders.  At the meeting, theshareholders elected 12 directors, approved the holding company formation andreorganization and adopted a new stock option plan.  The votes on those matters were as follows:

 
| ELECTION OF  DIRCTORS      |   | For 864,479 |   | Against | 0      |   |                     |   |
|----------------------------|--------|-------------|--------|---------|--------|--------|--------------------------|--------|
|                       |   |        |   |    |   |   |                     |   |
| HOLDING COMPANY  FORMATION |   | For 854,979 |   | Against | 5,000  |   | Abstain  4,500 |   |
|                       |   |        |   |    |   |   |                     |   |
| STOCK OPTION  PLAN         |   | For 847,479 |   | Against | 10,500 |   | Abstain  6,500 |   |

 

Item 5 – Other Items

 

None

 

Item 6 - Exhibits and Reports on Form 8-K

 

A)                        Exhibits

 

31.1 – Certification of CEO pursuant to Section 302 ofSarbanes-Oxley

31.2 – Certification of CFO pursuant to Section 302 ofSarbanes-Oxley

32.1 – Certification of CEO pursuant to Section 906 ofSarbanes-Oxley

32.2 – Certification of CFO pursuant to Section 906 ofSarbanes-Oxley

 

B)                          Reportson Form 8-K

 

On August 5, 2003, the Company filed an 8-K Reportunder item 5 reporting on the completion of the holding company reorganizationpursuant to which the Bank became the wholly-owned subsidiary of the Company.

 

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Signatures

 

 

Pursuant to the requirement of the Securities and Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:   November 12, 2003 | **/s/ Thomas E. Yott**     |   |
|--------------------------------|----------------------------|--------|
|                           | Thomas E. Yott             |
|                           | Chief Executive Officer    |
|                           |                       |
|                           |                       |
| Date:   November 12, 2003 | **/s/ Najam M. Saiduddin** |   |
|                           | Najam M. Saiduddin         |
|                           | Chief Financial Officer    |
|                                |                            |        |  |

 

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