Dogged by troubles in its loan securitization portfolio, Community West Bancshares in Goleta, Calif., is expected to report a full-year loss of about $3.8 million, or 65 cents per share, sources close to the company said. The market - spooked ever since Community West disclosed its regulatory troubles last month - has already punished the company's stock, which is down nearly 30% in the last 10 days. It set a 52-week low of $7.125 a share last Tuesday, and the shares were below that, at $6.25, in midday trading Thursday.
Community West chairman John Markel acknowledged that the $246 million-asset company would report a net loss for 1999 but declined to specify it. He said a formal announcement would be made today.
Sources said the loss stems from the company's plan to write off roughly $8 million in connection with two loan securitizations. Community West had retained on its books about $20 million of a $203 million securitization it completed in the fourth quarter of 1998 and the second quarter of this year. The company was forced to mark down a portion of these so-called "residual assets" after regulators questioned its default rate.
The bad news would end a profitable run at Community West. It had originally expected to report a 1999 profit of about $5.1 million, or 85 cents per share - an 82% jump from the year before.
Community West, parent of Goleta National Bank, is one of several small banking companies under regulatory scrutiny of its loan securitization practices since the failure of First National Bank of Keystone in West Virginia. This month a federal interagency report stated that the loan securitization market - with its risk management principles and bewildering accounting rules - has become too sophisticated for many small banks.
The California company's troubles began with a surprise telephone call from the Office of the Comptroller of the Currency in October. The agency told the company that it was severely undercapitalized and would have to pony up $11.2 million to meet Tier 1 capital requirements.
The OCC, according to Mr. Markel, said the company had miscalculated Goleta National's Tier 1 capital after completing the two loan securitizations. To satisfy the order, the parent company's 11 directors dug into their own pockets, pitching in more than $8 million of equity and $3 million of debt.
Mr. Markel said the company intends to quit the securitization business.
"In the current regulatory environment, it is imprudent to continue in the securitization arena," said Mr. Markel, citing tough capital requirements. "It's just not good business."
Community West will continue to originate high-loan-to-value credits but will not keep them on its books for more than 90 days, in order to minimize risk, Mr. Markel said. He added that the company plans to sell its high-LTV loans to larger companies remaining in the securitization business.
Despite the company's financial setback, observers expect it to bounce back next year.
"When we get all the adjustments done, Community West should be in good shape," said Hank Dahlgren, managing director of corporate finance at Torrey Pines Securities in Incline Village, Nev. "I think earnings will be strong in 2000."
The company could book a profit by spinning off its promising Electronic Paycheck subsidiary, which markets payroll software to check cashers and cruise lines. Community West, which owns 70% of Electronic Paycheck, said in a recent Securities and Exchange Commission filing that it may take the subsidiary public in 2000.